Recurring Deposit Account Explained with Features and Benefits

A recurring deposit account is not as much common as other types of bank accounts. So, clients face many complications in deciding whether they should open one or not. In this article, I have tried to depict pretty much all the major aspects of a recurring deposit, including its features, benefits and shared some insights that will help you to identify the right path in choosing a recurring account.

What is a Recurring Deposit Account?

A recurring deposit account is a special kind of term account offered by commercial banks. It enables clients to deposit a specific amount of money each month and earn decent fixed interest on the balance. This type of account is a compilation of savings and a fixed account. The account holder must deposit the committed amount each month for a specific period and cannot withdraw from the balance before maturity. This type of account is pretty popular in Indian banks. People with limited income usually tend to open such accounts.

Features of a Recurring Deposit Account

Some key features make a recurring deposit account different and unique from any other type of bank account. Let’s know the features in detail.

Monthly Deposit

A recurring deposit account holder must pay the contracted amount in monthly installments. The money is deposited into the balance at the end of each month and summed up with the previously deposited amount to make the new principal amount.

Interest Bearing

A recurring account offers handsome interest to the clients. Typically, the interest rate offered by the banks is 5-8.5%. Some financial institutions offer up to 11% interest on the deposited amount. [1] This rate is fixed when the bank account is opened, depending on the term of the account.

Fixed Amount of Deposit

The amount of deposit is fixed when the account is opened initially. This amount remains the same until maturity.

Maturity

Like a fixed account, the recurring deposit account also has a predetermined maturity. The client has to make the deposits and cannot withdraw any money from the account before that maturity.

Flexible Terms

Banks offer a wide variety of terms in the case of recurring deposit account. It starts from as low as six months to 10 years.

Auto Renewal and Conversion

After maturity, the term of the account can be extended easily. Banks even provide the opportunity to convert the recurring deposit account into a fixed deposit or CD account for another maturity.

Fewer Complications

Opening a recurring account requires less documentation and complications.

Benefits of Having a Recurring Deposit Account

There are plenty of benefits of having a recurring account for an individual. Some major benefits that aid in better money management and investment habits are discussed below.

High-Interest Rate

The interest rate from a recurring deposit account is higher than a checking and savings account but lower than a fixed deposit account. Other types of bank account require either a large sum of money or a large amount of time to offer high interest to the clients. But a recurring account eliminates those barriers and provides a high return on the little amount of Investment. This high rate of interest will be added to your deposited money and make the new sum as principal for future interests. This compound method makes both the interest amount as well as the deposited amount much higher over time.

Assured Return on the Investment

Generally, the interest rate is fixed while opening the bank account. So, the account holder can be assured about what return to expect from the Investment and manage money accordingly. There’s no uncertainty about the return of the Investment under any circumstances. Once you start saving money in your recurring deposit account, you will regularly start earning interest from that source. Sometimes this can be a good source of income for the account holders if the deposits and maturity are large enough.

Flexible Amount of Deposit

This is a great investment tool for the people with consistent monthly income, especially for the job holders. they can save their money according to the income and still get high interest in that. For a fixed deposit, one would need to deposit a large amount of cash at once, but the account holder doesn’t have to worry about having a large sum in a recurring deposit. A small amount can be deposited each month which helps people with low income make a habit of saving money and investing.

Loan Facilities

Like a CD account, banks also offer loans to the recurring account holders against the money they’ve deposited into the balance. These loans are easy to get, and the interest rate is not so high compared to normal loaning options. The recurring account holder will not have to worry about a liquidity crisis and avoid the penalty of withdrawing the money before maturity through this loaning option. Generally, banks offer up to 95% of the deposited amount as a loan to the clients who have recurring deposits in the respective bank.

Nomination System

The depositor can nominate someone who can withdraw and use the total money in the absence or death of the depositor. So, you can nominate your family members/friends/creditors/partners to ensure future financial stability for them.

Premature Withdrawal

Under any critical situations, the account holders can withdraw the deposited amount before maturity. In such cases, the bank charges some fees and expenses. But the depositor can withdraw and use the money without facing any complications from the bank.

Goal-Focused Saving

You are committed to depositing a certain amount each month in a recurring account. So, even if you have any issues, you are forced to manage the situation otherwise and deposit your committed amount of money each month. It also helps in making better money management skill. The depositors have a clear goal, and this goal-focused approach helps to save a large amount over time.

Limits Taxation

No taxation is applied to the earned interest from a recurring account up to a large amount. Thus, the account holder can avoid some taxes and earn tax-free returns from the invested money.

Things you Should know Before Opening a Recurring Deposit Account

A recurring is not as much common as other types of bank account. So, it’s better to know a few tricks and tips that might help you have a greater banking experience and choose the right type of path in selecting the bank and other options for the account.

Firstly, as we discussed earlier, the interest rate varies depending on the bank and maturity of your account. All the banks might not offer the same interest rate for the same amount of deposit and maturity. Some financial institutions also offer recurring accounts with much higher interest rates. So, if you are someone who needs a higher return, explore and find out the financial institution or bank that offers the maximum interest on the deposit.

Secondly, some banks offer more features in the recurring account but lower interest rates. For someone who seeks convenience and more services and cars, less about the interest rate should go for those options. For instance, clients can deposit their money using MFS services or ATM booths, or any other internet banking services. Before opening the account, make sure your bank offers such services. It’ll save both your time and money.

Thirdly, some banks do not cut charges, or the clients do not face any penalty if they miss depositing money in any month. This is a great option for people with limited income because you might face extra expenses in some months and fail to deposit the committed money into your recurring account. If the bank does not make you face any penalties in such cases, you should consider that bank for your recurring account.

Lastly, a recurring account may offer a high-interest rate and savings option to the clients, but it cannot offer you the services like a current account or fixed deposit offer. If you already have a large sum of money, go for a fixed deposit account or if you need regular transactions, go for a current account. But when your requirements fit the features of a recurring deposit, explore different services and options provided by different banks as well as financial institutions to choose the right one.

Bottom Line

A recurring deposit can be a great option for Investment and a source of emergency funds for your future. Taking the right strategies and choosing the right institution will help you make the best out of your limited income through a recurring deposit account. If you still have any confusion or urge to know more specific information, you can visit the official websites of different retail banks or investment banks, where they feature specific information about their banks and services.