All you want to know about recurring deposit

It is a saving avenue which works like the systematic investment plan of a mutual fund, wherein a particular amount of money is deducted from your account every month.

You have to apply for a recurring deposit account and ask the bank to deduct the stipulated amount from your savings or current account every month.

Your deposit can also be paid through internet banking. Almost all banks offer this scheme and you can invest as little as Rs 5 with public sector banks or, Rs 500 with private banks.

The investment tenure ranges from a minimum of six months to a maximum of 10 years.

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The date of monthly instalments will depend on the date on which you open your account.

If you started on June 1, 2011, your installments will be deducted on 1st of every month, thereafter.

You will get a passbook which will contain a record of all the transactions. You can either have an individual account or apply jointly with any family member, even a minor.

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How is the interest calculated?

Interest on recurring deposits is the same as that on a bank fixed deposit. As of now, State Bank of India is giving 7.75 per cent for one year deposits and ICICI Bank is offering 7.5 per cent.

Senior citizens get an extra interest rate of 0.5 per cent. Also, you can pay more than one instalment at a time, but will not get any interest on the additional amount.

Is premature withdrawal allowed?

You can withdraw prematurely, but the interest paid will be lower than the base rate for the deposit tenure or that for the tenure the deposit has been with the bank. Some banks may subject the deposit to a penal interest (1-2 per cent).

A recurring deposit account has a lock-in period of one month. Premature closure in less than a month will not earn interest. Only the principal amount will be returned.

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What happens in case of default?

If you've missed four to six instalments (varying from bank to bank), the bank can discontinue your account.

You can revive the account by paying the outstanding money within one month from the last default. The interest applicable will be in accordance with the bank's premature withdrawal policy.

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What are the other benefits?

You can take a loan or an overdraft, up to 90 per cent of the balance, against the recurring deposit.

During an emergency, this may be a better option than withdrawing your saving as the deposit keeps earning interest and you get a loan at a rate lower than a personal loan.

When should you apply?

It is a good saving avenue for creating an emergency kitty or liquidity for a near-term goal. Those starting off their careers or with low incomes can use this option.