FD vs RD: Which Investment is Right for You?

Both Fixed Deposits and Recurring Deposits offer guaranteed returns. But they serve very different financial purposes. Lets compare them.

By Finance Editor•Updated: 27 January 2024

In India, when we think of "Safe Savings", the first two words that come to mind are Fixed Deposit (FD) and Recurring Deposit (RD). Both are offered by banks, both are regulated by RBI, and both offer DICGC insurance up to ₹5 Lakhs. So, what's the difference?

1. The Core Difference: Cash Flow

  • FD (Fixed Deposit): You have a lump sum amount (say ₹1 Lakh) today. You lock it for a fixed time.
  • RD (Recurring Deposit): You do not have a lump sum. You want to save small amounts (say ₹5,000) every month from your salary.

Think of FD as "Parking Money" and RD as "Building Money".

2. Interest Calculation Logic

Many people assume that if FD rate is 7% and RD rate is 7%, they will get the same return. This is incorrect.

Why?

In an FD of ₹1.2 Lakhs for 1 year @ 7%, the entire ₹1.2 Lakhs earns interest for 12 months.
Interest Earned ≈ ₹8,600

In an RD of ₹10,000/month for 1 year @ 7% (Total Investment ₹1.2 Lakhs):
- Month 1 installment earns for 12 months.
- Month 2 installment earns for 11 months.
- ... Month 12 installment earns for only 1 month.
Interest Earned ≈ ₹4,600

Key Takeaway: RD effective returns on the total corpus are always lower than FD because the money enters the account in stages.

3. Comparison Table

FeatureFixed Deposit (FD)Recurring Deposit (RD)
Investment TypeOne-time Lump sumMonthly Instalments
Tenure7 days to 10 years6 months to 10 years
LiquidityCan be broken anytime (with penalty)Can be closed prematurely (with penalty)
Tax Saving optionYes (5-Year Tax Saver FD)No Tax Saving RD available

4. Who Should Choose What?

Choose FD if:

  • You just received a bonus, sold a property, or retired.
  • You want to park money for a specific goal (e.g., parking down payment for a house for 6 months).
  • You are a senior citizen looking for regular income (using Monthly Payout FD).

Choose RD if:

  • You are a salaried employee or student.
  • You struggle to save money and need a disciplined, automated deduction.
  • You are saving for a short-term goal like a vacation or buying a phone in 12 months.

Conclusion

Both instruments are excellent for risk-averse investors. The choice depends entirely on whether you have the capital now vs later.

Compare the returns yourself using our FD / RD Calculator.

Frequently Asked Questions

Is RD interest taxable?

Yes, RD interest is fully taxable just like FD interest. TDS is also applicable if interest exceeds ₹40,000/year.

Can I miss an RD installment?

If you miss an installment, the bank may charge a penalty (around ₹1.5 per ₹100). If you miss multiple, the account might be closed.

Which gives higher return: FD or RD?

Mathematically, for the same amount and tenure, FD gives higher returns because the entire lump sum earns interest for the full period. In RD, the last installment earns interest only for 1 month.