What is a Recurring Deposit (RD)?
A Recurring Deposit (RD) is a term deposit offered by banks that allows customers to deposit a fixed amount every month for a specified tenure. At the end of the tenure, the customer receives the maturity amount which includes both the principal and the interest earned.
How is RD interest calculated?
RD interest is calculated using the compound interest formula applied to each monthly installment. Each installment earns interest for the remaining tenure. The formula is: M = R × [(1+i)^n - 1] / [1 - (1+i)^(-1/3)], where M is maturity value, R is monthly installment, i is monthly interest rate, and n is number of quarters.
What is the benefit of compounding in RDs?
Compounding in RDs means you earn interest on both your monthly installments and the accumulated interest of previous periods. This leads to exponential growth of your investment over time, resulting in higher returns compared to simple interest.
How does compounding frequency affect RD returns?
Higher compounding frequency leads to higher returns. For example, monthly compounding will yield more than quarterly compounding for the same interest rate and time period because interest is calculated and added to the principal more frequently.
Are RD interests taxable?
Yes, the interest earned on RDs is taxable as per your income tax slab rate. Banks deduct TDS (Tax Deducted at Source) if the interest earned exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year.
Can I withdraw my RD before maturity?
Yes, you can withdraw your RD before maturity, but it usually attracts a penalty. The penalty amount varies from bank to bank, typically 0.5% to 1% of the principal amount. The interest is paid for the period the deposit remained with the bank.