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Recurring Deposit in Post Office Vs RD in Bank: Things to consider before opening an RD account

Sunil Dhawan
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Recurring Deposit In Post Office: One of the primary principles of investing is to save regularly especially over the long term. Regular and forced savings inculcates a habit of savings as well. However, for several investors investing a lump sum amount may not be feasible at all times. Salaried and even non-salaried individuals may, therefore, look at recurring deposits (RD) to save for their long term financial goals. Recurring deposits are available with all banks and are also available in post offices. Post office recurring deposit scheme is equally popular as bank RD scheme.

In a recurring deposit, one has to keep investing on a monthly basis, at a fixed interest rate and receive a maturity amount at the end of the tenure. RD is like an account and once opened, the interest rate and the amount of monthly investment remains fixed till maturity.

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Here are a few important points to consider before opening a RD account in bank or post office:

  • Generally, recurring deposit in a bank can be opened for any tenure between 6 months and 10 years while the recurring deposit in post office is for a term of 5 years.
  • Once invested in either bank RD or post office RD, the rate of interest will remain fixed till the end of the original tenure. The applicable rate of interest will be the rate prevailing at the time of opening the RD account. Presently, interest rate on bank RD is around 7 per cent and even lower with some front line banks for a 5-year RD. The interest rate on post office RD is 7.2 per cent for the RD account opened between July 1 and September 30, 2019. the compounding of interest is on quarterly basis in Post office RD. Illustratively, by investing Rs 10,000 a month in post office RD at 7.2 per cent, the maturity value at the end of 5 years will be nearly Rs 7,25,000.
  • After maturity, both bank RD and post office RD can be continued further by renewing it at prevalent rate of interest. In both of them, the nomination facility is available at the time of opening and also after opening of account.
  • Before opening a RD account, one should make use of the recurring deposit calculator available on most of the bank websites, to find out how much will the maturity amount become on different amount of monthly investment. In the RD calculator, one will have to enter term and amount based on which the maturity amount will get calculated. Most such calculators will automatically pick the current interest rate on bank RD as per the tenure for calculation purpose.
  • In the case of RD, a TDS (Tax Deducted at Source) of 10 percent will get deducted if the interest income of recurring deposit exceeds Rs.40,000 in a year. To avoid, Form 15G or Form 15H ( depending on age) may be submitted by the investors with income below the exempted limit. Form 15G is applicable for people under the age limit of 60 years.
  • For RD in a bank, one may avail, loan and overdraft facility typically up to 95 per cent of the recurring deposit amount.
  • Post office RD account can be transferred from one post office to another and any number of accounts can be opened in any post office for varying amount and maturities.