1. What is a Recurring Deposit?
A Recurring Deposit (RD) is a savings product where you deposit a fixed amount every month for a fixed tenure at a fixed interest rate. At maturity, you receive all your deposits plus accumulated interest.
RDs are offered by banks and post offices. They're ideal for salaried individuals who want to build a corpus through disciplined monthly savings without market risk.
2. How RD interest is calculated
Each monthly deposit in an RD earns interest for a different duration. The first deposit earns interest for the full tenure; the last deposit earns interest for just one month.
Banks compound RD interest quarterly using this formula:
M = P × [(1 + i)n − 1] ÷ (1 − (1 + i)−1/3)
Where P is the monthly deposit, i is the quarterly interest rate, and n is the number of quarters. The exact formula varies slightly by bank.
3. RD vs. SIP — an honest comparison
RDs and SIPs are structurally similar — both involve monthly deposits. But their returns and risk profiles are very different.
| Factor | RD | SIP (equity) |
|---|---|---|
| Return | 6%–8% p.a. | 10%–14% p.a. (long term) |
| Risk | Very low (DICGC insured) | Moderate to high |
| Tax | Slab rate | 10% LTCG / 15% STCG |
| Liquidity | Premature withdrawal penalty | Redeem anytime |
| Best for | Short-term goals | Long-term wealth |
💡 For a 5-year goal, an RD at 7% post-tax yields ~4.9%. A SIP at 12% post-tax yields ~11%. Over 5 years, the SIP would create roughly 60% more wealth.
4. When to choose an RD
RDs are excellent for:
- Short-term goals (1–3 years): A vacation, gadget purchase, or emergency fund.
- Regular monthly savings: If you have surplus cash flow each month and want a safe product.
- Capital protection: If you can't afford any loss on your savings.
- Senior citizens: Higher RD rates (0.5%–1% extra) and predictable returns.
- Post-retirement income: Non-cumulative RDs pay monthly interest — useful for retirees.
5. A worked example
₹10,000/month RD at 7% for 5 years with quarterly compounding:
- Total deposited: ₹6,00,000
- Maturity value: ₹7,17,000
- Interest earned: ₹1,17,000
- Effective yield: 7.09%
- Tax at 30%: ₹35,100
- Post-tax interest: ₹81,900
- Post-tax maturity: ₹6,81,900
Compare with a SIP of ₹10,000/month at 12% for 5 years: maturity value would be approximately ₹8,25,000. The SIP creates ₹1.08 lakh more wealth.
⚠️ RDs preserve capital but rarely build wealth. For goals over 7 years, a SIP in equity funds will almost always deliver better returns.
6. Tax on RD interest
RD interest is fully taxable at your income slab rate:
- TDS: 10% deducted if annual interest exceeds ₹40,000 (₹50,000 for seniors).
- Tax rate: Your slab rate — 5%, 20%, or 30% plus cess.
- Post-tax yield: Pre-tax yield × (1 − tax rate).
A 7% pre-tax RD return becomes roughly 4.9% post-tax for a 30% slab investor. That's below inflation for most people.
7. Common mistakes to avoid
- Locking in for very long tenures. Rates change. A 10-year RD may lock you into a low rate.
- Missing monthly deposits. RDs have penalties for missed deposits (usually ₹1 per ₹100 per month).
- Ignoring taxes. Pre-tax returns are misleading. Always evaluate post-tax.
- Not comparing with SIPs. For long-term goals, SIPs typically win by a wide margin.
- Putting all money in one bank. DICGC insures only ₹5 lakh per bank per depositor. Split large RDs across banks.
- Using RDs for retirement. Post-tax RD returns rarely beat inflation. Use a mix of equity and debt.
8. Final thoughts
Recurring Deposits are a safe, disciplined way to build a small corpus for short-term goals. But their post-tax returns rarely beat inflation, so they shouldn't be your only investment.
Use this calculator to see your RD maturity value, interest earned, and post-tax returns. Then compare with a SIP before deciding which is right for your goal.
