Stow more with flexi recurring deposits

Step up instalments to earn more from your bank RDs

One of the simplest and safest products for steady investments, the bank recurring deposit, has flexible variants, which can ensure healthy savings for conservative investors.

Normal RDs allow you to put away small sums every month for a specific period of time. But the monthly investments cannot be varied.

The ‘flexible’ recurring deposit allows you to invest a lot more. You can vary the amount that you invest every month, as a multiple of your regular investment. This way, you can earn a higher interest on your investment, during months when you are able to save more.

As a debt product with a fixed rate of interest, it would be suitable for risk-averse investors, especially for those in the lower tax brackets.

Many public and a few private sector banks offer flexi recurring deposits, including SBI, Bank of India, PNB, Indian Bank, Canara Bank, Union Bank of India, ICICI Bank and KVB.

The investor should specify a core/basic amount at the time of opening the flexible RD account. This is the minimum amount that needs to be invested every month.

The basic amount varies across banks. It is as low as ₹25 in the case of Indian Bank, and high as ₹1,000 in Karur Vysya Bank. For SBI, the amount is ₹500.

You can also invest a flexi/step-up amount, over and above the base amount. This flexible amount is usually expected to be a multiple of the base amount. So, if the base amount is ₹500, you can invest an additional ₹500 or ₹1,000 and so on. The excess amount that you invest can be varied every month — as much as your cash flows permit you to.

Banks allow you to invest 5-10 times your core instalment. But you cannot invest less than your core amount in any month.

When you receive your performance bonus, quarterly incentives or dividends from shares, you can consider putting in an amount that is more than your core amount into the flexi recurring deposit.

You can continue your flexible RD for three months to 10 years.

Applicable interest rates

The flexible recurring deposit carries an interest rate that corresponds to that of the normal term deposits that banks offer. If you opt for a five-year investment, the corresponding period’s fixed deposit rate would be applicable for the RD.

However, it must be noted that the stepped-up amounts would carry a different interest rate.

For example, if you opt for a three-year flexi recurring deposit in a bank, and invest ₹1,000 in the first month and ₹2,000 in the 12th month, the ₹1,000 excess instalment would carry an interest applicable for a tenure of two years, which may be different from that pertaining to the three-year period.

The core amount would always earn the interest that is applicable to the original deposit tenure.

Banks also allow you to make multiple additional instalments in a month, provided the upper limit is not exceeded.

With interest rates expected to increase over the next year or so, deposits may start looking attractive.

You can also take loans against these deposits, to the extent of 75-90 per cent of the amount invested.

Premature closures can invite penalties, and the rates applicable would be 0.5 percentage point lower than the original period’s rates. If core instalments are not made for 3-4 months, most banks close the flexi RD and give only savings bank rates for the amount outstanding.

Choose your core amount in such a way that you would not default under any circumstance.

Have specific goals to save for, and time the maturity of these deposits based on financial targets.

The tax angle

Flexi recurring deposits are most suitable for highly conservative investors in the 5 and 20 per cent tax slabs.

The interest earned on flexi RDs is taxable at your slab rates. TDS (Tax Deducted at Source) at the rate of 10 per cent is applicable if the interest earned during the year exceeds ₹10,000.

If you feel that your tax liabilities would be lower, you must provide Form 15G/15H to your bank early on in the financial year to avoid TDS deduction.

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