A Recurring Deposit (RD) is essentially a Fixed Deposit for people who want to save a fixed amount every month rather than a lump sum. RDs are excellent tools for short-term goals (like saving for an annual insurance premium or a vacation) because they enforce savings discipline with guaranteed returns.
The Math of RD Compounding
Because you are depositing money every month, each installment earns interest for a different duration.
For a 12-month RD:
The 1st installment earns interest for 12 months.
The 2nd installment earns interest for 11 months.
The 12th installment earns interest for only 1 month.
Like FDs, RD interest is typically compounded quarterly. The complex mathematics behind RD maturity values makes our RD Calculator essential for accurate planning.
RD Taxation vs. SIPs
Just like FDs, the interest earned on an RD is fully taxable as per your income slab. There is no tax benefit. For individuals in the 20% or 30% tax brackets, RDs are highly tax-inefficient.
For long-term goals (5+ years), Equity SIPs are vastly superior due to lower capital gains taxes (12.5% LTCG) and higher inflation-beating returns. RDs should strictly be used for capital preservation for goals maturing within 1 to 3 years.
Frequently Asked Questions (FAQs)
An RD is a savings scheme where you deposit a fixed sum monthly for a predefined tenure and earn a guaranteed interest rate.
RD interest is calculated on a monthly reducing balance and compounded quarterly using the standard IBA formula.
Banks charge a small penalty fee (typically ₹1 to ₹2 per ₹100 of installment) for delayed payments. Repeated defaults may lead to account closure.
Yes, commercial banks offer identical interest rates for RDs and FDs of the same tenure.
Yes, TDS is deducted at 10% if the annual interest earned exceeds ₹40,000 (₹50,000 for senior citizens).
The minimum tenure allowed for a bank recurring deposit is 6 months.
The maximum tenure allowed for a bank recurring deposit is 10 years (120 months).
Yes, but banks levy a premature closure penalty of 0.5% to 1.0% on the applicable interest rate.
Yes, senior citizens enjoy a rate markup of 0.50% to 0.75% p.a. on recurring deposits as well.
No. The monthly deposit amount is fixed at the time of account opening and cannot be altered during the tenure.