Contents
Definition
A recurring deposit (RD) is a deposit scheme that enables depositors to build a corpus through fixed monthly instalments over a chosen tenure (typically 6 months to 10 years). At maturity, the depositor receives the aggregate of all instalments plus compound interest. Banks and the India Post Payments Bank / Post Office Savings Schemes both offer RDs. Unlike an FD (single lump-sum), an RD is funded incrementally, making it suitable for investors who do not have a large surplus to deploy at once.
How It Works Mechanically
On opening, the depositor selects a fixed monthly instalment amount and tenure. The bank debits the instalment from the linked savings/current account on the due date each month (often automated via a standing instruction or NACH mandate). Interest is calculated on each instalment for the period it remains in the RD, compounded quarterly. The interest rate is typically aligned with the FD rate for the corresponding tenure. Late payment of an instalment attracts a penalty of ₹1.50 per ₹100 per month (most public-sector banks) or a flat fee. If more than a specified number of consecutive instalments are missed, the RD is treated as a premature closure with applicable penalty rates. Post Office RD carries sovereign backing and is governed by the Post Office Savings Account (Amendment) Rules; the current 5-year term earns interest compounded quarterly, credited at maturity.
Tax Treatment / Fees / Limits
RD interest is taxable as income from other sources, accruing annually on the interest earned each year (proportionate basis). TDS applies at 10% if aggregate RD + FD interest from a bank branch exceeds ₹40,000 in a year (₹50,000 for senior citizens). Form 15G/15H can be submitted to prevent TDS if total income is below the exemption limit. Senior citizens can claim up to ₹50,000 p.a. deduction under Section 80TTB covering savings + term deposit interest. Post Office RDs are not covered by DICGC but are backed by the Government of India. Bank RDs are covered under DICGC up to ₹5 lakh per depositor per bank.
Common Use Case
A salaried employee saving ₹10,000/month over 36 months to accumulate a down payment for a vehicle purchase or international vacation. The predictable instalment structure imposes savings discipline analogous to a SIP in mutual funds, but with a guaranteed return rather than market-linked growth. RDs are also used by parents to create an education corpus with a specific horizon (e.g., 5 years until child's college admission).
Worked Example
Meena opens a 12-month RD at ₹5,000/month at 6.80% p.a. (compounded quarterly).
- Each instalment earns interest for its remaining period in the RD.
- Instalment 1 (month 1): earns interest for 12 months → ₹5,000 × (1 + 0.068/4)^4 − ₹5,000 ≈ ₹350
- Instalment 12 (month 12): earns interest for ~1 month → ≈₹28
- Total deposits = ₹60,000; Total maturity ≈ ₹62,255; Interest earned ≈ ₹2,255
- Interest is below ₹40,000 threshold — no TDS; declared in ITR as other income.
See Also
- Fixed Deposit
- Savings Account
- NACH (National Automated Clearing House)
- Systematic Savings vs SIP
- India Post Payments Bank
Primary Source
RBI Master Direction — Interest Rate on Deposits (2016, updated) | India Post — Post Office Saving Schemes
Disclosure: MintByte Investment Advisors LLP (ARN-314872, APMI APRN-01658) is a SEBI-registered investment adviser. This article is for educational purposes only and does not constitute advice to open or close any deposit account. MintByte does not hold a banking licence and does not recommend specific banks.