With the upcoming apprehension of recession in the air, the chances of meeting your financial goals in the future might seem slim if you do not have a well-thought-out plan in place. Moreover, in the current economy, it is not possible for everyone to come up with a huge lump sum amount set aside for the purpose of investing. Thus, the most feasible option in such a situation is to make small and regular investments to attain your goals in future by sustaining funds.

Recurring Deposits

Source: Shutterstock

Recurring deposits offer investors a disciplined and sustainable option for wealth creation. Recurring deposits come in handy for people who have set goals for the future, such as buying a luxury car or building the house of their dreams or simply working to build wealth for their children’s higher education. Ergo, here is everything you need to know about recurring deposits to meet your saving goals in the long haul with small investments.

What are Recurring Deposits?

Recurring Deposits (RD) are a type of financial product offered by banks and financial institutions that allow investors to save small amounts of money on a regular basis for a fixed tenure in place of making a huge commitment by investing a huge lump sum amount. RDs work on the principle of systematic savings, where the account holder is required to deposit a pre-decided amount on a monthly basis for the duration of the RD tenure.

RDs have a minimum deposit requirement that varies from bank to bank and normally falls between Rs. 100 and Rs. 1000. An RD typically has a duration of six months to ten years, with the interest rate ranging according to the bank or financial institution and the tenure.

Recurring Deposits

Source: Shutterstock

A fixed rate of interest is offered on RDs, which is typically higher than the interest on savings accounts. RD interest is typically compounded every three months. The account holder receives both the principal and interest earned at the completion of the term.

Benefits of Recurring Deposits

Recurring Deposits (RDs) are a popular savings option that offers several benefits to the account holder. Here are a few key benefits of RDs:

• Systematic Savings: RDs promote regular and systematic savings, as the account holder is required to deposit a fixed sum on a monthly basis. This helps investors inculcate a savings habit and achieve their financial goals systematically.

 

• Fixed Returns: RDs offer a fixed rate of interest, which is higher than the interest offered on savings accounts. This allows investors to plan and achieve their financial goals more effectively.

 

• Flexibility: RDs offer flexibility in terms of deposit amounts, tenure, and premature withdrawals. This makes it a versatile savings option that can be customized to suit the account holder’s financial goals and preferences.

 

• Low Minimum Investment: RDs require a lower minimum investment compared to other savings instruments such as fixed deposits or mutual funds. This makes it accessible to investors with varying income levels.

 

• Compounding Benefits: RDs offer the benefit of compounding interest, where the interest earned on the recurring deposits is added to the principal amount, which earns interest in the subsequent period. This results in higher returns in the long run, making RDs an effective tool for long-term savings.

How is Income Tax Slab Related to RD?

Recurring deposits (RDs) and income tax slab are related as the interest earned on RDs is taxable, and the tax liability depends on the individual’s income tax slab. The interest received on RDs is considered income and is included in the individual’s annual income total. Next, using the individual’s income tax bracket, the tax obligation on this interest income is determined.

For example, if an individual earns Rs. 10,000 as interest income from RDs in a fiscal year, and their total income for the year is Rs. 5,00,000, they will fall under the 10% income tax slab. Hence, their tax liability on the RD interest income will be 10% of Rs. 10,000, which is Rs. 1,000. Similarly, if the individual’s income is higher, say Rs. 10,00,000, they will fall under the 30% income tax slab, and their tax liability on the RD interest income will be Rs. 3,000.

It is pivotal to note that the interest earned on RDs is subject to Tax Deducted at Source (TDS) if it exceeds Rs. 40,000 per fiscal year. The TDS rate is 10% if the PAN details are provided or 20% if the PAN details are not provided. However, the actual tax liability may be lower or higher depending on the individual’s income tax slab and other deductions and exemptions available to them under the Income Tax Act of 1961.

Final Thoughts

In summary, recurring deposits offer a range of benefits, such as regular and systematic savings, fixed returns, flexibility, low minimum investment, compounding benefits, and loan facilities. These benefits make RDs an effective savings instrument for investors with short-term and long-term financial goals.