A recurring deposit is a special kind of term deposit offered by banks 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 fixed deposits of a certain amount in monthly installments. This deposit matures on a specific date in the future along with all the deposits made every month. Recurring deposit schemes allow customers an opportunity to build up their savings through regular monthly deposits of a fixed sum over a fixed period of time. The minimum period of a recurring deposit is six months and the maximum is ten years.
The recurring deposit can be funded by 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 account.
When the recurring deposit 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 a recurring deposit up to 80 to 90% of the deposit value.
The formula to calculate the interest is given as under: where I is the interest, n is time in months and r is rate of interest per annum and P is the principal amount.
The formula to calculate the maturity amount is as follows: Total sum deposited+Interest on it .
Tax deducted at source (TDS) is applicable on recurring deposits. If interest earned on recurring deposits exceeds Rs. 40,000 a year, TDS at the rate of 10% would be deducted by the bank. Income tax is to be paid on interest earned from a Recurring Deposit at the rate of tax slab of the RD holder. Investors with no taxable income will have to submit Form 15G to avoid TDS on both recurring deposits and fixed deposits.
- "From Post Office RD, Bank RD to Debt MF SIP, find out your option for risk-free recurring deposits". 13 June 2019. Retrieved 23 June 2019.
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- M.L. Aggarwal. APC Understanding ICSE Mathematics - Class 10 - Avichal Publishing Company. Avichal Publishing Company. pp. 58–. ISBN 978-81-7739-302-6.