Recurring Deposits: Tax and Interest Rates

by Manshu on August 19, 2011

in Fixed Deposits

This is another post from the Suggest a Topic page, and this time we’re going to take a look at Recurring Deposits.

The original comment had a question on how tax is calculated on recurring deposits, and unfortunately I didn’t get any authoritative information on that. I did speak to one person who described how this will be calculated, but he wasn’t entirely certain himself.

So I will describe the tax on recurring deposits based on what he told me, and my own understanding and interpretation of what he said. I don’t know how accurate this is and if any of you have any good links or have practical experience, please do leave a comment.

Tax on Recurring Deposits

First, what I do know for sure – RDs are not tax free!

While doing research for this article I came across a few forums where people were asking if interest income from RDs is tax free or not. I don’t know what the origin for the question is but it could be people confusing no TDS with any tax at all.

Banks don’t deduct tax at source on RDs but the interest itself is taxable like other interest income. It will be added to the rest of your income and taxed at your slab.

This is what I think will happen

If you take a RD for the duration of over a year, say 2 years – then you will have to see how much interest accrues to you in one financial year, and then declare that interest as part of your return and pay tax on it.

So, even though you are still paying installments for the RD, and it hasn’t matured yet, you will need to declare the income that has accrued to you, and pay tax on it.

You add the interest income to your salary, and then pay tax on your regular tax rate. The interest earned can be calculated using a calculator such as the one on the Corporation Bank website.  

Let me reiterate that  I have never done this myself, and I am not a 100% certain if this is the right way or not – please do leave a comment if you know otherwise.

Here are some other things I found about RDs.

Interest rates on Recurring Deposits

I was going through the interest rate page of ICICI Bank, and saw that they give interest rates of 8.25% on RDs of 12, 15, 18, and 21 months, but they give 9.25% on a 390 day fixed deposit.

A few other bank websites said that they offered RDs at the same interest rate as the fixed deposit, but I think that means exclusion of special interest rates that banks give on deposits of 390, 555, 400 day maturities etc., and since these are the maturities that give you the higher interest rate, it looks like the interest on a RD will be lower than a fixed deposit.

Effect of Direct Tax Code on Recurring Deposits

I’ve seen that sooner or later someone comes along and asks how DTC will affect a particular product, so I thought to include this here.

There are no tax benefits of investing in RDs, they aren’t covered under Section 80C, and the interest is not tax free either. So, there are no tax benefits of investing RDs that will be affected negatively by the DTC. The tax slabs will change in DTC, and since interest income from RDs are going to be taxed according to your income slab – that’s the only effect that DTC will have on RD. In my opinion, this is not material or something that will make a difference in your decision to opt for a RD or not.

Stopping Recurring Deposits Early

Banks allow you to stop your recurring deposit earlier than the maturity period, but like fixed deposits, you get a lower interest rate than what you have settled for, and in some cases there is some penalty as well, which is also called a service charge in some banks.

Conclusion

In my mind, the difference in interest rates makes the fixed deposit a better option than a recurring deposit, and probably the only reason to do a recurring deposit is to get into the habit of saving and putting aside a fixed sum every month. Even so, I think shorter dated RDs are much better than longer dated ones because after a year or so you can take the maturity amount and open a fixed deposit where you will get a better return.

Views: 176921


Get free daily updates in your email:






{ 91 comments… read them below or add one }

ujjwal August 19, 2011 at 8:24 am

manshu, what i have learned that basically, RD is compounded monthly …and fixed deposit is compounded annually ( for the same rate of interest) and if the FD is compounded quarterly or monthly, you will see that interest rate is lesser…acually, currently i have two RD in Karur v bank….and i have calculated the difference in money ( suppose, instead of doing RD ,if i do FD everymonth )…..my outcome is that i am getting 500 rs more…..
RD is better than FD in terms of yield and also it give you a habit of saving….

Reply

Manshu August 21, 2011 at 10:40 pm

I’m curious to see what numbers you’re using Ujjwal – please let me know about the plans and numbers you are using. It will make for an interesting analysis.

Reply

Paresh August 20, 2011 at 7:35 pm

You are correct that income is taxable and calculated per year.I think it is not necessary to calculate but you can get interest paid certificate from respective bank / institution.We can not calculate it easily as calculation is not limited to installments paid this year but also important to calculate interest on incurred amount of previous years as interest is on compounding basis.

To Ujjwal: Most of the banks offers quarterly compounded interest rates both on FDs and RDs.And if anyone have suppose to have Rs.36000/- yield is better if invested in Fds for 3 years rather than investing Rs.1000/- per month for 3 years.

Institutions like HDFC / DHFL (not HDFC bank), offers compounded annual rates both on FDs as well on RDs.

Reply

Manshu August 21, 2011 at 10:14 pm

Thanks for your comment Paresh – glad to get some confirmation on this.

Reply

Paresh August 23, 2011 at 8:25 pm

Thank you Manshu and hopefully you will allow me to add some points.

If anyone fails to pay any installments, there is certain % of penalties (like most of banks charges Rs.2.5 per 1000/-) and after successive 3 defaults RD account is closed and money get credited in saving account.If account is operative more than 12 months,then there may be partial penalty but for period of less than 12 months only principal is refunded and is applicable for most of the banks.

Reply

Manshu August 24, 2011 at 5:11 am

Thank you so much for your great ideas on this post. I think I should make a mini post out of this information that you have so graciously provided. Thanks!

Reply

ujjwal August 22, 2011 at 2:36 pm

paresh and manshu
yes, i think paresh is right….my previous calculation was wrong….after long hour of study, i came to know generally banks give same compounding both RD and FD whether it is quaterly or yearly…my RD is rs 4000 of 24 months tenure with KVB @ 10 %……its maturity value is 106580..which is compounded quarterly…..i came to know this when i wrote a matlab programme for maturity ammount…..if it were componded monthly, the value would be 106675….acutally, previously i ignored this small 100 rs amount and thought RD is compounded monthly….and now i have written another programme to calculate the RD in case of compounding quarterly and the amount is matching exactly……and then assuming FD are componded yearly, i made my calculations. thats why i was getting the difference in money….
so, thanks paresh for removing my false concept….
p.s: i am attaching both the programme to make sure i am right…this time no mistake
for calculation maturity value for monthly compounding
close all
clear all
int=0;
for i=1:24
a=i*4000;
b=int+a;
interest(i)=b/120;
int=sum(interest);
end
totalrd=a+int;

and in case of compounded quaterly
close all
clear all
int2=0;
a=0;
for j=1:8
b(j)=int2(j)+a;
for i=1:3
a=i*4000+b(j);
interest(i)=a/120;
end
int2(j+1)=sum(interest);
end
totalrd1=a+int2;

Reply

Manshu August 22, 2011 at 4:32 pm

Wow that’s quite extensive Ujjwal – thanks for sharing. I don’t know how to use Matlab myself, but maybe someone else might find it useful.

Reply

Paresh August 23, 2011 at 8:35 pm

I am happy that I am able to remove your confusion.
About matlab code,its looks great but its beyond at least my understandings as I am not so much educated to understand it.

Reply

ujjwal August 22, 2011 at 2:47 pm

anyway…i think RD is suitable if investment time horizon is less than 2 years….market is uncertain and you do not want to take any risk ….and you need to built the amount slowly..when you are starting your financial carrer and there is not much cash-backing…..so, in conclusion, RD is best suited for your initial years….as in my case…..

Reply

Raghavendra August 23, 2011 at 4:41 pm

Hi Manshu,

TDS will be there for RD or FD, if your intesrest amount crosses 5k or 10k (based on bank). The bank will issue a TDS certificate and your can use it while filing tax.

Coming to interest calculation, the interest will be compounded on quartely for both RD/FD.
you can cross verify these details by calling to the bank u r going to invest.

I feel this good time for RDs as the itesrest rates are almost peak. May be another rate hike by RBI can fetch .25/.5% more.

Afterwards the interest rates will go down with th time. So i can say this is the best time to start RD.

Regards,
Raghavendra.

Reply

Manshu August 24, 2011 at 5:23 am

Hi Raghavendra,

The bank websites say that there is no TDS applicable, so can you please tell me what the source of your info is?

Reply

Rupesh S Mahadik April 21, 2012 at 2:16 pm

In case of RD / FD if the total interest amount in that particular year exceeds 10K then bank will deduct TDS else TDS will not be applicable. But the point to be noted is that whether bank deducts TDS or not, at the end this interest amount is going to be added to your annual salary & you have to end up paying Income Tax on this amount when you file your IT Returns. Hope this makes it clear.

Reply

Manshu April 22, 2012 at 8:22 pm

TDS is fine, that’s very well known and I don’t think there is any confusion on TDS. It’s the accrual versus payment of RD maturity and the tax on that which is a bit confusing.

Reply

Nitesh Kumar August 25, 2011 at 11:46 am

You were very much right while saying RD is best for 2 to 3 year…but FD is best for more than 3 year…Secondly i want to say if you have opend RD online you can see the intrest accumalted in your RD online which is changing everymonth. This RD is best when you have income from intrest on monthly basis. like you have a MIS in post office…that there is fixed deposit and intrest taken from MIS is deposited in RD. Duel benefit. Am i right dear.

Reply

Rupesh S Mahadik April 21, 2012 at 2:25 pm

I think one cannot say that RD is best for a shorter duration & FD for a longer duration. What I have learned from my experiences is that when it comes to a small but gradual investment RD is the best because the input amount can be kept very small & convenient with a good return ofcourse when the interest rates are good, but FD is very best when you have a good lump sum amount in hand & do not require it immediately i.e can forget the same after installing for the next few years. When it comes to getting good returns from both there are many factors such as the amount invested, interest rates & most important the duration because the more the duration the more the compounding & the more the return. Talking about PO MIS + RD, the duration is longer i.e 6 years previously now it is 5 years, but there is a great difference in the rate of interest as compared to what banks are offering today. But still more secure PAANCH Saal ke liye amount lock karo aur maturity tak bhool jaao, returns accha pakka hai.

Reply

ankm83 August 29, 2011 at 11:09 pm

Manshu i found in hdfc bank, interest on RD is 1% lower than highest FD rate. But i suppose RD rate would remain fixed for entire tenure, right? Just to compare, if 1-2 year down the line interest rates fall by 2-2.5%, i would get much lower in a FD, than what i would have locked with a RD (thts i lock my future cash flows at a stable rate). Does it make sense?

Reply

Manshu August 30, 2011 at 4:55 am

If interest rates rise then you already settled for a slightly lower rate, and if you want to break the RD then you will have to forego some money there as well – so it’s a double edged sword :)

Reply

ankm83 August 30, 2011 at 9:15 am

Considering we are already at peak of interest rate cycle now (deposit rates shudnt rise further), would be a good option to do some RD for a medium to long term horizon. Some banks (particularly PSUs) offering same rates for FD and RD. Besides, penalty for breaking RD i guess would be similar to FD.

Reply

ankm83 August 29, 2011 at 11:11 pm

and also can i only open a RD account in a bank in which i have salary account? cant i go for a different bank?

Reply

Manshu August 30, 2011 at 4:49 am

You can open an RD even if you don’t have a salary account, in fact a lot of times banks insist that you open a savings account in their branch in order to get a fixed deposit but even that’s not true. Many people here have commented that they have insisted and the bank let them open a FD without a savings bank account.

Reply

bemoneyaware September 2, 2011 at 3:38 am

Late but hopefully will add value.

Someone has said “death and tax cannot be avoided” so Recurring Deposit(RD) are no different. (Only place where EEE works is PPF fund. Under the EEE policy, there is (i) tax Exemption on Investing, (ii) tax Exemption during Accruals and (iii) tax Exemption on Withdrawal. )

Interest on RD (or infact any investment for more than one year) can be claimed either on:
1. Accrual basis: year on year basis
OR
2. Receipt basis: the year of maturity.

It all depends on the method of accounting adopted and should be consistently followed.
Advantage of Accrual basis is that you pay in parts but have to pay every-year while in Receipt basis you end up paying once but amount would be more.

One of the popular RD is the Post office RD which is combined with Monthly Income Scheme(POMIS). I have personally invested in it.
Giving an example:
If we max the amount in POMIS 9 lakh for a joint account:
Deposit amount in INR: 9000000
Monthly Interest is INR: 6000
If Monthly interest deposited in RD Account
Maturity Value in INR: 546048
MIS TO RD AUTO CONVERT

5% Bonus of MIS in INR: 45000
Total Gain in INR: 591048
Per Year Gain in INR: 98508
Percentage interest in INR: 10.945333333333334
(Calculations are from: http://www.indiapost.gov.in/netscape/6yearsMIS.html)
Details of PO RD is:http://www.indiapost.gov.in/netscape/5YearsRD.html
Details of POMIS with RD: http://www.indiapost.gov.in/netscape/6yearsMIS.html

References for Tax on RD.
http://www.caclubindia.com/experts/taxability-of-int-recd-on-recurring-deposits-296640.asp
http://www.thehindubusinessline.com/todays-paper/tp-investmentworld/article1014742.ece

A good article about RD is:
http://www.raagvamdatt.com/An-introduction-to-Recurring-Deposit

Reply

ankm83 September 2, 2011 at 10:17 am

does it mean that taxability upon maturity in case of RD is based on ~ capital gains?

Reply

Paresh September 2, 2011 at 11:24 am

Its true that we can pay tax on annual interest or in the year when accured interest is received. but if accured interest is very high then it can change your tax bracket and one may need to pay higher taxes.so its better to pay off the taxes yearly basis.

I do not know exactly but its same thing for NCDs also.

Reply

bemoneyaware September 2, 2011 at 1:33 pm

Rightly said that in Receipt basis tax would be more..but I have seen people who are not aware of it (I wasn’t till sometime back) and hence end up paying in Receipt basis.

Reply

bemoneyaware September 2, 2011 at 1:31 pm

No I don’t think so and please correct me if I am wrong ..no indexation is used for calculation just like in FDs,

Reply

Paresh September 2, 2011 at 11:20 am

Kindly allow me to find some loopholes in above calculation:
1.Postal MIS is of 6 yrs period.so if we invest monthly interest of Rs.6000/- for 6 yrs,maturity amount is nearly 5,55,000.(As postal RD is of period 5 yrs we can assume that interest earned is shifted to another RD account for remaining 1 yr.)

Adding 5% bonus as stated above total receivable at maturity.e after 6 yrs is:
5,56,000 + 45,000 + principle(9,00000) = 15 Lakh. and 1 thousand.
If we calculate for returns then it comes to actually: 8.60 compounded quarterly.

Reply

bemoneyaware September 2, 2011 at 12:34 pm

Thanks Paresh for your comment. Is there a loophole in calculation or just another way of calculation? My two cents for it:

Interest calculation as per POSMIS link(http://www.indiapost.gov.in/netscape/6yearsMIS.html)
is as follows:
Values are:
Deposit amount in INR: 9000000, Monthly Interest is INR: 6000, Maturity Value in INR: 546048
5% Bonus of MIS in INR: 45000

Total Gain in INR: 591048
Per Year Gain in INR= 591048/6= 98508

Interest = 100* Interest gain per year / Amount deposited
= 100 * 98508/90000
= 10.94533

We have often found that There are atleast two ways to measure the rate of return on an investment:
- Average annual rate of return or
- Compound rate of return

Usually Average rate of return would be higher than Compound Rate of Return. From the point of view of seller which one would he use…no guesses for it.

Awaiting your reply

Reply

Paresh September 2, 2011 at 12:56 pm

I agree that its wrong to call it as loophole.You show it as yield and I show as returns.

But i think for investments of more than 1 yr,returns should be calculated in terms of compounded annual / quarterly basis..generally not in terms of yields.
Banks offer interest rate of quarterly compounding so I show it as compounding quarterly basis and investors can compare it much easily,Otherwise readers may have entered into some confusion.

Reply

bemoneyaware September 2, 2011 at 1:30 pm

Paresh that was speedy..I posted reply before lunch and when I came back saw the reply. Bang goes my nap :-)

It is NOT a loophole. It is just another way of calculation. As an investor we need to be AWARE of what ways can the seller report the return on investment. We need to question the return reported. And We need to find one way of calculating returns..for we can’t end up comparing apples to oranges. But sadly most of the time we are either too lazy or just ignorant of finding the answers. And that’s why the forum like onemint helps.

Reply

Umesh September 6, 2011 at 7:48 pm

Hi Bemoneyaware

Thanks you use the term EEE.

Please be kind enough to let me know whether NSC is EEE or EET (though accruals are taxable but exemp because of reinvestment)

I am very much confused, as for withdrawls are exempt or taxable, as getting different replies from different source.

Thanks

Umesh

Reply

bemoneyaware September 7, 2011 at 3:29 am

Hello Umesh,

I can understand the confusion regarding whether NSC is EEE or EET. I also searched the net and got more confused then I started. I am not a financial person so I asked my CA and once I have his answer I shall let you know. But I shall try to explain what I know.

E- means Exempt
T- means Taxable.
When one invests in any financial instrument then there are 3 stages:
1. Investment Stage: when one invests
2. Earnings Stage: when one gets benefit(earns interest) on investment.
3. Withdrawal Stage: when one withdraws the whole or part of your investment with benefit i.e. interest or accrued interest

All financial instruments fall under categories.
EEE (Exempt – Exempt – Exempt)
EET (Exempt – Exempt – Taxable)
ETE (Exempt – Taxable – Exempt)
ETT (Exempt – Taxable – Taxable)

For Public Provident Fund (PPF)
Investment: Tax-deductible upto amount Rs 70,000 to maximum limit of 1,00,000 under section 80C.
Accumulation: Tax-free
Withdrawal: Tax-free
Stages : Exempt – Exempt – Exempt or EEE regime is followed for PPF.

National Saving Certificate or NSC offers 8% interest compounded half-yearly. Due the compounding, the effective rate per annum works out to 8.16%. It is a cumulative scheme with a term of six years, meaning, though the interest accrues every year, it is paid to the investor together with the initial capital invested at the end of six years. For example, Rs 10,0000 invested in NSC today will grow to Rs 1,60,110 at the end of six years.

Illustration: You invest Rs 1,00,000 in an NSC on April 1. Interest on this investment for each year is shown in the following table:

April 1, Initial investment 100,000
Mar 31, interest for Yr 1: 8,160
Mar 31, interest for Yr 2: 8,830
Mar 31, interest for Yr 3: 9,550
Mar 31, interest for Yr 4: 10,330
Mar 31, interest for Yr 5: 11,170
Mar 31, interest for Yr 6: 12,070
Total interest 60,110
Total value of investment: 1,60,110

Investment: Tax-deductible up-to limit of 1,00,000 under section 80C
Accumulation: ??
Withdrawal: ??

Let’s talk about the tax treatment of the interest paid out:
Each year’s interest for the first 5 years is considered reinvested in the NSC. Since it is deemed reinvested, it qualifies for a fresh deduction under Sec 80C, thereby making it tax-free. Only the final year’s interest, when the NSC matures, does not receive a tax deduction as it does not get reinvested, but is paid back to the investor along with the interest of the earlier years and the capital amount.

To benefit from this feature of reinvested interest and its deduction, it is important to declare the accrued interest on NSC on a yearly basis in your tax return. In the above example, you will include the interest amount of Rs 8,160 in your tax return under the head “Income from Other Sources”. Under deductions, you will claim Rs 8,160 under Sec 80C as reinvested NSC interest. Both cancel each other out, making the interest in effect tax-free.

From the above discussion, it may appear that both NSC and PPF interest is tax-free. However, the difference is that PPF interest is tax-free per se, whereas the NSC interest becomes tax-free on account of the deemed reinvestment under Sec 80C. Remember that Section 80C has a limit of Rs 1 lakh. Your NSC interest would only qualify for the deduction provided you have funds left in Sec 80C. Provident fund contributions, insurance premiums, housing loan principal repayments, tuition fees, PPF, tax saving mutual funds and bank deposits — not to mention any fresh investment in NSC — are also covered under the same Rs 1 lakh limit

So In the second stage the interest is taxable or not depends on whether one has exhausted the limit of 80C or not?

Withdrawal stage: No where I found any mention on tax of withdrawal which I interpret as it will be taxed.

More on once I hear from my CA.
Hope it helps.

Reply

Umesh September 7, 2011 at 1:25 pm

Hi Bemoneyaware

Thanks for your such a detailed reply.

Although I am not related to finance in any capacity as well but being interested in personal finance made me aware of EEE etc and about NSC before but you explained all these things so clearly, in layman language, that it will certainly be useful to me and other readers as well. Thanks once more.

Please do write when you get reply from your CA.

Umesh

Reply

bemoneyaware September 7, 2011 at 5:15 pm

Thanks Umesh.

We are in the same boat. I am also not related to finance but interested in personal finance , learning thanks to onemint and other blogs. Once I get the answer from my CA(He is down with viral) I shall update .

I need to thank you for asking for in trying to explain you we learnt a lot. Now realized why my teacher used to say “If you want to learn teach”.

Thanks Manshu for the forum.

Kirti
on behalf of bemoneyaware.com

Reply

Umesh September 7, 2011 at 9:27 pm

Hi kirti

Yes, Hats off to Manshu for such a forum and to make us learn the fundamentals of personal finance in simple language

Umesh

Reply

Manshu September 11, 2011 at 5:16 am

You people are just too kind, complimenting me when you are doing all the hard work of researching and contacting CAs for this information. Thank you for being so wonderful :)

Reply

Paresh September 7, 2011 at 7:57 pm

Interest of NSC is taxable….

I do not understand the confusion but it may be in tax benefits on capital invested and capital received…
As both of you,I am also non-finance person…so confirm it..

Reply

Umesh September 7, 2011 at 9:22 pm

Hi Paresh

Yes. You got it.

You get 80C benefit on investment, you get 80C benefit on interest for 5 years, though interest accrued is taxable but exempted as deemed reinvested. (6th year ‘s is taxable and one has to pay tax on it, no exemption) then after completion of 6 years you withdraw this amount.

The confusion is about this maturity amount, whether this amount is taxable or not. You just search internet for this and you will get more confused, either no answer or different answers.

If this amount is tax free then it is ok and if taxable then, question arises, why we should invest in NSC as we will end up paying more tax, than what we saved 6 years before. (may be at higher slab also)

Umesh

Reply

Paresh September 7, 2011 at 10:13 pm

I think due to safety factor and to save tax only..
I have spend nearly 22 initial years in a small village and there is nothing better that POST to save tax.

Reply

bemoneyaware September 8, 2011 at 3:21 am

Bottom Line:Interest earned on NSC(except the last year) is included in Total Income then it deducted u/s 80c. If you have exhausted 80c limit of Rs. 1,00,000/- then it is taxable.
Detail:
Till FY 2004-’05, an individual could avail of a deduction under Section 80L of the Income Tax Act. This limit was Rs 12,000 of interest income received during the financial year.

This deduction has been done away with from FY 2005-’06.The interest accrued on NSC is taxable. But, it is also eligible for a deduction under Section 80C.

Generally, it is advisable to declare accrued interest on NSC on a yearly basis. So, over the period of six years, you could declare the interest income for each year. In such a case, it does not amount to a huge sum.

If you do not declare the interest on accrual basis, then the entire interest earned (difference between the amount deposited and the maturity value) would accumulate in the year of maturity. You could then claim it under Section 80C but it would be a huge amount and would be taxable at the current applicable tax rate

Summarizing:
-The capital investment in N.S.C.s qualifies for rebate u/s 80C in the first year of investment -the total limit of all investments under 80C is 1,00,000.
• Thereafter (after completion of one year) for the next 5 years, this annually accrued interest on an accrual basis EVERY YEAR needs to be added under the head ‘Income from Other Sources’
-The annually accrued interest on N.S.C.s(for first five years) is eligible for rebate u/s 80C as it is considered reinvested in N.S.C.s . Note:Limit of all investments/exemptions under 80C is 1,00,000.
• If the accrued interest is not taxed every year on an accrual basis than the entire income becomes taxable during maturity / withdrawal.

Ref:http://in.answers.yahoo.com/question/index?qid=20060620214239AAOOQpW
http://www.caclubindia.com/forum/nsc-interest-taxation-69147.asp
http://www.caclubindia.com/forum/does-interest-earned-on-nsc-attract-income-tax–28561.asp

Reply

bemoneyaware September 8, 2011 at 12:20 pm

Hello,

My CA got back . He said the same thing that I mentioned
“Interest earned on NSC(except the last year) is included in Total Income then it deducted u/s 80c. If you have exhausted 80c limit of Rs. 1,00,000/- then it is taxable.”

Manshu can you get it verified by other CAs?

Thanks
Kirti
on behalf of bemoneyaware.com

Reply

Manshu September 11, 2011 at 5:12 am

Thank you so much for digging into this Kirti – I’m going to send this to a friend and see if he has any input. Thanks again!

Reply

Umesh September 6, 2011 at 7:50 pm

Hi Manshu

A very good article indeed

To compare an RD with FD is not logical. One will go for FD if one has sufficient money while RD is meant for those who are unable to spare large sum in one go but can spare small amount regularly. In RD you get better yield comparatively, as even the last month’s installment will be charged for same rate of interest. While for one month FD you will get much less.

It all depends on time period and rate of interest. Some years back, normally, while deposit period increases the rate of interest increases as well, so it was better to have an RD or FD of longer duration then, but now, the two are not related, now banks offer higher rates for lesser period. Now, one can get better yield for 9 months/12 months than 18 or 24 months. So, it is wiser to choose time period accordingly. In RD you will get higher interest for small period as well.

@ Paresh Aug 20, 2011 (on Ujjwal comments)
Comparing a Rs 36,000 FD for 3 years with Rs 1,000 x 36 months RD is illogical. Naturally the yield will be better in FD than RD because you are charging more money to interest for the same period. If you apply monthly factor (monthly balance), then a 36 K x 36 months FD is equal to 1296 Kmonths (i.e. 36+36+36+36…….to 36 times i.e.36 x 36 = 1296) while 1000 pm RD is equal to 666 Kmonths only (i.e. 1+2+3+4….+35+36 = 666). (1 Kmonth is Rs 1000 deposit for 1 month)

So, in 3 years FD, in other words, you are charging Rs 1,000 for 1296 months while for FD you are charging Rs 1.000 for just 666 months. (just little more than half then how you can expect comparable yield)

Similarly if you calculate according to quarters (as interest is compounded quarterly), you will find in FD, more money is charged to every quarter as compare to RD. Hence more difference in yield. (I think a bank personal can explain it in a better way, using banking terms)

If you want to compare RD & FD yield then do it for a fix period say 1 year (Let us say the interest is maximum for this period).

Suppose there are 2 people, and both can spare Rs 1000 per month. Let one person deposits Rs 1000 per month in RD and second person offers Rs 1000 for FD of 12 months period in first month,1000 for 11 months period in second month, 1000 for 10 month in third month and so on depositing 1000 every month till 1000 for 1 month in twelfth month (similar to RD person) and then see the difference on maturity of RD and all FDs

You will find that RD has better yield because interest rate for RD will be same for whole duration of 12 months but may be variable for FD as rate of interest may be (or will be) less for small duration (subject to prevailing rate of interest). (Both person should offer money on same date, say first day of each month so that there should not be any discrepancy on account of time period)

As far as penalty on failure to pay any installments is concerned, it is a different issue.

Umesh

Reply

Vinoth September 12, 2011 at 11:12 pm

First I wish to thanks Manshu for showing me a wonderful topic about recurring deposit. We can also calculate the maturity value for recurring deposit using this Recurring Deposit Calculator

Reply

Hari February 18, 2012 at 10:13 pm

The level of information shared here is very useful and pretty much appreciated. Thanks to all. And Vinoth, I believe there will be a slight difference with the Recurring Deposit Calculation in US and India.

For instance for compounding Quarterly calculation, we do calculate the Interest using Simple Interest Formula for the first 3 months, add the Interest to the Principal and then calculate for the next 3 months and so on. Whereas they will use an effective monthly rate which will have a relatively reduced Interest yield.

For the example given by Ujwal, KVB has given 106580 whereas the link will give a value of 106575 which is 5 lesser. For loans it is better to use their model and for Deposits it is better to use our model ;-)

Reply

Jeff Fernandez February 21, 2012 at 10:37 am

how to avoid tax on an annual indian income of INR 4,00,000/- of a state government emplyee/teacher (46 yars old lady)through government and public infrastructure investments?

Reply

Jitendra P.S.Solanki February 23, 2012 at 12:52 pm

Jeff,

Rs 1.9 lakh is the exemption limit for females. Rest of the income becomes taxable.By making total investment of Rs 1.2 lakh in various instrument such as Infra bonds, PPF,NSC etc you can reduce your taxability. Above this schemes like health insurance gives you additional tax benefit.

Rest, tax saving through investment has some limit and so after a certain point you have to bear the tax.

Reply

Pradeep Sharma March 1, 2012 at 11:43 am

Hi,
My name is pradeep and I opened RD account with ICICI Bank for one year. Interest Rate on RD for one year is 8.25%. According to ICICI Bank Representative The Maturity amount after one year will be 62731. (they are calculating cumulative interest). but according to me the Total maturity amount should be 64950.
Please tel me which is right. If I am right then why 62731 amount is showing as maturity amount in my net banking page. Or if the bank is right then please tell me how they calculated this with which formula (month wise calculation, quaterly calculation, or half yearly or yearly calculation) which calculation they are doing.

Regards

Pradeep Sharma

Reply

Pradeep Sharma March 1, 2012 at 11:44 am

Invested amount is 5000/month

Reply

AB March 3, 2012 at 12:25 pm

here is calculation:
RD Accumulated Amount Interest amount Mature amount
Month1 5000 5000 34.375 5034.375
Month2 5000 10034 68.98632813 10103.4
Month3 5000 15103 103.8356091 15207.2
Month4 5000 20207 138.9244789 20346.1
Month5 5000 25346 174.2545847 25520.4
Month6 5000 30520 209.827585 30730.2
Month7 5000 35730 245.6451497 35975.8
Month8 5000 40976 281.7089601 41257.6
Month9 5000 46258 318.0207092 46575.6
Month10 5000 51576 354.5821015 51930.2
Month11 5000 56930 391.3948535 57321.6
Month12 5000 62322 428.4606931 62750.0

Reply

Pradeep Sharma March 25, 2012 at 9:48 pm

hi AB,

thanks for your response and calculation

Reply

Paresh March 25, 2012 at 10:56 pm

Just there is one error.You have considered monthly compounding frequency..its actually quarterly..and maturity comes to be Rs.62,731 exacly told by the bank…

Reply

Manshu March 26, 2012 at 12:45 am

Paresh is right of course, and just to add to what he said with respect to the calculations AB has shown – what he has done is added the interest back to the accumulated amount every month whereas if you do that at the end of every 3 months you will get the exact amount the bank says. You can also see this independently on the Corporation Bank calculator found on this link.

https://www.corpbanknet.com/Recurr_deposit_Calc.html

Reply

Paresh March 26, 2012 at 9:17 am

Thanks Manshu, for elaborating it more simply.

Reply

kb March 25, 2012 at 5:59 pm

Hi,

What if I open it in name of my mom who is a housewife, then total maturity amount should be non-taxable ? (Assuming no yearly interest exceeds 2 lac rs per year)

Thanks!

Reply

s p sam March 28, 2012 at 2:31 pm

My opinion is RD is far better than FD. RD is for long term gains, not short term.
RD of 4K per month for 10 years , gives you approx 9 lacs on maturity.
To get 9 lacs after 10 years, you have to invest 3.5 lacs.

By simple intelligence, saving 4K per month is 100 times better than investing 3.5L as FD.

Hope all of you agree :)

Reply

Rupesh S Mahadik April 21, 2012 at 2:41 pm

I think when it comes to earning nice returns on a lump sum amount you have there is no other better thing than going for a FD, you need to just check out a good interest rate of course on the best possible smaller duration possible, nowadays a 2-3 years FD offers good interest rate as per my info. RD is one of the best small saving option which does not require a big amount as an input but still can provide a good return and additionally a lump sum amount in few years which you can still use at that time for opening a FD or other investment.

Reply

SKK April 11, 2012 at 3:55 pm

s p sam, What if I have 3.5 lacs on hand right now and wondering what is the best way to invest for long term(safely – not in stocks or mf)? Is there a 100 times better solution in this case :-) Sorry not arguing with you just a trigger. Cheers

Reply

Rupesh S Mahadik April 21, 2012 at 2:56 pm

If you require the amount in say the next 2-3 years investing the amount in a FD would be fine, but if you can wait for a long term then investing in NSC would be advisable and now we have two versions of NSC i.e 5 yrs & 10 yrs with a good interest rate. Also consider investing in PO MIS could be better and further if possible investing the monthly earned interest from the MIS of course if not needed for spending can be invested in a PO RD i.e PO MIS + RD could be more better. Hope I am going correct, pls correct me if wrong.

Reply

Manshu April 22, 2012 at 8:21 pm

That’s a good point and there is a post here with a rich comment thread on this very thing. You can see that here:

http://www.onemint.com/2010/12/13/post-office-monthly-income-scheme/

Reply

Ashok April 27, 2012 at 10:33 am

Sir,
I am employed in a PSU and I am under 10% tax slab. Tax for my salary is deducted by my employer and form 16 will be given at the end of financial year. I have SB ,RD, and FD account in a private bank. They are deducting TDS for FD only. I am getting approx 4000 from SB and 6000 from RD account as interest . Bank made it clear that they wont deduct and TDS for SB and RD. So 1.how can i pay tax for my SB & RD ? And when?
2.Should I file returns since My taxable income is below 5L?
3.If am filing returned should i show proof for my income ,or just write sum of SB,RD,FD interests in other income?
4.Since TDS is duducted by bank ,should I attach proof of deduction of TDS?
5.Where should I mention I have payed this much tax my self ?

Reply

Varnu May 4, 2012 at 6:59 am

Hi,

I did go through the thread.

And it sounds pretty interesting.

Now I wanted to know if opening an RD/FD account in you mothers name is taxable or not???

And also which is a better investment option RD/FD????

And which bank offers the best interest rates for RD/FD???

Reply

Jitendra P.S.Solanki May 4, 2012 at 12:18 pm

Varnu,

It will be taxable for your mother if the income falls under taxable limits.

Since both have similar tax treatment you can go for RD if keen to invest regularly otherwise for Lumpsum investment FD is more viable.

Reply

Raj May 22, 2012 at 9:07 pm

Which banks are offering highest interest rates for recurring deposits..?

Reply

Manshu May 23, 2012 at 5:45 am

I don’t have that info, sorry.

Reply

Ashok May 23, 2012 at 4:33 pm

Most of the banks have Same rate for FD and RD.
In karur vysya bank it is 10.00 .. i think its the highest rate

Reply

Raj May 29, 2012 at 4:29 pm

Thanks for the info Ashok.. will contact them on this..

Reply

Ravish Hasija May 28, 2012 at 3:38 am

Hi,

Glad i saw this site. Very informative indeed.

I have a quick query. Can i open more than 1 RD account in one bank? For example in ICICI

Reply

Manshu May 30, 2012 at 5:14 am

Yes you can.

Reply

bemoneyaware June 1, 2012 at 2:32 pm

In Post Office RD or banks like Canara Bank, or SBI there is no prescribed upper limit.In HDFC Bank monthly installment can be as large as Rs 14,99,900 per month. ICICI Bank website does not mention any maximum limit so as Manshu says you should be able to.
Quoting from ICICI Bank RD webpage
The minimum balance of deposit is Rs. 500 per month and thereafter, in multiples of Rs. 100.

Reply

Raj May 29, 2012 at 4:18 pm

which bank is offering highest rate of interest for recurring deposits..?

Reply

bemoneyaware June 1, 2012 at 2:36 pm

On how to account for tax on interest from RD Quoting from my post Overview of Recurring Deposits

As discussed interest earned on the amount is fully taxable. It comes under the Income From Other Sources. But Tax is not deducted i.e TDS is not applicable on the Interest earned by Recurring Deposits as per current income tax rules. So how to account for the interest? Interest can be accounted based on method of accounting used. If the cash system of accounting is followed, the entire income by way of interest will be chargeable only at the time when the interest is received. If on the other hand the mercantile system of accounting is followed, the interest will have to be accounted in the respective years.

Reply

Manshu June 2, 2012 at 6:27 pm

Thanks

Reply

Ravish Hasija June 6, 2012 at 2:25 am

Hi,

A quick query here..

I have already invested 40% of my monthly savings to SIP in mutual funds. I wish to invest the rest in debt.Say if i want to invest 15000 pm in debt what all options do i have?
I am thinking of opening a RD of 7000 for 10 years(as the interests rates are currently high) and 8000 for 1 year(lump sum 96000 + interest). Then transfer the lump sum amount to PPF every April..Is this a good plan? If not, Any better plans/ideas??

Thanks
Ravish

Reply

samad June 16, 2012 at 5:49 pm

Hi ALL
By mistake,Instead of Fixed deposit I opened a recurring deposit online of Rs 5 Lakhs for a period of 2 yrs..(thinking that Only this amount will be deposited)…
But the statement says my maturity amount + Interst after 2 yrs will be Rs 1,31,14,223
I was in a shock that how come there will so much returns
1.Hence If I am not wrong does that means every month Rs 5 lakhs will debited from my account for the period of 2 years…(amounting to Rs 1,20,00,000 ,(Rs 1 Crore 20 Lakhs) Am I correct???
2.If the scenario 1 is correct,then I do not have so much money with me…what am I suppose to do??
3. What penalities will I have to bear(if any)?
If scenario 1 is correct,I would like to stop this recurring deposit …how to do this etc…
Pls help me and advise me accordingly..
Regards
Samad

Reply

Paresh June 16, 2012 at 6:32 pm

Of course,scenario 1 is correct and Rs.5 lakh per month will debited from your saving account.

Now there are few things:

1.You can close your RD any time.Most of the banks do not offer any interest if RD is preclosed within first quarter.(i.e before completion of 3 months).so penalty is that you will not receive any interest on principal if you foreclose it immediately.
2.It will depend on your bank whether you can close it online or not.Few banks allow it and few do not allow.If its not possible online then you can submit service request form at your home branch for the same.
3.Most of banks have provision of auto-closure of RD if two successive installments are missed so if there is not sufficient balance in your saving account to pay next two RD installments then it will be preclosed automatically.
4.Few banks charge penalty for missed installments.Its like Rs.2-3 / 1000.
So consider above points .Please check the provisions with your bank and take appropriate decision.

Reply

Manshu June 18, 2012 at 12:22 am

You should be able to close this out easily by going to the bank. It looks like an RD was opened instead of a FD. All the best.

Reply

samad June 16, 2012 at 7:09 pm

Dear Paresh
Thanks a lot for ur interst and advise on my problem..
Really appreciate ur meticulous advise..
Regards
Samad

Reply

Paresh June 16, 2012 at 8:05 pm

Thank you.
I think ,If you have opened RD account by mistake then ideal decision is to close RD and open fixed deposit…though you will loose some interest for said days.

Reply

C. Naveen June 21, 2012 at 8:31 am

Hi,
Great opportunity for investment, invest like RD and FD, invest in guaranteed Agrigold India Pvt Ltd, for RD give 11% interest and for FD in 6 years, it will double your amount, for further details contact – 9902408944

Reply

Ravi July 6, 2012 at 8:01 pm

Hi,

I have two questions (2nd one is out of context but will appreciate if considered for a reply)

1. If I invest in 5 years RD (monthly deposit) in a post office, can we claim deduction under section 80C similar to FD > 5 years?

2. Can a pensioner claim deduction under section 80GG or, sec. 10 (quote if any other sec. is applicable) against HRA? If yes, whats the rule? Pension is from Nationalised bank, does not have any HRA component

Reply

Manshu July 7, 2012 at 5:47 am

1. No, RD doesn’t come under 80C.

2. You mean get tax exemption for the HRA that he is getting? But that’s an income then how will you get an exemption against it? Or maybe I didn’t understand the question correctly….

Reply

Ravi July 9, 2012 at 10:04 am

He worked in a PSU Bank. He is retired now. He gets pension every month. There is as such no component of HRA in pension. Can he claim deduction against house rent he pays? If yes, to what extent & under which section?

Reply

Manshu July 9, 2012 at 3:23 pm

I’m not familiar with such an option.

Reply

Naresh July 17, 2012 at 8:26 pm

An awesome thread I say! Very thanks to every one here

Reply

subramanian August 25, 2012 at 3:58 pm

Recurring Deposits
Formula to calculate Maturity Value for Recurring Deposits
FV =   P[((1 + (r / n))^Yn   -1) / (1-((1+(r / n))^ -n/12))]

Symbols Description
FV Future Value / Maturity value
P Monthly Recurring Principal Amount
r Rate of Interest expressed as decimal (so 8% = 0.08)
Y Period in Years (No. of months/12, example 57 Months = 57/12 which is 4.750)
n Number of times interest is compounded in one Year

Reply

akshay February 1, 2013 at 7:31 pm

is tax paid on rd amount?

Reply

shma May 23, 2013 at 8:15 pm

according to me RD is better than FD because the bank will not deduct TDS even when the interest is more that rs. 10000.

Reply

Rupesh S Mahadik May 23, 2013 at 8:38 pm

Even if there is no TDS on a RD i.e Recurring Deposit, an individual is still liable to pay Income tax on the interest earned from RD as the interest amount upon maturity adds to the annual income. The same needs to be shown while Filing IT Returns.

Reply

Sanjaysoni11 July 15, 2013 at 11:54 pm

Icici has launched special saving scheme bank account holder-
**CASH ADVANTAGE ****
Basic Features of Cash Advantage -
To deposit 2 lac up to 5 years and get 5000/-from 6 th years onwards every month for next 120 month to manage your monthly expanses. Get lump sum maturity with amt of 14.5 lacs at 15th years .
Is it a good investment option. kindly suggest.

Reply

P Badala August 10, 2013 at 4:23 pm

There is another form of RD Known as Flexi RD by PNB .It is daily interest product and in flexi RD one can deposit 20 times more money then committed at the time of opening RD in any month at any time or during all the months. People use this product in lieue os saving account by opening Flexi RD for duration of 1 year at the rate of interest 9%. There is No TDS .

Reply

Leave a Comment

{ 2 trackbacks }

Previous post:

Next post: