An RD is like a fixed deposit you build up in instalments. You commit to depositing a set amount — for example ₹5,000 a month — for a term such as one to five years, and the bank pays a fixed rate on your growing balance.
It suits people who want FD-like safety and returns but do not have a lump sum to invest upfront. Each monthly deposit earns interest for the remaining months of the term.
For instance, ₹5,000 a month for 3 years at 7% grows to roughly ₹2 lakh, of which about ₹20,000 is interest. Like an FD, RD interest is taxable and the deposit is safe, but returns trail equity mutual funds over the long run.