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If you want to create a big fund without any market risk by saving a fixed amount every month, then the 5-year Recurring Deposit (National Savings Recurring Deposit Account – RD) scheme of the Indian Post Office can prove to be a very suitable option for you. Away from the ups and downs of the stock market or mutual funds, this scheme is fully backed by the Government of India, keeping your principal and interest 100% protected. This scheme is considered to be the most reliable means for maintaining regular financial discipline among the working class, small businessmen and housewives.
The basic maturity period of Post Office Recurring Deposit Scheme is fixed at 5 years (i.e. 60 months). According to the rules set by the Finance Ministry of the Central Government, currently 6.7% annual interest rate is being given on this scheme, which is calculated on Quarterly Compounding basis.
If you deposit a regular installment of ₹6,000 every month in this scheme, your returns in 5 years will be as follows:
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Monthly Deposit Amount: ₹6,000
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Total investment period: 5 years (60 months)
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Your total principal balance in 5 years: ₹3,60,000 (6,000 × 60)
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Applicable interest rate: 6.7% per annum (compounded quarterly)
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Total interest received in 5 years: Approximately ₹68,130
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Total maturity amount after 5 years: About ₹4,28,130
This means that in just 5 years of disciplined investment, a total of ₹ 3.60 lakh will go out of your pocket and the post office will hand over to you a lump sum fund of approximately ₹ 4.28 lakh with a guarantee.
The biggest strength of Post Office RD is its quarterly compounding calculations. Unlike normal Simple Interest, in this the interest earned every three months is added to your principal amount and interest is calculated on that increased balance for the next three months. The first installment of ₹6,000 deposited initially gets interest for the full 59-60 months, while the last installment gets the benefit of less time. It is because of this compounding cycle that an investment of ₹3.60 lakh is able to generate a solid return of over ₹68,000.
If you do not need this fund immediately after completion of 5 years, you can extend your post office RD account for next 5 years by applying at the concerned post office branch. Even during the extension period, the account will continue to operate at the same interest rate in effect at that time. If an account holder continues monthly savings of ₹6,000 for 10 consecutive years (120 months), his total investment at the end of 10 years will be ₹7,20,000 and after adding the accumulated interest, the total maturity corpus can translate into a whopping corpus of ₹10.3 lakh to ₹10.5 lakh.
Liquidity has also been taken care of in Post Office RD so that the account holder does not face any problem in case of any untoward incident or emergency:
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Loan Facility: After opening an account and depositing at least 12 regular monthly installments, the account holder can avail a loan up to 50% of the total balance in his account. This loan is available at simple interest only 2% more than the post office RD interest rate.
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Pre-mature closure rule: The account can be closed prematurely after completion of 3 years from the date of account opening. However, for premature closure, payment is made at the Post Office Savings Account’s simple interest rate (currently 4.0%) instead of the 6.7% RD rate. Therefore, to maximize financial benefits, it is best to complete a period of 5 years.
Opening a 5-year RD account in the post office is very simple. Any adult citizen of the country can open a joint account individually or along with three adults. This account can also be operated in the name of a minor above 10 years of age. This account can be started with a minimum of ₹100 per month and there is no maximum investment limit. With Aadhar Card, PAN Card and passport size photograph, you can open this account at any nearest post office or through India Post Payments Bank (IPPB) Mobile Banking. This scheme is an ideal financial instrument for families looking for regular savings and planning for a secure future without risk.