A Recurring Deposit, or RD, is one of the simplest and most disciplined ways to save money in India. Instead of putting in a large sum at once, you deposit a fixed amount every month for a chosen period and earn interest at a fixed rate. It is ideal for salaried people and anyone who wants to build a savings habit without taking market risk. This guide explains exactly how an RD works, the interest and tax rules, and whether a bank or post office RD suits you better.
What Is a Recurring Deposit?
An RD is a term deposit where you commit to depositing a fixed instalment each month into the account for a fixed tenure. At maturity you receive your total deposits plus the accumulated interest. Because the interest rate is locked in when you open the account, market movements do not affect your returns — making it a safe, predictable savings tool.
How Monthly Deposits Work
When you open an RD, you decide three things: the monthly instalment, the tenure, and the bank or post office where you open it. After that:
- The same amount is debited from your account every month, usually through standing instructions.
- Each instalment earns interest for the remaining months until maturity, so earlier deposits earn more interest than later ones.
- Interest is typically compounded quarterly.
- You cannot change the monthly amount once the RD starts, though you can open additional RDs for extra savings.
Missing an instalment usually attracts a small penalty, and repeated defaults can lead to premature closure, so it is best to keep the linked account funded.
Tenure and Interest Rates
Bank RD tenures generally range from 6 months to 10 years, while post office RDs run for a standard 5-year term. Interest rates are broadly similar to fixed deposit rates and vary by institution and tenure. Senior citizens usually get an additional rate benefit, often around 0.50% higher, at most banks.
Because you are depositing gradually rather than as a lump sum, the effective return on an RD is slightly lower than an FD of the same headline rate and tenure — the later instalments simply have less time to grow.
TDS on RD Interest
Interest earned on a recurring deposit is fully taxable as “income from other sources” and added to your total income. Importantly, TDS (Tax Deducted at Source) applies to RD interest just as it does to FDs:
- Banks deduct TDS if your total interest across deposits crosses the prescribed threshold in a financial year.
- If your total income is below the taxable limit, you can submit Form 15G (or Form 15H for senior citizens) to avoid TDS.
- Even if TDS is deducted, you must still report the interest in your return and pay any balance tax according to your slab.
If you are unsure how this deduction works, read our explainer on what TDS is and how it is deducted.
Post Office RD vs Bank RD
Both are safe, but they differ in a few ways:
- Post Office RD: Backed by the Government of India, fixed 5-year tenure, rates set quarterly by the government, and available at any post office across the country — convenient in rural and semi-urban areas.
- Bank RD: Flexible tenures from 6 months to 10 years, fully digital account opening, easy linking to your savings account, and deposits insured up to Rs 5 lakh under DICGC.
If you want maximum flexibility and online management, a bank RD is convenient. If you want a sovereign-backed 5-year commitment, the post office RD is a solid choice.
Who Should Use an RD?
An RD suits anyone with a regular monthly income who wants to save steadily toward a near-term goal — a vacation, an emergency buffer, a down payment or festival expenses. It enforces discipline because the deduction is automatic. For comparison with other options, see our guides on RD vs FD and PPF vs FD to see where each fits in your plan.
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FAQ
Q: Can I withdraw my RD before maturity?
A: Yes, premature withdrawal is allowed but usually attracts a penalty and a lower interest rate. Some banks also offer a loan or overdraft against your RD instead.
Q: Is RD interest tax-free?
A: No. RD interest is fully taxable and added to your income. TDS may also be deducted if your total interest crosses the threshold.
Q: What happens if I miss a monthly deposit?
A: A small penalty is charged for each missed instalment. Repeated defaults can lead to the account being closed prematurely.
Q: Which gives a higher return, RD or FD?
A: For the same rate and tenure, an FD typically returns slightly more because the full amount earns interest from day one, whereas RD instalments are added gradually.
This article is for informational purposes only and is not financial advice. Consult a SEBI-registered advisor or tax professional before making decisions.