A recurring deposit (RD) is a savings account where you deposit a fixed amount every month for a chosen term, and the whole balance earns interest at a rate locked when you open it. You commit to a monthly instalment, the bank or post office pays a fixed rate on the growing balance, and at maturity you get back every deposit plus compounded interest – but the interest is fully taxable and earns no 80C benefit. A post-office RD runs five years at around 6.7% this quarter.
An RD is the mirror image of a fixed deposit. Where an FD parks one lump sum, an RD builds a lump sum from a monthly habit, useful when you have steady income but no large amount to set aside at once.
Recurring deposit at a glance
How does a recurring deposit work?
You pick a monthly amount and a term, and pay that instalment every month. Each instalment joins the balance and starts earning the rate fixed at opening, so your earliest deposits compound the longest. Interest is usually compounded quarterly. At the end of the term you receive the total of all instalments plus the accumulated interest.
The rate is set when you open the RD and does not change for its term, even if market rates fall afterward. That is the appeal: certainty about what a fixed monthly saving will grow into.
Bank RD or post office RD?
Both work the same way; the differences are in term and rate-setting.
| Feature | Bank RD | Post office RD |
|---|---|---|
| Tenure | 6 months to 10 years | Fixed 5 years |
| Rate set by | Each bank | Government, revised quarterly |
| Current rate | Varies by bank | Around 6.7% this quarter |
A bank RD gives you flexibility on tenure and is convenient if you already bank there. The post office RD is a single five-year product at a government-set rate, part of the wider post office savings schemes. Neither is inherently better; they suit different preferences on term and access.
How is RD interest taxed?
RD interest is fully taxable. It is added to your income and taxed at your slab rate, with no exemption of its own and no Section 80C deduction on the deposits. Banks also deduct TDS (tax deducted at source) on RD interest once it crosses the yearly threshold, clubbed with any fixed-deposit interest you earn at the same bank.
There is one relief worth knowing. Under Section 80TTB, a senior citizen can deduct up to ₹50,000 of interest that includes recurring-deposit interest, in the old regime. For those under 60, Section 80TTA covers savings-account interest only, so ordinary RD interest is not sheltered there.
What if you miss an instalment or want out early?
Missing a month usually costs a small penalty per default. In the post-office RD, defaults beyond a set limit can lead to the account being discontinued, though it can often be revived within a window by paying the arrears and penalty.
Premature closure is allowed, but at a cost. The interest is typically recomputed at a lower rate and a penalty may apply, so you receive less than the full maturity value. Banks often require the RD to run a minimum period, commonly three months, before you can close it.
Related NYVO guides
- Post Office Savings Schemes: The Full List – where the five-year post office RD sits among the other small-savings options.
- Section 80TTA and 80TTB: Tax-Free Interest – how much deposit interest, including RD, can be kept out of tax.
- National Savings Certificate (NSC): A Guide – a five-year post-office option that, unlike RD, does carry an 80C benefit.
An RD is the least glamorous account you can hold, and that is the point. It asks for one decision – a monthly amount – and then quietly turns discipline into a lump sum, with no tax break and no surprises.
