In the previous post I had suggested using a Recurring Deposit to plan for your future expenses by depositing a small amount monthly. Lets now see what the frequently asked questions regarding a Recurring Deposit are. You can login to your online banking website and immediately start an RD account within a few minutes.
Note: My answers would be as much as possible applicable on all banks. However there may be a few exceptions and its better you verify with your bank’s website if you have any doubt.
Recurring Deposits in a single sentence?
You give your bank a fixed amount of money, every month, for a fixed number of months and at the end of the specified number of months, your bank returns your money along with some more money as interest earned on your deposits.
Remember the amount and number of months are fixed and once started, cannot be changed. There are no weekly or quarterly options – only monthly.
What would happen if I forgot to deposit a month?
You don’t have to go to a branch to deposit the money. When you open your RD account online, it will be linked with your Savings Bank account and your bank automatically debits the money on the date you specify. You just have to make sure that you have enough balance in your SB account. Though you can go deposit it in person, I would suggest leaving that job to the computers as it will be automatic.
If case you don’t have enough money in your Savings account, there might be a small penalty for every month you don’t pay. Your won’t lose your existing money, only you would have to pay extra charges when you continue.
What is the minimum amount I can deposit every month?
Most banks have the minimum amount as Rs.100 or 500. Usually you can only deposit in multiples of 100s. Its better to check with your bank before you begin a RD.
How many months can I start the RD for?
Usually banks have a minimum period of 6 months and maximum period of 120 months (10 years). There are some banks like SBI (State Bank of India) which has a minimum period of 12 months.
If I start a RD for 120 months and I want to stop it after a year or so, can I?
Yes, you can stop your deposits anytime you want. But your interest earned would be hit by a small penalty (usually 1%) for premature withdrawal. You would never incur a loss on the principal money your deposited.
What are the interest rates for RD?
Usually RDs interest rates are very similar to Fixed Deposit’s rates. The rates also differ based on how long your term is for. Shorter terms like 6 or 9 months will earn lesser rate than 2 or 3 years. It holds true for the other end of the spectrum too. 10 years might have lesser rates too. Senior citizens earn a slightly higher rates (usually 0.25%-0.5% points)
As interest rates differs depending on the Reserve Bank’s rates, you should check your bank’s website before starting a RD. Currently rates range from 7.5% to 9% per annum.
Is the interest earned taxable? Will the bank deduct the tax at source (TDS)?
Yes. The interest earned is taxable depending upon your personal tax bracket. However the bank doesn’t deduct the tax at source and you have to proactively declare this interest income when you file taxes.
Can I get loan against this deposit?
Yes. Most banks give loan against the money you have in this account. Usually it is around 90% of your account balance. The interest you need to pay for that loan will also be very less compared to a personal loan. This interest rate will be around 0.5% to 1% above the deposit rate the bank pays you.
Using this loan facility is better if you suddenly require some cash for unforeseen circumstances, since the interest on this would be less than what a normal personal loan will cost you. Also your deposit keeps earning interest and you don’t have to pay a penalty of premature withdrawal of the deposit.
How do I calculate how much money I would get back at the end of the term?
Most banks have a online calculator, where you enter your monthly deposit, period and interest rate and it would give you what you will get back at the end. Here is one from HDFC Bank.
I have covered most of the common questions that people will have before opening a recurring deposit. All that remains is to login to your net banking portal and begin the RD.
If you’ve got any more questions that I haven’t answered here, leave a comment below and I will reply with an answer.