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  1. Bank RD: Persistence pays

Bank RD: Persistence pays

Bank RDs will come under TDS ambit from June, but they remain a handy investment tool for the risk-averse

By: | Published: March 10, 2015 12:07 AM
Bank RD, Recurring deposit, Budget 2015-16, Union Budget RDs are ideal for paying annual school fees, insurance premium or any other short-to-mid- term lump sum expenses.

From June this year, bank recurring deposits (RDs) will come under the ambit of tax deduction at source (TDS). The TDS will be credited to the investor’s permanent account number (PAN) and the assessee will have to mention that while filing their annual tax return. Else, there will be a mismatch between tax credit and the income declared by the assessee. These changes featured in the Budget proposals for 2015-16.

Currently, while interest from RDs is taxable, there is no TDS at the bank. The investor has to show their income at the time of filing the return and pay the tax. Tax is paid on the interest earned, depending on the tax slab, in the form of advance or self-assessment tax while filing the return in the column ‘income from other sources’. Tax has to be paid every year on the interest accrued even though the depositor gets the interest amount after the account’s maturity.

However, the existing threshold of R10,000 for non-deduction of tax will apply in case of interest payment on RDs to safeguard the interests of small depositors. If the investor’s total income, including the interest earned on the RD, is below the basic exemption limit, they can submit a declaration with the bank using Form 15G or 15H while making the investment.

RDs are popular as an investment tool among those who have to make periodic payouts. In fact, they are ideal for paying annual school fees, annual insurance premium or any other short-to-mid- term lump sum expenses. Both public and private sector banks and even post office offer RDs.

One can start a bank RD for as little as R100 a month and choose the tenure depending on their need. For banks, there is no outer limit on investment. India Post, too, offers a five-year RD where the minimum deposit is R10 per month and, beyond that, any amount in multiples of R5. There is no outer limit and the interest rate is 8.4% per annum. At banks, the interest rate on RD ranges from 8.5% to 9% per annum. The minimum period of investment is six months and the maximum is 120 months. Most banks offer loans against RDs and senior citizens get a higher interest rate, usually 50 basis points (bps) more.

If an investor closes the RD account before the original term, interest is paid at the rate applicable on the date of deposit and for the period the deposit has remained with the bank. Banks charge a penalty for non-deposit of monthly instalments. For example, State Bank of India charges R1.50 per R100 for accounts with a five-year tenure and less, and R2 per R100 for default on accounts that are longer than five years. Most banks insist that the depositor open a savings account with it, from which money can be transferred to the RD account every month.

While India post allows partial withdrawals after a year, banks allow partial withdrawal after three years. Most banks, however, charge for premature withdrawals. Nomination facility is available at the time of opening the account.

A post office RD can be transferred from one branch to another. In post offices, a minor who has attained the age of 10 years can open an RD account in his name. A guardian, on behalf of a minor below 10 years, can also open an account. The interest accrued in a minor’s account will be clubbed with the income of the parent.

India Post offers rebates on advance deposits. This can be useful as in case of a default on an RD account, the depositor will have to first pay the monthly deposit with default fee, and then the current month deposit. The default fee is 5 paisa for every R5. After four continuous defaults, the account discontinues and can only be revived in two months.

One can withdraw up to 50% of the balance after a year. However, premature closure is allowed only after three years. Non-resident Indians (NRIs), however, are not eligible to open RD accounts in post offices. But if a resident Indian subsequently becomes an NRI after opening an account, he can continue with it till maturity on a non-repatriation basis.

Analysts say that as interest rates are likely to fall now — the RBI lowered the repo rate by 0.25 percentage points to 7.5% on March 4, the second cut in two months — it makes sense to invest in an RD for short-to-medium-  term needs. Analysts say that despite the TDS regulation, RDs remain a handy tool for the risk-averse as far as systematic wealth creation goes — the depositor knows the amount they will get after maturity.

Systematic view

* RDs are ideal for paying annual school fees, insurance premium or any other short-to-mid- term lump sum expenses
* One can start a bank RD for as little as R100 a month and choose the tenure. For banks, there is no outer limit on investment. India Post, too, offers a five-year RD where the minimum deposit is R10 per month and, beyond that, any amount in multiples of R5
* If an investor closes the RD before the original term, interest is paid at the rate applicable on the deposit date and for the period the deposit has remained with the bank
* While India post allows partial withdrawals after a year, banks allow partial withdrawal after three years. Most banks, however, charge for premature withdrawals

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