Saving money may not come naturally to you. Considering the number of mandatory bills on a monthly basis, it can sometimes be difficult to think about how you may save money. With impulse spending, major purchases, and unplanned expenses, saving for future needs becomes more of a thought than an action.
Luckily, a Recurring Deposit (RD) Account can become a reliable means of saving regularly. It is a clear, uncomplicated savings vehicle to foster a savings habit rather than it being a financial obligation. Below are some features and benefits that define a Recurring Account.
What is a Recurring Deposit Account?
A Recurring Deposit Account is similar to saving for a goal, but on autopilot. A Recurring Account requires you to commit to depositing a fixed amount of money in the Account, usually monthly, for a fixed term. For example, six months, one year or even five years. It is a good option for savers who like to set and achieve goals.
In exchange, your fixed and generally predetermined contributions will earn interest, which is normally fixed throughout the term, and when the term ends, you will earn predictable returns.
It is intended to encourage habitual deposits of funds consistently for a defined time period, which is why it is a great savings tool for people making a regular income with a desire to create wealth gradually.
Key Features You Should Know
Here are some features of a Recurring Deposit Account:
- Fixed Monthly Contributions: You will determine how much you will deposit each month, and, except for possible changes in your situation, you will likely be able to continue the same monthly contribution. You may develop a savings plan and simply save money out of habit.
- Flexible Tenure: You could be saving for a gadget in six months, or a greater goal over a period of years; the term is up to you. Most banks have RD terms between 6 months and 10 years.
- Fixed Interest Rate: The rate of interest is typically fixed when you set up the Account, meaning that the returns that you receive from this Account would not change as a result of any economic fluctuations.
- Compounding Benefits: Interest is also typically paid quarterly and compounded, which means that your savings could potentially have more compound growth than you could achieve with a standard Savings Account.
- Low Entry Barrier: There is no need to put a lot of money down to get started. Many banks allow you to get started now with as little as ₹100 per month. This makes it accessible to students, early jobbers, and retirees alike.
- Auto-Debit Convenience: With the auto-debit facility, your monthly amount is deducted straight from your Savings Account. This is great if you wish for no reminders or missed instalments.
- Loan and Nomination Facilities: Life’s unpredictable. If you ever need funds, many banks offer Loans against your RD. You can even nominate an individual to receive your maturity amount, just in case.
Benefits of Choosing a Recurring Deposit Account
So, what are the benefits? Here are the reasons that you should make the choice for an RD:
- Establish a Savings Habit: With regular contributions, you will be teaching yourself to think long term; small amounts can be accumulated over time into a meaningful amount of savings.
- Higher Interest Returns: Generally speaking, on average, interest rates on RDs will tend to be higher than standard Savings Accounts. It is like a little reward for your discipline.
- Predictable, Safe Growth: With fixed interest and no market exposure, RDs are a safe bet. You’ll always know how much you’re getting at the end of your tenure.
- Tailored to Your Goals: Saving for a vacation? A laptop? A child’s school fees? The flexible terms and monthly commitment mean you can save with purpose and plan.
- Emergency Support: Many banks will allow Loans against your RD balance, so you can tap into cash without liquidating your Deposit.
Important Considerations Before You Open an RD
As useful as RDs are, here are a few fine-print details you must take into account:
- TDS on Interest: The interest income from RDs is taxable. It is liable for TDS if it is over ₹40,000 in a financial year (₹50,000 for a senior citizen). If your overall income stays below the taxable limit, just fill in either Form 15G or Form 15H.
- No Partial Withdrawals: You can’t withdraw part of your RD, like you can with a Savings Account, before the maturity date.
- Penalties for Early Closure: If you want to close your RD before maturity, you will get a lesser interest payout and possibly a penalty fee.
- Interest Rates Vary by Bank: Not all banks have the same deal. Make sure to use an RD calculator to compare returns by bank before committing your funds.
Final Word
A Recurring Account may not seem flashy and probably won’t make you rich overnight. However, a Recurring Deposit is a great option if you want to develop a consistent savings habit, achieve your personal goals, and earn interest without risk.
Given that there are RD calculators available, you can schedule your Deposits and align those to your life goals, whether that’s for a big holiday, a new car, or simply to enhance your future financial well-being.
