How recurring deposit maturity is calculated
A recurring deposit lets you save a fixed amount every month at a contracted rate. Each instalment earns interest only for the time it stays in the account, so the total interest is far smaller than an equivalent fixed deposit — not because the rate is worse, but because the money arrives later.
Formula
Maturity = Σ [ instalment × (1 + r/4)^(4 × months remaining ÷ 12) ]
- Each monthly instalment is compounded separately until maturity
- Indian banks conventionally compound recurring deposits quarterly
- The first instalment earns for the full tenure; the last earns for one month
Why the interest looks small
₹5,000 a month for five years at 7% deposits ₹3 lakh and matures at about ₹3.60 lakh, earning roughly ₹59,700 of interest. The same ₹3 lakh placed as a single fixed deposit for five years at 7% would earn about ₹1.24 lakh.
The difference is entirely timing. In an RD the average rupee is invested for only about two and a half years, so half the interest simply never had time to accrue. Comparing the two totals without noticing that leads people to think RDs are a worse product than they are.
What an RD is actually good for
Recurring deposits suit short-horizon goals funded from monthly income — a school fee due next year, an insurance premium, a planned trip. The rate is contracted at the start, so the maturity amount is known on day one.
For goals more than five years away, the guaranteed rate becomes a liability rather than a comfort, because it is unlikely to beat inflation after tax. A SIP into a mutual fund is the usual alternative, with the trade-off of an uncertain outcome.
Missed instalments and early closure
Missing an instalment usually attracts a small penalty, and repeated defaults can lead the bank to close the account prematurely at a reduced rate. Setting up a standing instruction avoids this entirely.
Premature closure pays the rate applicable to the period completed, less a penalty of roughly 0.5-1%. Most banks require a minimum period, often three months, before closure is allowed at all.
Tax treatment
RD interest is taxable at your slab rate as it accrues, exactly like a fixed deposit, and TDS applies once interest crosses the notified threshold. There is no special exemption for recurring deposits.
For a taxpayer in the 30% bracket, a 7% RD returns roughly 4.8% after tax. That is worth knowing before choosing it over a debt fund or a PPF contribution for money you will not need soon.
Example: ₹5,000 a month for 5 years at 7%
- Monthly instalment
- ₹5,000
- Tenure
- 5 years (60 instalments)
- Total deposited
- ₹3,00,000
- Maturity value
- ≈ ₹3,59,690
- Interest earned
- ≈ ₹59,690
- Same sum as a 5-year FD
- ≈ ₹1,24,433 interest
The FD earns more only because the whole amount was invested from day one. Judge an RD against other monthly savings options, not against a lump sum you do not have.