Q. I am a 45-year-old teacher residing in Ranchi. I like to consider myself a conservative investor who seeks assured returns by investing regularly, generally for medium-term goals. I already have a fixed deposit account with a private bank and was thinking of opening a recurring account with the post office. Can you please throw some light on RD and its features like tenure, deposits, interest rate, etc.?

Pradeep Singh, Ranchi

Post offices in India perform a range of functions beyond just delivering mail. Due to their extensive reach, post offices also offer banking and insurance services to the remotest parts of India. One of its most well-known banking services is the Post Office Recurring Deposit (Post Office RD) plan.

The Post Office Recurring Deposit (Post Office RD), which is risk-free in nature, is a scheme for mid-term savings that asks depositors to deposit their money for at least five years. Depositors must make fixed deposits at regular intervals, and the interest they earn is compounded every three months.

What is a post office recurring deposit?

The Post Office Recurring Deposit (PORD) is a systematic savings plan that allows investors to save money for 60 months. The recurring deposit at the post office earns a fixed rate of interest, which can be used to save up a large amount of money over time. The current rate of interest is 5.8 % per annum (quarterly compounded)

Opening of account

Customers can open recurring deposit accounts either in the form of a single account or as joint accounts. Minors are also allowed to open a recurring deposit account. Minors over 10 years old can open an account in their name directly. The scheme also allows parents or guardians the facility to open and operate the account of a minor on their behalf.

Tenure

The maturity of the National Savings Recurring Deposit is 5 years, i.e., 60 months from the date of the first deposit. If one wishes to continue with the RD account after 5 years, there is a provision that allows the RD to be extended for another 5 years, bringing the total tenure to 10 years.

Minimum and maximum deposits

A recurring deposit is one of the most popular investment options to get significant returns on the monthly investment. The minimum deposit is kept at a very reasonable level to keep it within the means of those who frequently have doubts about the deposit amount and interest rate. According to post office RD regulations, the minimum deposit is Rs. 100/-per month or any amount in multiples of INR 10/-and the maximum deposit has got no limit.

Dates of deposit

A post office RD requires a total of sixty deposits, or one deposit per month for five years. The first deposit is made when the user opens the account, with the next monthly deposit to be made on or before a specific date, depending on when the account was started.

recIn terms of dates, anyone who opens an account between the first and fifteenth of the month is required to make the subsequent deposits by the 15th day of each month. Accounts opened after the 15th of a specific month must make payments between the 16th and the last day of the subsequent month.

Default in post office recurring deposits

A default fee will be charged if the subsequent deposits are not made on time or at all. The default fee would be at the rate of one rupee for every hundred rupees of a defaulted instalment for each month. The fee will be charged for each month the default continues. When investors fall behind on their deposits, the amount of the defaulted deposit and the default fee must be paid first. One can only make a regular deposit for the current month only after paying off these dues.

The account holder can miss up to four monthly payments with a post office RD. If the account holder misses the fifth monthly payment, the account becomes inactive (called a "discontinued account"). After the fourth month of default, investors have two months to revive the account. An account in which defaulted installments are deposited is not considered a discontinued account.

Premature closure

A premature withdrawal from a national savings RD account is permitted once three years have passed since the date of the initial deposit. Due to a premature withdrawal, the interest rate will equal that of the Post Office Savings Account. One must submit a Form-2 application to the nearest Post Office of India branch.

Loan

By submitting Form 5, one can request a loan against the National Savings Recurring Deposit. To be eligible for the loan, one must maintain the account for a year and make twelve deposits. Investors can take out loans worth up to 50% of the amount in their RD account.

The loan can be repaid in a lump sum or in equal installments by the account holder. The entire balance must be repaid prior to the maturity date of the RD. The simple interest rate applicable to the loan will be 2% + the RD interest rate applicable to the RD account. Interest will accrue from the date of withdrawal until the date of repayment in full and in proportion to the amount repaid. If the loan is not repaid, the post office will deduct the loan amount plus interest from the maturity value of the RD account.

Conclusion

A recurring deposit is a good investment avenue for risk-averse investors who want to invest in a conservative investment option every month. RDs also help fulfil both short-term and long-term goals. A recurring deposit is the most effective way to build the habit of saving because it can help investors build a financial cushion and achieve their investment goals.

It is one of the best ways to achieve financial goals while only devoting a small portion of one's monthly income through recurring deposits. Also, the high-interest rate of the post office's recurring deposit account lets investors get the most out of a small initial investment.

Kuvera is a free direct mutual fund investing platform.

Note: This story is for informational purposes. Please speak to a financial advisor for detailed solutions to your questions.

Recurring Deposit

Your Questions Answered: Opening an RD account: What are its advantages, tenure, deposit limits and other features?

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