How a Recurring Deposit (RD) works
A Recurring Deposit lets you build up savings through disciplined fixed monthly installments, instead of investing a lump sum all at once like a Fixed Deposit (FD). Each installment is locked in at the interest rate applicable when you open the account, and earns interest for however long it remains on deposit until the RD matures.
Quarterly compounding on each monthly installment
Indian banks typically compound RD interest quarterly, applied individually to each monthly installment based on how long that specific installment has been deposited. In practice, this means your first deposit earns the most interest (since it's on deposit for the full tenure), while your last deposit earns very little (since it's only on deposit for a short time before maturity). The maturity value is the sum of every installment's own compounded value.
Premature closure and missed installments
Closing an RD before its tenure ends, or missing a monthly installment, usually attracts a penalty — either a fee or a reduced effective interest rate for that period. This is entirely bank-specific, so check your bank's terms before committing to a tenure you might not be able to sustain.
Tax treatment
RD interest is taxed the same way as FD interest — at your slab rate, with TDS deducted by the bank once your interest crosses the annual threshold. See the FD calculator for the full TDS mechanics and threshold details, which apply identically here.
Who an RD suits best
An RD works well if you have a predictable monthly surplus but don't already have a lump sum sitting around to put into an FD — think of it as a forced-savings habit with a guaranteed return, rather than an investment for growth. It's commonly used for short, specific goals: a down payment a year or two out, an annual insurance premium, or simply building an emergency fund in fixed, disciplined steps rather than letting the balance sit idle in a savings account earning a much lower rate.
Opening and closing an RD
Most banks let you open an RD online in minutes, with tenures typically ranging from 6 months to 10 years. Some banks also offer a "flexi RD" variant that allows you to deposit more than the fixed installment in a given month — but the interest calculation on that extra amount often follows different rules, so check with your bank if you're considering one. At maturity, the proceeds are usually credited automatically to your linked savings account, though you can also choose to reinvest the maturity amount into a fresh FD or RD.