What is the definition of Recurring deposit
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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 [II It is similar to making FDs of a certain amount in monthly installments.for example 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. Minimum Period of RD is 6 months and maximum is 10 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 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. Earlier it seemed to be one of the best method to save the amount yield after years of deposit. But effective from June 1, 2015 TDS is applicable on RDs.121
Taxation of Recurring Deposit
Tax Deducted at Source (TDS ) is applicable on RD5. If interest earned on recurring deposits exceeds Rs. 10.000 a year. TDS at the rate of 10 per cent 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 1SG to avoid TDS on both recurring deposits and fixed deposits.
Formula to calculate RD =Pn(n+1)r/2400
The formula to calculate the interest is given as under: I = where I is the interest. n is time in months and r is rate of interest per annum.
The formula to calculate the maturity amount is as follows: Total sum deposited+Interest on it = P — I