Post office savings schemes have always been reliable investment tools for the common man. Whether it is school fees for children or fulfilling small ambitions such as buying a two-wheeler, post office schemes have been helping the general population of the country for quite a long time. It has benefitted more than just the primary earning person in a family as many housewives have also cashed on the opportunity to save small amounts utilising several post office savings schemes. Calling it the financial backbone of the Indian middle-class society would not be an overstatement.
Post Office Recurring Deposit
Individuals willing to invest and build capital must understand that good returns on investments are not generated overnight. You need to develop investment habits and follow them with the discipline to build good capital. And among all the investment tools, a recurring deposit or RD is certainly a good choice to start with.
Indian Post offers several savings schemes of which RD is one of the most favoured. Post Office recurring deposit scheme is a government-backed scheme that offers guaranteed returns. The scheme has a medium-length tenure and people can start investing from as low as Rs. 100 per month for a period of 5 years. The tenure can be extended in blocks of 5 years as well. The initial deposit for opening a post office RD account can be made with both cash and cheque. Besides the basic benefits, the scheme offers some unique advantages that are not available with bank RDs. These include the facility for transferring where you can switch your post office and transfer your RD account anytime without any fuss.
Two adults can open a joint RD account and deposit money in monthly instalments. Additionally, minors aged 10 years and above can also have a post office RD account and can manage it on their own. Parents/Guardian of a minor can also open an account in his/her favour if the minor is below 10 years of age. However, minors are required to apply for a conversion (minor to adult RD account) after maturity to withdraw the amount.
Adults are also allowed to open a joint account with a nomination facility. The advance deposits are subject to a rebate as well in the case of a minimum of 6 advance instalments. An amazing feature of post office RD is that you can easily convert your joint account to a single account and vice versa. If the depositor expires and under specific conditions, the maturity amount will be granted in denominations of Rs. 50 to the nominee.
How to Open a Post Office RD account?
You have to visit your nearest post office and fill the RD form and submit it along with the pay-in slip with the initial deposit. Account opening forms are different for senior citizens.
Post Office Recurring Deposit Interest Rate:
A post office RD account can be opened from a minimum of Rs. 10 with no maximum limit (in multiples of 5). The interest is offered at the rate of 7.1% w.e.f. 1/07/2017. The interest is compounded quarterly which is another benefit for individuals who cannot deposit large sums of money since it enables them to receive good value for their investments.
Post Office Recurring Deposit Withdrawal:
Depositors are allowed to withdraw up to 50% of the available balance in their RD account after 1 year. On the other hand, minors have to convert their accounts into the regular RD accounts for withdrawal and that is possible only once they mature.
Is Post Office Recurring Deposit Better than Bank RD?
Experts always suggest that a recurring deposit is the best way to develop investment habits that will become a great help in covering future needs. A small investment every month adds up to big capital along with the compounded interest. It can also help investors learn the differences between different types of accounts and their applicable taxes.
As per government regulations, the banks are allowed to deduct TDS on interest while post offices do not deduct TDS on interest at all. Banks deduct TDS if your annual interest exceeds the limit of Rs. 10,000. The deduction applies to the entire interest amount, not just on the amount over a specified limit. However, the income from interest from post office RDs is taxable under the Income Tax Act and it should be added under the head of ‘Income from Other Sources’ every year.
Having said that, comparing the tenure of RD accounts offered by banks against those offered by the post office presents a different picture. The tenure of bank RDs is flexible as it starts from as low as 6 months and goes up to a maximum of ten years. There is no compulsion on you to keep an account for 6 months or 2 years. On the contrary, a post office RD is opened for a minimum duration of 5 years and can only be extended in blocks of 5 years. This means that post office RDs are good for individuals looking for long-term benefits while bank RDs are good for short-term benefits such as saving money to buy jewellery or for a vacation.
In addition, banks review their interest rates every year as per the dynamics of market economics while post offices offer a fixed interest rate as applicable on the date of opening the account. This means your maturity amount will not fluctuate and you will get the promised sum of money at the end of your tenure. However, despite having floating interest rates, bank RDs also offer good returns as the interest rates can rise considerably giving the opportunity for higher returns.
Post Office Recurring Deposit Payment Default
A penalty is charged on every default in a post office RD account. This penalty is levied at the rate of 5 paisa for every Rs. 5. For a single default which happens only rarely, the depositor is required to pay the penalty along with the payment for both the previous (missed) and current months. In the case of a default for 4 regular intervals, the account is closed. The depositor can also reopen the account within 2 months of discontinuation but after that period, the account is closed permanently and no deposit is allowed into the same account.