Recurring Deposit: Returns, Rules, Penalties and Tax
Table of Contents
A recurring deposit turns a monthly habit into a lump sum. You commit a fixed amount each month for a set term, the bank fixes the rate on the day you open it, and the whole thing comes back with interest at the end. The part that surprises people is the return. Put ₹5,000 a month into a three-year RD at 7% and you get roughly ₹2,00,700 back on ₹1,80,000 paid in. Put the same ₹1,80,000 into a three-year fixed deposit at the same 7% and you get about ₹2,21,700. Same rate, ₹21,000 apart.
Nothing has gone wrong there, and this page explains why. Along with what happens when you miss a payment, what closing early actually costs, and the deduction most senior citizens never claim.
Dhanvantri Capital Services Private Limited, known as Dhanvantree, is an AMFI-registered mutual fund and SIF distributor (ARN-194216). We are not a bank and do not accept deposits.
Recurring deposit: the key numbers
| Bank RD term | 6 months to 10 years |
| Post office RD term | 5 years, the only option |
| Interest compounding | Quarterly at most institutions |
| Minimum instalment | From about ₹100 at the post office, ₹500 at most banks |
| Interest on ₹1,80,000 at 7% over 3 years | About ₹20,700 as an RD, about ₹41,700 as a lump-sum FD |
| Bank default penalty | About ₹10 per ₹1,000 of the instalment, per month of delay |
| Post office default fee | ₹1 per ₹100 of the instalment, per month |
| Defaults before closure | 4 to 6 at banks · 4 consecutive at the post office |
| Post office revival window | 2 months from the fourth default |
| Premature closure, bank | Lock-in about 3 months, then 0.5% to 1% off the rate |
| Premature closure, post office | Whole deposit recomputed at the savings account rate |
| Loan against the deposit | Typically 80% to 90% of the balance |
| Deposit insurance | ₹5 lakh per depositor per bank (DICGC’s FAQ confirms the limit and what counts towards it) · post office carries a government guarantee instead |
| TDS threshold | ₹50,000 a year · ₹1,00,000 at age 60+ |
| TDS rate | 10% with PAN, 20% without |
| Senior citizen deduction | Up to ₹50,000 of deposit interest under Section 80TTB, old regime only |
Sources: India Post · Reserve Bank of India · Deposit Insurance and Credit Guarantee Corporation · Income Tax Department. Bank terms vary; post office rules are set nationally and its rate is revised quarterly. Figures current at [date].
What is a recurring deposit?
A recurring deposit is a bank or post office deposit built from equal monthly instalments over a fixed term, at an interest rate locked in when the account opens. Interest is compounded quarterly at most institutions. Nothing is paid out along the way. Instalments and interest are returned together at maturity.
Bank RDs run from six months to ten years. The post office offers one term only, five years. Minimum instalments start around ₹100 at the post office and ₹500 at most banks, in multiples the bank sets.
The rate is usually the same one the institution pays on a fixed deposit of matching tenure. Two products, one rate, very different outcomes, which is the next section.
Why the return is lower than the rate suggests
Money in a recurring deposit is not invested for the full term. The first instalment earns for all 36 months of a three-year deposit, the last for about one. On average the money is working for roughly half the term, so the same rate produces roughly half the interest a lump sum would.
This is not a worse product. It is a different one. The fixed deposit needs ₹1,80,000 you already have; the recurring deposit builds it from income you have not earned yet. Comparing their returns is comparing a sprint to a savings habit.
What it does mean is that anyone choosing between them on headline rate alone is comparing the wrong number.
Set side by side, on ₹1,80,000 at 7%:
| Recurring deposit | Fixed deposit | |
|---|---|---|
| How it goes in | ₹5,000 × 36 months | ₹1,80,000 on day one |
| Total paid in | ₹1,80,000 | ₹1,80,000 |
| Maturity value | About ₹2,00,700 | About ₹2,21,700 |
| Interest earned | About ₹20,700 | About ₹41,700 |
How RD interest is calculated
Each instalment is treated as its own deposit and compounded quarterly for the months it is actually held. The maturity value is the sum of all of them. Most published formulas show a single calculation, which is why their answers do not match the bank’s.
For one instalment:
A = P × (1 + i)ⁿ
where P is the instalment, i is the annual rate divided by four, and n is the number of quarters that instalment stays in.
On a 36-month deposit at 7%, the first instalment compounds over 12 quarters, the second over slightly less, and the last barely at all. Run it 36 times and add the results. That is what every bank calculator is doing behind the button.
Two consequences worth knowing:
Interest credited at the end of a quarter earns interest in the next one. That is where compounding actually happens, and it is why quarterly compounding beats annual on the same rate.
A term ending mid-quarter usually earns simple interest on the final part period rather than a fourth compounding. It is a small amount, and it is why a calculator sometimes shows a few rupees less than you expect.
Choosing your instalment and term
You pick an instalment and a term, the bank fixes the rate for that term on the opening date, and the same amount is debited monthly by standing instruction. The instalment, the date and the rate are all fixed for the life of the deposit and normally cannot be changed.
Because nothing about a regular RD flexes, it suits steady income and nothing else. Three alternatives exist for income that moves: a flexi RD lets you pay extra, a variable recurring deposit lets you pay less as well as more, and a shorter term reduces the commitment.
Choosing the instalment matters more than people expect. The penalty structure below means an RD you struggle to fund costs real money, and closing it early costs more. Setting it below what you can comfortably pay and topping up through a flexi facility is the safer shape.
Flexi recurring deposits
A flexi recurring deposit keeps a compulsory base instalment and lets you pay more on top in months when you can, usually in multiples of the base amount. The extra earns the same rate for the time it stays in, and no penalty applies for not paying it.
Some banks apply the same name to a savings-linked structure instead, where surplus above a threshold is swept into the deposit automatically. The two behave differently at maturity, so read the product sheet rather than trusting the label.
A variable recurring deposit goes further and allows the instalment itself to move in both directions, generally without penalty. That is the right structure for genuinely irregular income, where a flexi RD still punishes you for missing the base amount.
Post office recurring deposits
The post office offers a single five-year recurring deposit with rules set nationally rather than by branch. Missing an instalment costs ₹1 for every ₹100 of the instalment, per month of default. Four consecutive defaults discontinue the account, and it can be revived within two months of the fourth.
Four features that differ from a bank RD.
The default fee is fixed and published. ₹1 per ₹100 per month. On a ₹2,000 instalment that is ₹20 a month of delay. You pay the arrears plus the fee to bring the account current.
Discontinuation is a defined event, not a bank’s discretion. After four consecutive missed instalments the account is discontinued. Revive it within two months of that fourth default and it continues. Miss the window and no further deposits are accepted, though the balance stays and earns until the original maturity date.
Paying in advance earns a rebate. Deposit six or more instalments ahead and the post office pays a small rebate; twelve instalments ahead roughly doubles it. There is no bank equivalent.
Premature closure is punitive. Close early and the whole deposit is recomputed at the post office savings account rate, not the RD rate. That is a far heavier penalty than a bank’s 0.5% to 1% reduction, and it is the single most important thing to know before opening one.
Confirm the current rate and rebate amounts with India Post before acting. The scheme’s rate is revised quarterly by the government.
Recurring deposits for minors
An RD can be opened in a child’s name, operated by a parent or legal guardian until the child turns 18. KYC is completed by the guardian and the account runs against the guardian’s PAN. At 18 the account holder gives fresh KYC and a new signature mandate before operating it.
The tax treatment catches people out. Interest on a minor’s deposit is normally clubbed with the income of whichever parent earns more and taxed in their hands, not the child’s. So it does not create a separate tax-free allowance. A small exemption applies per child, but the bulk of the interest is the parent’s income.
Some banks allow a minor over ten to operate certain accounts alone. A recurring deposit usually still requires the guardian until 18.
Joint recurring deposit accounts
An RD can be held by two or more people under a mandate chosen when the account opens. The mandate decides who can operate it; the order of names decides who pays the tax. Interest is assessed in the first holder’s hands regardless of whose bank account the instalments leave.
Either or Survivor. Either holder operates the account, and on the death of one the survivor can close it without involving the legal heirs.
Former or Survivor. Only the first holder operates it during their lifetime.
Jointly. Every holder signs for every transaction, including premature closure.
Register a nominee whichever mandate you pick. A nominee is not an owner. They receive the money to hold for the legal heirs. But nomination is what saves the family a succession certificate.
Because the interest lands on the first holder’s PAN, putting the lower-earning spouse first can change the tax on the same deposit. Worth a moment’s thought at opening, when it costs nothing to arrange.
Documents you need to open one
Opening an RD needs PAN, proof of identity, proof of address, a photograph and the account the instalments will be debited from. An existing customer can usually open one online in minutes against KYC already held. Without a PAN on record, TDS runs at 20% instead of 10%.
The institution issues a recurring deposit receipt or an account statement showing the account number, instalment, rate, start and maturity dates and the expected maturity value. It is what you produce to claim the money, to raise a loan against the deposit, or to settle a dispute about the rate.
Set the standing instruction and the nominee at the same sitting. Both are harder to add later, and the standing instruction is what prevents the default penalties below.
Interest payout options
Almost all recurring deposits are cumulative. Interest accumulates and is paid with the principal at maturity. A few banks offer a payout variant crediting interest monthly or quarterly, but it is far less common than on fixed deposits, because the balance is still being built up.
The tax treatment does not follow the payout. Interest is taxable in the year it accrues, whether or not it reaches you. A three-year cumulative RD creates a tax liability in each of the three years while paying you nothing until the end, and it is reported annually in Form 26AS and the Annual Information Statement.
Penalty for missing an instalment
Banks commonly charge around ₹10 per ₹1,000 of the instalment for each month of delay, counting part of a month as a whole one. The post office charges ₹1 per ₹100. Four to six consecutive defaults, depending on the institution, close the account and settle it at a reduced rate.
On a ₹5,000 bank instalment that is ₹50 for one month late. Trivial once, expensive as a habit.
The larger cost is what happens at the end of the run. When repeated defaults force a closure, interest is paid at the rate for the period actually completed, less the premature closure penalty. So a deposit contracted at 7% and closed in month fourteen might pay under 6%. The missed instalments are not the loss; the re-rated interest on everything you did pay is.
The penalty is charged on the delay, not waived by skipping. Pay late and you still owe both the instalment and the fee.
If your income genuinely varies, a variable recurring deposit that permits a lower instalment without penalty is the product built for it.
Closing an account early
Bank RDs can usually be closed after a lock-in of about three months, with a penalty of 0.5% to 1%. The penalty applies to the rate for the period actually completed, not the contracted rate, so you lose twice. Post office RDs are recomputed at the savings account rate, which is far harsher.
The double effect, worked. A three-year bank RD contracted at 7%, closed at 18 months when the bank’s 18-month rate is 6.5%: you receive 6.5% less the penalty, around 6%. Not 7% less the penalty.
Closing inside the lock-in generally returns the instalments with no interest at all.
Partial withdrawal is not usually permitted. The choice is to keep the deposit or end it. A handful of banks allow a limited partial withdrawal while keeping the account running; where they do, the terms are set by the bank rather than by any common rule. That restriction is precisely why a loan against the deposit is the better route for a temporary need.
Loan against a Recurring Deposit
Most banks lend against an RD once it has run a few months, typically up to 80% to 90% of the balance, at roughly 1% to 2% above the deposit rate. The deposit keeps running and keeps its contracted rate, and the instalments continue as normal.
Compare the two routes on the same need. Breaking an 18-month-old deposit surrenders the rate difference plus a penalty on everything accrued. Borrowing against it for three months costs 2% over the deposit rate on the amount borrowed, and nothing else.
It is also quicker than most other secured borrowing, because the security is already sitting with the lender.
Recurring Deposit vs fixed deposit
A fixed deposit takes one amount at the start; a recurring deposit takes a fixed sum monthly. At the same rate and the same total, the fixed deposit returns roughly twice the interest, because all of it is invested from day one. The choice is about when the money exists, not which pays more.
A practical sequence many people use: run the RD while the money is being earned, then place the maturity amount as a fixed deposit so the whole sum works from day one. Neither product does both jobs.
| Recurring deposit | Fixed deposit | |
|---|---|---|
| How you pay in | Fixed sum every month | One amount at the start |
| Suits | Saving out of income | A lump sum you already hold |
| Typical term | 6 months to 10 years (post office: 5 years) | 7 days to 10 years |
| Interest earned on | Each instalment, from its own date | The whole amount, from day one |
| Interest on ₹1,80,000 at 7% over 3 years | About ₹20,700 | About ₹41,700 |
| Missing a payment | Penalty, then closure after repeated defaults | Does not arise |
| Premature closure | 0.5%–1% penalty (post office: re-rated to savings rate) | 0.5%–1% penalty |
| Deposit insurance | ₹5 lakh per depositor per bank | ₹5 lakh per depositor per bank |
| Tax on interest | Slab rate, as it accrues | Slab rate, as it accrues |
Recurring Deposit vs SIP
A recurring deposit and a monthly SIP both take a fixed sum each month. An RD pays a contracted rate and, in a bank, insures the first ₹5 lakh. A SIP buys mutual fund units whose value moves with the market, no contracted return, no insurance, and no fixed maturity value.
| Recurring deposit | SIP into a mutual fund | |
|---|---|---|
| Return | Fixed, known at the start | Not fixed, moves with the market |
| Capital protection | ₹5 lakh per bank, via DICGC | None |
| Access | Penalty for early closure | Redeem any working day (except ELSS) |
| Missing a month | Penalty, closure after repeated defaults | Skip or pause freely |
| Tax | Slab rate, as interest accrues each year | On redemption, at capital gains rates |
The two are not substitutes and the honest answer is that they serve different money. Short horizons and money you cannot afford to see fall belong in a deposit. Longer horizons where you can carry a fall have historically been served differently, and that is a conversation about your own circumstances rather than something a web page can settle.
As an AMFI-registered distributor we are paid on mutual fund investments and not on deposits, which is exactly why this section states the trade-off rather than a preference. The choice is yours.
Tax and TDS on recurring deposits
RD interest is taxed at your slab rate (see the Income Tax Department’s as income from other sources) Banks deduct 10% TDS once interest across all your deposits with them passes ₹50,000 in a tax year, or ₹1 lakh for those aged 60 and above. Without a PAN, 20%. TDS is not the final tax.
Four points, and the last one is worth real money to a retiree.
The threshold is per institution, across all deposits. Fixed and recurring deposit interest at the same bank is added together, so an RD can push an existing FD over the line.
Interest is taxed as it accrues. A cumulative RD generates taxable interest each year while paying nothing out. Leaving it off the return creates a mismatch with Form 26AS and the Annual Information Statement.
TDS at 10% is a payment on account, not a settlement. In the 30% bracket you owe the balance at filing.
Senior citizens can deduct up to ₹50,000 of deposit interest under Section 80TTB, and unlike Section 80TTA, which covers savings account interest only and caps at ₹10,000, Section 80TTB includes fixed and recurring deposit interest from banks, co-operative banks and the post office. It is available to resident individuals aged 60 and above, under the old tax regime only. For a retiree living on deposit interest this is usually worth more than the higher TDS threshold, and most RD pages do not mention it at all.
If your total tax for the year comes to nil, file Form 121 with the institution before the interest is credited. Form 121 replaced Forms 15G and 15H on 1 April 2026 and now covers every age group.
Frequently Asked Questions
Why is my RD maturity lower than an FD at the same rate?
Because the money is not invested for the full term. The first instalment earns for the whole period and the last for about a month, so on average it works for roughly half the term. Put ₹5,000 a month into a three-year RD at 7% and you get about ₹20,700 of interest; the same ₹1,80,000 as a lump sum at 7% returns about ₹41,700.
What happens if I miss an RD instalment?
Banks typically charge around ₹10 per ₹1,000 of the instalment for each month of delay, with part of a month counted as whole. The post office charges ₹1 per ₹100. Four to six consecutive defaults, depending on the institution, close the account and settle it at a reduced rate.
Can a discontinued post office RD be revived?
Yes, within two months of the fourth consecutive default. Pay the arrears and the default fee and the account continues. Miss that window and no further deposits are accepted, though the existing balance stays and earns until the original maturity date.
Can I close a recurring deposit before maturity?
Bank RDs usually allow it after about three months, with a penalty of 0.5% to 1% applied to the rate for the period actually completed. A post office RD is recomputed at the savings account rate, which costs considerably more. Closing inside the lock-in generally returns the instalments with no interest.
Is RD interest taxable?
Yes, at your slab rate, as income from other sources, and it is taxed as it accrues rather than when you receive it. Banks deduct 10% TDS once interest across all your deposits with them crosses ₹50,000 a year, or ₹1 lakh at 60 and above.
Can senior citizens claim a deduction on RD interest?
Yes. Section 80TTB allows a resident individual aged 60 or above to deduct up to ₹50,000 of interest from bank, co-operative bank and post office deposits, including recurring deposits. It is available under the old tax regime only. Section 80TTA, which covers savings interest alone and caps at ₹10,000, is the version for everyone else.
Can I change my monthly instalment?
Not in a regular RD, the instalment is fixed at opening. A flexi RD lets you add more in some months, and a variable recurring deposit lets the instalment move in both directions, generally without penalty.
Are recurring deposits covered by deposit insurance?
Bank RDs are, up to ₹5 lakh per depositor per bank, counted together with every other account you hold there. Post office deposits sit outside DICGC and carry a government guarantee instead.
Can an RD be opened for a child?
Yes, operated by a parent or guardian until 18. The interest is normally clubbed with the income of whichever parent earns more and taxed in their hands. At 18 the account holder completes fresh KYC before operating it.
Can I borrow against my RD?
Most banks lend 80% to 90% of the balance once the deposit has run a few months, at roughly 1% to 2% above the deposit rate. For a short-term need it usually costs far less than closing the deposit.
Depositors aged 60 and above are usually offered a higher rate on the deposit itself as well. See recurring deposits for senior citizens.
Disclaimer: The views expressed here are of the author and do not reflect those of Dhanvantree. Mutual funds are subject to market risks, please read the scheme documents carefully before investing.