A Recurring Deposit (RD) is a type of term deposit offered by Indian banks and India Post, allowing individuals to deposit a fixed amount every month and earn interest at a rate similar to fixed deposits. It’s an attractive savings option for people with a regular income who want to systematically build savings over a fixed period.
Key Features of Recurring Deposits in India
- Monthly Deposits:
- Individuals deposit a fixed amount monthly, much like paying installments, which then accumulates and matures on a specified future date.
- Fixed Tenure:
- RD accounts typically have a tenure ranging from 6 months to 10 years, depending on the bank’s terms.
- Interest Rate:
- The interest rate for RDs is usually similar to that of fixed deposits. Interest is compounded quarterly, which enhances the overall return over time.
- Funding Options:
- Most RDs can be funded through standing instructions, which automatically debit the specified amount from a customer’s savings or current account.
- Penalty for Delayed Payments:
- If monthly installments are delayed, a penalty applies, which reduces the final maturity value. The penalty rate is predefined by the bank.
- Loan Facility:
- Many banks offer loans against an RD of up to 80-90% of its value, providing liquidity without breaking the RD.
Recurring Deposit Formulas
Interest Calculation:
I = P × n(n + 1) × r / 2400
Where:
- P: Monthly deposit
- n: Time in months
- r: Annual rate of interest
Maturity Value (MV):
MV = P × n [1 + (n + 1) × r] / 2400
Quarterly Compounded Maturity Formula:
MV = R [ (1 + i)n – 1 ] / 1 – (1 + i)-1/3
Where:
- R: Monthly installment
- n: Number of quarters
- i: Annual interest rate / 400
Taxation on Recurring Deposits in India
- Tax Deducted at Source (TDS): If RD interest exceeds ₹40,000 per year, a 10% TDS is deducted. Senior citizens (60+ years) or individuals without taxable income can avoid TDS by submitting Form 15H (for senior citizens) or Form 15G.
- Income Tax: Interest from RDs is taxable under the depositor’s tax slab.