Recurring Deposit Account Definition
Recurring Deposit is a special type of deposit account which enables a depositor to save by paying into the account an agreed fixed sum of money monthly over a stipulated period. The deposits in this type of account earn compound interest on quarterly basis. Longer the period for which monthly deposits are agreed to be made, higher is the rate of interest subject to rules. This account is most suitable for fixed income people.
Features of Recurring Deposit Account
- Any individual or HUF can open a recurring deposit with a bank or post office.
- Recurring deposit gives the investor the benefit of a fixed rate.
- Minimum period for recurring deposit is 6 months, and thereafter in multiples of 3 months upto a maximum period of 10 years.
- The minimum investment is 100 at most banks, while post offices accept even an initial amount of 10. Some banks have an upper limit of 15 lakh
- Senior citizens are eligible for a higher rate of interest, usually 0.5% more than that for other investors.
- It also doesn’t allow depositors to change the tenure. You could have to pay a penalty for premature withdrawal
Monthly installment of recurring deposit should be fixed on the basic of needs and affordability of the person so that he/she don’t miss any installment in the future. If he/she has missed his/her any installment this may lead to a default, which could result in a penalty. The penalty depends on the monthly installment and the number of days by which the payment is delayed. Penalty is deducted from the interest that has been accrued on the deposit till then. Each bank has its own policy on dealing with defaulters.
Tax implications in Recurring Deposit
There is no tax deduction or exemption available on the amount invested in recurring deposit and interest earned on the amount is fully taxable. The tax has to be paid every year as it accrues. Benefit is that tax is not deducted at source.