Post Office Recurring Deposit

The Post Office Recurring Deposit is a saving habit with a government guarantee attached.

A fixed amount goes in every calendar month for five years. The minimum is Rs 100 a month, and above that in multiples of Rs 10. There is no maximum.

Interest is set by the government for each quarter, compounded quarterly, and paid only at maturity. So nothing comes out along the way — the whole point is accumulation.

The risk is low, because the interest and principal are guaranteed by the government.

Two things it does not give you. There are no tax benefits on the amount invested or the returns earned. And missing an instalment has a price: deposits have to be made regularly on a monthly basis, and penalties apply for non-payment.

It is not the bank product of the same name. Different issuer, different rules.

The terms, from Chapter 6.

The premature-closure penalty is the sharp edge. Closing after three years does not simply forfeit a little interest. The workbook says only the savings bank interest rate is payable — so three years of compounding at the RD rate is recomputed at the much lower savings rate. That is what makes the five-year term a real commitment rather than a soft target.

Where the quarterly reset puts it. The rate is re-fixed by the government every quarter, which makes this a reset-linked instrument in the workbook's classification — a fixed-return product whose rate moves, not one whose capital moves. Chapter 1 groups the small savings schemes this way explicitly.

Suitability. Because nothing is paid out until maturity, the RD belongs to the accumulation stage, not the income stage. Chapter 6 lists the Senior Citizens Saving Scheme, the Post Office Monthly Income Scheme and Post Office Time Deposits among the products used to generate income in the distribution stage; the recurring deposit is not among them.

Mrs Kulkarni, 46, sets up a Post Office Recurring Deposit for Rs 3,000 a month for five years, as a disciplined side pot for her retirement plan.

Interest rates on small savings schemes are reset quarterly and the workbook does not print a rate table, so the rate below is illustrative.

Monthly instalment    = Rs 3,000
Instalments           = 5 x 12 = 60
Total deposited       = Rs 1,80,000
At 6.7 percent compounded quarterly, maturity value = about Rs 2,14,000
Interest earned       = about Rs 34,000, received only at maturity

Not a rupee of that Rs 34,000 reaches her before year five. That is the product working as designed.

The Rs 10 multiple rule, in practice. She wanted to save Rs 3,005 a month. Not permitted: above the Rs 100 minimum, deposits must be in multiples of Rs 10. She rounds to Rs 3,000 or Rs 3,010.

The month she misses. In year two a medical bill absorbs her surplus and she skips a month. The deposit must be made regularly on a monthly basis, so a penalty applies for non-payment — the RD is not a flexible instrument like an equity SIP she could simply pause.

Year one, and the 50 percent door. Fourteen months in, with a balance of about Rs 43,000, she needs money urgently. She may take one withdrawal of up to 50 percent of the balance, so roughly Rs 21,500 — available only because more than one year has passed.

Year four, and the expensive exit. At month 42 she considers closing the account. Premature closure is allowed after three years, so it is possible. But only the savings bank interest rate is payable:

She leaves it running. Compare her sister-in-law, who chose a bank recurring deposit: that account is covered by deposit insurance up to Rs 5 lakh per customer per bank and its rate was agreed on the day she opened it, but it carries no government guarantee on the rate and follows that bank's own tenure and penalty rules. Two products with the same name and different rulebooks.

Chapter 6, section 6.1, covers the Post Office Recurring Deposit among the accumulation-stage products, with the full list of features above. Chapter 2, section 2.10.4, lists it under Post Office Schemes and Deposits alongside POMIS and POTD, and defers the detail to Chapter 6.

Expect the numbers: 5-year tenor, Rs 100 minimum monthly deposit in multiples of Rs 10, no maximum, three adults maximum as joint holders, one withdrawal up to 50 percent after one year, and premature closure after three years with only the savings bank rate payable. The compounding and payout pattern — compounded quarterly, paid only at maturity — is asked directly, as is the absence of any tax benefit. A comparison question may set it against the bank Recurring Deposit or against a Post Office Time Deposit.

• This is not the bank Recurring Deposit. The post office version has a fixed 5-year tenor, a government-set quarterly rate, a Rs 100 minimum in Rs 10 multiples, and a statutory 50-percent-after-one-year withdrawal rule. The bank product's tenure and rate vary from bank to bank.
• No tax benefit at all. Not on the investment and not on the returns. Its sibling the 5-year Post Office Time Deposit does qualify for a deduction, which makes this an easy pair to confuse.
• Compounded quarterly, but paid only at maturity. Nothing is received along the way, so it is an accumulation product and not an income product.
• Premature closure pays only the savings bank rate. Closing after three years does not preserve the RD rate for the period held.
• 50 percent after one year is one withdrawal, not a facility. The workbook says one withdrawal up to 50 percent of the balance.
• Three adults may hold jointly — more than the two permitted on a Post Office Time Deposit. Two different joint-holding limits in the same chapter.
• Penalties apply for a missed instalment. An RD is not a pausable SIP.
• The rate is reset quarterly, which does not make it market-linked. Capital is guaranteed; only the rate moves.