A recurring deposit (RD) is a savings instrument where you deposit a fixed amount every month for a chosen tenure, and the bank or post office pays you a guaranteed, fixed interest rate locked in on the day you open it. At maturity you get back everything you paid in plus compounded interest. It's built for one job: turning a small monthly habit into a predictable lump sum, with zero exposure to market ups and downs.
How a recurring deposit works
An RD sits between a savings account and a fixed deposit. You commit to an instalment (often as low as ₹100–₹500) and a tenure (typically 6 months to 10 years). Each month the bank debits that amount and adds it to your RD, where it earns interest until maturity.
A few mechanics worth understanding:
- The rate is fixed at opening. Whatever rate applies the day you start is locked for the full tenure, even if the bank later cuts rates. This is what makes returns guaranteed — you know your maturity value on day one.
- Interest compounds, usually quarterly. Each instalment earns interest for the time it stays invested, so your earliest deposits earn the most. That's why an RD's effective return is lower than the headline rate on the total you deposit.
- Tenure is fixed, instalments are fixed. Unlike an SIP, you generally can't pause, skip freely, or change the monthly amount once set. Missing instalments usually triggers a small penalty.
- Senior citizens earn more. Most banks add roughly 0.25%–0.75% p.a. over the standard RD rate for depositors aged 60+.
To see exactly what a given instalment and rate produce at maturity, run the numbers on the RD calculator before you commit.
What returns to expect (and how they're taxed)
RD interest rates in India broadly track FD rates and move with the RBI's rate cycle. In 2026 they typically sit in the mid-single-digit range, with the precise figure depending on the bank, tenure, and your age. Treat any rate you see as a snapshot — it can differ across lenders and changes when the rate cycle turns.
Here's the part many savers miss: RD interest is fully taxable. It's added to your total income and taxed at your income-tax slab rate — there is no special concession.
On the TDS side, banks deduct tax at source once your aggregate FD + RD interest in a financial year crosses a threshold. As of FY 2025-26 these limits were raised:
- ₹50,000 for general depositors (up from ₹40,000 earlier).
- ₹1,00,000 for senior citizens (up from ₹50,000 earlier).
TDS is 10% if your PAN is on record (20% without PAN). Crucially, TDS is not the same as your final tax — if your slab rate is higher than 10%, you still owe the difference; if your total income is below the taxable limit, you can submit Form 15G (or Form 15H for seniors) to stop the deduction. And remember: crossing the TDS threshold only decides whether tax is deducted at source — the interest is taxable either way.
Because the rate is locked and modest, an RD is best viewed as a disciplined parking spot, not a wealth engine. For longer goals, compare it against the post-tax math of an FD calculator and tax-advantaged options before deciding.
Who an RD is genuinely good for
An RD shines when certainty and habit matter more than maximising returns. It's a strong fit if you:
- Are building a short-term goal — an emergency buffer, a festival or wedding fund, an insurance premium, school fees — needed in roughly 1–3 years, where you can't risk a market dip.
- Have irregular willpower but regular income. The auto-debit enforces saving before you can spend it.
- Are a first-time saver or student starting with small amounts and wanting a safe, simple instrument.
- Want zero volatility and value knowing the exact maturity amount upfront.
It's a weaker choice if your goal is 5+ years away and you're comfortable with market risk — there, the post-tax, post-inflation return of an RD often lags equity-based options.
RD vs SIP: guaranteed vs market-linked
This is the comparison most savers wrestle with. A recurring deposit and a mutual-fund SIP both involve a fixed monthly outflow, but they are fundamentally different instruments — one promises certainty, the other targets growth.
| Feature | Recurring Deposit (RD) | Mutual Fund SIP |
|---|---|---|
| Returns | Fixed, guaranteed (locked at opening) | Market-linked, not guaranteed |
| Typical return profile | Modest, mid-single-digit range | Potentially higher over the long run; can be negative short term |
| Risk | Very low (bank/post office) | Varies — debt funds lower, equity funds higher |
| Best time horizon | Short to medium (1–3 years) | Medium to long (5+ years, especially equity) |
| Taxation | Interest taxed at your slab rate | Equity: LTCG 12.5% above ₹1.25L/yr; STCG 20% (2024 rules) |
| Flexibility | Fixed instalment; penalty for missing | Pause, increase, or stop anytime |
| Capital safety | Principal protected | Principal can fluctuate with the market |
The honest takeaway: an RD protects your money; an SIP aims to grow it. They aren't rivals so much as tools for different jobs. A common, sensible approach is to use an RD for near-term, can't-lose-it goals and an SIP for long-horizon wealth-building — and many savers run both. If you're weighing how these fit into a bigger picture across goals, mapping them out in the financial life planner helps you decide how much belongs in safe versus growth assets.
One nuance on SIP returns: they are market-linked and not guaranteed. Equity SIPs can deliver attractive long-run returns because they carry risk, and they can fall in any given year. That trade-off — certainty versus potential — is the entire decision.
Practical tips before you open an RD
- Shop the rate. RD rates differ across banks and small finance banks; even a small gap compounds over a multi-year tenure.
- Match the tenure to the goal. Don't lock money you'll need sooner; premature closure usually means a reduced interest rate plus a penalty.
- Automate the instalment date for just after your salary credit so the debit never bounces.
- Account for tax. Estimate the post-tax return at your slab, not the headline rate, when comparing options.
- Keep an emergency cushion separate. An RD is semi-liquid — breaking it early costs you, so don't make it your only liquid money.
Frequently Asked Questions
Is a recurring deposit safe? Yes. RDs with scheduled commercial banks are covered by DICGC deposit insurance up to ₹5 lakh per depositor per bank (covering all your deposits at that bank combined), and post office RDs carry a sovereign guarantee. The principal is not exposed to market risk, which is the core appeal of an RD.
Can I withdraw my RD before maturity? Usually yes, but it counts as premature closure. The bank typically pays interest at a lower rate (often the rate applicable for the period the money actually stayed invested) and may levy a small penalty. Some banks also offer a loan or overdraft against your RD, which can be cheaper than breaking it.
What happens if I miss a monthly instalment? Most banks charge a small penalty per missed instalment, and repeated defaults can lead the bank to close the RD prematurely. Because instalments are not as flexible as an SIP, only commit to an amount you're confident you can pay every month.
Is RD interest tax-free up to the TDS threshold? No — this is a common misconception. The TDS threshold (₹50,000 for general depositors, ₹1,00,000 for seniors in FY 2025-26) only decides whether the bank deducts tax at source. The interest itself is always taxable and must be reported in your return at your slab rate, regardless of whether TDS was deducted.
This article is general information, not financial advice. Mutual fund and market-linked returns are not guaranteed. Consult a SEBI-registered advisor for decisions specific to you.
