Recurring Deposits – How to get maximum benefit from them in your financial life !
POSTED BY ON November 18, 2013 COMMENTS (205)
Today I will talk about the simplest financial product known to me – the Recurring Deposit or RD as it is called. Most investors know about Recurring Deposits and have used them at some point of time. However, many investors are still confused regarding this straightforward product.
Also, I will share tips on extracting the maximum benefit out of Recurring Deposits and on using this product to lead a better financial life.
Simple and Beautiful financial Product
Recurring Deposits are often rightfully called one of the simplest financial products in the world. You open a Recurring Deposit for a fixed amount and for a fixed tenure. Each month that fixed amount is invested and you earn interest (at a predefined rate) on the Recurring Deposit.
For example – You can open a Rs. 1,000 Recurring Deposit for 2 years @ 9% interest. Now for the next 24 months, Rs. 1,000 will be invested from your bank account and it will get accumulated in the Recurring Deposit and will accrue interest at the rate that was offered. This is exactly the same as putting Rs. 1,000 in a piggy bank on a certain date for the next 2 years, except that in Recurring Deposit you also get interest income (which is not an option with the piggy bank).
I have been unequivocal in stating that almost all new investors who enter the world of personal finance should start with Recurring Deposits. Typically, new investors do not fully understand the principles behind personal finance and so to protect their money from the they leave funds dormant in their savings account or use them up for some other purpose. Instead, by creating a Recurring Deposit, they will ensure their income is getting channeled into investments and more importantly that they earn interest on their money – eventually leading to good investing habits being formed. Gradually over the next 1-2 years, they can start investing in other instruments such as mutual funds, real estate or bonds.
Planning your Short Term Goals using Recurring Deposits
A Recurring Deposit is a safe investment, or in other words, it is a financial product with guaranteed returns. Stocks or mutual funds are not ideal investments for short tenures. There is no guaranteed return in equity-based productsand consistent returns can only be expected over a long horizon of 8-10 years.
Recurring deposits are therefore the ideal products to consider when planning short-term goals over a horizon of 1-3 yrs. These may include
- A corpus for a downpayment of our new home
- Education fees for your children (yearly fees paid in one shot)
- Home Renovation expenses
- Higher Education Expenses if you are in Job
- Upcoming Marriage expenses due in 2-3 years (e.g. sister’s/brother’s marriage)
- Setting aside funds for a vacation
Now if you look at most of these goals above, Recurring Deposits give returns similar to those of Fixed Deposits. Returns are at the moment in the range of 8-10% depending on the tenure chosen. As Recurring Deposits do not carry risk, they are the ideal investment solution for short-term goals (such as the ones above) where the investor is looking for guaranteed and liquid returns on savings.
Using Recurring Deposits for Ultra Short term goals in life
But the real reason why I love Recurring Deposits the most is this – Recurring Deposits are without doubt, the most powerful way to reach your ultra short-term goals in life. The parts below are excerpted from my 2nd book – “How to be your own financial planner in 10 steps“.
How many long-term financial goals do you have in life – A maximum of 3 or 4, right? Investors tend to overemphasize their focus on this handful of goals in life and spend most of their time working towards them. However most of these goals are so distant in the future, that planning for them is virtually impossible. On the other hand, we have dozens of small goals in life, which are due in next 6 or 8 months or a year at the most. We really aspire to achieve these goals, but ironically, never plan for them – because we think they can be achieved without planning.
Let me explain –
Imagine you want to buy Nokia ‘Lumia 720’ in the coming 6 months. This is very small goal. But most people think about it and leave it hoping to have sufficient money for the phone when the time comes. Now imagine 8 months go by. If at that time, the person has enough money in his account, the idea to buy the phone will again occur to him and he will make the purchase. And if the money is not there, the purchase idea yet again gets pushed out in to the future.
The same habit recurs in a case where you might wish to gift a small vacation to your parents on their birthday next year. Lets say you want to send your parents on a small vacation after a year, and it would cost Rs. 25,000. Now again no one “plans” for it. The matter of having sufficient funds when the time comes is left to chance.
Now here comes the power of Recurring Deposits where you convert each ‘small expenditure’ that is due in the next 6 months to 2 years (not more than this please) into a goal – and open a Recurring Deposit for it. You then let the money flow out of your bank account each month without manually getting involved, set reminders for each goal on the target date and keep achieving those goals!
Example of using Recurring Deposits in a Scenario
Imagine you have 3 small goals within next 1.5 years and those are
- Buy Nokia Lumia 720 in next 10 months – Rs 20,000
- Gift a Vacation to Parents in next 1 yr – Rs 25,000
- Pay Installment of you Kid Pre-school in next 1 yr – Rs 25,000
Most people have goals similar to the ones listed above. To achieve these goals, you can open 3 Recurring Deposits (one for each of these), for the exact tenure (10 months, 1 year and 1.5 years). Consequently, just by having small investments each month, your planning for short-term goals will become quite robust. As the deposits mature, you will find that you have the financial means to achieve your goals without scrabbling to arrange money at the last moment or worse, having to drop your goals altogether.
Taking the above example, The RD’s would be like this
- Buy Phone – Start 10 months RD for Rs 2,000
- Gifting Vacation – Start 1 yr RD for Rs 2,000
- Pre-school Fees – Start 1 yr RD for Rs 2,000
- Total Money going in RD each month – Rs 6,000
What you have done above is to give concrete shape to your short- term goals by using Recurring Deposits and prevent your goals from turning into perennially postponed wishes or wishes that remain unfulfilled throughout your life.
Simplicity means Fast Action
Setting up a Recurring Deposit is so easy it’s almost effortless. You can log onto your Internet-banking page and open an online Recurring Deposit within seconds. You just have to pick the amount per month, the tenure and the date you want the money to be debited from your bank account – and your Recurring Deposit is all set. This simplicity in setting up also helps you take actions faster
Recurring Deposits Tenure’s and minimum Requirement
The minimum and maximum tenure and amount for recurring deposits varies from one bank to the other. In general, PSU banks such as SBI Bank, PNB or Andhra Bank have a minimum limit of Rs. 100 to open a recurring deposit. However, private banks such as ICICI, HDFC or Axis have minimum limits of Rs. 500 or Rs. 1000. The maximum tenure for Recurring Deposits is up to 10 yrs. Here is a snapshot just to give you an idea
Some other Features of Recurring Deposits
- There is no TDS applicable on recurring deposits, but the interest income is fully taxable in your hands.
- You can break your recurring deposits anytime before maturity with some penal interest. The interest applicable will be the rates applicable for the tenure RD was running and not the original tenure chosen.
- Some Banks offer flexi recurring deposits also, where you can increase the amount of deposit each month (but cant decrease it)
- The minimum tenure for RD is 6 months and maximum is 10 yrs
- You can start recurring deposits for minimum of Rs 500 or Rs 1,000 . In post office its minimum Rs 10
- Recurring deposits comes with Nomination Facility, so your nominee will be contacted and handed over the money if you die.
- You can take loans against your recurring deposits for 80-90% of RD worth
- Interest is compounded on quarterly basis in recurring deposits
Please share what you think about Recurring Deposits. Have you used them? Can you share one insight or hidden information about Recurring Deposits, which you feel may help others!
Dear Mahesh, I have R.D. Account opened in SBI for Rs 10000/- per month for 60 months and authorized it to for payment
of installments from my SB account, by mistake I paid Rs 10000/- by mistake through net banking and it became double
payment i.e. two instalments in one month, my query is do I get the interst for extra payment or not please clarify?
Yes, you will get interest for any amount of RD you make..
Dear Mahesh ji, same query as above.. i made duplicate payment of installments past 2 months(kept standing instructions duplicates). Will it fetch same interest as RD deposits and do have to pay original
RD installment or it should be equal/higher than previous installments paid(read somewhere that this is the case). kindly clarify!
I think there is no harm in paying more.. you shall get interest!
I approached for my RD A/C maturity amount on 18-9-20 where as it was matured on 10-07-20. Bank refused to give SB interest on Matured amount for 3 months, they are telling that amount goes in Overdue A/C. Please guide me about the rules about whether i am eligible for 3 months SB interest?
Yes, if its matured and if you dont renew . you dont get interest.. You can get benefit of being late !
Can you explain this point ? For RD tax is deducted if the interest earned is more than rs 10000? I want to save rs 1000 per month in RD. And iam a housewife
No , its not like that. If your interest is more than 10k a year, then only TDS is deducted not TAX
Thank you so much for idea of multiple recurring deposits, it indeed was helpful. My question is whether I can open multiple recurring deposits in same bank
Yes you can
Hello,
I have a RD for 12000 for 1 year , I want to add more more money i.e 8000 more to 12000 to make it 20000, and i have paid up to 6 months now .Is it possible and how should i add money to it?
You will have to visit the bank for this. Talk to them .. they will help you
In a month how many times i can deposit in my RD account.
RD is a account with auto mode, The money gets deducted automatically !
Hi I have open rd in hdfc bank last month, The date is come, so how to pay the next month rd through netbanking. please help
As far as I know, RD will automatically get deducted from your account .
The tax deducted from interest earned through RD falls under the same slab as your income tax. So, is it fine to first give the RD amount to my mother (for example), whose taxable income is 0 and then open the RD through her name. Will I be saving tax in this way? Plus is it legal and not shady?
Yes, you will save tax this way and its legal
Hello Chauhan,
I really dont understand the following:
“There is no TDS applicable on recurring deposits, but the interest income is fully taxable in your hands.”
What does it mean!
No tds means there is no tax on interests and the money deposited for RD?
And interest income is fully taxable in your hands??
Please say it in a clear language, thanks, raj
No , you need to get your basics right here.
TDS means an automatic way of tax deduction by banks/companies and paying it to govt on your behalf.
NO TDS means someone else will not do it, you will have to do it on your own .
So in case of RD, it means that whatever is the interest, you need to calculated the tax and pay it on your own. If there was TDS, the bank would have done this step for you
Manish
Hi Manish, Thanks. So it is our responsibility to calculate the tax and pay. Do everyone do it? Or if we dont do what will happen? I am just to know..
Thanks, Raj
Yes, we need to do it ourself or if you dont want to take that pain, you can hire a CA for that.
Hello:
If i open a NRE RD account to 5 years..and what will happen if I return india after 2 or 3 years??
Thanks
It will be treated as NORMAL FD then
thanks, but how will the banker know about it.
Thats a good question . If you dont tell them and later if you bank comes to know about it. Then you will not get any interest also .
if i open an rd flexi in sbi @ 15000/9 per month for 3 years, what is the total amount of return that i will enjoy sir?
Hi Saurav
Calculate it using the excel sheet withthe interest rate
How many RD accounts can be owned by an individual?
Means if i want 13 rd account month wise (means 1 to 13 month each month Rs 1000 a/c is opened ) can this be possible?
yes its possible !
How much is the maximum money you can invest in RD per month ? Is there any cut off ? Can one invest 50k or 60k per month ?
There is no limit like that . you can invest crores also if you want !
Sir i invest monthly 1000for ten years .i deposit in this from 16month .now i want to deposit 3000 in this account. Can i received more interest
You will get more interest from the time you invest more money !
if i open a recurring deposit of thousand and if i deposit 10000 every month will get the same interest rate?
Yes
how you review
DHFL– Recurring Deposit
Rate of Interest of 8.75 %
Dear Manish,
Does the matured RD amount be considered under ‘Other Incomes’ in ITR, and, the TDS Amount be stated while filing ITR ???
Mr. Rana
Yes, It should be considered into “Others Income” only
I came to know a lot.
Regards
I opened RD of 10000/month for tenure of 6 month, can i extend tenure period ?
Yes, you can do that
Hello Manish sir..,thanks for such a useful article.
I have got one RD of 5 years term.Due to some prob I have stopped paying Installment after 2 years from the start date.In this case if the amount of those installment which I have paid earlier would be credited to the account associated with my RD.Or if I need to apply for the withdrawal.Plz help me with your reply.
can i pay the whole amount befor the date of maturity.like 8 months before
Pay in RD ?
yes
hi manish nice financial advice .
i want know what is the specific period that we can pledge our RD bond for loan
for example i have opened a RDaccount and i have invested for starting 2 months . later i will pledge the bond will they consider . or will they ask for maturity . if they ask for maturity whats minimum maturity period…
plz help me
I am not very sure on this
Hi Manish,
What if the person with RD is not coming under any tax slabs (lets say-a homemaker). Even then she is liable for TDS (whether interest earned is below 10K or not)?
Thanks
Yes
Thanks for updating our knowledge through you articles/emails.
I had heard about RD but I have never invested in it. You have
taught how short term goals can be met by investing in RD.
Thank you. Shall start two RDs for both my children.
Regards.
Glad to know that Preeti ..
in which bank in India we can start recurring deposit scheme for 25 years tenure.
I dont think there is any bank which allows RD for that long
Hi Manish,
I have started RD of 15000 pm and paying the money for two months.
If I stop paying the money that is if I discontinue, will the money that l so far invested will be lost?
NO , you can always redeem back the investment amount
Hi Manish,
What happen if interest rate is changed(increase or decrease)?
Example : I open iwish RD @8% interest rate and after 1-2 months, interest rate is decrease and became @7%. How interest will be calculated? Is it calculate by 8% or 7%.
Thanks!!
RD or FD get the interest rates locked. It does not change for you till maturity
Hi Manish,
I have opened RD in ICICI. Can i open one more RD. Also please tell me how can i increase the RD amount also TAX rates for every year.
Thanks!
Yes, you an open any number of RD
Hi Manish,
A very good article 🙂
I have open an rd of 5000,what amount i will have to pay as tax after its maturity i.e after 5 years?
You will have to pay tax on interst each year . Even though you dont get it in hand
5000Rs for 5 years. So per years its 12000 and interest amount will be less than 10000. Will TDS on RD will be calculated based on each year or it will be calculated after the maturity because after 5 years of RD the interest amount will be more than 60000. Please suggest.
It will be calculated on yearly basis
As wef June 2015, even RD is taxable, but after a certain limit, so I make an installment of 10000 per month for an year in HDFC , will it be taxable?
RD was always taxable. You are talking about TDS part . Now TDS is applicable on RD also
Sir which one is better…..Flexi Deposit or Recurring Deposit ?? Plz rpl
One is not better than other. Its about the suitability with respect to situation !
Hi Manish,
Is it really possible to open a eRD in SBI(Online). Whenever I try to create a new eRD in online SBI, I always get the status as ‘Failure’ the next day. I have tried multiple times but always get the status as’failed to create a new account due to technical issue’. I have full transaction rights and its a single owner account.
Hi joydeep
This is very specific query which you should follow up with the concerned authority only. We wont be able to comment on that
Manish
Yeah, you can open eRd in Sbi… I have opened few accounts myself..Contact your bank for further queries
dear Manish, I have invested in RD in SBI,Can i invest for this for Long term(For 20 years).If bank will detect any interest from earning.i have invested last 2014 February onwards. please explain todays RD and Before june 2015 RD scheme.
Bank will deduct the TDS from the interest, as per the recent budget rules
hi,manish…..i hv an RD a/c. which was running for than 5 months,and now i am not able to continue it further….what will be the maturity amount for me….it is rs.8500/ month with allahabad bank..
Hi raju khan
You should check the calculation with the bank only, they will be able to comment
Nice article Manish. Helped me understand RD better. Thanks.
Hi Dillon
Its explained here – http://jagoinvestor.dev.diginnovators.site/2013/11/recurring-deposits-tax-benefits-and-best-usage.html
Hi Manish.. Do we need to show interest accumulated while filing returns even though the RD hasn’t reached maturity?
Yes you need to . What matters is the accrued interest, not the received interest !
Sir I am depositing in rd for the past one year. Suppose if I want to continue for 10 years when should I pay the tax?. Yearly or at the end of ten yes??. Kindly clarify.
Yearly ! ..
is there any bank that provide rd tenure for more than 10 years?
Nice article, but am still not clear on how it is calculated. I guess they are calculated on compounded interest?
Lets say i deposit 5000 Rs for 6 months in HDFC, so for 5000 X 6 months, will fetch total amount+interest and maturity amount? How is the compounded interest calculated?
Sharath
Its compounded on quarterly basis .
Hi Manish,
Thanks for the wonderful article & the guiding light in my financial life.
Here I am starting with an RD for my wife who is continuously eating my head for gold bangles. Hopefully with the power of RD I can manage it efficiently.
Thanks again 🙂
haha .. better open a account with gold jewelers itself 🙂
Hmmm…That’s new,,,,,”Opening account with jewellers”….any benefits???
Its just a trap to get more customers I think !
Nice article Manish, though I had idea about RD but never realised the importance of it until I read this article. I have missed and also compromised on so many occasions and have not bought the item which I desired like bike, etc. due to lack of full amount at the time of purchase. Now, will open RD soon, Thanks 🙂
Welcome !
@Manish – This is awesome article
I am planning for opening RD with HDFC for say 9 months, I will earn interest say around Rs-300/-
So what is the tax implication on this
THis Rs 300 gets added to your income for the year and then taxed accordingly !
Isn’t short term debt funds are better?
Interest earned would nearly be the same and they are more tax efficient.
Yes it can be .. if you have all the knowledge to handle things and do all the analysis . its worth it .. however its not an option for all because most of the people do not understand things at that level
Very nice article Manish….could you please let me know if it would be ok to start an RD of 15000 per month for 1-2 years or I should go with a lower amount? I already have an RD of 10000/ month and want to start one more.
Any amount you can invest is ok with .. you can do a 15k RD !
Hey Manish,
Nice article. I use RD to manage expenses incurred on house maintenance such as painting work, masonry,caprentry work etc.
Thanks for sharing Lalit !
Hi Manish,
Thanks for this wonderful article, I am entitled to start a RD account asap!
I have a question though, which was already asked earlier but want to know more details on same – why can’t RD be used for long term purpose? Like for 10 years and then again start a RD for 10 years. Apart from the reason of less returns, what is the reason from your side to not recommend RD for more than 2/5 years?
Also, what can be the suitable investment vehicles for long term goals? If there is any separate article or forum post on same, please share the URL for same.
Thanks,
Vimal
Returns are the only major reason .. If you are ok with the returns they give you POST TAX, you are free to go for it !
Thanks Manish. I loved this article. This is really going to help me fulfil my needs.
Great to hear that !
Thanks Manish for this wonderful article on RD’s.which do you think is the best place to park emergency fund.RD’s or liquid funds or any other funds?
RD is much simpler to do , thats why I feel its the best thing . However liquid fund has a different reason , you feel its not in your reach and you do not break it 🙂
Thanks for touching this subject.
Very useful info for someone trying to get a perspective of RDs.
Could someone please explain the benefits of RD over the schemes like chit funds/kuries ?
RD’s come from BANKs which you can trust, there are almost no changes of fraud, same is not true for CHIT FUNDS
But Interest Income is free till 10000/- in hands of receiver.
Its for SAVING BANK Interest , and not FD/RD interst. You pay tax on Even Rs 1 FD/RD interest income . Just that upto Rs 10k interest on FD , there is no advance tax cut by bank (but you have to pay it from your pocket still) .
Thanks for touching up on this subject Manish. Insignificant it may look but to me it did become the basis of my financial discipline.
Btw, for the benefit of all ICICI has a brilliant innovation RD plan called iWish where you can set goals with target amounts (i,e Insurance payments, Note 3 etc.) and allocate amount to the RD, the amount can be of any size and you could even get contribution from others towards your goal. It gives a graphical representation of your goal and SMSs about the status of your goal. It is an amazing product and I would suggest RD lovers to try it (On a lighter note, I do not get paid for this endorsement from ICICI :D)
Thanks for suggesting iWish .. Its a great thing , the only point where I do not like it is – lack of automation, which is very important to create wealth. Anyways some people might not want it, but i Personally find normal RD a more powerful thing .
Manish
I believe there two AJs here 😀 I guess I will use the handle AJ-2 from now on. Yeah, RD is amazing I suggest this to folks who are skeptical about the power of compounding and saving.
If one can simply RD about 3000 rupees a month (which is apparently a bill most of us spend on one of the weekends in a month) within 3 years along with a compounding of 8.75% it would turn out to be 1.25 lakhs.
What can we do with 1.25 lakhs? It could be at least 4 home loan installments for most of us thus could act as an emergency fund in times of uncertainty. The amount could be used for any number of things for which most of us go and take personal loans that amount to 16% interest.
Hi Manish,
TAX is applicable on the interest amount earned on RD, right! Is there any limit for this? like, for ex, if the interest amount crosses Rs. 10,000/- tax is applicable, something like this. And what would be your suggestion if one goes to invest 10 – 20k per month as RD installment for a tenure of 24 months. Is it good idea?
thanks… / Vamsi
Vamsi
You have to pay tax even if the interest is Rs 1 . Who told you that tax is applicable only if it crosses Rs 10,000 ? Its the rule for SAVING BANK interest and not the deposits interest . Also above 10k , TDS is applicable . TDS is advance tax .
Hi Manish
I have opened RD previous month at Axis Bank. However, interest is very low. It is 1000/- p.m, after 12 months, I will get only 12596/-. Only 596 interest for 1 year.
After tax I think it turns out to be close to 6.5% – 7% , Which is ok
A very good article Manish. Planning through RDs works wonders. I make my RD planning for my Insurance premiums and other short term goals (I maintain my RD calculator and planning in an excel). Infact RDs make you reach your goal with lesser cost than the actual. For example: For my yearly premium of Rs.49226, I’ve made RDs of Rs1900 (at 8.75 ROI) for alternate 2 years and the Maturity amount I get is 49964 for the amount 45600 that I’ve accumulated. So, I gain by approximately 4364.
Nice .. thanks for sharing what you do exactly. SO much can be learnt by your one example 🙂
Thanks for a very useful aticle Manish! I will make my whole family invest in RDs here on. Had a query on one point you mentioned in your article:
“Now here comes the power of Recurring Deposits where you convert each ‘small expenditure’ that is due in the next 6 months to 2 years (not more than this please)…”
Could you please elaborate on why do you not recommend RD for a period longer than 2 years (say 5 years). In my opinion this may include mid term goals like ‘expenses for sister’s wedding’. Which investment vehicle do you suggest for such goals?
You can do that, but over 5 yrs period , I suggest some equity exposure too . but thats because I am more biased on equity. you can take your own pick !
Thanks for the reply Manish!
Is it that only the interest earned that is more than Rs.10,000 is taxed? For instance, if I earn say 15,000 as my FD interest per year, will I be charged tax on 15,000 or on Rs 5,000 (i.e. 15000-10000)?
Tax is payable on full amount, only TDS is deducted if interest crosses 10k
How are RDs for a long time investment…say a RD for 10 years of 5000 rs.
For that long term if you are ok with no real return , then its fine ! ..
My primary preference is to make sure I have all the annual payments paid using RDs and those payments include PPF savings, Term Insurance, Bike Insurance, Health Insurance, DTH Annual Recharge etc.
Here is what I do with my RDs. I have 2 RDs, one started on march 2011 and other started on march 2012, each 5000 per month and each RD runs for 2years. On 2013 March, the RD which was started on 2011 got matured which was around 1L 32k. I deposited 1L for PPF between 1st to 5th of April (Thanks to JagoInvestor for guiding on PPF) and used remaining amount for other annual payments. I Created a new RD as well for the next 2years which will mature on 2015 march.
Similarly the RD which was started on 2012 will be matured on 2014 and the same payments will be done with the maturity amount. It will also be renewed for next 2years which will be matured on 2016 March. This way im freed with any annual payments crunch since I get to pay them by starting of the financial year.
Thanks for sharing your experience of using RD’s . I am sure if only people adopt this method , a lot of their financial problems will get solved !
nice.
but whether the interest of RD will be considered for income from other source(bank interest) if total Interest earned during year including FD/ Saving Account interest is more than Rs. 10000/- .
RD interst is other than normal saving bank interst !
RD is the best saving tool for NRE’s. Go for 10 year RD. A few nationalized banks are giving 9.5 % interest rate for NRE FD. Cummulative annual yield is around 14.5%. That too tax free
But what is an NRI want to invest and use in INDIA after they are back ? NRE wont help in that case ?
Dear Manish,
This is a perfect tool which you have shared with us. I have been taking out small amount from my salary to take care of such small term needs but never thought of using RD as a tool.
Thank you very much.
Thanks for appreciation 🙂
Nice, I have been using RD for making sure my yearly premiums towards policies are paid up smoothly.
Also it is great for someone to start RD for a year and once the amount gets deposited they can start an SIP for the same amount, thus having dual investment with the same amount.
Example RD or Rs.1000 each month for a year = 12,000 + Interest at the end. Then start with SIP of 1,000 from that 12,000 and continue to invest in RD too. Thus you invest only 1,000 and get dual benefits of SIP and RD.
Thanks for sharing that TIP 🙂
Sir,
I am confuse about RD and TD now i have 10000 rs. in my RD ,should i break my RD and put it in TD/FD for 46 days or should be carry on with RD?
I think dont complicate it so much , just continue the RD
As a basic question how does a RD compare to an FD?
Its for different situation , the interest rates are same, but one is lumpsum investment and RD is monthly !
Dear Manish, in your article you mentioned one point as follows.
Some Banks offer flexi recurring deposits also, where you can increase the amount of
deposit each month (but cant decrease it)
Can you let me know the name of bank having this type of RD?
You can go to Indian bank they will offer 9% , It is called VRD
Thanks Sachin.
There are just few banks , I think on of them is INDIAN BANK
Thank you manish.
Andhra bank RD PLUS where u can fix ur monthly rd amount and u have to pay that amount compulsory every month. Suppose if u have excess money u can deposit that also. But the regular rd amount will be the same. It won’t change. If u have excess u can deposit any month any amount.
Rd is perfect tool for short term goals. I had used them & believe me they are quite simple & handy
Yea .. thanks for suggesting
I am also running one RD, opened with SBI with 1 year (this is my first RD, so I just want to see how it goes and that is why have chosen just 1 year) tenure. My intention in opening that is, instead of keeping some part of amount every month aside as an emergency rescue fund, keeping it in the form of RD would help me to not touch for small expenses. And, moreover after RD completion the total amount I can use some where or invest in something. I feel okay about this option.
Yes, its a good thing to start with ! . I think just continue what you are doing !
Hey Manish,
Thanks for the article. I have been pushing my friends and family to use RD as a simple and powerful way to save towards goals.
I have one question about this. How do banks apply penalty of 0.5/1% when we break the RD? is this % reduced from the Rate of Interest till the term we have held the deposit or we need to pay it seperately?
First, you get the interest rate which is applicable for the tenure you have the money , and out of that the penalty is reduced. Like if you opened a RD for say 2 yrs and the interest rate was 9% , now imagine you stopped your RD after 7 months, so your RD was only there for 7 months, for which lets say the interest rate was just 7.25% . now you will get 7.25% – 0.5% = 6.75% interest rate !
Manish
Thanks Manish for explaining in clear way.
Welcome !
Nice article Manish !! Even I am using this simple yet powerful prodcut to meet my yearly health and life insurence premiums, emergency fund etc.
Thanks for sharing that Chetan !
Hi Manish,
Nice article as always.
Apart from Regular RD, here are a number of flexible RDs in the Market now a days e.g. SBI Flexi, ICICI iWish, UCO shoubhagya etc. I have found these products equally good for achieving short term goals also. In fact, keeping the amount flexible sometimes give a lot of advantage. E.g. In October (festive month), I always find hard to save any money for investment purpose whereas, in other months I can compensate that.
Thanks for sharing that good tip !
Manish
RDs is a great tool to avoid sudden outflow of cash for me. I use RDs for
1, Health and Term insurance
2, Internet bills
3, DTH bills
4, Accumulating Emergency fund
5, payment of anyother fees
THis way it will not pinch our pocket suddenly and also helps keep tap on your expenses
Thanks for sharing that .
Dear Manish,
i did read ur book “Jago Investor” approx. 1.5 yr before. then i realised the value of small but early investment. i started RD with 2200 rupee/month and now i have total 4 RD (Total 10,000/month) also i will increase this investment by some thousand rupee in next year. RD is a very powerful tool to accumulate lump sum money in 4-5 yrs. i am going to use this money to pay down payment of my flat.
thanks manish
Yes. Agree with you . For some one who wants to start small and does not want to put lot of time in analysis, RD is the best tool 🙂
Manish
Dear Manish…gud job
can you please through some light on interest tht is been compounded quaterly??? for example, for an
RD of 1000 for 12 months, what will be the interest earned???
I am not calculating it here, but it will be calculated on quarterly basis as said by you !
Manish
There is a key aspect regarding FD and RD taxation that maybe relevant to young(er) people.
one can choose to pay tax on FD and RD (beyond TDS if applicable for FD and full tax on RD) on maturity instead of each financial year.
The key point here is, if we have already paid tax each financial year then we cannot change this practice. Once we make a choice we need to stick to it.
There is some debate about this among even CAs. However, the court has ruled in favour of adopting one system, and this can be made use of. I have a list of links on this if anyone is interested I can share it here.
This will not make a big difference in terms of returns for short durations but takes away the headache of paying each year.
Thanks for sharing that important point Pattu
I am sure many will be interested in reading more on this , however this particular post was just to introduce RD as a powerful tool to invest for short term and if one wants to keep things simple, I intentionally chose not to talk about returns and tax benefit in this article 🙂
Manish
Sir I am working in an institute as salaried person and I am in 30%slab now. I am depositing money in RD in a bank monthly 20,000 in two rd accounts (10,000 each account). I am panning to start my own business in next one or two years where I would be getting my income mostly in black. So I am thinking to take matured rd amount after I start my own business . suppose I take matured money after one or two years where I am no longer salaried person what would be the taxation at that time. Please clarify. ( thinking that I opt for paying tax at the end of maturity time).
Still you will be paying tax on that matured amount !
Hi Manish,
Thanks for the article on RD. I have been thinking of opening a RD account for last 3 weeks and your article came at the right time…
I have a question.. Say, i open a RD with Rs 10000 per month for 2 years and after 8th month, i am in urgent need of money, then what is the deduction percentage(or the penalty charge if I break my RD before maturity) ?
~ Saket
Hey Saket,
I’ll suggest you to open multiple RDs of various amounts and terms instead of one single RD with max term so that you can break only one or few RDs as necessary. That’s what I follow. I hope Manish can give better suggestions.
Regards,
Bhavik
Yea I think its a good idea
The interest which will apply will be 0.5% or 1% less than the applicable interest rate for the duration your money was actually invested . Like if interest for 2 yrs and 8 montsh was 8.25% , then you would get that return minus 0.5% or 1% , whatever is the bank terms
Manish
Hi Manish,
Thanks for nice article. I have seen from my childhood, my mother did RD of 100/- per month. I know that my sister marriage and other functions, we were able to do from RD. I think, it make you disciple in Financial life.
Thanks for sharing that Pritesh ! . It proves that Old system of saving and investing money were as powerful as any other way today 🙂
Dear manish,
thanks a lot for nice article.
i and my parents following it since 1990.
it could be good if some more details regarding post RD may included. i heard that post RD have slight less interest than banks RD but to pass the incentives from 1000/PM amount, post agents is depositing 1020 and one can see good the different in matured amount of 1000rs RD and 1020Rs RD . one more fear for POST RD is they are not tracked online unlike most bank RDs. if post dept goes online then it may be more rewarding for the peoples.
regards,
tejash
While taxation is an important angle , we are not covering it here in this particular article because the focus is not on that. I suggest you open this question on forum – http://www.jagoinvestor.com/forum
Manish
Hi Manish,
what you have mentioned is correct and meaningful. But it can’t be efficient for those whose income tax slab is 30% !!! For Eg., the 9% interest or yield turns out to be 6.2% post tax !!
What do you say?
Hari
One has to stop looking at tax angle all the time ,We dont have to optimize taxation in everything . When you want to plan some thing for 6-10 months, nothing can optimize tax . We are talking about the ways we can use recurring deposits to fund few goals, automate it, and track things . No wonder the returns would be limited, but thats ok .
Manish
But Manish, can liquid funds be considered for that. They are not only tax efficient but are also safe. And can be tracked, automated.
Yes, if you can do that . In this article i have used RD’s , because its more easier to start and maximum people will be able to relate to it , also every one has a bank account so opening one should be hassle free . for liquid fund , imagine one who does not have a mutual fund account or portfolio already and has to start it .
Note that simplicity and easyness of the product is of prime importance , because that decides if “action” will be finally taken or not . Imagine 2 groups of 1000 investors, and you ask first group to use RD for this purpose and for other group you ask them to do liquid funds and also tell them that its more tax efficient and meet them after 1 week . You will agree with me that there would be more “actions taken” in first group and hardly any in 2nd group 🙂 .
Do you agree with me and see my point ?
Manish
Very well said manish. RD is very nice tool. I also have planned to start RD eventhough i a m investing in Fundsindia.
Yea , RD has a specific purpose in life and some part of your investments has to be there !
This is for the first time I am going through your blog. Great Job Sir!
It helps people…
Welcome !
Is investing in RD will give Tax benefit
No Ashok, there is no tax benefit .
But is that not ok ? We dont have to evaluate every thing from tax benefit point !
Manish
Good one Manish. I have been using RD for my recurring annual expenses life insurance premium, car insurance premium and even car maintenance costs (planned). The pinch on the pocket is not there when I save monthly and end of the tenure I get the money to pay for the commitments.
Wow .. Thanks for acknowledging that you are using the same as I have explained in the article . Lots of things to learn from you on this .
Manish
Very insightful information.
Could you plz elaborate upon tax part with simple example?
In features of RD you have mentioned in 1st point that no TDS applicable, could you plz send me a link or explain this particular part so that I get this point clear.
Thanks.
Rutvij – The bank does not do a TDS on RD accounts, unlike FD where they do TDS if interest > 10k. However the interest you earn is income for you and you have to declare it when you file the returns.
Dont ask me why they dont do TDS for RD interest… Even I am looking for the answer for that 🙂
Hope this answers the query ?
There is nothing to be explained here, its just RBI rule that TDS should not be cut in case of RD .
TDS is the advance tax cut by Banks on your interest . In case of RD, they cut TDS if interest is more than 10k in a year . Learn more about that point here – http://jagoinvestor.dev.diginnovators.site/2013/04/tds-tax-deducted-at-source-guide.html
However in case of RD’s , there is no TDS applicable , as per RBI rules.
Manish
I think you meant FD in first line 🙂
Not sure. I think I meant RD only
Manish
Hi Manish
I’m little confused, you first said in above post “In case of RD, they cut TDS if interest is more than 10k in a year .” and then said that “However in case of RD’s , there is no TDS applicable , as per RBI rules.”
As per my understanding TDS is applicable for any FD or RD. Will bank cut TDS at the time of payment of interest or has option to tell that as someone might miss to include it while filing returns. I’d personally want to get TDS deducted before interest is paid even if it is less than 10K as year if there is such option. I also wanted to know what if we miss to pay TDS on interest earned on FD as I heard from one of friend that he doesn’t pay any TDS and not file it in returns.
Just to add I meant – friend doesn’t pay any tax for interest on FDs – I mentioned it as TDS earlier. And I wanted to have option of TDS even on interest of less than 10K so that I don’t have to manually do it, do we’ve such options to tell bank while opening RDs? hope I’m not confusing.
Sorry , I mistakenly said wrong first
1. You need to pay the tax on both FD and RD interest
2. For FD , tds is deducted above 10k interest, else not
3. For RD , there is no TDS deducted !
Thanks Manish!, am stating an RD today for my daughter’s education expenses.
Great to know that. But are you talking about yearly recurring expenses on education or the long term corpus for higher studies ?
manish
My daughter is now 5 months old:), am referring to yearly fee expenses. A decent school here in Bangalore is costing +/- 1Lakh per year. A mid salaried person like me has to have some kinda secure source to bare these expenses. And hence inspired by your article today have decided to start an RD.
BTW – have already initiated the process with SBI today:)
Thanks again,
Lokesh
Thanks for sharing that Lokesh , so in your case , I think a monthly RD of 8,000 should be enough to accumulate 1 lac a year ! .
Manish
A beautiful article Manish!! Though I do at least 1 RD every year, this makes me realize that so much of order can be brought about in one’s life for purchases/decisions that are often classified as random/unplanned. Cheers
yea .. I think thats the best use of RD ! . I have also mentioned that in my 2nd book incase you have read it !
Manish
nice article Manish. I have been using this method of RD’s to plan for my insurance premiums as I wanted to avoid bulk payments in future. I think its a good way to do it because this one time planning ensures I wont default on my payments and saves me from unnecessary worries later on. Plus its a small amount of monthly payment so it doesn’t really make a significant difference in my lifestyle.
Thanks for confirming that Vishal 🙂 . I am sure this trick alone can change many investors financial life. All they need to be is a little disciplined 🙂
Manish
Even I follow the sme trick to pay my yearly insurance premium.
Good to know that Amrutha 🙂 ..