Are you just saving money or putting it to better use so that it grows with time? If you want your money to grow in a consistent manner irrespective of the state of the economy or marketing conditions, you should consider investing your money in an RD.
In an RD, while you save money, your saved money also generates interest.
What is RD?
RD stands for recurring deposit – you deposit a small amount in your bank account or your local post office every month.
Isn't it like an FD (fixed account)?
It isn't.
In an FD you put a lump sum amount for a period of time, let's say 5 years, and then forget about it. Over the years your money accumulates interest.
In a recurring deposit you don't have to put in a lump sum amount. You can deposit a small amount according to your budget and saving plans, every month.
It is like your piggy bank. The big difference between an RD and your piggy bank is that in your piggy bank, your money doesn't grow more than you save, but in your recurring deposit account, it does.
What’s the difference between opening an RD account in a bank and in a post office?
Investing money in a bank RD
Take for example The State Bank of India (SBI). Currently the bank offers the maximum interest of 5.4% on a recurring deposit – it may be different at the time you are reading this so check the latest RD interest rate offered by the bank before making a financial decision. Senior citizens get an additional 0.50% interest.
You can open an RD for a minimum of 12 months and a maximum of 120 months. You can choose for how many years you want to maintain an RD account with SBI. You can open an RD with SBI with Rs. 100 minimum. After that, you can deposit any amount in the multiples of 10 with no limit on the maximum deposit amount.
Can you withdraw money prematurely once you have invested in an RD in SBI? Yes, there might be many reasons you may want to withdraw your money prematurely. There is a penalty though.
For deposits up to Rs. 5 lakh there is no penalty provided the amount has remained with the bank for at least 5 days. For deposits above Rs. 5 lakh and less than Rs. 1 crore, the penalty will be 1% of the amount.
What about defaulting on the payment? Defaulting means not depositing the money. If you don't deposit the money for 3 consecutive months a service charge of Rs. 10 will be levied. There will also be a penalty charge of Rs. 1.50 for every Rs. 100 per month. In case you don’t make the payment consecutively for 6 months, your account is closed and whatever amount you have saved up till that time, is paid to you.
Investing money in a post office RD
A post office RD has a maturity period of 5 years. The minimum monthly amount that you can deposit in a post office RD is Rs. 100 per month. The amount can be increased in the multiples of Rs. 10. There is no maximum limit on investment. You can enjoy a rebate if you make an advance payment of 6 or more RD instalments. On the other hand, if you miss your deposits, there is a penalty of Re. 0.05 per every Rs. 5 deposit defaulted. You can prematurely close your account after three years and you can withdraw 50% of your account balance after completion of one year.
In a 5-year post office RD you can earn 5.8% interest per annum right now, compounded quarterly. The rate of interest is changed from time to time so please check what the latest interest rate is before making your investment plans for post office RD.
Although money in a post office RD must be invested for 5 years, you can extend this period by another 5 years or on a year-to-year basis.
Calculating how much you save in an SBI RD
Monthly deposit: Rs. 1000
Current interest rate: 5.4%
Lock in period: 60 months (5 years)
You put in: Rs. 60,000
Interest: Rs. 8,964
Total value: Rs. 68,964
Calculating how much you save in a post office RD
Monthly deposit: Rs. 1000
Current interest rate: 5.8%
Lock in period: 60 months (5 years)
You put in: Rs. 60,000
Interest: Rs. 9,690
Total value: Rs. 69,690
Taxation for recurring deposit in post office and bank account
When you have an RD account at the post office you can get tax exemption under Section 80 C. You can get exemption up to Rs. 1.5 lakhs.
Recurring deposits in banks attract no tax exemptions. You will need to pay income tax on the interest that you earn from your recurring deposits. TDS is also applicable on recurring deposits. If your earned interest exceeds Rs. 40,000 (Rs. 50,000 for senior citizens) TDS is deducted at 10%.
Which is better? RD in a bank or in a post office?
It is a matter of convenience and options available to you.
When you decide to open a recurring deposit account with a bank, the choices are far and wide. Multiple interest rates are available, ranging from 2.05% to 8.50%. Different banks offer different features for your RD. In most of the cases you don’t have to visit a bank branch. Almost all major banks these days allow you to open a recurring deposit account from their websites.
Also, you can choose multiple payment modes to make your monthly instalments. You can use net banking, you can use your debit or credit card or you can even deposit a check at your local branch. If you open your RD in the same bank where you have your savings or current account, you can link both the accounts and the payment is automatically transferred every month to your recurring deposit account.
In that regard opening an RD in the post office can be burdensome and only makes sense if the post office is in your neighbourhood. For example, if you live in a village or a small town and the post office is nearby, it may be convenient for you to open a recurring deposit account at the post office. Another small hassle with opening an RD in the post office is that you can only deposit cash.
An advantage of having an RD at the post office is that you can get a loan of up to 50% of the sum credit on your RD account. You need to complete Form-5 and to qualify for the loan your account must be a year old, and you should have paid at least 12 instalments. Then afterwards, you can either repay the loan in lump sum or in equal instalments.
A recurring deposit, whether you open it at the post office or in a bank, is usually a short-term saving mechanism. Maybe you’re planning a holiday after a few years, or you want to save for a marriage or your child’s college fee. You want to keep some amount separate but instead of keeping a lump sum amount aside, you want to save small amounts and at the same time you also want to earn an interest. Then opening a recurring deposit – whether at the post office or in a bank – is a good option.