Power of Compounding FAQs
What interest rate do recurring deposits pay?
Bank RD rates track their fixed deposit rates for the same tenure, typically 6.5% to 7.5%, with senior citizens getting an extra 0.5%. The Post Office RD rate is set separately by the Ministry of Finance each quarter. Interest is compounded quarterly in both cases.
What is a Recurring Deposit (RD)?
A Recurring Deposit is a disciplined monthly savings scheme offered by banks and India Post where you deposit a fixed amount every month for a set tenure and earn guaranteed quarterly compounded interest.
Is RD interest taxable in India?
Yes. Like fixed deposits, RD interest is fully taxable under Income from Other Sources at your slab rate, in the year it accrues. From 1 April 2025 the bank deducts TDS under Section 194A once your interest from that bank crosses Rs 50,000 in a financial year, or Rs 1,00,000 for senior citizens. TDS is 10% if your PAN is registered and 20% if it is not. Post office RDs have no TDS, but the interest is still taxable.
Can I withdraw money from an RD before maturity?
Premature closure is allowed by most banks with a small penalty (typically 0.5% to 1.0% lower interest rate than the contracted rate for the period held).
What happens if I miss a monthly RD instalment?
The account is not closed, but a default fee is charged. A post office RD costs Re 1 per Rs 100 of the monthly instalment for each missed month, so a Rs 5,000 RD costs Rs 50 per default, payable with the arrears; after four straight defaults the account is discontinued, though it can be revived within two months. Banks levy a similar small penalty and may close the RD after consecutive misses. Keep a standing instruction on the account.
Can I take a loan against my recurring deposit?
Yes. Banks lend up to 80% to 90% of the RD balance at roughly 1% to 2% above the RD rate, which is far cheaper than a personal loan at 12% to 18%. A post office RD allows a loan of up to 50% of the balance after 12 instalments have been paid, repayable in a lump sum or in instalments. Borrowing leaves the RD intact so it keeps earning, which usually beats breaking it early.
Should I use an RD or an SIP for a three-year goal?
For a goal that is fixed in date and amount, an RD is the safer instrument — Rs 10,000 a month for 3 years at 7% gives about Rs 4,01,600 with no uncertainty. The same amount in an equity SIP at an assumed 12% gives about Rs 4,35,100, but three years is too short a window to rely on equity and a bad year can leave you short. Use an RD or a short-duration debt fund under five years, equity only beyond that.