Recurring Deposit (RD): How It Works and Who Should Open One
A Recurring Deposit is one of the simplest and most effective ways to build savings through regular monthly contributions. It combines the discipline of systematic saving with the security of a fixed return, making it a popular choice for salaried individuals and first-time investors. Here is a complete guide to understanding RDs.
What is a Recurring Deposit?
A Recurring Deposit (RD) is a type of term deposit offered by banks and post offices where you deposit a fixed amount every month for a predetermined period. At maturity, you receive the total amount deposited plus interest accumulated over the tenure.
Unlike a Fixed Deposit where you invest a lump sum upfront, an RD allows you to build a corpus gradually through small, regular monthly instalments.
How Does an RD Work?
1. You choose a monthly deposit amount (minimum Rs. 100 in most banks, Rs. 10 in post office RDs).
2. You choose a tenure, typically ranging from 6 months to 10 years.
3. Every month, the fixed amount is auto-debited from your savings account.
4. The bank compounds interest monthly (or quarterly) on the accumulated deposits.
5. At maturity, the total (principal + interest) is credited to your account.
Interest Rates on RDs
RD interest rates are generally similar to FD rates for the equivalent tenure. As of 2025:
– Public sector banks: 5.5% to 7% p.a.
– Private banks: 6% to 7.5% p.a.
– Senior citizens typically earn 0.25% to 0.5% additional interest.
– Post Office RDs offer a government-guaranteed rate (currently around 6.7% p.a.).
Interest is calculated using compound interest on a quarterly basis in most banks.
Tax Treatment of RD Interest
Interest earned on a Recurring Deposit is fully taxable as income from other sources. It is taxed at your applicable income tax slab rate.
If the interest in any financial year crosses Rs. 40,000 (Rs. 50,000 for senior citizens), the bank deducts TDS at 10% (20% if PAN is not provided). You can avoid TDS by submitting Form 15G (for non-senior citizens with income below the taxable limit) or Form 15H (for senior citizens).
Premature Withdrawal
Most banks allow premature closure of an RD. A penalty of 0.5% to 1% of the interest rate is typically levied for premature closure. Some banks do not allow premature closure before a minimum period.
Post Office RDs cannot be prematurely closed before one year.
Comparison with Fixed Deposits
| Feature | Recurring Deposit | Fixed Deposit |
|—|—|—|
| Investment Pattern | Monthly instalments | Lump sum |
| For | Regular savers | Lump sum investors |
| Minimum Amount | Rs. 100/month | Rs. 1,000 upfront |
| Interest Rate | Similar to FD | Standard FD rate |
| Liquidity | Premature withdrawal (with penalty) | Similar |
Loan Against RD
Many banks allow you to take a loan against your RD balance, typically up to 80-90% of the deposited amount. The interest on the loan is slightly higher than the RD rate. This is a useful feature if you need temporary funds without breaking the RD.
Practical Example
Ramya decides to save Rs. 5,000 every month for 2 years in a bank RD at 7% p.a. At maturity, she will have deposited Rs. 1.2 lakhs. With compound interest, her maturity amount will be approximately Rs. 1.29 lakhs, earning Rs. 9,000 in interest. The interest is added to her taxable income and taxed at her slab rate.
Key Takeaways
– An RD is a monthly savings product with a fixed tenure and guaranteed returns.
– Interest rates are similar to FD rates; senior citizens earn a bonus rate.
– Interest earned on RDs is taxable as income from other sources.
– TDS is deducted if annual interest exceeds Rs. 40,000 (Rs. 50,000 for seniors).
– Premature closure is allowed with a small interest penalty.
– Post office RDs offer a government-guaranteed, stable rate.
An RD is ideal for individuals with a regular monthly income who want to build a corpus systematically without the need for a large upfront investment. It enforces saving discipline through automatic monthly deductions.
