Recurring Deposits: The Disciplined Saver's Favourite Investment
A Recurring Deposit (RD) is one of the simplest and most accessible savings instruments offered by Indian banks and post offices. It combines the safety of a fixed deposit with the convenience of monthly instalments, making it ideal for salaried individuals who want to save a fixed amount every month without exposure to market risk. Every major bank in India, from State Bank of India and HDFC Bank to smaller regional banks and cooperative societies, offers RD accounts with varying interest rates and tenure options.
How Does a Recurring Deposit Work?
When you open an RD account, you commit to depositing a fixed amount every month for a predetermined tenure, typically ranging from 6 months to 10 years. Each monthly instalment earns compound interest for the remaining period of the deposit. Most Indian banks compound RD interest on a quarterly basis, which means your interest is calculated every three months and added to the principal.
The key difference from a fixed deposit is that in an FD, you deposit a lump sum once, whereas in an RD, you deposit equal monthly amounts over the tenure. This makes RDs particularly suitable for people who do not have a large sum to invest at once but can set aside a fixed monthly amount. The minimum monthly deposit in most banks is just Rs 100, making RDs accessible to virtually everyone.
RD Interest Calculation: The Mathematics
The maturity value of an RD is calculated by summing the compound interest earned on each individual instalment. The first instalment earns interest for the full tenure, the second instalment for one month less, and so on. With quarterly compounding (the standard in Indian banking), each instalment's interest is computed at the quarterly rate raised to the power of the remaining quarters.
For example, if you deposit Rs 5,000 per month for 2 years at 7% per annum with quarterly compounding, the first instalment compounds for 8 quarters, the second for approximately 7.67 quarters, and so on. Our RD calculator performs this precise instalment-by-instalment calculation to give you an accurate maturity figure.
Current RD Interest Rates at Major Banks (2025-26)
As of early 2026, RD interest rates at major Indian banks typically range from 6.5% to 7.5% per annum for general citizens and up to 7.0% to 8.0% for senior citizens (who receive an additional 0.25% to 0.50% premium). Post office RD rates are set by the Government of India quarterly and currently stand at approximately 6.7% for 5-year deposits. Small finance banks like AU Small Finance Bank and Ujjivan Small Finance Bank often offer 50 to 100 basis points more than large banks, though with proportionally higher risk profiles.
RD vs FD vs SIP: Which Is Right for You?
RD vs FD: If you have a lump sum available, an FD will generally earn slightly more because the entire amount compounds from day one. RDs are better when you want to build savings gradually from monthly income. The interest rates for RDs and FDs of the same tenure are usually identical at the same bank, but the effective yield on an FD is marginally higher due to the compounding advantage.
RD vs SIP: This is the most important comparison for Indian investors. SIPs in mutual funds are market-linked and carry risk, but historically deliver 10 to 14% CAGR over 10+ year periods. RDs guarantee a fixed return (currently 6.5 to 7.5%) with zero market risk. For short-term goals (1 to 3 years), RDs offer certainty. For long-term goals (5+ years), SIPs in equity mutual funds have consistently outperformed RDs on a post-tax, inflation-adjusted basis.
A balanced approach is to use RDs for short-term goals and emergency fund building, while directing long-term savings into equity SIPs. This way, you get the safety of guaranteed returns for near-term needs and the growth potential of equities for distant goals.
TDS on Recurring Deposit Interest
Tax Deducted at Source (TDS) applies to RD interest just as it does to FD interest. If the total interest earned across all your deposits (RDs and FDs combined) at a single bank exceeds Rs 40,000 in a financial year (Rs 50,000 for senior citizens), the bank deducts TDS at 10%. If you have not provided your PAN to the bank, TDS is deducted at a higher rate of 20%.
To avoid TDS if your total income is below the taxable limit, submit Form 15G (or Form 15H for senior citizens) to the bank at the start of each financial year. Note that RD interest is added to your income and taxed at your applicable slab rate, regardless of whether TDS has been deducted.
Premature Withdrawal and Penalties
Most banks allow premature closure of RD accounts, but impose a penalty of 0.5% to 1% on the applicable interest rate. If you opened an RD at 7% and close it prematurely after 1 year, the bank will calculate interest at the 1-year FD rate minus the penalty. Some banks also require a minimum 3-month holding period before allowing premature withdrawal.
Missing an instalment typically incurs a small penalty (Rs 1 to Rs 2 per Rs 100 of the instalment). However, if you miss instalments for several consecutive months, the bank may classify the RD as discontinued and prematurely close it.
Tips for Maximising RD Returns
Compare rates across banks: The difference between the highest and lowest RD rates in the market can be 100 to 150 basis points. Small finance banks and post offices sometimes offer better rates than large commercial banks.
Consider the tenure carefully: Interest rates vary by tenure. Many banks offer the highest rates for 1-2 year tenures. Locking in for 5-10 years at a lower rate may not always be optimal, especially in a rising rate environment.
Use the senior citizen premium: If you have a parent or grandparent above 60, opening the RD in their name (with nomination to you) can earn an extra 0.25% to 0.50% per annum.