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Boond boond se sagar banata hai” (little drops of water make an ocean) As per this saying, small but periodic investments can grow to a large sum at maturity. This is the basic investment logic behind recurring deposit schemes. In this article we shall be discussing What are Recurring Deposits, Maturity Value of Recurring Deposits,Premature Withdrawal of Recurring Deposits and Tax on Recurring Deposits.

What are Recurring Deposits?

Recurring Deposits are a special kind of Term Deposits offered by banks in India in which people deposit a fixed amount every month into their Recurring Deposit account and earn interest. It is similar to making Fixed Deposits (FDs) of a certain amount in monthly installments, for example Rs 1000 every month. This deposit matures on a specific date in the future along with all the deposits made every month.  Thus, Recurring Deposit schemes allow customers with an opportunity to build up their savings through regular monthly deposits of fixed sum over a fixed period of time.

Recurring deposit account is generally opened for a purpose to be served at a future date. Generally opened to finance pre-planned future purposes like, wedding expenses of daughter, purchase of costly items like car, holiday etc.The main objective of recurring deposit account is to develop regular savings habit. As our reader Ashok Sir commented on the post For middle age parents, this is a good tool to help thier child(ren) cultivate habit of saving. By linking this with a near term goal – buying a higher end TV or Fridge 12 months/ 24 /36 months down the line) with the tenure and monthly amount can help in meeting the finacial commitment without any pains.

Banks and post offices  offer such schemes in India. A post office recurring deposit account (PORD or Post Office RD) is similar to a recurring deposit in a bank, where you can invest a fixed amount on a monthly basis. But the postal RDA has a fixed tenure of five years unlike bank which offer flexibility of tenure from 6 months to 10 years. Other than minor differences such as minimum limit or maximum limit or interest rate both Bank and Post Office Recurring Deposit are similar.

In recurring deposits, a monthly deposit (RD Installment) of a pre-fixed amount is made in the RD account and on maturity the depositor gets back the amount deposited, along with interest calculated at the rate applicable at the time of opening of RD account.

Eligibility: Recurring Deposit can be opened only by individuals and Hindu Undivided Family. Recurring Deposit be opened in joint names. RD can be made in name of minor.  Nomination facility is available on an RD account. While NRIs cannot open a recurring deposit in a post office, they can set up an account under their NRE accounts with banks.

Monthly installments: Monthly installments can be for any amount starting from as low as Rs.50 (Union Bank, Canara Bank – Recurring Deposits,Indian Overseas Bank – Recurring Deposit  ). Banks like HDFC Bank, ICICI Bank take Rs 500 as minimum amount while State Bank of India(SBI) takes Rs 100 as minium. The minimum investment in a Post office RDA is Rs 10.

  • In Post Office RD or  banks like Canara Bank there is no prescribed upper limit.In HDFC Bank monthly installment can be as large as Rs 14,99,900 per month
  • The installment amount once fixed cannot be altered at any later date.
  • Partial payment of installments are not permitted.For instance, if you pay 2,000 a month, you cannot break this up in two instalments of 1,000 each.
  • More than one installment can be paid at any given time but there will be no interest paid on any additional amount deposited other than the installment due.
  • One can give the bank/Post office a standing instruction to pay RD installments on a monthly basis. A monthly debit facility from one’s Current or Savings account is advisable.

Tenure or Period: RD in a bank can be opened for any period ranging from 6 months to 120 months or 10 years, in intervals of 3 months. Post office RD has a fixed tenure of 5 years. Tenure of the Recurring Deposit cannot be changed. But premature withdrawal is allowed.  Section Premature withdrawal covers the details.

Installment Date: The date of monthly RD instalment will depend on the date of opening of RD account. For example, an account opened on 25th June, 2012, subsequent installments will fall due on the 25th of every subsequent month

Interest Rates: Interest is compounded every quarter. But Interest is paid only on maturity. There is no option of monthly/quarterly interest pay-out. Interest rates are comparable (mostly equal) to that of regular Fixed Deposits of similar period. Senior Citizens usually get advantage(typically 0.5% more). You can compare Recurring Deposit interest rates at apnapaisa:FD-Recurring Deposit

Taxation: There is no tax deduction or exemption available on the amount invested. In fact, the interest earned on the amount is fully taxable. It comes under the Income From Other Sources. Effective 1 Jun 2015, Tax is deducted i.e TDS is applicable on the Interest earned by Recurring Deposits as per current income tax rules. So how to account for the interest? Section Taxation covers it in detail

Maturity Value of Recurring Deposits

As mentioned earlier,in recurring deposits, a monthly deposit (RD Installment) of a pre-fixed amount is made in the RD account and on maturity the depositor gets back the amount deposited, along with interest calculated at the rate applicable at the time of opening of RD account. Interest is compounded quarterly. Onemint:How to calculate interest on recurring deposits? discusses in detail about how interest rate calculation is done. It tells how to compute the Future Value for each installment and the summation of all of these individual values will be the maturity value. For example series of three annual payments of 25 at 9% monthly compounding is computed as the sum of the Future Values of three single sum payments of 25 each with terms of 2, 1 and 0 years. Images below try to explain the step. Please note in case of recurring deposit the compounding is quarterly.

Deconstruction Approach to calculate Maturity Value

Deconstruction Approach to calculate Maturity Value

Maturity Value Calculation using Deconstruction Approach

Maturity Value Calculation using Deconstruction Approach

To find the maturity value of recurring deposit you can use any of the following calculators: HDFC Bank Recurring Deposit Calculator , InvestmentYogi Recurring Deposit Calculator, Corporation Bank Recurring Deposit Calculator. HDFC Bank Recurring Deposit Calculator shows the detailed calculation in Table and Graph format for each month.

Premature Withdrawal of Recurring Deposits

When the RD account is opened, the maturity value is indicated to the customer assuming that the monthly instalments will be paid regularly on due dates. But premature withdrawal is allowed. Each institution follows its own premature closure or withdrawal policy. For example,  In case of Post Office RD Premature closure is allowed after three years. Infact Post Office RD offers Part withdrawal facility . In case of  State Bank of India Loan / Overdraft facility available against the balance in RD account and Premature withdrawal is allowed at 1%* below the rate applicable for the period the deposit has remained with the BankNo partial withdrawal is allowed. While Banks like HDFC and ICICI do not allow partial withdrawal. Premature closure is allowed but with some penalty.

Penalty of  Not paying Installament on Recurring Deposits

Fix the monthly installment according to your needs and affordability so that you don’t miss an instalment in the future. This may lead to a default, which could result in a penalty. The penalty will depend on the monthly instalment and the number of days by which you have delayed the payment. It is deducted from the interest that has been accrued on the deposit till then and the policy of the bank.

If you fail to pay the instalments on time, the bank or post office can close your recurring deposit account. In such a case, the interest rate applicable to your account will be altered according to the premature withdrawal policy of the bank or Post Office. Each bank has its own policy on dealing with defaulters. For HDFC Bank if 6 installments fall in arrears then bank can shut down your account . The post office excuses a defaulter four times and also extends the payment period to two months, after which it will axe the account. DCB Bank does not charge a penalty, but considers an account inactive if you do not deposit any money for two years.

If frequent defaults (non-payments) are observed in payment of monthly installments, and six installments fall in arrears, the Bank reserves the right to close your RD account. The interest rate applicable on such accounts will be as per the premature withdrawal policy of the Bank.

Tax on Recurring Deposits

As discussed earlier interest earned on the amount is fully taxable. It comes under the Income From Other Sources. But Tax is not deducted i.e TDS is not applicable on the Interest earned by Recurring Deposits as per current income tax rules.  Effective 1 June 2015, the entity paying interest on RD has to deduct tax at source on the interest earned. Hence, TDS at the rate of 10% is applicable if the interest income during the relevant financial year exceeds Rs.10,000. So how to account for the interest? Interest can be accounted based on method of accounting used. If the cash system of accounting is followed, the entire income by way of interest will be chargeable only at the time when the interest is received. If on the other hand the mercantile system of accounting is followed, the interest will have to be accounted in the respective years. Article Methods of accounting: Mercantile and Cash deals with the topic in detail. Onemint:Recurring Deposits: Tax and Interest Rates (Aug 2011) ,as name suggests also talks about Taxation part of Recurring Deposits.

Interest earned on RD is taxable under the head  Income from other sources. Per se, there has been no change in the taxability of interest on RD. The deduction under section 80TTA available up to Rs.10,000 per financial year (FY) can be availed only against the interest earned on savings account with a bank or post office. Interest on RD does not qualify for such deduction.

Effective 1 June 2015, the entity paying interest on RD has to deduct tax at source on the interest earned. Hence, TDS at the rate of 10% is applicable if the interest income during the relevant financial year exceeds Rs.10,000. Accordingly, if your applicable income tax slab rate is either 20% or 30%, you would be required to pay the balance taxes (net of TDS) by way of an advance tax or self-assessment tax. So now tax on RD is just like on FD or Fixed Deposits. Our article Fixed Deposit , Interest , TDS, Tax,Income Tax Return, Refund explains the concept in detail 

But what about when the account is opened in the name of the minor? Quoting from HinduBusinessLine: Tax on interest income (Feb 2011)

I had opened a post office recurring deposit account in the name of my minor daughter. Now I had closed the account and received the deposit money along with interest. My daughter has become major at the time of closure of the recurring deposit account. Will the entire cumulative interest be taxable in her hands as her income?

The interest income from the deposit will be chargeable on cash basis or on mercantile basis. This interest will be chargeable under the head income from other sources and as stated earlier, on one of these methods which is the method of accounting regularly employed by the assessee. In your case, the assessability in the hands of your daughter or in your hands will depend upon the accounting method employed by you and your daughter. If the cash system of accounting is followed, the entire income by way of interest will be chargeable only at the time when the interest is received. Since in your case it has been received after your daughter attained majority, the entire interest will be chargeable to tax only in her hands. If on the other hand the mercantile system of accounting is followed, the interest will have to be accounted in the respective years and the years in which you daughter was a minor, the interest income will have to be clubbed in the hands of the parent and the interest relating to the period after she attained majority will be taxed in her hands.

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