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Investing in Recurring Deposits (RDs) - Check the pros and cons

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BANKS have begun to reduce deposit interest rates. Small investors, who do not have large amounts to invest in fixed deposits (FDs), can look at making regular invests in a recurring deposits (RDs).


How does an RD work?


RDs are like systematic investment plans (SIP) in FDs. You will have to choose the amount of investment that you can make every month and the tenure. However, you need to be sure that you will be able to pay the fixed amount every month because any delay in the payment of scheduled instalments will change the maturity amount due to application of penalty charges.

Most banks do not allow partial payment, nor can you pay more than the determined amount. The minimum balance of deposit and tenure varies from bank to bank. While in case of post offices, you can start an RD with Rs 10, with the State Bank of India (SBI), you can start an RD with a minimum amount of Rs 100, while for many private banks, the minimum deposit is Rs 500 per month. While some banks have no prescribed upper limit, most private sector banks allow you to invest up to Rs 14.99 lakh per month. A post office RD account is similar to an RD in a bank, but, has a fixed tenure of five years. However in a bank, the RD can be opened for six months to 120 months, or, 10 years in intervals of three months.


Method of earning interest: Says Surya Bhatia, a certified financial planner, "In an RD, you earn an interest on a compounding basis. Typically, the compounding is quarterly. So for instance, if you started an RD of Rs 1,000 from January 2012, the interest earned on your capital invested in February would be calculated for 11 months, while your RD in March will earn interest for 10 months."

Interest rates: While some banks, such as SBI, offer the same interest for an RD and for a FD, there are others who offer lower interest rates for RDs, compared with FDs. So, do compare the rates of banks before investing. For instance, HDFC Bank offers an interest rate of 7.25 per cent on an RD for 12 months, while on a regular FD of one year and one day to one year and 15 days, the rate is 9 per cent, while for a FD of one year and 16 days, the rate is 9.25 per cent. The bank offers 8.5 per cent for RDs of 15, 24 months, 9.25 per cent for 27, 36, 39, 48 and 60 months.

No TDS: The best feature of an RD is that there is no tax deducted at source (TDS). Adds Bhatia, "Although, RDs do not have TDS, the interest income is taxable on an accrual basis based on your marginal rate of tax." With no TDS, you don't have to open different RDs in multiple branches like you would have to with FDs to avoid TDS.

But, FDs offer you better ability to extract higher returns if you have ready funds to invest right away without spreading them over a few months. 

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