How Does A Recurring Deposit Work?

A recurring deposit (RD) is a savings option banks offer where you deposit a fixed amount of money every month for a set period. It earns interest at a rate similar to fixed deposits. Once the tenure ends, you receive the total amount saved plus interest.

RDs are usually ideal for salaried people who want to build savings through regular, small contributions, helping them achieve financial goals systematically. Let's understand how they work.

Recurring Deposits are similar to FDs, where you can invest in monthly instalments, for example, ₹2000 every month. This deposit matures on a particular date in the future, along with all the deposits made each month. Thus, the Recurring Deposit schemes allow you to build up your savings through regular monthly deposits of a fixed sum over a fixed period. The RD period can range from 6 months to 10 years.

You can fund your Recurring Deposit Account by providing instructions to your bank on how much money from your Savings/ Current Account should be withdrawn and credited to the Recurring Deposit account.

When the RD Account is active, the maturity value is displayed on the deposit account, assuming you will pay all the monthly instalments regularly on due dates. If any instalment is overdue, the interest due in the account will be reduced and insufficient to reach the maturity value.

Therefore, the difference in interest will be deducted from the maturity value as a penalty, the rate of which will be fixed upfront. You should be aware that the RD amount is subject to TDS and the maturity would vary if TDS gets deducted.

Tax Deducted at Source (TDS) is applicable on Recurring Deposits. If interest earned on FD AND RD exceeds ₹10,000 in an FY per Customer ID, TDS at the rate of 10% would be deducted by the bank. Income tax is to be paid on the interest earned from a Recurring Deposit at the rate of the tax slab of the RD holder.