A recurring deposit (RD) is a savings account where you deposit a fixed amount every month for a set period, earning a guaranteed interest rate until the account matures. It’s designed for people who want to build savings gradually rather than locking in one large lump sum. RDs are offered by most banks and post offices, and they combine the discipline of forced monthly savings with the safety of a fixed return.
How a Recurring Deposit Works
When you open an RD, you choose three things: the monthly deposit amount, the tenure, and the bank. The interest rate is locked in at the time you open the account and stays the same for the entire duration, regardless of what happens to market rates afterward. Each monthly installment earns interest for the remaining months until maturity, so earlier deposits earn more interest than later ones.
Tenures typically range from six months to ten years. The minimum monthly deposit at most banks falls between ₹100 and ₹1,000, though there’s usually no upper cap. Most banks let you set up an auto-debit from your savings account so you never miss a payment. If you do miss one, banks generally offer a grace period of five to seven days before any penalty kicks in. Skipping three to six consecutive payments can give the bank grounds to close your account entirely.
Interest Rates and Compounding
RD interest rates vary by bank, tenure, and depositor category (senior citizens often get a slightly higher rate). The rates are comparable to fixed deposit rates at the same institution, since the underlying product is similar.
Interest on an RD is compounded, meaning you earn interest on previously accumulated interest. The compounding frequency depends on the bank and can be either monthly or quarterly. Quarterly compounding is more common among major banks. The practical difference between the two is small, but monthly compounding produces a marginally higher payout at maturity.
Here’s a simplified way to think about how earnings accumulate: if you deposit ₹5,000 per month into a three-year RD at 7% annual interest compounded quarterly, your total deposits would be ₹1,80,000. The interest earned on top of that would be roughly ₹20,000 to ₹21,000, giving you about ₹2,00,000 at maturity. The exact figure depends on the compounding method your bank uses, and most banks provide an RD calculator on their website so you can model your specific numbers.
What Happens at Maturity
When your RD matures, the bank credits the full amount (all your deposits plus accumulated interest) to your linked savings account. Some banks offer the option to automatically renew the RD for another term at the prevailing interest rate. If you don’t want automatic renewal, check with your bank when opening the account, since the default setting varies.
Withdrawing Early
You can close an RD before it matures, but you’ll typically pay a penalty. The standard penalty structure at most banks is a 1% reduction from the applicable interest rate. So if your RD was earning 7% and you close it early, the bank might pay you interest at 6% for the period you held it. Some banks waive the penalty if you’ve held the RD for at least six months, but this varies by institution.
Partial withdrawals are generally not allowed. An RD is an all-or-nothing product: you either keep it running with monthly deposits or you close it entirely. If you need flexible access to your money, a regular savings account or a liquid fund would serve you better.
How RD Interest Is Taxed
Interest earned on a recurring deposit is fully taxable. It gets added to your total income for the year and taxed at your applicable income tax slab rate. There is no tax deduction available under Section 80C for RD deposits (unlike certain fixed deposits with a five-year lock-in).
Banks deduct TDS (tax deducted at source) at 10% if the total interest earned across all your deposits at that bank exceeds ₹10,000 in a single financial year. If you don’t provide your PAN to the bank, the TDS rate jumps to 20%. If your total income is below the taxable threshold, you can submit Form 15G (or Form 15H for senior citizens) to avoid TDS altogether.
One detail that catches people off guard: TDS is calculated on accrued interest, not just the interest paid at maturity. So even though you receive the interest only when the RD matures, the bank may deduct TDS each year on the interest that has accumulated during that year.
Who an RD Is Best Suited For
RDs work well for conservative savers who want a predictable outcome. Because the interest rate is fixed at the outset and not linked to any market, your returns are guaranteed. You won’t lose principal, and you know exactly what you’ll receive at maturity. This makes RDs a good fit for short- to medium-term goals like saving for a vacation, building an emergency fund, or setting aside money for a down payment.
They’re also useful for people who find it hard to save consistently. The mandatory monthly deposit creates a structure that a regular savings account doesn’t. Once the auto-debit is set up, the money moves out of your spending account automatically.
How RDs Compare to Fixed Deposits and SIPs
A fixed deposit (FD) requires a single lump-sum deposit upfront, while an RD lets you spread contributions across months. Interest rates for the same bank and tenure are usually similar for both products. If you already have the full amount available, an FD will earn slightly more total interest because the entire principal starts compounding from day one. If you’re accumulating savings over time, an RD is the natural choice.
A systematic investment plan (SIP) in a mutual fund is a different animal. SIPs are market-linked, meaning your returns depend on how the underlying fund performs. This gives SIPs the potential for higher long-term returns, but also exposes you to volatility. You could end up with less than you put in during a bad stretch. SIPs also offer more flexibility: you can start, stop, increase, or decrease contributions without penalty. RDs don’t offer that flexibility, but they guarantee your principal and a known return, which SIPs cannot do.
The choice between an RD and a SIP often comes down to your risk tolerance and time horizon. For money you’ll need within one to three years and can’t afford to lose, an RD is safer. For goals five or more years away where you can ride out market dips, a SIP in an equity or balanced fund has historically delivered better inflation-adjusted returns.