Banks are integral part of our lives and the country’s economy. Banks encourage people to save money and in turn provide safety and liquidity. A bank accepts deposits from its customers and lends the money to people/institutions who need it. Banks are highly regulated by Reserve Bank of India. Banks are subject to minimum capital requirement of Rs. 500 crores. Banks are required to keep some deposit with RBI and lend the rest for profit. Each Depositor in a bank is insured upto a maximum of Rs. 1,00,000 (Rupees One Lakh Only) for both principal and interest amount held by him/her. Please note that the deposits kept in different branches of the same bank are aggregated for the purpose of insurance cover and a maximum amount upto Rs. One Lakh is paid. All funds of each depositor are added together before deposit insurance is determined. If a bank goes into liquidation, the Deposit Insurance and Credit Guarantee Corporation is liable to pay to each depositor through the liquidator upto Rs. One Lakh only.
There are several accounts such as salary accounts, zero balance accounts, sweep-in or multiplier accounts linked to Fixed Deposit or Term Deposit Accounts. Funds lying in savings accounts earn very low interest.
Banks pay higher rate of interest on Fixed Deposits or Term Deposits than a savings account. Generally, the interest rates for longer maturity periods are higher. The Tenure of Fixed Deposit may vary from 10, 15 or 45 days to 1.5 years and can be as high as 5 years. The depositor may choose to reinvest the interest earned in fixed deposit. In such deposits, the interest is paid alongwith the deposit amount on maturity. Usually interest on Fixed Deposits (FDs) is paid every quarter. Loans against fixed deposits are easily available. Breaking of Fixed Deposits before maturity attract penalty. Tax is deducted by the banks if interest earned exceeds Rs. 5000/- in a financial year. If a depositor’s total income from all sources is likely to be below the taxable limit, then he/she can submit form 15G if he/she is below 65 years of age or form 15H in case of deposits above 65 years of age.
Recurring Deposits are a special kind of Term Deposits offered by banks which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits. It is similar to making FDs of a certain amount in monthly installments, for example Rs. 1000 every month. This deposit matures on a specific date in the future along with all the deposits made every month. Thus, Recurring Deposit schemes allow customers with an opportunity to build up their savings through regular monthly deposits of fixed sum over a fixed period of time.
The Recurring Deposit can be funded by Standing instructions which are the instructions by the customer to the bank to withdraw a certain sum of money from his Savings/ Current account and credit to the Recurring Deposit every month. Thus Recurring Deposit Schemes allow customers with an opportunity to build up their savings through regular monthly deposits of fixed sum over a fixed period of time.
When the RD account is opened, the maturity value is indicated to the customer assuming that the monthly instalments will be paid regularly on due dates. If any installment is delayed, the interest payable in the account will be reduced and will not be sufficient to reach the maturity value. Therefore, the difference in interest will be deducted from the maturity value as a penalty. The rate of penalty will be fixed upfront. Standing instructions can be given to the banks to withdraw a certain sum of money from the savings/current account and credit the recurring deposit every month. Tax Deducted At Source (TDS) is not applicable on RDs. The depositor can avail loans against the collateral of Recurring deposit up to 80 to 90% of the deposit value. Rate of Interest offered is similar to that in Fixed Deposits.