Saving money is a habit that lays the foundation for financial security, and a Recurring deposit (RD) account is one of the most disciplined ways to build wealth over time. Herein, individuals deposit a fixed amount of money for a predetermined tenure and earn interest at a fixed rate. Technically, it is ideal for those looking to build savings over time without the risk of market fluctuations.
Unlike market-linked investments, it provides stability and predictability. This makes it an attractive option for individuals across all income levels. Usually, different financial institutions and banks offer different types of recurring deposit accounts. Each of these is created to suit the specific needs, be it for minors, senior citizens, or even NRIs. Some RDs also come with tax-saving benefits, thereby adding another layer of financial advantage. Understanding these variations can help you choose the right account that aligns with your savings goals.
That said, let's walk you through the different types of recurring deposit accounts, their benefits, and how they can play a crucial role in your financial planning.
Regular Recurring Deposit Account
A regular recurring deposit account is one of the most common types of recurring deposit accounts provided by financial institutions and banks. It is a structured savings option that helps you to invest a fixed amount every month over a predetermined period while earning interest at a competitive rate. This type of account is well-suited for people who are salaried, students, or anyone looking to build a disciplined savings habit.
The tenure for a regular RD account generally is between 6 months to 10 years (depending on the bank). The interest rates typically mirror those of fixed deposits and are compounded quarterly. This ensures that the savings grow steadily over time. At maturity, the depositor receives the total sum along with the accumulated interest.
One of the key advantages of a regular RD account is its low entry barrier. Many banks allow individuals to start with a small monthly deposit. This makes it accessible even to those with limited disposable income. Additionally, it offers a risk-free investment option because returns are fixed and unaffected by market fluctuations.
Some banks also provide loan facilities against RD accounts. This allows depositors to borrow up to 90% of the RD balance if needed. While premature withdrawal is possible, it often comes with a penalty. As a result, it reduces the final payout.
All in all, a regular recurring deposit account is a great tool for individuals who are seeking stable and predictable growth of their savings without the volatility of market-linked investments.
Recurring Deposit Account for Minors
This is a special savings scheme to help guardians/parents build a financial shield for their children's future. This type of account enables minors to develop a habit of saving right from an early age, while also benefiting from fixed and safe returns over time.
Parents/guardians can open an RD account on behalf of the child, usually from the day they are born until they turn 18. The tenure for these accounts ranges from 6 months to 10 years. The interest here is compounded quarterly (similar to regular RDs).
One of the major advantages of a minor RD account is long-term wealth creation. By the time the child reaches adulthood, these deposits help them with education, extracurricular activities, and other major expenses in the future. Most banks require a minimum deposit amount to begin with. Many banks allow nomination facilities to secure savings in case of unforeseen circumstances.
Senior Citizens Recurring Deposit Account
Next up in the list of types of recurring deposit accounts comes the senior citizens' RDs. A senior citizen recurring deposit is a specialised savings scheme designed for individuals aged 60 and above. This offers higher interest rates besides being a secure investment option. Here, interest is compounded quarterly. This leads to better returns over time.
A flexible deposit structure allows retirees to invest a fixed amount every month. This makes it easier to manage their expenses post-retirement. Many banks also offer nomination facilities, ensuring that funds can be easily transferred to beneficiaries in case of unforeseen circumstances. The interest earned here is taxable under the individual’s income tax slab.
Note: In case the interest income exceeds ₹50,000 in a financial year, TDS applies. However, senior citizens can submit Form 15H to avoid deductions if the taxable income is below the exemption limit.
Tax-Saving Recurring Deposit Account
A tax-saving recurring deposit is a specialised RD scheme that helps individuals save their surplus funds systematically besides enjoying tax benefits. Unlike regular RDs, this type of account comes with a fixed lock-in period of 5 years. This means withdrawals before maturity are not allowed. The primary advantage of this RD is that the deposits made are eligible for tax deductions under Section 80C of the Income Tax Act, 1961.
Note: Herein, although the principal amount qualifies for tax benefits, the interest earned is taxable. This is usually based on the individual’s income tax slab.
Additionally, since tax-saving RDs are not market-linked, they offer stable and guaranteed returns. This makes them a quite low-risk investment option. These accounts are generally available at selected post offices and banks. The interest rates also vary as per the financial institution.
NRE/NRI Recurring Deposit Account
An NRE/NRI recurring deposit account is designed specifically for NRIs (non-resident Indians) who wish to invest in India while earning secure returns. These accounts allow NRIs to deposit money in INR from their foreign income. Consequently, it helps them grow their savings with fixed interest rates offered by banks and financial institutions.
Another significant advantage of these accounts is that both the interest earned and the principal are fully repatriable. This means that funds can be transferred back to the depositor’s foreign account without restrictions. Additionally, the interest earned is tax-free in India.
Speaking of the tenure, it can range from 1 year to 10 years. The minimum deposit amount here entirely depends on the bank/ NBFC. Premature withdrawals may come with penalty charges.
Flexi Recurring Deposit Account
A flexi recurring deposit account comes with the benefits of a traditional RD. However, unlike a regular RD (where a fixed amount must be deposited every month), a Flexi RD offers flexibility.
As the name suggests, this helps individuals to increase or decrease their monthly deposits within a predefined range set by the bank. Usually, Flexi RDs are ideal for individuals with irregular income or those who want more control over their savings.
For example, freelancers or business owners who experience fluctuations in income can benefit from a Flexi RD. They do not need to worry about missing a deposit installment.
Moving on to interest calculation, it is usually based on the minimum balance that is maintained in the account during the month. This ensures fair returns. Another key advantage here is the liquidity feature. Some banks allow partial withdrawals without closing off the entire RD. Yet again, note that the interest rate might be slightly lower than that of a standard RD due to the added flexibility.
Benefits of Recurring Deposit Accounts
Now that you know the different types of recurring deposit accounts, some of the major benefits of these accounts involve:
Guaranteed Returns
Unlike stocks or mutual funds, recurring deposit accounts offer fixed interest rates. This ensures safe and predictable returns. It is another reason why RDs are ideal for risk-averse investors.
Zero Market Risks
Unlike investments in cryptocurrencies, mutual funds, or equity, recurring account deposits are not affected by market fluctuations or downturns. This ensures stability along with secured growth.
Flexible Tenure
Banks offer a variety of tenure options (from 6 months to 10 years). This allows individuals to choose any specific duration that aligns with their financial goals.
Senior Citizen Benefits
Senior citizens enjoy higher interest rates on RDs. This ensures better returns for their retirement savings.
Builds Financial Discipline
With mandatory monthly deposits, a recurring deposit account helps you to save regularly. It allows you to create a substantial corpus over time without feeling the sudden financial strain.
Ideal for Short and Medium-Term Goals
RDs are perfect for setting aside funds for planned expenses like education, vacations, or emergency reserves, without the need for a lump-sum investment.
Affordable Savings Option
You don't need a large sum to start. With a low minimum deposit requirement, RDs are accessible to everyone. It lets you save in small amounts consistently. This makes it a great choice for salaried individuals, students, and all income groups.
Loan Against RD
Several banks allow account holders to take loans against their RD balance. This gives them the benefit of liquidity without breaking the deposit. The loan amount can usually go up to 80% to 90% of the RD value.
Conclusion
Summing up, a recurring deposit account is all about building a strong financial discipline. It also involves securing steady returns with minimal risk. Unlike market-linked investments, RDs offer predictability. This makes them ideal for those who need stability without any market fluctuations.
The key is choosing the perfect one among the several types of recurring deposit account that aligns with your financial goals. You must be able to show up for timely contributions. The magic here lies in commitment and consistency. While RDs may not deliver very high returns, their easy approach makes them a solid addition to a well-balanced financial plan.