The RDS service secures the database by encrypting the database volume with the specified encryption key from the KMS. Note that RDS does not encrypt the database at the application level; it encrypts the complete database volume at the OS file level.
The data stored in the database rows is in plain text; the application does not need the encryption key to decrypt the data. If an unauthorized user gets hold of the database volume, it will be of no use to him/her since it is encrypted, and without the encryption key it cannot be decrypted. The option to encrypt the database volume is available at the time of database creation.