Recurring Deposit
Also written RD · Recurring Deposit (RD) · Recurring Deposit Account
A bank deposit where you put in a fixed amount every month for a set term. It earns more than a savings account, and TDS applies beyond a stipulated amount of interest.
In plain language
A recurring deposit is a fixed deposit built in small monthly pieces.
Instead of handing the bank one large sum, you agree to put in the same amount every month for a period you choose. At the end of the term the bank returns everything you deposited plus interest.
It suits a person who does not have a lump sum but does have a steady monthly surplus: a salary earner, a shopkeeper with regular takings, a family saving for a wedding or a school fee due next year. It turns the habit the workbook preaches, "spend what is left after saving", into something the bank enforces every month.
How it works
The booklet's features of an RD (Chapter 4):
- A fixed amount is deposited at monthly intervals for a predetermined term.
- It earns higher interest than a savings bank account.
- TDS is applicable on interest accrued or earned beyond a stipulated amount.
- Senior citizens may get extra benefits on the interest rate.
- Tenure and rate of interest vary from bank to bank.
Like other bank deposits, an RD is covered by the Central Government deposit insurance scheme up to Rs 5 lakh per customer in that particular bank.
An RD is not the same as a Systematic Investment Plan (SIP), even though both take a fixed sum every month. The RD pays a rate of interest agreed at the start. The SIP buys mutual fund units at whatever the price is that month, so its value goes up and down with the market.
A worked example
All rates here are illustrative. Banks calculate RD interest using their own compounding rules; this simple version only shows the idea.
Anwar, a tailor in Lucknow, opens a 12-month RD of Rs 2,000 a month. He deposits Rs 24,000 in total.
Assume simple interest of 6% a year on each instalment for the months it stays with the bank. The first instalment earns interest for 12 months, the last for 1 month. Each month of Rs 2,000 earns Rs 2,000 × 6% ÷ 12 = Rs 10, and the instalments stay a total of 1 + 2 + … + 12 = 78 months. Interest = Rs 10 × 78 = Rs 780, so he gets about Rs 24,780 back.
The booklet happens to use the same Rs 2,000 a month for 12 months in its rupee cost averaging table for a mutual fund SIP. There, Rs 24,000 bought 466 units at an average price of Rs 51.50. The value of those units at the end depends on the market; Anwar's Rs 24,780 does not.
Why NISM asks about it
Chapter 4 (Savings Related Products) lists the RD in its table of bank accounts, next to the savings account, the BSBDA, the FD and the Special Bank Term Deposit. Questions test the features one line at a time: monthly fixed amount, higher interest than a savings account, TDS beyond a stipulated amount, extra rate for senior citizens. Chapter 5 is where the SIP comes in, and an RD-versus-SIP comparison is a natural question.
Common exam traps
- An RD is monthly; an FD is one lump sum. Both have a fixed term and a rate set at the start.
- "Higher interest than a savings account" is what the booklet says. It does not claim an RD beats an FD.
- TDS applies to RD interest beyond a stipulated amount, just as for an FD.
- An RD is not a SIP. The RD pays agreed interest; the SIP buys units at market prices and carries market risk.
- A Payment Bank can accept demand deposits but not recurring or fixed deposits. An RD needs a bank that is allowed to take term deposits.
- Rates and tenures differ between banks; there is no fixed national RD rate in the booklet.
Check yourself
1.A depositor places ₹14,00,000 at one bank across a savings account, two fixed deposits and a recurring deposit. How much is covered by deposit insurance?
- a)₹20,00,000, being ₹5 lakh for each of the four accounts
- b)₹5,00,000, because the cover is per customer in that particular bank regardless of the number of accounts
- c)₹14,00,000, because all bank deposits are fully guaranteed
- d)₹10,00,000, being ₹5 lakh for the savings account and ₹5 lakh for the deposits
Show the answer
Answer: (b) ₹5,00,000, because the cover is per customer in that particular bank regardless of the number of accounts
The cover is "up to a limit of ₹5 lakhs PER CUSTOMER IN THAT PARTICULAR BANK." All accounts held by the same customer at the same bank are added together, so four accounts share one ₹5,00,000 cover and ₹9,00,000 sits uninsured. Splitting the money into more accounts at the same bank changes nothing. The remedy is to change banks, not accounts: ₹5,00,000 + ₹5,00,000 + ₹4,00,000 across three banks brings every rupee inside the limit, with the same products at roughly the same rates. Two honest caveats. The cover matters only on the day a bank fails, which for a large scheduled commercial bank is a remote event — the rule exists for the tail. But chasing a rate materially above every other bank usually means moving towards smaller institutions, which is exactly when the limit stops being theoretical. As Chapter 3 puts it, "always check the potential risks and do proper due diligence when promised returns are unusually high."
2.Under the Central Government deposit insurance scheme, deposits are insured up to:
- a)₹1 lakh per account
- b)₹5 lakh per customer in that particular bank
- c)₹5 lakh per deposit
- d)₹10 lakh per customer across all banks
Show the answer
Answer: (b) ₹5 lakh per customer in that particular bank
"Central Government deposit insurance scheme ensures that all deposits are insured by the Government UP TO A LIMIT OF ₹5 LAKHS PER CUSTOMER IN THAT PARTICULAR BANK. So, even in case of a failure of a bank, depositors are assured that the Government will step in and return up to ₹5 lakhs of their savings in that bank." Three words carry the rule: per customer, per bank. It is not per account and not per deposit, so a person holding a savings account, two fixed deposits and a recurring deposit at the same bank has one ₹5 lakh cover across all four. Split the same money across three banks and each brings its own limit. The chapter adds that "for complete details on the scheme, one can refer the website of Reserve Bank of India, from time to time."
3.Which statement about interest on a savings bank account balance is correct?
- a)TDS is deducted and the interest is not taxable thereafter
- b)No TDS is deducted, but the interest is taxable in the hands of the depositor
- c)Neither TDS nor tax applies to savings bank interest
- d)TDS is deducted only for senior citizens
Show the answer
Answer: (b) No TDS is deducted, but the interest is taxable in the hands of the depositor
The chapter states it in one line: "NO Tax deducted at Source (TDS) on interest on SB account balance, BUT TAXABLE IN THE HANDS OF DEPOSITOR." Two different things are being described and candidates routinely collapse them. TDS is the bank cutting tax before paying you — on a savings account the bank does not do this. Taxability is whether the income belongs in your return — savings interest does. So the interest arrives whole and is still yours to declare; the bank's silence is not permission. Contrast the fixed deposit and recurring deposit, where "interest accrued or earned is subject to TDS beyond a stipulated amount" — and where many depositors then wrongly assume the deduction settles the matter. TDS is a collection mechanism, never a settlement of liability.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Systematic Investment PlanA facility to invest a constant amount into a scheme at regular intervals, which buys more units when the NAV is low and fewer when it is high and so averages the cost of acquisition down.
- Fixed DepositMoney placed with a bank for a fixed term at an agreed rate of interest. Safe and simple, but the interest is taxable, and TDS applies once interest crosses a stipulated amount.
- Payment BankA new category of bank that offers savings and current accounts, debit cards and remittances, but cannot give loans, issue credit cards, or accept fixed or recurring deposits.
- SavingThe difference between money earned and money spent. Saving becomes investment only when that surplus is committed for a period in the expectation of getting back a larger amount.
- Savings Bank (SB) accountAn ordinary bank savings account paying low, liquid interest, with no TDS on the interest itself — distinct from the zero-balance Basic Savings Bank Deposit Account.
- Special Bank Term Deposit SchemeA five-year, tax-saving bank term deposit eligible for a Section 80C deduction, with no premature withdrawal and no loan against it allowed.
- TDS — Tax Deducted at SourceTax the bank deducts before crediting certain interest to you — absent on savings bank interest but charged on fixed and recurring deposit interest beyond a stipulated amount the workbook does not state.
- Post Office Recurring DepositA five-year post office deposit built from monthly instalments of at least Rs 100, at government-fixed quarterly rates compounded quarterly and paid only at maturity, with no tax benefit.