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Right time to lock into recurring deposits

Those in the lowest tax bracket can use RDs to get better return
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First Published: Thu, Nov 29 2012. 08 29 PM IST
Updated: Fri, Nov 30 2012. 10 55 AM IST
With the Reserve Bank of India (RBI) indicating policy easing on interest rates as soon as January 2013, you may well use the window to lock into high deposit rates if you are looking for assured returns. If you have a lump sum, fixed deposits would be the right instrument for you, but if you prefer regular savings, recurring deposits (RDs) would work for you.
“Banks will align interest rates offered as and when RBI makes changes in the policy rates. So down the line there is a possibility of downward revision,” says C.M. Khurana, chief general manager (large corporate credit), Oriental Bank of Commerce.
The benefits
Regular contribution: The benefit in RDs is that you would get the same interest rate even on the last instalment that you may pay after a year even if rates are lower then. In RDs, you can contribute a predetermined amount every month for a pre-decided number of months or years. “It is a very good product for those who want to make regular contribution. This works for people with regular fixed income,” says Surya Bhatia, managing partner, Asset Managers.
Premature withdrawal penalty: What makes the product more attractive is that some banks have stopped charging premature withdrawal penalty. But remember that all banks do not offer this benefit.
Low minimum limit: An RD can be opened with as low as Rs.10 per month with a post office. Banks usually accept a minimum of Rs.100 every month. “This makes the product more affordable for everyone,” says Bhatia.
Advantage senior citizens: They usually get a higher interest rate—additional 50 basis points to the rate on offer. One basis point is one-hundredth of a percentage point.
The caveats
There are a few aspects you should remember before investing into RDs.
Taxation: The interest accrued in RDs is taxable at your marginal rate of tax. So it may not be tax effective for those in the highest tax bracket. “It is a good asset to look at right now. It especially works for people who have low risk appetite and are in the lower tax bracket,” says Bhatia.
Other limitations: Once fixed, the tenor or monthly contribution amount cannot be changed. Also, if you fail to pay the contribution on time for some months in a row, the RD account may be closed. The grace period offered by banks and post offices differ.
No partial withdrawal: Though banks do not offer this option, you get it at post offices after completing one year. This withdrawal is treated as a loan, which can be repaid either in lump sum or instalments within the tenor of RD.
Who should buy?
If you fall in the lowest income-tax bracket and want assured returns, this may be the right time to start investing in RDs. Usually, senior citizens and people who have just started working fall in the lowest tax bracket. For beginner investors, it is also a good tool to learn the discipline of saving regularly.
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First Published: Thu, Nov 29 2012. 08 29 PM IST
More Topics: bank | recurring deposit | tax bracket | return |