Say you can put aside ₹5,000 from every salary but never have a big lump sum to lock into a fixed deposit. A recurring deposit is built for exactly that. You commit to a fixed amount every month, the bank or post office pays interest on each instalment, and at the end of the term you get back everything you paid in plus the interest it earned.
This guide explains how a recurring deposit (RD) works at a bank and at the post office, what happens when you miss an instalment or need the money early, how TDS applies to RD interest, and how safe your money is. If you already know fixed deposits, think of an RD as an FD that you fill up one month at a time.
How a recurring deposit works
When you open an RD you choose two things: the monthly instalment and the term. The instalment stays the same for the whole term. The interest rate is fixed on the day you open the account and does not change even if rates move later, which is the main attraction for people who like certainty.
Each instalment earns interest only from the month it is paid. Your first ₹5,000 earns interest for the full term, while your last ₹5,000 earns interest for just one month. That is why the interest on an RD is always lower than on an FD of the same total amount kept for the same period.
Most people set up an auto-debit from their savings account on a fixed date each month. That one step takes care of discipline, which is the real value of an RD.
- Instalment: fixed for the term; you cannot raise or cut it once the account is open.
- Rate: locked on the opening date for the whole term.
- Payout: a single maturity amount at the end, credited to your linked account.
- Nominee: always add one at opening; it saves your family paperwork later.
Bank RD and post office RD: the main differences
Banks set their own RD terms, so tenures, minimum instalments, penalties and rates differ from bank to bank. The post office RD is a Government of India small savings scheme with one set of rules for the whole country. The table below sets out the key differences.
| Feature | Bank RD | Post office RD |
|---|---|---|
| Who sets the rules | Each bank, within RBI rules | Central Government scheme rules |
| Minimum instalment | Set by the bank | ₹100 a month, then multiples of ₹10; no upper limit |
| Term | Chosen by you from the bank’s menu, often a few months to several years | 5 years, can be continued for another 5 years |
| Interest rate | Set by the bank; varies by tenure | Reset by the Ministry of Finance every quarter |
| Early closure | Allowed, usually with a penalty set by the bank | Allowed only after 3 years, at the post office savings rate |
| Safety | DICGC cover up to ₹5 lakh per depositor per bank | Backed by the Central Government |
| TDS | Yes, above the yearly threshold | Yes, for notified post office schemes, above the threshold |
A post office RD can be opened by one adult or up to three adults jointly, and a guardian can open one for a minor. You can also pay six or twelve months in advance and earn a small rebate for doing so, according to the National Savings Institute.
How RD interest is calculated
Banks and the post office calculate RD interest with compounding, so interest earned in earlier quarters also earns interest. You do not need to work this out by hand. The free RD calculator on this site shows the maturity value for any instalment, rate and term.
As an illustration, say you deposit ₹5,000 a month for five years and assume 7% a year, compounded every quarter. You pay in ₹3 lakh in total. The maturity value works out close to ₹3.6 lakh, so roughly ₹60,000 comes from interest. If you had ₹3 lakh on day one and put it in an FD at the same rate, you would earn more, because every rupee would be invested for the full five years. The RD earns less because the money arrives in pieces.
Two practical points follow. First, compare RD rates across tenures before you sign up, since a bank may pay more for one term than another. Second, for the post office RD, check the rate notified for the current quarter on the India Post or National Savings Institute website. Small savings rates change every quarter, but the rate on the day you open your RD stays fixed for that account.
What happens if you miss an instalment
Life gets in the way. A salary is delayed, an auto-debit bounces, and suddenly you have skipped a month. The consequences depend on where your RD is.
Post office RD
The post office rules are clear. If you miss an instalment, you can pay it later with a default (revival) fee of ₹1 for every ₹100 of the missed instalment for each month of delay. With up to four defaults, you can also choose to extend the maturity by as many months as you missed and pay those instalments in the extra months. On a ₹5,000 instalment paid two months late, that is ₹50 for each month, or ₹100 in all. An account in which the missed instalments are made good is not treated as discontinued.
If there are more than four defaults, the account is treated as discontinued. You can still revive it, but only within two months from the month of the fourth default, by paying all the missed instalments with the default fee. After that window closes, the account cannot be revived.
Bank RD
Each bank sets its own penalty for late instalments, and some close the account after a set number of missed payments. The rule will be in the account terms you accept when you open the RD, so read that section before you sign up. If you know a payment will bounce, fund the account a day early rather than paying a penalty and a bounce charge on your savings account.
Premature closure and loans against an RD
An RD is meant to be held to maturity, but you can break it if you have to. The cost is lower interest.
Post office RD: You can close the account early only after three years from the date of opening. When you do, interest is paid at the post office savings account rate, which is much lower than the RD rate. If you need cash sooner, the scheme allows you to take a loan of up to 50% of the deposits made, once the account has run for one year and twelve instalments are paid. It is a loan, charged simple interest at 2 percentage points above the RD rate. Note also that if you have paid instalments in advance, you cannot close the account before the period covered by those advance deposits is over.
Bank RD: Most banks allow premature closure at any time, but they pay interest at the rate applicable for the period the money actually stayed with them, minus a penalty set in their policy. Many banks also offer a loan or overdraft against an RD, which can be cheaper than breaking it if you need money for just a few months.
Before closing an RD early, do the sum both ways. Compare the interest you lose on closure with the interest you would pay on a short loan against the deposit. For small, short needs, the loan often wins.
TDS and tax on recurring deposit interest
RD interest is fully taxable. It is added to your income and taxed at your slab rate under whichever tax regime you choose. There is no special exemption for RD interest.
From 1 April 2026, TDS on bank and post office interest falls under section 393 of the Income-tax Act, 2025, which replaced the old section 194A. The bank deducts TDS at 10% only when the total interest it pays you in a tax year, across all your deposits with that bank, crosses ₹50,000. For a senior citizen the threshold is ₹1 lakh. The same thresholds apply to post office deposits under notified schemes.
A few things to keep in mind:
- TDS is not the final tax. If your slab rate is higher than 10%, you pay the balance when you file your return. If your income is below the taxable limit, you can claim a refund.
- Interest below the threshold is still taxable. No TDS does not mean no tax. Report all RD interest in your return.
- Nil-tax declaration. If your estimated tax for the year is nil, you can give the bank a written declaration under section 393(6) so that it does not deduct TDS. Under the new Act this declaration takes the place of the old Form 15G and Form 15H; ask your bank which form it now accepts.
- Keep your PAN updated with the bank. It links the TDS to your name so the credit shows up in your annual tax statement.
Is your money safe? DICGC cover and government backing
A bank RD is covered by deposit insurance from the Deposit Insurance and Credit Guarantee Corporation (DICGC). The DICGC insures savings, fixed, current and recurring deposits. The cover is up to ₹5 lakh per depositor per bank, and that limit includes both principal and interest. The limit can be revised; check the DICGC website.
The ₹5 lakh is per bank, not per account. If you hold a savings account, an FD and a recurring deposit at the same bank in the same name and capacity, all of them are added together for the ₹5 lakh limit. Deposits at different banks are insured separately. So if your total balance at one bank is well above ₹5 lakh, you may want to spread new RDs across banks.
The post office RD is different. It is not a bank deposit at all. It is a small savings scheme run for the Central Government, so the money is owed to you by the Government of India and does not depend on DICGC cover.
When an RD makes sense, and when it does not
A recurring deposit suits short and medium goals where you cannot take any risk with the money. Think of a school fee due in a year, a family wedding in three years, or building an emergency fund from scratch. You know the exact maturity value on day one.
It suits long goals less well. After tax, RD returns often only just keep pace with inflation. For goals ten or more years away, such as retirement or a child’s higher education, long-term options like PPF or a SIP in a diversified mutual fund, covered in separate guides on this site, may fit better depending on your risk appetite. An RD can still be a good parking place for money you will need in the next few years.
Key takeaways before you open an RD
- Pick an instalment you can pay every month without strain; missed payments cost money.
- Compare the bank’s RD rates for different tenures, and check the current quarter’s post office RD rate.
- Set up an auto-debit a few days after your salary date.
- Know the premature closure rule: three years minimum for a post office RD, a penalty at most banks.
- Remember that RD interest is taxable; TDS applies above ₹50,000 a year (₹1 lakh for senior citizens) per bank.
- Keep your total deposits at any one bank in mind against the ₹5 lakh DICGC limit.
- Add a nominee and keep your KYC and PAN up to date.
An RD will not make you rich, and it is not meant to. What it does well is turn a monthly habit into a known sum on a known date. For a goal that matters and cannot wait, that certainty is worth a lot.
