Recurring Deposit (RD) Explained
A Recurring Deposit (RD) is a disciplined investment option offered by banks and financial institutions that allows individuals to save a fixed amount every month. Unlike a Fixed Deposit (FD) where you invest a lump sum once, an RD allows you to build a corpus steadily over time. It is an ideal instrument for salaried individuals or those with a regular income looking to cultivate a habit of saving while earning guaranteed returns.
How Can an RD Calculator Help You?
Calculating RD returns manually is notoriously difficult because each monthly deposit earns interest for a different duration. For instance, your first deposit earns interest for 12 months, while the last one earns for only 1 month. An RD calculator simplifies this:
- Eliminates Complexity: Automates the complex summation of quarterly compounded interest for every monthly installment.
- Future Planning: Gives you the exact maturity figure, helping you plan for goals like a vacation, wedding, or insurance premiums.
- Accuracy: Removes human error from the tedious calculation of varying tenures for each deposit.
- Comparison: Allows you to quickly switch between different tenure options (e.g., 1 year vs 3 years) to see which fits your timeline.
Formula to Determine RD Maturity
Most banks in India calculate RD interest by compounding it quarterly. Since each installment is deposited at a different time, the calculator treats each deposit as a separate investment and sums up the maturity value.
The Calculation Logic:
- M= Maturity Value
- P= Monthly Installment
- n= Number of Quarters
- r= Rate of Interest (%)
The calculator sums up the compound interest for every installment based on how many months it remains in the bank.
RD Calculation Example
Consider you invest ₹5,000 per month for 1 year (12 months) at an interest rate of 8%.
- Month 1 Deposit (₹5000): Earns interest for 12 months
- Month 2 Deposit (₹5000): Earns interest for 11 months
- ...and so on.
How to Use Finzony’s RD Calculator?
- Input Monthly Amount: Enter the fixed amount you plan to save every month.
- Set Interest Rate: Input the annual interest rate offered by your bank.
- Select Tenure: Choose the number of years you want to continue the deposit.
- Get Results: The calculator instantly computes the total principal deposited, interest earned, and final maturity amount.
Advantages of Using an RD Calculator
- Time-Saving: Performs complex iterations in milliseconds.
- Financial Discipline: Helps you visualize how small monthly savings grow into a large sum.
- TDS Awareness: While the calculator shows gross returns, it reminds you that interest on RD is taxable if it exceeds ₹40,000/year (₹50,000 for seniors).
- Error-Free: Provides precise figures based on the standard banking formula.
Frequently Asked Questions
Is TDS applicable on RD?
Yes, TDS is applicable on the interest earned from Recurring Deposits. If the interest income exceeds ₹40,000 in a financial year (₹50,000 for senior citizens), the bank will deduct TDS at 10%.
What is the minimum amount to start an RD?
This varies by bank, but you can typically start an RD with as little as ₹500 per month. There is usually no upper limit on the deposit amount.
Can I break my RD prematurely?
Yes, you can close an RD account before maturity. However, banks usually charge a penalty (often 1% lower interest rate) and pay interest only for the duration the money remained with the bank.
Is RD interest taxable?
Yes, the interest earned on RD is fully taxable. It is added to your total income and taxed according to your applicable income tax slab rates.
What is the tenure range for RDs?
RD tenures typically range from a minimum of 6 months to a maximum of 10 years, allowing flexibility for short-term and long-term goals.