Question 1

How is RD interest compounded?

Accepted Answer

RD interest is compounded quarterly in India (per RBI guidelines for banks). This means interest is calculated and added to your balance every 3 months, resulting in slightly higher returns than simple interest.

Question 2

Is RD interest taxable?

Accepted Answer

Yes, RD interest is fully taxable as "Income from Other Sources" at your applicable slab rate. TDS at 10% applies if total interest from all deposits at a bank exceeds ₹40,000/year (₹50,000 for senior citizens). Submit Form 15G (15H for seniors) to avoid TDS if income is below taxable limit.

Question 3

What happens if I miss an RD instalment?

Accepted Answer

A penalty of 1–2% per month on the missed instalment is charged. Some banks allow a grace period of 1–2 days. If 3–6 consecutive instalments are missed (varies by bank), the RD may be discontinued and premature closure charges apply.

Question 4

Can I break an RD prematurely?

Accepted Answer

Yes, but premature closure attracts a penalty of 0.5–1% off the applicable rate for the period held. For example, if the contracted rate was 6.5% and you close early, you may receive 5.5–6%. Senior citizens typically get penalty waivers.

Question 5

RD vs FD — which is better?

Accepted Answer

FD gives slightly higher effective returns because the full principal is deployed from day one (compounding on full amount). RD is better when you have a monthly surplus rather than a lump sum. For the same rate, a 12-month FD at ₹60,000 earns more than a ₹5,000/month RD for 12 months.

Feature	RD	FD	SIP
Investment mode	Monthly fixed	One-time lump sum	Monthly flexible
Typical returns	6–7% p.a.	6.5–7.5% p.a.	10–14%* p.a.
Returns guaranteed?	Yes	Yes	No (market-linked)
Risk level	None	None	Medium–High
Liquidity	Moderate (penalty)	Low (penalty)	High (no penalty)
Best for	Monthly surplus savings	Lump sum parking	Long-term wealth creation
Tax on returns	Taxable (slab rate)	Taxable (slab rate)	LTCG 10% above ₹1L
DICGC insured?	Yes (up to ₹5L)	Yes (up to ₹5L)	No (not a deposit)

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