Benefits of Recurring Deposit: What makes RD an attractive savings scheme

Consistently saving every month will help you accelerate your wealth creation journey. If you want to automate the savings process, you can consider opening a recurring deposit, which is one of the most effective tools to build savings. 

A recurring deposit is a savings instrument that enables you to save a small amount every month for a specific time frame. You will receive interest and the principal amount back at the end of the chosen time frame. The interest on recurring deposits is typically higher than that offered on a savings account. Hence, it is preferable to contribute to a recurring deposit rather than keep excess money in your savings accounts. This article highlights the key benefits of recurring deposits and how they can boost your finances.

What is a Recurring Deposit? 

A recurring deposit is a savings scheme offered by banks, non-banking financial companies (NBFCs), and the post office, enabling you to save in monthly instalments. The tenure of the recurring deposit can range from six months to 10 years. A recurring deposit is a popular savings option due to the flexibility it offers — you can choose the amount to be invested and the time frame based on your earnings and goals. The amount is deducted each month on your selected date throughout the time frame. Wondering what other benefits recurring deposits offer? You can find the same below:

Eight Benefits of Investing in RD

Automate savings 

A key advantage of recurring deposits is that they enable you to save automatically. Just choose the amount, tenure, and deduction date, and rest assured that savings will become a way of life.  

Earn higher returns 

Recurring deposits offer a higher interest compared to when money sits idle in your savings account. For example, the interest provided on a savings bank account in SBI is 2.7%. Meanwhile, the interest rate SBI offers on a five-year RD is 5.6%. Also, RD interest rates are higher for senior citizens.

Zero risk 

Since the returns for recurring deposits are not market-linked, they pose no risk of depreciation. The interest promised at the end of the tenure is what you receive at maturity, along with the principal amount subject to all payments being made on time during the period of RD. You also get a complimentary insurance cover of up to Rs. 5 lakhs by DICGC on your bank RD.

Start saving with small amounts  

An RD lets you save in a hassle-free manner. If you can put away a small sum every month, the amount compounds, and your wealth grows consistently. The benefit of a post office recurring deposit, for instance, is that you can save as little as Rs. 100 per month while getting an interest of 5.8% for a tenure of five years.  

Commit to just six months 

For some, committing to a long savings tenure can seem intimidating. An RD is convenient as you can open a recurring deposit with a bank for a tenure of just six months.

Access to online banking

With access to net banking and mobile banking, you can easily open a recurring deposit account with a bank where you have an existing savings account. Fill in the required information, such as tenure, monthly instalment, and date of deduction, and get started easily.

Save for short-term goals

RDs are ideal for achieving short-term goals such as paying insurance or going on a short vacation at the end of six months or one year.

Loan facility

You can use your recurring deposit account in a bank as collateral to take a loan.  

Disadvantages of a Recurring Deposit

No tax saving

Recurring deposit holders cannot get any tax exemption under Section 80C or in any other section of the Income Tax Act of 1961.

Penalty on premature withdrawal

If you want to make a premature withdrawal, a penalty may be levied on the same. Premature withdrawal rules vary from bank to bank.

Lower returns than market-linked instruments

While higher than the interest earned on a savings account, recurring deposit returns are typically lower than market-linked returns earned through mutual funds or other stock market investments.  

Final Thoughts

The multiple benefits of a recurring deposit account make it a compelling savings opportunity, especially for those looking to save in small amounts for a short duration. It helps build a consistent saving habit to fuel your short-term goals and gradually get more ambitious in your investing journey.