A recurring deposit (RD) account is a good way of making periodic investments, especially for risk-averse people having regular source of income, like a salaried individual. RD accounts fetch you more interest than savings bank accounts and make you avail the benefits of FDs without making lump sum investments.
RDs help you inculcate a habit of regular investments out of your salary that generates a higher return in the long term, than keeping the money in a savings account. You may effectively use it to accumulate funds for a planned lump sum expenditure as you get a fixed rate of interest, which is guaranteed for the duration of the RD, when you open the account.
However, a recurring deposit is only a way to make regular investments in a small amount and does not provide any other benefit like rupee cost averaging, as in case of systematic investment plan (SIP) in mutual funds, to minimise risks and earn higher return. So, you will not get any additional benefit over FD by opening an RD account.
RDs are not tax effective and you will not get any deductions u/s 80C on the money you invest and the interests you earn are also taxable. Moreover, TDS will be cut if interest exceeds Rs 10,000 in a financial year for normal investors and if it exceeds Rs 50,000 for senior citizens.
You may open an RD account either in any Post Office or in any bank, be it a nationalised bank, private sector bank or a foreign bank. However, there are some advantages and disadvantages in opening RD accounts either in a Post Office or in a bank, which you should know before opening an account.
1. Capital Protection: The money you invest in Post Office RD (PORD) bears sovereign guarantee of the Government of India and is fully secure, but in case of bank RD, the amount invested is protected up to Rs 1 lakh only by the Deposit Insurance and Credit Guarantee Scheme of India.
2. Convenience: For opening a PORD, you have to visit a particular Post Office branch, but you may open a bank RD online through your net banking facility. You may, however, instruct your bank for auto payment of subsequent installments for both Post Office and bank RDs.
3. Tenure of RD: In Post Office, you can open an RD account for five years only. However, banks give you more options, so that you could select an RD tenure that suits you.
4. Interest Rates: The government decides the 5-year RD rate for Post Office, which is now 7.3 per cent per annum compounding quarterly. However, for bank RDs, the interest rates vary from bank to bank and from tenure to tenure. The following table shows broad rate of interest offered by various banks on RDs of different tenures: