How Banks Calculate Recurring Deposit Interest in India
Under Reserve Bank of India (RBI) guidelines, interest on recurring deposits is not calculated on a simple interest basis; it is compounded quarterly (every 3 months). Because a fresh instalment is deposited every month, each instalment remains in the bank for a different duration and earns compound interest accordingly: M = P × (1 + r/4)^(4 × t), where t decreases by one month for each subsequent instalment.
Taxation & TDS on Recurring Deposits (Section 194A)
Under Section 194A of the Income Tax Act, interest earned on recurring deposits is fully taxable according to your applicable slab rate. Banks are legally required to deduct 10% TDS if the aggregate interest earned on fixed and recurring deposits crosses:
- ₹40,000 per financial year: For non-senior citizen depositors.
- ₹50,000 per financial year: For senior citizens (aged 60 years or above).
Frequently Asked Questions
Can I withdraw an RD prematurely?
Yes. Premature closure is permitted in Indian banks, but the bank typically deducts a penal interest of 0.5% to 1.0% from the interest rate applicable for the period the deposit was actually maintained.
Is there any loan facility against a Recurring Deposit?
Yes. Most commercial banks and post offices allow you to take a loan or overdraft of up to 90% of the accumulated RD value at an interest rate that is typically 1% to 2% higher than the deposit rate.
What is the minimum tenure for an Indian bank RD?
The minimum tenure for a bank recurring deposit is 6 months, and the maximum allowable tenure is 10 years (120 months).