Recurring deposit: Before investing, weigh bank and Post Office options

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Regular small savings every month helps us to create a handsome corpus without feeling a burden. While SIP in a mutual fund does not guarantee a fixed return and is not appropriate for those valuing safety of funds above everything else, a recurring deposit (RD) gives a guaranteed return after a specific period.

An individual can open RDs both in a bank and a post office simultaneously.

You can contribute as low as Rs 100 a month to open a RD in a bank or a post office. You only need a savings account in the bank or post office in your name to start a recurring deposit.

Bank RD

Bank RDs have certain features that their post office counterparts don’t offer. You can open a RD for time periods varying from 6 months to 120 months in banks.

For a 12-month RD banks generally offer interest rates between 5% and 6%. For 5-year RD banks offer 6% to 6.6% interest rate for all people except senior citizens.

People above 60 generally get interest rate which is 20-25 basis points higher than the normal rate.

The scheme gives you a fixed rate of returns. Flexible RD schemes are also available with different banks.

Tax may be deducted at source if the interest income earned on recurring deposits across branches exceeds Rs 40,000 per financial year. The limit for senior citizens is Rs 50,000 per financial year.

Taxpayers with total annual income within the basic exemption limit may submit Form 15G/15H to the bank requesting not to deduct tax at source.

Post office RD

The minimum contribution is as low as Rs 100, and, thereafter, in multiples of Rs 10.

However, the tenure of recurring deposit is fixed in post offices. One cannot open a RD for a term less than 5 years. The interest rate is 5.8%, compounding quarterly.

Any person above 10 years can open a RD. The tax deductibility rules are the same as in banks.

The interest earned on an RD is paid on maturity along with the principal.

One has to visit a post office to open a RD, but, in case of banks, one can easily do it with the help of cellphones or internet banking.

Expert take

Investment planners feel that RD is a basic investment instruments and one can start one even with his/her pocket money. This helps inculcate a habit of saving.

If one needs quick return (within 1-3 year) one should go with a bank. Else one can go either with a post office or a bank.

“One of the main disadvantages of recurring deposits is that it is not tax efficient. Interest income from RD is added to income for declaring tax liability and TDS is applicable on interest earned from a RD. Besides the returns are low as is the risk,” said Nilotpal Banerjee, an investment planner in Kolkata.

However, for people willing to invest a fixed and small amount every month, opening a RD still is certainly an option, added Banerjee.