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Factors To Consider Before Opening A Recurring Deposit Account

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Recurring deposits (RD) have gained immense popularity among savers, especially millennials like us. They are a reliable and secure savings tool offered by banks of all sizes. RDs enable us to adopt a disciplined approach to saving, as a fixed amount of money is automatically saved every month. This eliminates the hassle of manually transferring funds and allows us to save conveniently. 

Whether we’re just starting our investment journey or have some experience under our belts, it’s essential to familiarize ourselves with the features of recurring deposits before taking the plunge. In this blog, we’ll take a look at the factors and considerations of RDs, equipping you with the knowledge to make well-informed decisions about your savings. Without waiting further, let’s dive in!

Factors You Need to Check Before Opening a Recurring Deposit

1. Interest Rate

Every month, the balance in a Recurring Deposit (RD) account earns interest. Think of an RD as having multiple Fixed Deposit (FD) accounts, all with the same maturity period. The interest rate for RDs typically falls between 7% and 9%. It’s worth noting that senior citizens often enjoy a higher interest rate compared to other depositors. The interest earned on an RD is paid out upon maturity. However, it’s important to keep in mind that monthly interest payouts are not available with RDs. So, while RDs offer the benefit of earning interest on your balance, the interest is received in a lump sum when the RD reaches maturity.

2. Term Period 

Before you jump into opening an RD account, one crucial aspect to consider is the investment period. RDs come with a predetermined investment period, which can span anywhere from 6 months to 10 years. It’s essential to carefully select an investment period that aligns with your financial goals and requirements. If you anticipate needing the funds in the near future, opting for a shorter investment period might be more suitable. On the other hand, if you’re saving for long-term objectives like retirement or your child’s education, a longer investment period would be more fitting. Remember, choosing the right investment period for your RD can significantly impact the outcomes and success of your financial plans.

3. Minimum Investment Amount 

The minimum investment amount for an RD can differ from one bank to another. Some banks may require a minimum investment of Rs. 500, while others may set it at Rs. 5,000. Therefore, it is crucial to be aware of the minimum investment amount before opening an RD account. This aspect holds particular importance for individuals who have recently entered the workforce and may not have a substantial surplus income. 

With RDs, the investment amount is automatically deducted from your savings account, so it’s essential to ensure that you have the necessary funds available in your savings account to cover the RD amount. By being mindful of the minimum investment amount and managing your savings account accordingly, you can effectively plan and maintain your RD contributions without any financial strain.

4. Taxability of Interest

Before you decide to open an RD account, it’s essential to consider the tax implications associated with the interest earned. The interest on RDs is subject to taxation, and it’s crucial to evaluate these implications based on your individual circumstances. If you fall into a higher tax bracket, it may be worth exploring other investment options that provide tax benefits, such as the Public Provident Fund (PPF) or Equity-Linked Saving Schemes (ELSS).

Similar to Fixed Deposit interest, the interest earned on a Recurring Deposit is taxable. However, there is a minimum threshold for the interest amount before the bank deducts Tax Deducted at Source (TDS). For regular individuals, the minimum interest threshold is Rs. 40,000, whereas, for senior citizens, it is Rs. 50,000. If the interest earned on your RD falls below these thresholds, the bank will not deduct any tax on it.

If your income is below the taxable limit, it is advisable to submit Form 15G/15H to the bank. By doing so, you can ensure that the bank does not deduct any tax on your RD interest.

Considering the tax implications of RD interest is important to make informed decisions about your investments and to optimize your tax planning strategies.

5. Penalty for Premature Withdrawal 

It’s crucial to be aware that many RDs impose a penalty for early withdrawal. This means that if you withdraw your funds before the investment period concludes, you will be subject to a penalty fee. Considering this penalty is essential when opening an RD account, particularly if you anticipate the possibility of needing to withdraw your money before the investment period concludes.

Final Thoughts

Opening a recurring deposit account can be a great way to save money and earn interest. However, it’s important to consider several factors before making the decision. Make sure you choose the right bank, understand the terms and conditions, and assess your financial situation. By taking these steps, you can ensure that you’re making the best choice for your long-term financial goals. So go ahead and start exploring your options today – who knows, you may be pleasantly surprised at what you find!

Author Bio:

Naina Rajgopalan has a thing for numbers and a deep fascination to learn about all things finance. She’s been money-wise from a young age and has always shared her knowledge and tips with those around her. Being a part of the content team at Freo Save, a digital savings account that offers up to 7% interest rate on savings along with benefits such as insurance on balance, safe & secure banking, and so on. Naina stays updated with the latest of what happens in the banking and fintech industries. She has taken upon herself to share her knowledge with readers across all walks of life to help them manage their finances and budgets better, so they can make better decisions while spending, borrowing, investing and saving.

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