Why RD interest compounds quarterly, not monthly

A recurring deposit feels like it should compound monthly — you’re paying into it every month, after all. But the interest itself is only actually calculated and added to your balance once a quarter. That mismatch is baked into the standard bank formula, and it’s easy to get wrong if you try to estimate an RD’s maturity value by hand.

Monthly instalments, quarterly interest credit

Every RD instalment starts earning interest from the day it’s deposited, but the accumulated interest is only actually credited to the balance once every quarter — not every month. This isn’t a choice the depositor makes; unlike fixed deposits, where a bank sometimes offers monthly or annual compounding as an option, recurring deposits are conventionally always compounded quarterly. India Post’s own 5-year RD scheme, one of the most widely held small-savings instruments, uses the identical quarterly-compounding formula banks use.

The formula, worked through

The standard bank/post office formula folds monthly deposits and quarterly compounding into a single closed form:

M = R × [(1+i)ⁿ − 1] ÷ [1 − (1+i)^-1/3], where R is the monthly deposit, i is the quarterly rate (the annual rate ÷ 400, which converts it to a decimal and splits it into a quarterly figure in one step), and n is the number of quarters.

Run at this calculator’s own default inputs — ₹5,000 a month at 7% p.a. for 5 years (20 quarters, quarterly rate 1.75%):

Why a simple estimate understates it

A common back-of-envelope check treats an RD like simple interest on the average balance held over the tenure, rather than working through the real compounding formula above. Run on the same ₹5,000/month, 7%, 5-year deposit, that shortcut lands short of the real figure.

The gap isn’t a rounding error, and it grows with tenure — the same shortcut applied to a longer, larger RD understates the real value by far more.

The takeaway has nothing to do with quarterly compounding being unusually generous. Compounding math doesn’t reduce cleanly to a mental shortcut, and the gap between a rough guess and the real number widens the longer the RD runs. Worth running the actual formula (or a calculator that does), rather than estimating, once the tenure stretches past a year or two.