Recurring Deposits (RDs) are among the most common saving options banks and other financial institutions offer. They are a convenient way to build capital over time.
Even though they have benefits, such as security profits and determination in deposit amounts, they also have some possible drawbacks. These comprise comparatively lower interest rates and tax liabilities.
Explore features of RD accounts with 5 factors to consider before opening an RD Account.
What is an RD?
A Recurring Deposit (RD) is a simple savings scheme that lets people deposit a fixed amount of money regularly. These deposits are made regularly for a fixed time of 6 months to 10 years in advance. The rate of interest and terms of the RD account are decided at the opening time, ensuring the investor has full clarity and transparency. The RDs are an investment option trusted highly by the public since reputable financial institutions and banks offer them. They provide investors with a safe and regular method of saving.
Investment amount
The first step to starting your RD is deciding how much to invest. The minimum investment requirement is only Rs. 100, RDs which is suitable for a broad range of investors. RDs, due to their low threshold, are a realistic initiative for people who want to start saving with smaller amounts. However, you must examine your finances and choose an investment amount that fits your purpose and expenditure. Whether you go with a minimal plan or decide to invest more, it must fit adequately into your monthly budget without putting a strain on your pocket.
Tenure
Recurring deposits last at least 6 months and no more than 10 years. After opening an RD account, you won't be able to change its terms until it matures. For the best return, you should carefully choose the length of time based on your financial goals.
Interest rates
The interest rate determines how much profit you will get from your recurring deposit (RD). These recurring deposit interest rates can vary from bank to bank. You must invest in an RD scheme with the highest interest rates to earn maximum benefits. At Kotak, RD rates start from 6%, with an additional 0.50% for senior citizens. Selecting a higher interest rate will substantially increase your savings over time.
Tax implication
The Interest earned on Recurring Deposits (RDs) will also be taxable. However, any interest earned shall be above a certain threshold. It becomes taxable after a certain cap of Rs. 40,000 for individuals (Rs. 50,000 for senior citizens) is crossed. On the other hand, if the interest earned is lower than the above-specified thresholds, banks will not deduct any taxes. The deductions from the income tax can be avoided by submitting Form 15G/15H to the bank. Submit this form if your income is below the taxable limit.
Premature withdrawal penalty
You must know a premature withdrawal penalty exists when opening an RD account. This penalty applies if the funds are withdrawn before their maturity date. The RD penalty amount depends on the particular bank and the years associated with the RD. Thus, before you decide upon the RD account, it is necessary to factor in all the recurring deposit fees and charges, including the penalty amount, and remember that early withdrawal might not be an option.
Conclusion
Opening a recurring deposit account provides a properly organised measure for low-risk investments with assured returns. However, you should be mindful of the drawbacks mentioned. Making an investment decision can be simplified by these 5 factors to consider before opening an RD Account. Using the RD calculator for an estimated interest calculation and choosing a bank with competitive rates ensures the money works for you. If you strategise properly, you can get the most out of your money and achieve whatever financial objective you set. At Kotak, we offer the most attractive RD interest rates with various features. Open a Kotak 811 account and take advantage of Recurring Deposits benefits.
FAQs
1. How does an RD work?
RD operates by regularly depositing a fixed amount into an account for a specified period. These investments earn interest, and upon maturity, the investor receives the principal and the accumulated interest.
2. What is the minimum amount to open an RD?
The minimum deposit for an RD differs from bank to bank, but it is generally reasonable and manageable, making it accessible to many investors. Usually, banks provide RDs with the lowest possible beginning deposit of Rs.100.
3. Can I get my RD money before it matures?
Although early withdrawal is possible, it may be subject to penalties or affect the interest rates.
4. Are RD investments taxable?
Certainly, the interest earned on RD investments will also fall under the “income from other sources” category and would be taxed as per the income tax slab. The bank deducts TDS on the interest accrued, which the investor must declare in their income tax returns.
5. Is the interest rate fixed for the period of RD?
The interest rate for an RD is fixed when the account is opened and stays the same until the end of the term.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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