Union Bank of India has recently launched a recurring deposit that allows investors to enjoy the returns of a term deposit while allowing flexibility to invest varying sums into the account every month.
Union Monthly Plus is a recurring deposit scheme offered for individuals, institutions, corporates, partnership, trusts and HUFs. Investors can put in an initial amount and add to it by way of instalments made every month. Investors can vary the term of the investment for any period between 6 and 60 months (in multiples of one month).
Instalments
This deposit scheme requires investors to choose a minimum core amount (initial investment) that can vary from Rs 100 to Rs 1,00,000 and deposit it initially.
Investors may have to choose the core amount conservatively, as the subsequent instalments cannot fall short of this amount. Future instalments can, however, be hiked up to 10 times the core amount.
For example, if an investor deposits Rs 1,000 initially, the subsequent monthly instalments cannot be less than Rs 1,000 a month. The maximum can go up to Rs 10,000 a month (10 times the initial deposit).
The positive feature of the instalment facility is that the investor need not make the monthly contribution in one shot. The contribution can be made once or over the course of a month. In other words, investors can just add to their deposit savings kitty as and when they manage to build some surplus.
Depending on one’s monthly expenditure, the contribution can also be stepped up or lowered, as long as it is above the initial deposit amount.
There would be no penalty for delayed payment of instalment or failure to pay instalment in a given month.
Interest
The recurring deposit would enjoy returns similar to the prevailing term deposit interest rates offered by Union Bank. The interest rate for a five-year term deposit is 9.5 per cent. Hence, a recurring deposit opened now for 60 months would earn 9.5 per cent.
Interest rates are credited on a quarterly basis and would be compounded and received at the end of the deposit term.
However, for the purpose of calculation of interest, the bank would consider only the minimum balance between the 10th and last day of a given month.
Thus, any instalment for a given month would earn interest only if it is deposited before the 10th of the month.
For instance, if you invest Rs 1,000 on January 2 but make the next instalment of say Rs 2,000 on February 11, the interest for the month of February would be calculated only on Rs 1,000 and not Rs 3,000.
Other features
The scheme does not impose any penalty for premature closure of the deposit. In other words, if an investor who had chosen a five-year scheme opts to withdraw his deposit there will be no charges. Interest would be calculated up to such period of withdrawal. The bank has also stated that being a cumulative deposit, there will be no deduction of income-tax at source irrespective of the amount of interest earned. Investors should, however, note that the interest would attract income-tax at the investors’ slab rate at the time of filing the return.
Investors can also avail a loan against the deposit for up to 25 per cent of the deposit amount at 2 per cent over the deposit rate.
Review
For the five-year Union Monthly Plus Scheme, the post-tax return will depend on the tax slab of the individual. An investor ploughing Rs 1,000 a month over 60 months would receive close to Rs 77,000 at the end of the term. Note that the interest earned (of close to Rs 17,000) would suffer income-tax. The product may be attractive for those in the lower income slabs.
The scheme is suitable for those without sufficient surplus to invest a lump sum in a term deposit.
It also provides an opportunity to invest systematically in a safe debt option. But those who have large surplus might find a regular term deposit providing three-year returns of 10.5-11.5 per cent better.
The product may also not fit the bill of retired and senior citizens looking at a monthly source of income.
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