How an RD actually compounds
A recurring deposit takes a fixed amount from your account every month for a fixed tenure, and pays a fixed rate. Simple — except for one detail most calculators get wrong.
Indian banks compound RD interest quarterly, not monthly. And each instalment only earns for the time it is actually on deposit: your first instalment works for the full tenure, your last one for a single month.
That is why an RD at 7% does not return 7% on the money you put in. On a 12-month RD, your average rupee is invested for only about six and a half months, so the effective return on total deposits lands closer to 3.8%. Nothing is being taken from you — it is just arithmetic that headline rates obscure.
Post office recurring deposit rate
A bank sets its own RD rate. The post office 5-year RD is notified by the Ministry of Finance every quarter and is identical nationwide.
Post Office Recurring Deposit – 5 years, current rate
6.7% p.a.
Applies to deposits for 1 July 2026 to 30 September 2026 (Q2 FY 2026-27).
Compounded quarterly and added to your balance.
The Ministry of Finance reviews small savings rates every quarter and notifies them shortly before the quarter begins. A rate change applies to new deposits; SCSS, NSC, KVP and Post Office time deposits keep the rate fixed for the whole term once you have invested, while PPF and SSY balances earn whatever the current rate is each year.
Source: Ministry of Finance, quarterly small savings notification (Q2 FY 2026-27). Verified 2026-08-13.
The same arithmetic above still applies: the quoted rate is not what you earn on total deposits, because your later instalments have barely been on deposit when the term ends.
The tax nobody budgets for
RD interest is fully taxable at your slab. There is no exemption, no concessional rate, no indexation.
Banks deduct 10% TDS once your RD interest crosses ₹40,000 in a financial year (₹50,000 for senior citizens). TDS is not an extra tax — it is a prepayment adjusted when you file — but the interest is taxable whether or not TDS is triggered.
For someone in the 30% bracket, a 7% RD returns about 4.9% post-tax. Set that against inflation before deciding it is "safe".
Where an RD genuinely wins
- A goal 1–3 years away. A wedding, a deposit, school fees. You know the maturity on day one and it cannot fall.
- Enforced discipline. The auto-debit is harder to skip than a manual transfer, and missing instalments carries a penalty — which is the point.
- Emergency-fund laddering, where certainty matters more than return.
Where it doesn't
For anything a decade away, the certainty you are buying is expensive. A post-tax 4.9% against 5–6% inflation is a slow, guaranteed loss of purchasing power. That is the honest trade: an RD protects the number in your account, not what the number can buy.
RD vs SIP, plainly
| RD | Equity SIP | |
|---|---|---|
| Outcome | Known on day one | Unknown |
| Can it fall? | No | Yes, substantially |
| Taxed | Slab rate on interest | 12.5% LTCG above ₹1.25L/yr |
| Suits | 1–3 year goals | 7+ year goals |
| Missing a month | Penalty | Free to pause |
They are not competitors. They answer different questions about the same money.