Recurring deposit: how an RD works, how interest is worked out, and the tax

A recurring deposit, or RD, is a fixed deposit paid in monthly pieces. You choose an amount, say 2,000 rupees, and a term, say one year. The same amount leaves your account every month, and at the end you get everything back with interest at a rate fixed on day one.

Who it suits. People who can save a fixed amount every month but don’t have a lump sum yet. It works best for a goal with a date: a school fee next June, a bike, a wedding gift, the deposit on a rented flat.

How the interest is worked out. This is where an RD differs from what most people expect. Your money doesn’t all earn interest for the full term. The first instalment stays in for the whole term, the last one for just a month. Banks and the post office usually compound RD interest every quarter, and the maturity amount is each instalment grown for its own time, added up.

A rupee example. Say you deposit 5,000 rupees a month for 5 years at 7% a year, compounded quarterly (an illustration; bank rates differ).

• You put in ₹3,00,000.
• The RD matures at about ₹3,59,664, so about ₹59,664 is interest.
• That’s less than 7% of 3 lakh for 5 years would suggest, because most of the money was in for less than 5 years.

Bank RD vs post office RD. Both are safe, but they work a little differently.

	Bank RD	Post office RD
Rate	Set by each bank	6.7% a year, set by the government (Oct to Dec 2026)
Term	Chosen from the bank’s list of terms	5 years
Minimum	Set by the bank	100 rupees a month, in multiples of 10
Safety	Insured up to 5 lakh rupees per bank by DICGC	Backed by the Government of India
Early exit	Allowed, usually with a lower rate	Allowed after 3 years

At the post office rate, 1,500 rupees a month for 5 years matures at about ₹1,07,049, the figure India Post’s own handbook shows. After 12 instalments, the post office also lets you borrow up to half your balance.

How RD interest is taxed. RD interest is added to your income each year and taxed at your slab rate. A bank cuts TDS at 10% once your total interest from it, across FDs and RDs, crosses 50,000 rupees a year, or 1 lakh if you are 60 or older. Unlike PPF or a tax saver FD, an RD gives no deduction on the old regime. If your income is below the taxable limit, see our guide to TDS on deposit interest and Form 121.

Did you know? Your bank RD counts towards the same 5 lakh rupee deposit insurance cover as your savings account and FDs in that bank. If your total deposits in one bank are well above 5 lakh, spreading them across banks keeps all of it covered.

If you miss a month. Most banks charge a small fee for each late instalment, and after several missed months may close the account and pay out what has built up. The post office also charges a small amount for each month in default. Set the instalment for a few days after your salary arrives.

RD or SIP? An RD gives a fixed, known amount and suits goals one to three years away. For goals five or more years away, a SIP in an equity mutual fund can grow faster, but its value moves with the market and nothing is guaranteed. Our RD vs SIP guide compares them.

The takeaway. An RD is the simplest way to turn a monthly habit into a guaranteed lump sum. Pick a term that ends just before your goal, remember the interest is taxed, and see your exact maturity amount in our RD calculator.

More to read: post office savings schemes, fixed deposits explained, and sinking funds for known costs.