How recurring deposit interest is actually calculated
Every RD instalment earns interest for a different length of time, compounded quarterly. Here is the actual formula, worked through with real numbers.
Most people assume a recurring deposit pays interest on the total they have put in. It does not. Each monthly instalment is treated as its own small deposit that earns interest only from the day it lands until maturity — so your first instalment earns for the whole term and your last one earns for barely a month.
That single detail explains why an RD maturity figure never matches the back-of-envelope number.
The formula banks actually use
Indian banks compound RD interest quarterly, not monthly. Each instalment is compounded from its own deposit date:
M = Σ P × (1 + r/4)^(4n/12)Where P is the monthly instalment, r is the annual rate as a decimal, and n is the number of months that particular instalment stays invested.
The summation matters. You are not applying one formula once — you are applying it once per instalment and adding up the results.
Worked through with real numbers
Take ₹5,000 a month for 12 months at 7% a year.
| Instalment | Months invested | Value at maturity |
|---|---|---|
| 1st | 12 | ₹5,359 |
| 2nd | 11 | ₹5,329 |
| 6th | 7 | ₹5,207 |
| 12th | 1 | ₹5,029 |
You deposit ₹60,000 in total and receive roughly ₹62,150 back. The effective return is about 3.6% of the amount deposited — not 7% — because the average rupee was only invested for about half the term.
Try it with your own numbers
Where people get caught out
- Comparing an RD rate to an FD rate directly. A 7% FD pays 7% on the full amount for the full term. A 7% RD does not. The FD wins on identical money, which is why an RD is a savings habit rather than an optimisation.
- Forgetting TDS. Banks deduct tax at source once interest across your deposits crosses ₹40,000 in a year (₹50,000 for senior citizens). The maturity figure a calculator shows is pre-tax.
- Missing an instalment. Most banks charge a penalty and some reduce the applicable rate for the whole deposit.
- Breaking it early. Premature closure usually pays 1% below the rate applicable for the period the money actually stayed.
Is an RD or an SIP better?
They answer different questions. An RD gives you a guaranteed, known figure — useful when the money has a date attached, like a deposit or a fee due next year. An SIP has no guarantee but has historically beaten deposit rates over long horizons.
The honest framing: use an RD for money you will need on a known date, and an SIP for money you might need much later.
Where these figures come from
- Reserve Bank of India — Policy rates, lending and deposit regulation, credit card rules
Published by FinClamp. This guide is information, not financial advice — see the disclaimer.