Recurring Deposit is a special kind of Term Deposit offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits. It is similar to making 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.
The Recurring Deposit can be funded by [Standing order (banking)|Standing instructions] which are the instructions by the customer to the bank to withdraw a certain sum of money from his Savings/ Current account and credit to the Recurring Deposit every month.
When the RD account is opened, the maturity value is indicated to the customer assuming that the monthly installments will be paid regularly on due dates. If any installment is delayed, the interest payable in the account will be reduced and will not be sufficient to reach the maturity value. Therefore, the difference in interest will be deducted from the maturity value as a penalty. The rate of penalty will be fixed upfront. Interest is compounded on quarterly basis in recurring deposits.
One can avail loans against the collateral of Recurring deposit up to 80 to 90% of the deposit value.
Rate of Interest offered is similar to that in Fixed Deposits. At present it seems to be one of the best method to save the amount yield after years of deposit because TDS is not applicable on RDs.
Taxation of Recurring Deposit Tax Deducted at Source ( TDS ) is not applicable on RDs. However interest from RD is not tax free. Income tax is to be paid on interest earned from a Recurring Deposit at the rate of tax slab of the RD holder.