Recurring Deposits (RDs)

Why RDs Matter

RDs help you build the habit of disciplined monthly saving. For example, setting aside ₹10,000 per month for 2 years gives you ₹2.4 lakh in principal and approximately ₹20,700 in interest at 7%.

They’re also useful for safe, predictable returns, especially for senior citizens. On a ₹2.5 lakh deposit at 7.5%, seniors can earn around ₹18,750 per year.

RDs work well when you're saving up for lump-sum debt repayments. For example, putting aside ₹15,000 per month into an RD for 2 years at 7% builds a fund of about ₹3.87 lakh to clear loans or cover big expenses.

Challenges of RDs

The biggest drawback is taxation. Interest from RDs is taxed as per your income slab. So, someone in the 30% tax bracket effectively reduces their 7% return to just 4.9% after taxes.

TDS applies if your interest crosses ₹40,000 per year (₹50,000 for senior citizens).

RDs also lack flexibility. If you break an RD early, banks typically reduce your interest rate by 1% and may apply penalties.

Finally, real returns can struggle against inflation. If inflation sits at 6.5%, your post-tax returns might not keep pace, gradually eroding the value of your money.

How to Manage RDs Effectively

Use a ladder strategy. Instead of locking ₹5 lakh into one RD, split it into multiple RDs of 1, 2, and 3 years. This keeps money accessible while also capturing better rates as they change.

If the Budget 2025 proposal for a 15% flat tax on RD interest is introduced, switching to it may improve post-tax returns. Until then, under the old tax regime, you can offset some of your total tax burden through deductions like ₹1.5 lakh under Section 80C, though RD interest itself isn’t directly deductible.

For senior citizens, always take advantage of the 0.5% extra interest many banks offer. For instance, a ₹3 lakh RD at 7.5% gives ₹22,500 annual interest, compared to ₹21,000 at 7%.

Enable auto-debit from your bank account to ensure you never miss a payment. Some banks charge penalties like ₹50 plus GST for missed instalments.

Final Thoughts

RDs help build a savings habit with guaranteed returns. They work best with careful tax planning and strategies to manage inflation. With stable interest rates and potential tax reforms ahead, RDs remain key in a balanced, low-risk portfolio. They are especially useful for short- to medium-term goals.