Why Post Office RD Is Better Than Bank RD?

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Recurring deposit is the best to start with as it will help an investor with systematic and disciplined investment process. Individuals who are new to investing can start with recurring deposit. In banks, the tenure of the RD starts with minimum 1 year. RD in post office would be maintained for 5 years and can be extended for another 5 years.

In last year's Union Budget, it was announced that all Recurring deposit opened with banks will attract TDS, while, the same is not applicable for Post Office Recurring deposit.

Here all the things you need to know about recurring deposit:

How to open a recurring deposit in a post office?

Visit your nearest post office, fill the Recurring deposit form with the signature specimen and pay in slip to make initial payments. A senior citizen should fill the separate form to avail RD in the post office.

The recurring deposit can be opened in the name of the minor. While, the minor above age of 10 years can open and operate the account, the account can be transferred from one post office to another.

India post will provide a rebate on advance deposit of at least 6 installments. A single account can be converted into Joint and Vice Versa.


What is the withdrawal procedure?

Post office customer is allowed one withdrawal up to 50% of the balance allowed after one year. Full maturity value allowed on recurring deposit accounts restricted to that of Rs 50/- denomination in the case of death of depositor subject to fulfillment of certain conditions.

In the case of minor accounts, the one after attaining majority has to apply for account conversion in his name.


Why is Post Office RD better than Bank RD?

Banks deducted TDS if interest earned on recurring Deposit is above Rs 10,000 per annum. However, the same is not applicable in the case of RD opened with Post Office as TDS is exempt in post office recurring deposit.

Note that banks deduct TDS on entire interest amount not for the amount over and above Rs 10,000.


Taxation on Post office recurring depositor

As Post office does not deduct TDS in the case of recurring deposit. However, one should add interest income every year under the head "Income from another sources", while filing tax returns. What this means is that interest income is not completely tax-free in hands of investor.


What if you default on the RD payment?

In case if you miss the deposit and i t is not made up to the prescribed day, default fee is charged at 5 paisa for every Rs5. If the same is not deposited for continuous 4 intervals, the account becomes discontinued.

The account can be revived in two months but if the same is not revived within this period, no further deposit will be allowed to be made.

Where there is the monthly default(s) the depositor has to first pay the defaulted monthly deposit with default fee and then pay the current month deposit.


Power of compounding

If you invest Rs 10 now with interest rate of 7.4 per cent, on maturity which is 5 years, the Rs 10/- account fetches Rs 726.97. This can be continued for another 5 years.

As of now, the prevailing interest rate is at 7.4 percent where interest is compounded quarterly. The interest rate on post office RD is revised time to time by the government.


Story first published: Friday, September 30, 2016, 9:29 [IST]
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