Recurring Deposit (RD) is one of the popular investment schemes in India. Most of the public and private banks offer RD scheme through the post offices. The interest rate of recurring deposit is similar to that of fixed deposit. You have to deposit certain fixed amount every month till the term you agree to pay. Most of the people prefer recurring deposit over Systematic Investment Plan (SIP) in mutual funds due to the less risk involved. In recurring deposit, there is no risk involved as far as capital protection and interest generation go if you complete your term. But there are various other types of risk involved which one must be aware of before opting for recurring deposit investment scheme.
Premature Withdrawal – Public banks and post offices may not allow you to withdraw your deposited money with interest before the term ends. It depends on their policy when you opt for recurring deposit scheme. However, private banks allow their customers to withdraw recurring deposit amount which includes money deposited and interest rate. But the interest rate calculated will be less than the prevailing interest rate of RD and a fine is levied according to the withdrawal policy of the bank.
Non-Payment of Monthly Installment – In RD, you have to pay a fixed amount every month. But in case you forget to pay the amount on the exact date and pay it after a few days, a penalty will be levied on the due amount as per the policy of the bank and the number of days by which you have delayed the payment. The penalty is generally in double digit percentage and deducted from the interest rate generated.
Furthermore, if your financial condition deteriorates and you fail to pay the fixed amount for consecutive months, your recurring deposit will be deactivated as per the non-payment policy of the bank. It generally varies from 3 to 6 months. You have to pay all the dues at once to bring back the account online. Certain banks also reserve the right to close your recurring deposit account permanently and hence, the only option you will have is to make a premature withdrawal with less interest rate than promised and a huge penalty.
Tax Deduction – The interest amount generated from the recurring deposit after maturity is liable to tax. It falls underthe category – income from other sources, and tax is deducted at the source. The rate is 10% at present, and you need to submit the PAN card details to withdraw your money. If you fail to furnish PAN card details, 20% of the interest amount will be deducted from the final amount.
Non-Changeable – The fixed amount that you decide to pay every month cannot be changed even if your financial condition deteriorates. As a matter of fact, the term of the deposit is also non-changeable. Therefore, choose your monthly payment and the term wisely. If you have certain financial goals in mind, you can use a recurring deposit calculator to calculate the amount you will receive on maturity and fix your installment amount accordingly.
If you are comfortable with the above-listed risks in recurring deposit, you can go ahead with your plan of opening a recurring deposit account and availing the perfect scheme for achieving your financial goals.