An RD is a fixed deposit you build in instalments. You commit to depositing a set amount every month — say ₹5,000 — for a term usually between six months and ten years, and the bank pays a fixed rate on the growing balance. The rate is locked when you open the RD and does not change if rates move afterwards.
Who it is actually for
An RD suits someone who wants fixed deposit safety and predictability but does not have a lump sum to place. That is most salaried people early in their careers, and anyone saving toward a defined near-term goal from monthly income.
The commitment is the feature. Money leaves the account on a fixed date before it can be spent, which is the same behavioural trick that makes a SIP work — with a guaranteed return instead of a market-linked one.
Why the return is lower than an FD at the same rate
This is the single most misunderstood thing about RDs, and it is not a trick or a hidden charge.
In a fixed deposit the entire amount earns interest for the whole term. In a recurring deposit each instalment only earns interest for the months remaining after it is paid. Your first ₹5,000 earns for the full term; your last ₹5,000 earns for about a month.
Deposit ₹5,000 a month for 12 months at 7% and you will have paid in ₹60,000 and receive roughly ₹62,275 at maturity — about ₹2,275 of interest. A single ₹60,000 FD at the same 7% for the same year would have earned closer to ₹4,300, because all of it was working from day one.
Neither is a better rate. They are the same rate applied to different amounts of time, which is exactly what you would expect. The RD's real comparison is not against an FD you could not have funded — it is against leaving the money in a savings account, where it would have earned considerably less.
RD or SIP?
They solve the same behavioural problem and produce very different outcomes, so the choice comes down to your time horizon.
An RD gives a guaranteed return, taxed at your slab rate, with no possibility of loss. Over one to three years, for money you know you will spend — a deposit, a wedding, a planned purchase — that certainty is worth more than a higher expected return.
An equity SIP has no guarantee and can be worth less than you put in at any given moment. Over ten years or more it has historically delivered considerably more, and its long-term gains are taxed more favourably than interest income. For money you will not touch for a decade, that trade has usually been worth making.
The mistake is using an RD for a twenty-year goal, where inflation quietly erodes it, or a SIP for money you need in fourteen months, where a bad quarter can force you to sell at the worst time.
Missing an instalment
Miss a month and the bank levies a small penalty, and repeated defaults can lead to the account being closed prematurely with interest recalculated on less favourable terms. Set the standing instruction for a date shortly after your salary lands rather than late in the month.
Tax
RD interest is fully taxable at your slab rate, and taxable as it accrues rather than only at maturity. Banks deduct TDS once interest crosses the annual threshold across your deposits at that bank, and it appears in your Form 26AS and AIS. Form 15G, or 15H for senior citizens, stops the withholding if your income is below the taxable limit — it does not make the interest tax-free.
Senior citizens generally receive a higher rate, and the same ₹5 lakh per depositor per bank DICGC insurance that covers fixed deposits covers recurring deposits too, counted together across all your accounts at that bank.
Before you open one
Compare rates across banks, since the spread is wider than people assume, and check the premature-closure terms rather than assuming they are standard. Use the RD calculator to see the actual maturity value for your amount and term before committing — the number is usually lower than a first guess, for the timing reason above, and it is better to know that at the start.