How Recurring Deposits Can Help You Save Without Market Risk
For those venturing into the world of investing for the first time, the idea of locking away a large sum of money can be daunting. Fortunately, recurring deposits (RDs) provide an ideal alternative, allowing you to invest small amounts regularly rather than committing a lump sum upfront. Recurring deposits are a popular, safe, and reliable option, especially for those looking to build their savings steadily over time.
What Are Recurring Deposits?
Recurring deposits are a type of term deposit offered by banks and post offices, where you can invest a fixed amount of money every month for a predetermined period. The interest rates offered on RDs are often comparable to those of fixed deposits (FDs), making them an attractive option for risk-averse investors. Since RDs are not linked to the stock market, they carry no market risk, ensuring that your principal amount is safe.
How Do Recurring Deposits Work?
To open a recurring deposit account, you must have an existing savings account with the bank offering the RD scheme. Each month, a fixed amount will be automatically deducted from your savings account and credited to your RD account. The interest on the recurring deposit is calculated annually but is often paid out on a quarterly or half-yearly basis. This makes RDs a disciplined way of saving, as you commit to regular monthly contributions.
You can choose the amount you wish to deposit each month, making RDs flexible and accessible to a wide range of investors. Whether you want to save a small amount or a more substantial sum, recurring deposits cater to all budgets.
Tax Implications of Recurring Deposits
While recurring deposits offer a safe and steady way to save, they are not exempt from taxation. Like other savings instruments, RDs attract Tax Deducted at Source (TDS). The current TDS rate for interest earned on RDs is 10% if you provide your PAN card details to the bank. However, if the interest earned is below ₹40,000 per annum (or ₹50,000 for senior citizens), no TDS will be deducted.
In cases where the PAN card is not provided, the TDS rate increases to 20%. This makes it essential to submit your PAN card details when opening an RD account to avoid higher tax deductions.
It's important to note that the interest earned on RDs is fully taxable and must be declared as part of your total income. The tax rate applicable to the interest income will depend on your tax slab. Unfortunately, investments in bank RDs do not qualify for deductions under Section 80C of the Income Tax Act, 1961. However, a recurring deposit opened with a post office for a tenure of five years is eligible for a tax deduction under this section, offering tax savings of up to ₹1.5 lakh.
Forms and Documentation for Tax Savings
To minimise tax deductions, investors who fall under the non-taxable income bracket must submit Form 15G or Form 15H, depending on their age. Form 15G is meant for individuals below 60 years of age, while Form 15H is for senior citizens aged 60 and above. Submitting these forms to your bank or post office will help you avoid unnecessary TDS deductions on your interest income if your total income is below the taxable limit.
Additionally, Form 16A, which is provided by your employer, serves as proof of the TDS deducted from your income. It's crucial to keep this form for your records, especially if you're filing an income tax return.
Why Choose a Recurring Deposit?
Recurring deposits are an excellent choice for conservative investors who prefer a risk-free and disciplined approach to saving. The fixed monthly contributions ensure that you regularly set aside money, while the assured returns make it easier to plan for future financial goals. Additionally, RDs offer flexibility in terms of the amount you wish to invest, making them suitable for both small and large savers.
Whether you're saving for a short-term goal, such as a holiday, or a long-term one, like education, a recurring deposit can help you achieve your objectives without exposing your savings to market volatility. The safety and predictability of RDs make them a preferred option for those looking to build their wealth steadily over time.