Recurring deposits, and how banks really compound them
Why the standard annuity formula overstates an RD, what the quarterly-compounding mismatch costs, and how an RD compares with a debt fund SIP.
Last reviewed · 1,225 words
In short
- Banks compound RDs quarterly while instalments arrive monthly. The two periods do not line up, so the annuity shortcut is the wrong formula.
- ₹5,000 a month for five years at 7% matures at about ₹3,59,664 — ₹59,664 of interest on ₹3,00,000 deposited.
- Interest is fully taxable at your slab rate and TDS applies above ₹50,000 of interest in a year.
- Missing an instalment attracts a small penalty and, after six consecutive misses, closure of the account.
- An RD guarantees the rate. A SIP does not, and that difference is the entire choice between them.
A recurring deposit is a standing instruction to deposit a fixed amount every month for a fixed term at a fixed rate. It is the fixed deposit's answer to people who have income rather than a lump sum, and it is where most Indians first meet compound interest.
Why the usual formula is wrong
Almost every RD calculator online uses the future value of an annuity:
FV = P × [((1 + i)ⁿ − 1) ÷ i]
That formula assumes the compounding period and the deposit period are the same. For an Indian bank RD they are not: instalments arrive monthly and interest compounds quarterly.
The correct approach is to treat each instalment separately, compounding it quarterly for the number of months it was actually invested, and add them up. That is what this calculator does, and it is why its figure differs slightly from calculators that take the shortcut.
The mismatch runs in a consistent direction. On ₹5,000 a month for five years at 7%:
| Compounding assumption | Maturity |
|---|---|
| Quarterly (what banks do) | ₹3,59,664 |
| Monthly (what shortcut calculators assume) | ₹3,60,053 |
₹389 on a five-year deposit. Not large, but it is the difference between a figure that matches your bank's statement and one that does not — and the gap widens with term and rate.
What an RD produces
At 7%, compounded quarterly:
| Term | Deposited | Maturity | Interest |
|---|---|---|---|
| 1 year | ₹60,000 | ₹62,311 | ₹2,311 |
| 2 years | ₹1,20,000 | ₹1,29,099 | ₹9,099 |
| 3 years | ₹1,80,000 | ₹2,00,686 | ₹20,686 |
| 5 years | ₹3,00,000 | ₹3,59,664 | ₹59,664 |
Notice that the interest more than doubles between years three and five while the deposits rise by two thirds. The reason is the same as everywhere else in compounding: each early instalment has been invested longer, and the balance those returns are calculated on keeps growing.
It also explains why an RD looks disappointing over one year. The average instalment has only been invested for six and a half months, so ₹60,000 earns roughly half of what a ₹60,000 lump sum would. That is not a poor rate; it is the arithmetic of paying in over time.
RD against FD
They are the same product with a different payment pattern, and comparing their headline rates directly is misleading.
A ₹3,00,000 fixed deposit for five years at 7% matures at ₹4,24,433. The RD above deposits the same ₹3,00,000 across the same five years and matures at ₹3,59,664. The FD is not paying a better rate — it had the whole sum working from day one, while the RD's final instalment earned for one month.
The right comparison is against what you would otherwise do with the money: leave it in a savings account at 3%, or spend it. Against those, the RD wins comfortably.
The tax, which is where the return goes
RD interest is taxable at your full slab rate as income from other sources. There is no exemption and no special treatment.
TDS at 10% applies once interest across all your deposits at a bank crosses ₹50,000 in a financial year, ₹1,00,000 for senior citizens. TDS is a payment on account, not the tax itself — at a 30% slab you owe the remaining 20% when filing.
Interest is taxable as it accrues, quarter by quarter, not in the year the deposit matures. Declaring the whole amount at maturity is a common error that can push one year into a higher slab.
In the 30% bracket a 7% RD returns 4.9% after tax. Against inflation near 5% that is roughly flat in real terms, which is the honest limit of what a guaranteed deposit can do.
Missing instalments
A missed instalment attracts a penalty, typically ₹1 to ₹2 per ₹100 per month for bank RDs. Post office RDs charge 5 paise per ₹5 of the instalment.
Miss six consecutive instalments and the account is closed, with the balance paid out at the savings account rate for the period — a material loss of return, not just a penalty.
Post office RDs allow revival within two months of the sixth default by paying the arrears and penalty together. Bank rules vary; ask before assuming.
If the instalment has become unaffordable, closing the RD deliberately and opening a smaller one is better than defaulting, because a voluntary closure keeps a proportionate rate while six defaults do not.
RD against a debt fund SIP
Both put a fixed amount in every month. The difference is what you are promised.
An RD guarantees the rate for the whole term. Whatever happens to interest rates, your maturity figure was fixed on the day you opened it, and up to ₹5 lakh per bank is insured by the DICGC.
A debt fund SIP does not guarantee anything. It has historically returned a little more than an RD, is liquid on any business day without penalty, and its gains are taxed at your slab rate — the indexation benefit for debt funds was removed in 2023, which erased the tax advantage they once had.
The practical division is by horizon. For money needed on a specific date within three years, the RD's certainty is worth more than the extra half a percent. For a longer horizon where the date is flexible, a fund's liquidity and slightly higher return usually wins.
For anything above five years, neither is really the right instrument. A guaranteed 7% before tax is not going to build wealth, and a horizon that long can absorb the volatility of something that might.
Choosing the term, and the renewal trap
The term of an RD does two things at once: it fixes how long the money is committed, and it fixes the rate. Those pull in opposite directions.
Longer terms usually carry higher rates, and every instalment gets longer to compound. But the rate is locked, and locking a five-year rate at a cyclical low is the mistake that costs most. Indian deposit rates have moved between roughly 5% and 9% over the last two decades, and the direction is not predictable.
A practical compromise is to run two or three shorter RDs starting at different times rather than one long one — the same laddering logic that applies to fixed deposits. Each matures at a different point in the rate cycle, and each maturity is a chance to reprice.
Watch the auto-renewal setting. Most banks renew a matured RD's proceeds into a fixed deposit automatically, at whatever the card rate happens to be that day and often for the same term you originally chose. If the money was earmarked for something, an automatic renewal locks it away again; if it was not, an unattended renewal at a poor rate can run for years. Either set the maturity instruction deliberately when opening the account, or put the maturity date in a calendar.
The other detail worth setting at the outset is the debit date. Aligning it to the day after salary credit removes almost every missed instalment, and a missed instalment is the only way an RD can go meaningfully wrong.
What this calculator assumes
- Quarterly compounding with monthly instalments, computed instalment by instalment rather than by the annuity shortcut.
- Each instalment is paid on time, on the same date each month.
- The rate is fixed for the whole term, which is true of a booked RD.
- Figures are before tax. Apply your slab rate to the interest.
- No penalty, premature closure or partial withdrawal is modelled.