How is interest rate on recurring deposits calculated?

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    How is interest rate on recurring deposits calculated?
    Recurring deposits (RD) are deposits where you can invest a sum each month periodically. This helps to build a corpus at the end of maturity period. Recurring deposits help you to start your saving with a small amount you are left with at the end of the month.

    The schemes are regular monthly deposit ones and so you don't have to fix a lump sum amount in them as you do in case of fixed deposits. Instead, you get a lump sum amount when the deposit matures.

    Interest rates

    Interest rates on recurring deposits are compounded quarterly. Suppose, you decide to put Rs.2000/- every month in a recurring deposit for 24 months at 8.75 per cent. Then the bank will pay you interest rate on Rs.2000/- on the first month by compounding it quarterly for 24 months. Next month it will pay interest compounding it quarterly for 23 months and so on.

    So, recurring deposits are quite helpful as they build your corpus for a rainy day. Click here to know why recurring deposits are best bets for new investors.

    Closing early

    If you are inclined to close your recurring deposit account then you can do so. However, keep in mind that you have to be happy with lower interest rates. Some banks also impose penalty in the form of service charges.

    Tax Implication

    However, you must keep in mind that there is an existing income tax on recurring deposits. Tax Deducted at Source (TDS) are not imposed on such deposits. However, the interests income is taxable and you need to pay tax at the time of filing your returns. 

    So, if you fall under the 20 per cent tax bracket then you have to pay 20 per cent taxes on interest income form recurring deposits. To know more about taxes on recurring deposits click here.

    Conclusion

    So recurring deposits help you to start saving in small amounts and eventually turn out into a big amount. You can bank on recurring deposits if you want to avoid TDS.

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