How It Works: Recurring Deposit Mechanics
A Recurring Deposit (RD) is a unique term deposit offered by Indian Banks and the Post Office. It allows individuals to build a corpus by depositing a fixed sum every month, while earning interest rates comparable to Fixed Deposits (FDs). It is the debt-market equivalent of a mutual fund SIP.
The Quarterly Compounding Reality
Unlike mutual funds which compound daily/monthly, Indian banking regulations mandate that RD interest is compounded quarterly. This means the bank calculates interest every month, but only adds it to your principal balance at the end of the quarter (every 3 months) to generate compound growth.
SIP vs RD: Compare the Assumptions
Eligible bank deposits may be covered by DICGC deposit insurance subject to the applicable rules and limits. Deposit terms and bank product conditions still matter. However, the interest earned is fully taxable per your income slab. For shorter goals, an RD may be useful when its stated rate, tenure and liquidity fit your needs. For longer horizons, compare RDs with market-linked investments using your own return, tax, liquidity and risk assumptions.
Formula
Formula: A = P Ć [(1 + r/n)^(nt) ā 1] Ć (1 + r/n) / (r/n) for monthly deposits. Where r = annual rate, n = compounding periods per year, t = years.
Worked Example
Monthly deposit ā¹5,000 for 5 years at 6.8%. Total deposited = ā¹3,00,000. Maturity value = ā¹3,56,420. Interest earned = ā¹56,420. RD interest is taxable at slab rate.