How Recurring Deposit (RD) Interest is Calculated in Indian Banks

The Quarterly Compounding Convention

Unlike simple recurring investment models where each month's contribution earns simple interest, Indian commercial banks and India Post compound Recurring Deposit interest QUARTERLY (four times a year).

Because installments are deposited every month, each monthly installment remains deposited for a different number of months. The first installment earns interest for the entire tenure, while the final installment earns interest for only one month.

The Standard IBA / RBI Calculation Formula

The Indian Banks' Association (IBA) formula calculates maturity value using geometric series summation:

M = P * [ (1 + q)^(n/3) - 1 ] / [ 1 - (1 + q)^(-1/3) ]

Here, P is the monthly deposit amount, q is the quarterly interest rate (Annual Rate / 400), and n is the tenure in months.

Because interest compounds quarterly, the effective annual yield (APY) is always higher than the nominal contracted rate. For instance, a 6.80% nominal rate produces an effective annual yield of 6.98%.

Recurring Deposit vs Mutual Fund SIP

While both RD and SIP involve periodic monthly contributions, their risk and return profiles are fundamentally distinct.

An RD provides guaranteed principal protection and a fixed contractual interest rate backed by RBI deposit insurance (up to ₹5 Lakh per bank under DICGC).

A mutual fund SIP invests in market-linked assets (equities or bonds) where returns fluctuate with market conditions but offer potential inflation-beating long-term compounding.

TDS and Income Tax Rules on RD Interest

Interest earned on Recurring Deposits is fully taxable at your applicable income tax slab rate under 'Income from Other Sources'.

Under Section 194A of the Income Tax Act, banks deduct 10% TDS if total interest across branches exceeds ₹40,000 per financial year (₹50,000 for senior citizens). Depositors with income below the taxable threshold can submit Form 15G or 15H to prevent TDS deduction.