A Recurring Deposit is a deposit scheme, much like a fixed deposit, where an investor chooses the amount to invest and the term of investment. However, unlike FD, the mode of investment is not a lumpsum amount but regular monthly savings. Thus the scheme works like an SIP in fixed deposits. Only banks and post office offers RD scheme. The investors receives a fixed interest for the term and on maturity the principal along with interest is paid. Generally, the term of this scheme varies from 6 months to 10 year. While most banks accept a minimum deposit of Rs 100, one can start the investment in a RD scheme even by Rs 10 through post office. Some banks even impose maximum limit on the amount of investment one can make.

Who can Invest?
All resident Indian and HUF are allowed to open a RD scheme with any of the banks or post office. Even NRIs can open an RD scheme though their NRE account but only at the banks and not post office.

Like fixed deposit, the interest in a Recurring Deposit scheme is taxable. However, there is a difference between the taxability of these two instruments. In a RD investment, there is no TDS deducted by the bank /post office and there is neither any exemption available. Thus, the liability of paying tax on this scheme is entirely on the investors. Although the interest is received on maturity the tax is payable every year as it gets accrued. If the investment is in a minors name then the interest income is clubbed with the parent with higher income. Due to the taxability of this interest amount, the net return from the scheme varies for individual in different tax slab.

Who benefits?
The scheme is much in demand during the last 1-2 years due to higher interest rate. Even in existing scenario, the interest rate offered by most banks for a 5-10 year deposit is roughly 8-9%. This is still attractive to lower income individuals and senior citizens considering the interest remains fixed for the term. However, for higher tax slab the debt mutual funds offers higher tax efficiency and so this may not be a viable option. Thus an RD scheme is an ideal choice for small investors whose interest income will not fall in those taxable limits.

From India, Ahmadabad

RD gives you discipline and regular savings with a specific time period.You may want a car in three years -open an RD and work towards saving max money possible
However Honble Jaitley has brought in TDS for F/Y 2015-16.
Amendments made to Section 194A will mean that interest income above Rs 10,000 for an RD, will attract TDS.
If your risk appetite is higher go in for SIP of a five star rated Large Cap fund.

From India, Pune

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