Understanding Recurring Deposits (RD)
A Recurring Deposit (RD) is a type of term deposit offered by banks and financial institutions that allows individuals to deposit a fixed amount every month for a predetermined period. It is an ideal investment tool for disciplined savings and is widely used by salaried individuals and small investors.
How RD Interest is Calculated
Unlike Fixed Deposits, interest in RDs is calculated on the total of monthly deposits, each of which earns interest for different durations. The interest is compounded based on the selected frequency (monthly, quarterly, etc.).
M = P × [(1 + r/n)nt - 1] / [1 - (1 + r/n)-1]
Where:
- M = Maturity amount
- P = Monthly deposit
- r = Annual interest rate (in decimal)
- n = Number of compounding periods in a year
- t = Time period in years
Compounding Frequencies in RD
Interest in Recurring Deposits can be compounded at different intervals. The frequency affects the final maturity value:
- Annually: Compounded once a year
- Half-Yearly: Compounded every 6 months
- Quarterly: Compounded every 3 months (standard for many banks)
- Monthly: Compounded every month (rare but available in some cases)
Benefits of Using an RD Calculator
- Planning Tool: Helps you plan future savings and financial goals.
- Accurate Estimation: Quickly shows maturity amount and interest earned.
- Customizable Inputs: Change deposit amount, duration, and rates to compare results.
- Visualization: Understand investment vs returns through charts.
Taxation on RD Returns
Interest earned on Recurring Deposits is fully taxable under "Income from Other Sources" as per the Income Tax Act. If the total interest earned in a financial year exceeds ₹40,000 (₹50,000 for senior citizens), the bank deducts TDS (Tax Deducted at Source) at 10%.
Key Points to Remember
- Delayed monthly deposits may attract penalties or reduced interest.
- Senior citizens may receive slightly higher RD interest rates from some banks.
- Premature withdrawal is allowed but subject to penalty and lower interest rates.
- Compare RD rates across banks and NBFCs before starting a deposit.
RD vs Other Savings Options
| Investment Option | Risk | Return | Liquidity |
|---|---|---|---|
| Recurring Deposit (RD) | Low | Moderate (Fixed) | Low (Lock-in until maturity) |
| Savings Account | Very Low | Low (2-4%) | High |
| Mutual Funds (SIP) | Moderate to High | High (Market Linked) | High |
| Fixed Deposit | Low | Moderate | Low |
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