Introduction: what is RD?
A recurring deposit (RD) is a form of investment instrument offered by banks. The nature of an RD is similar to that of an FD. However, an FD requires you to invest a lump sum amount, whereas an RD gives you the facility of investing small amounts at regular intervals.
Therefore, it helps you develop a habit of investing regularly while taking away the tension of investing a bigger chunk of money at once. A recurring deposit comes with various benefits, making it a viable option for a lot of users. Let us take a look at some of these features:
- A better interest rate compared to your savings deposit amount. A savings account offers an annual interest of 3%–4%, whereas an RD gives an interest of up to 7%.
- One can start with a smaller amount. In fact, some banks offer to start an RD with an amount as low as Rs 10.
- It helps you inculcate a habit of investing at an early stage. This can help you generate higher returns in the long run.
How can an RD calculator help you?
A recurring deposit allows you to deposit small amounts at a regular interval. However, it is difficult to calculate the interest receivable at the end of the year. This is because every fraction of your RD is invested for a different time duration.
The amount deposited at the beginning of the year receives interest for 12 months. On the other hand, the amount deposited at the end earns interest for only 1 month. In fact, the component of compounding interest makes it even more complex for investors to track their annual interest.
This is where an RD calculator helps with concerns related to interest calculation on an RD. An RD calculator completely eliminates the requirement of any manual interest calculation and automates the entire process.
The RD calculator helps you with the final maturity amount at year-end. For using an RD calculator, you need to know about three variables, namely the principal, rate of interest, and tenure.
An RD calculator uses the following formula to calculate the maturity amount (A):
A = P*(1+R/N)^(NT)
Here, A is the maturity amount, P is the principal amount invested every month, R is the rate of interest, N is the number of quarters, and T is the tenure.
Say you want to start an RD with a monthly investment of Rs 5000 with an interest rate of 8.25%. The maturity amount at year-end for this RD would be as follows:
A = 5000*(1+0.0825/4)^(4*12/12) = 5425.44
= 5000*(1+0.0825/4)^(4*11/12) = 5388.64
= 5000*(1+0.0825/4)^(4*01/12) = 5034.14
As you can see, the number of months keeps decreasing from 12 to 1. This is the final amount at the end of each month. The sum of these amounts totals to Rs 62,730.85, which is the maturity amount at year-end.
Tax Benefits on an RD
An RD does not only help you save money but also helps you save taxes too. There is a specific kind of RD known as a Post Office Recurring Deposit. An investor who invests in the Post Office RD can claim a tax deduction under Section 80C of the Income Tax Act, 1961.
The amount of this deduction is capped at Rs 1.5 lakhs per annum. Therefore, if you earn an interest of less than Rs 1.5 lakhs on a Post Office RD, you do not have to pay any taxes on it. However, if the annual interest earned exceeds the given amount, you will have to pay tax as per your respective income tax slab
Benefits of the RD Calculator
As discussed earlier, an RD calculator makes the life of an investor easy by reducing the workload of calculating interest manually. Let’s take a look at some major benefits of using an RD calculator:
- Saves time: An RD calculator automates the entire calculation process and provides the results within a few seconds. Therefore, investors can save their precious time. All you have to do is enter the details such as the principal amount, rate of interest, and tenure of investment. The entire process would take a minute or two, whereas, the manual calculation might require a lot more time.
- Highly accurate: Since the calculator of interest is done through a computerized format, the scope of error does not exist. Once you have entered the details correctly, you get an accurate amount. This might not be the case in manual calculation as it is prone to human error.
- Free to use: An RD calculator does not require you to pay any fees for using it. Therefore, you can use it for calculating the maturity amount whenever you want. You can also try various combinations of variables to find the maturity amount in different cases.
Provides clarity about the future: The advantage of an RD calculator is its ability to tell you the maturity amount even before the tenure completion of the investment. Therefore, you can plan your future investments accordingly since you already know the amount you will receive at maturity.
Moreover, if you have a financial goal for the future, you can use the RD calculator to figure out the principal amount you need to invest every month for achieving that goal.
Say you want to have 10 lakh rupees in your bank after 5 years. All you need to do is enter the expected rate of return and the tenure of investment as 5 years, you can know the required monthly investment.
How to use an RD Calculator?
An RD calculator is one of the easiest tools for calculating your investments. Let us guide you to the basic steps involved in using an RD calculator.
- The first thing you need to do is visit the website and find the RD calculator.
- Now, enter the principal, that is, the amount you will be investing monthly.
- After this, enter the expected rate of return on the RD along with the tenure of your investment.
- Once you have entered all the details, click on calculate and the final amount will be there on your screen.
Conclusion
An RD is a great investment opportunity for those who want to inculcate the habit of investing at an early stage in life. Since the amount required to start an RD is quite low, it is feasible for investors with less capital.
Moreover, the interest on an RD is calculated on a compounding basis, therefore providing you with higher returns. The RD calculator is an easy-to-use tool that helps you track your investment returns by eliminating the hassle of manual calculations.
Let us now take a look at some FAQs to address any queries that you might have.
Frequently Asked Question
Q1. How is RD interest calculated?
Ans. The interest receivable on your RD is calculated using a compounding formula. Therefore, you not only earn interest on the principal amount but also keep earning interest on the maturity amount. However, interest is compounded quarterly in the case of an RD, although the amount is invested every month.
Q2. Is TDS applicable on RD?
Ans. Yes, like any other saving or investment instrument, an RD is entitled to TDS, that is, the tax deducted at the source. The TDS deducted on an RD is calculated at 10%. However, it is only applicable if the accrued interest on your investment exceeds an amount of Rs 10,000 in a financial year.
It is important to note that an RD calculator does not take TDS into account. Therefore, you have to deduct that amount manually.
Q3. Is RD better than FD?
Ans. Both the financial instruments are designed by keeping in mind the needs of different individuals. If you are an investor with lesser funds and want to start investing, an RD could be a better option as it offers a monthly investment opportunity.
However, if you are an investor with a lump sum amount, investing in an FD could be a better option. This is because, in an FD, you earn interest on the entire amount invested.
Q4. Is RD tax-free?
Ans. No, just like any other investment instrument, RD is taxable. One has to pay a TDS of 10% on the interest earned through an RD. However, if your annual interest earned from an RD falls under Rs 10,000, no TDS is applicable. The final interest at year-end is calculated as per the tax slab of the investor.
Q5. Is there any additional interest provided for senior citizens?
Ans. Yes, senior citizens who invest in an RD generally receive a higher rate of interest compared to others. The interest rate mostly varies by around 0.25% to 0.75%. Therefore, a bank that normally offers an interest of 5% on an RD might offer a higher rate of around 6% to a senior citizen.
This is done to promote the habit of investment among senior citizens and give them a greater benefit.
Q6. Is the interest paid on RDs compounded quarterly?
Ans. Yes, the interest earned on an RD is compounded quarterly. The formula used for calculating the final amount using compound interest is as follows:
A = P*(1+R/N)^(NT)
Here, A is the maturity amount, P is the principal amount invested every month, R is the rate of interest, N is the number of quarters, and T is the tenure.