Recurring Deposit (RD)

How it works

A Recurring Deposit is a savings product where you commit to depositing a fixed amount every month for a chosen tenure (typically 6 months to 10 years) at an interest rate locked in at the start. The bank compounds the interest (usually quarterly) and pays out the principal plus interest at maturity. It's like an SIP, but into a guaranteed-return bank product rather than the market.

Why it matters

RD is built for disciplined, regular saving toward a near-term goal — a gadget, a trip, an insurance premium, or building a small emergency buffer. The returns are guaranteed and predictable, with capital protected (bank deposits are insured up to ₹5 lakh per bank under DICGC). It suits conservative savers and those who can't invest a lump sum but can set aside a fixed amount monthly.

In India

RDs are offered by every bank and the Post Office, with rates broadly similar to fixed deposits and often a little higher for senior citizens. They can be opened in minutes through net banking. Interest earned is fully taxable at your income-tax slab rate, and banks deduct TDS if interest across your deposits crosses the annual threshold.

Common mistakes

The key drawbacks: RD returns are modest and may barely beat inflation once interest is taxed at your slab rate, so RDs are unsuitable for long-term wealth creation — equity SIPs have historically done far better over long horizons. Investors also forget that missing instalments attracts a small penalty, that premature closure reduces the interest earned, and that the locked rate, while reassuring, means you miss out if rates rise during your tenure. Some savers pile money into RDs purely out of habit or fear of markets, leaving long-term goals badly under-funded. Use an RD for short-term, capital-protected goals (a planned purchase, a fee payment) and to build a modest emergency buffer with predictable, guaranteed growth. But for goals five or more years away, a disciplined equity or hybrid mutual fund SIP — which harnesses compounding and the equity premium — is usually the smarter wealth-building choice.