1. What is a Recurring Deposit?
A Recurring Deposit (RD) is a savings product offered by banks and post offices where you deposit a fixed amount every month for a fixed tenure. The bank pays a guaranteed interest rate on your deposits, and you receive the maturity value at the end of the tenure.
RDs are the fixed-deposit equivalent of a SIP — but with guaranteed, government-insured returns instead of market-linked equity returns. They're ideal for conservative savers and short-to-medium term goals.
2. How RD interest is calculated
Each monthly deposit earns interest for a different duration. The first instalment earns interest for the full tenure, while the last one earns for just one month. Interest is typically compounded quarterly (as per RBI norms for banks).
The formula for RD maturity (approximation using standard quarterly compounding) is:
M = Σ P × (1 + r/400)^(4 × t/12)
Where P is the monthly deposit, r is the annual rate, and t is the number of months each instalment remains invested (from 1 to n). The total is the sum across all instalments.
3. A worked example
₹10,000/month for 5 years at 7% p.a. compounded quarterly:
| Component | Amount |
|---|---|
| Monthly deposit | ₹10,000 |
| Tenure | 60 months |
| Total deposited | ₹6,00,000 |
| Interest earned | ~₹1,14,000 |
| Maturity value | ~₹7,14,000 |
That's an absolute return of about 19% over 5 years — roughly 3.5% CAGR on invested capital. The higher effective yield (about 7.2% on the average balance) comes from quarterly compounding.
💡 The "effective yield" on an RD is higher than the quoted rate because interest is compounded. At 7% quoted with quarterly compounding, the effective annual yield is about 7.19%.
4. RD vs FD vs SIP — which is best?
| Feature | RD | FD | SIP |
|---|---|---|---|
| Investment mode | Monthly | Lump sum | Monthly |
| Returns | Guaranteed (6–7.5%) | Guaranteed (6–7.5%) | Market-linked (10–14%) |
| Risk | Very low | Very low | Moderate–High |
| Tax on interest | Slab rate | Slab rate | 10% LTCG above ₹1L (equity) |
| Best for | Monthly savers, short goals | Lump sum parking | Long-term wealth |
RDs are best for conservative savers or short-term goals where certainty matters more than maximum returns. For 10+ year goals, SIPs in equity funds will almost always beat RDs.
5. RD vs SIP — the trade-off
Both involve monthly deposits. The key difference is guarantee vs potential:
- RD: Guaranteed 6–7.5% p.a., zero market risk, taxed at slab rate.
- SIP: Historically 10–14% p.a., market risk, more tax-efficient for equity.
Over 10+ years, an equity SIP at 12% will build roughly 2x the corpus of an RD at 7%. But the RD is certain, while the SIP's 12% is a historical average, not a guarantee.
6. Taxation of RD interest
RD interest is taxed at your income tax slab rate. This is less favourable than equity mutual funds (10% LTCG above ₹1 lakh). Key points:
- Interest is taxed every year as it accrues (not at maturity).
- Banks deduct TDS at 10% if annual interest exceeds ₹40,000 (₹50,000 for senior citizens).
- Post Office 5-year RD qualifies for Section 80C deduction (up to ₹1.5 lakh/year).
- Bank RDs do not qualify for Section 80C.
⚠️ If you're in the 30% tax bracket, a 7% RD effectively returns only ~4.9% after tax. For long-term goals, equity SIPs are significantly more tax-efficient.
7. Typical RD rates in India (2025)
| Bank / Institution | Rate (general) | Senior citizen |
|---|---|---|
| HDFC Bank | 7.00% | 7.50% |
| SBI | 6.80% | 7.30% |
| ICICI Bank | 7.00% | 7.50% |
| Post Office RD | 6.70% | 6.70% |
| Axis Bank | 7.00% | 7.50% |
| Kotak Mahindra | 7.00% | 7.50% |
8. Premature withdrawal
If you need to close your RD before maturity, most banks:
- Deduct 0.5–1% from the applicable interest rate.
- Require you to close the entire RD (no partial withdrawal in most cases).
- Some banks require a minimum lock-in (usually 3 months).
Post Office RD has a strict rule: no premature closure for the first 3 years. After 3 years, you can close it, but with reduced interest.
9. When an RD makes sense
- Short-term goals (1–5 years): Where you need certainty of returns.
- Emergency fund building: Regular deposits build a reserve fast.
- Conservative investors: For those who can't tolerate market volatility.
- Tax bracket is low: If you're in the 5–10% slab, RD tax drag is minimal.
- Post Office RD: For 80C tax benefit on 5-year term.
- Senior citizens: The extra 0.5% makes RDs more attractive.
10. When an RD doesn't make sense
- Long-term goals (10+ years): Equity SIPs will beat RDs significantly.
- High tax bracket: After-tax returns fall to 4.5–5% for 30% slab investors.
- You already have an emergency fund: Additional RD savings may be better deployed for growth.
- Very short tenure (under 6 months): Liquid funds often yield similar returns with more flexibility.
11. Common mistakes to avoid
- Missing an instalment. Most banks charge a penalty of ₹1–2 per ₹100 per month for missed deposits.
- Premature withdrawal. Costs you 0.5–1% in reduced interest.
- Ignoring tax. RD interest is taxed at slab rate — 30% investors lose almost half the return.
- Choosing the longest tenure without need. Locking money for 10 years at 7% may not be optimal vs 5 years at the same rate with reinvestment.
- Not comparing with Post Office RD. Post Office 5-year RD qualifies for 80C; bank RDs don't.
12. Final thoughts
RDs are one of the safest, simplest ways to save monthly. They suit short-to-medium term goals, conservative investors, and anyone who wants a guaranteed return without market risk. But for long-term wealth building, their after-tax returns are modest compared to equity SIPs.
Use this calculator to see how your RD will grow. Compare the after-tax return with alternatives before committing — and consider pairing an RD for short-term goals with a SIP for long-term goals.
