Recurring Deposit- A scheme for small investors

Recurring Deposit is the most preferred investment for conservative investors. The concern of volatility in investments and assured benefit on maturity is what makes it the first choice when it comes to regular savings for child future, buying a house, and others. Many even include it in long term planning for their goals and at times rely on this instrument. In recent years the higher rate of interest has also favored investing in this instrument. However, one need to analyze the real benefit from the product before making a decision.

What is a Recurring Deposit?
A RD 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. Taxability
Like fixed deposit the interest in a Recurring Deposit scheme is fully taxable. However, there is a difference between the taxability of these two instrument. 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. Points to Ponder
Since RD is a monthly deposit scheme, there are caveats associated with it. If an investor defaults on the payments then banks or post office charge a penalty or even close the scheme if the defaults go above a limit. The other factor to consider is that the payment amount remains fixed for the term which means one have to think before committing for this recurring savings. You should not commit a higher amount which you may find difficult to sustain in case any emergency arises. One can avail a loan facility in case of need which is based on the deposit balance in the scheme. There is also premature withdrawal flexibility available after a certain term, say 1-3 year, but with a penalty. So you will have to read all the terms, which can vary across banks, before you choose a RD scheme. Variant of RD
There are now flexi scheme available in RD where one can contribute any amount multiple number of times in a month. Some banks even do not charge for any default on these monthly payments. However, in many banks this scheme is in highly variance to regular scheme as the interest is subject to TDS making it like a multiple fixed deposit scheme. Thus, one needs to check the terms clearly before availing a flexible deposit scheme.
A recurring deposit is a good option for many small investors especially when interest income is not subject to tax. The fixed interest for 5-10 years ensures the maturity amount to be received and so one can plan it for various needs. However, when it comes to wealth accumulation the alternatives throw a better opportunity which should be well analyzed before making a decision.