What is a Recurring Deposit?
A Recurring Deposit (RD) is a disciplined savings product offered by banks and post offices in India. You commit to depositing a fixed amount every month for a fixed tenure, and at the end, the bank returns your total deposits plus compounded interest. Think of it as a forced savings plan — the bank locks you into a monthly habit.
RDs are ideal for salaried individuals who want to save incrementally rather than all at once. The ticket sizes are small (some banks accept ₹100/month), making them accessible to first-time savers. Unlike a Fixed Deposit, you don't need a large lump sum to start.
How RD interest is calculated
Indian banks calculate RD interest using quarterly compounding on an accumulating balance. Here's how it works step by step:
Month 1: You deposit ₹5,000. Balance = ₹5,000.
Month 2: You deposit ₹5,000. Balance = ₹10,000.
Month 3: You deposit ₹5,000. Balance = ₹15,000. End of quarter: interest = ₹15,000 × (8%/4) = ₹300. New balance = ₹15,300.
Month 4–6: Continue deposits, interest credited at end of month 6.
At maturity: Sum of all monthly deposits + all interest credits.
The formula commonly used:
M = R × [(1+i)^n − 1] / [1 − (1+i)^(−1/3)]
Where i = r/400 (quarterly rate), n = quarters. This is equivalent to the simulation above.
RD vs FD — the compounding gap
For the same total deposit amount, FD always earns more interest than RD. Why? Because in an FD, your full principal earns interest from day one. In an RD, your capital is deployed gradually — the first installment earns full-tenure interest, but the last installment earns just one month's interest.
Example: ₹5,000/month for 12 months vs ₹60,000 FD for 12 months, both at 7%:
- RD maturity: ~₹62,350 (interest ~₹2,350)
- FD maturity: ~₹64,200 (interest ~₹4,200)
The FD earns nearly 80% more interest on the same capital. But you need ₹60,000 upfront for the FD — which is precisely the point of RD for incremental savers.
RD vs SIP — the risk-return tradeoff
| | RD | SIP | |---|---|---| | Returns | Guaranteed 6–8% | Expected 10–14% (market-linked) | | Capital safety | 100% guaranteed | Can go negative in bad years | | Ideal tenure | 1–3 years | 5+ years | | TDS | Yes (>₹40K annual interest) | No | | Tax on returns | Slab rate | LTCG at 12.5% (>₹1.25L gains) |
For a 1-year ₹5,000/month goal, RD wins on safety and simplicity. For a 10-year wealth creation goal, SIP wins on post-tax returns by a wide margin.
When RD makes sense
Use RD when:
- You're saving for a specific goal in 1–3 years (vacation, gadget, emergency fund)
- You want zero risk — capital must be safe
- You're new to saving and need the discipline of a fixed monthly commitment
- You're in a low tax bracket (5% or nil), minimising tax drag on interest
Skip RD when:
- Your time horizon is 5+ years — SIP will significantly outperform
- You're in the 30% tax bracket — post-tax RD yield is only ~4.9% at 7%
- You have a lump sum ready — FD is more efficient than RD for the same capital
Post office RD — the safer alternative
India Post offers RDs at 6.7% (current rate, reviewed quarterly). The advantage: it's sovereign-guaranteed, not just DICGC-insured. For accounts with large deposit amounts or with risk-averse depositors, post office RDs offer the same return profile with zero credit risk. Minimum deposit: ₹100/month. No maximum. Tenure: 5 years only.
Tax on RD interest
RD interest is treated as income from other sources and taxed at your applicable slab rate. The same TDS rules as FD apply: 10% TDS if annual FD+RD interest exceeds ₹40,000. Submit Form 15G / 15H to avoid TDS if your income is below the taxable threshold.
Unlike mutual fund SIPs (where each installment has its own long-term holding period after 1 year), RD interest is always taxed as regular income — there's no preferential long-term capital gains treatment.