Recurring Deposit (RD): A Complete Guide

A recurring deposit is one of the simplest savings tools in India, and a good one for building the habit of setting money aside every month. It does not promise high returns, but it does promise certainty and discipline. This guide explains how an RD works, how it is taxed, and when it is the right choice.

What is a recurring deposit

A recurring deposit, or RD, is a bank or post office product where you deposit a fixed amount every month for a fixed period, and earn a fixed rate of interest on it. At the end of the term, you receive your total deposits plus all the interest as a single maturity amount.

Think of it as a fixed deposit built up in monthly instalments. A fixed deposit takes one lump sum. An RD takes a steady monthly contribution. Both pay a guaranteed, fixed rate.

How RD interest works

RD interest rates in India are broadly similar to fixed deposit rates, typically in the 6.5 to 7.5 percent range, depending on the bank and tenure. Senior citizens usually get a little extra. Tenures commonly run from 6 months to 10 years.

Each monthly instalment you deposit earns interest for the remaining months until maturity. Your first instalment earns interest for the whole tenure, the second for one month less, and so on. So the early instalments do more work than the later ones, which is one more reason to start any savings habit sooner rather than later. Our RD calculator shows the exact maturity value for any amount and tenure.

How an RD is taxed

RD interest is fully taxable. It is added to your income for the year and taxed at your income tax slab rate, exactly like fixed deposit interest. There is no special lower rate.

Banks also deduct TDS on RD interest if your total interest from that bank in a year crosses the threshold, which is ₹40,000, or ₹50,000 for senior citizens. As with an FD, TDS is not an extra tax. It is an advance payment adjusted when you file your return, and you must declare all RD interest whether or not TDS was deducted.

RD versus SIP

Since an RD and a SIP share the same monthly rhythm, the natural question is which to use. The honest answer is that they are built for different jobs.

Use an RD for short-term goals, money you will need within a year or three, where certainty matters and a market fall would be unacceptable. Use an equity SIP for long-term goals, where time lets equity grow your money well above what an RD can. They are partners. An RD is not a long-term wealth builder, and a SIP is not a safe place for next year's money.

Who should use an RD

• Someone building the savings habit. If you find it hard to save, an automatic monthly RD forces the discipline gently.
• Savers with a near-term goal. Money for a goal one to three years away, a planned purchase or a trip, sits safely in an RD.
• Conservative savers who simply cannot tolerate any market movement and value a guaranteed outcome.
• Building up towards a fixed deposit. Some people use an RD to accumulate a lump sum, which they then move into an FD or invest.

It is less suited to long-term wealth creation, where its modest, fully taxed return tends to struggle against inflation.

A recurring deposit will not build your fortune. But it is a fine, dependable place to keep money you will need soon, and a gentle first step into the habit of saving every month.

Check what your monthly deposit will grow to with the RD calculator, and remember to judge the return after tax, not just the rate on the brochure.