FD vs RD: Which Is Better, and for Whom?

“FD or RD?” is the wrong first question. The right one is where is the money right now? If it is already in your account, a fixed deposit (FD) puts all of it to work today. If it will arrive in monthly pieces from your salary, a recurring deposit (RD) puts each piece to work the month it arrives. Both are bank or post-office deposits with a rate fixed at the start, both generally compound interest quarterly (the practice at Indian banks and the post office), and both are about as safe as a bank account. The difference is timing, and timing is what every number below comes down to.

Every figure in this guide is produced by the same functions that run our FD calculator and RD calculator. The rate used throughout, 7% a year, is an example rate only. It is not any bank’s rate; banks and the post office publish their own rates, which change from time to time, and you should put the rate you are actually offered into the calculator.

How each one earns interest

Fixed deposit. You deposit a lump sum once, for a fixed term, at a fixed rate. In a cumulative FD the interest is added to the deposit every quarter and itself earns interest; at maturity you get principal plus all the compounded interest. In a non-cumulative FD the interest is paid out monthly or quarterly instead, and the principal comes back at the end.

Recurring deposit. You commit to a fixed monthly instalment for a fixed term, at a rate fixed when you open it. Each instalment earns interest from the month it is deposited until maturity, compounded quarterly. The first instalment earns interest for the whole term; the last one earns interest for only a month.

That last sentence is the whole story. In an RD, your money is deposited on average for only about half the term. In an FD, all of it is deposited for the full term.

Worked example: ₹60,000 over one year

Say you can put ₹60,000 into a deposit this year, at the example rate of 7%.

• FD: ₹60,000 deposited today for 12 months → maturity ₹64,311.54, interest ₹4,311.54
• RD: ₹5,000 a month for 12 months (the same ₹60,000 in total) → maturity ₹62,310.66, interest ₹2,310.66

The FD earns ₹2,000.88 more on the same total, at the same rate. The RD is not worse value; it simply holds less money for less time. If you had ₹60,000 on day one and chose the RD, you would be leaving ₹2,000.88 on the table. If you had only ₹5,000 a month, the FD was never an option: the honest comparison for you is the RD against leaving the money in a savings account.

The gap grows with the term

The longer the term, the longer the FD’s head start lasts. Same instalment, same example rate, same total deposited:

Over five years, ₹5,000 a month in an RD grows to ₹3,59,663.95 on ₹3,00,000 deposited. The same ₹3,00,000 as a single FD on day one grows to ₹4,24,433.46. But notice what the table does not say: it does not say the RD is a bad product. It says a lump sum is worth more than the same money arriving slowly, which is true of every investment.

A useful way to see the RD from the inside: its first ₹5,000 instalment, held for the full 60 months, grows to ₹7,073.89, exactly as a 60-month FD of ₹5,000 would. Its last instalment, held for one month, grows to only ₹5,029.00. An RD is really 60 small FDs of shrinking length, and the calculator adds them up.

Who should choose an FD

• You have a lump sum now. A bonus, a maturing policy, sale proceeds, a gift. Deposit it today; every month it waits in a savings account is lost compounding.
• You want a regular payout. A non-cumulative FD can pay interest monthly or quarterly, which suits retirees and anyone living on interest income. An RD cannot pay out before maturity.
• You want to pick the term precisely. FDs are available for terms from a week to ten years at most banks, so you can match a known date: a fee due in 14 months, a wedding in 3 years.
• You want to stagger maturities. Three FDs of ₹1,00,000 for 1, 2 and 3 years at the example rate mature at ₹1,07,185.90, ₹1,14,888.18, ₹1,23,143.93, one each year. This “ladder” gives you liquidity every year without breaking a deposit.

Who should choose an RD

• You are saving from salary. The instalment is debited automatically on a fixed date. Nothing to remember, nothing to decide, no temptation to skip a month.
• You want FD-style safety for a goal you are saving towards. A school fee due in two years, a down payment in three. The rate is fixed on day one, so you know the maturity amount to the rupee before you start; a SIP cannot promise that.
• You cannot yet afford an FD worth opening. Many banks have a minimum FD amount; RDs start at a few hundred rupees a month at the post office and many banks.

Five differences beyond the interest

1. Missed instalments. An FD has no instalments to miss. An RD charges a penalty for late instalments, and repeated defaults can lead the bank to close the account. Check the terms before opening.
2. Premature withdrawal. Both can be broken early, usually with a penalty on the rate, and the post office has its own lock-in rules for both products. Breaking a five-year RD in year two typically earns the rate applicable to the term actually completed, minus a penalty, not the five-year rate.
3. Loan against deposit. Most banks lend against both an FD and an RD, typically up to a high percentage of the balance, which is often cheaper than breaking the deposit. The RD’s balance is small early on, so the loan is small early on.
4. Tax. Interest on both is fully taxable as “income from other sources” at your slab rate, in the year it accrues or is paid. Banks deduct TDS on FD and RD interest above the threshold set by the Income Tax Act; the current threshold and the Form 15G/15H rules are on the Income Tax Department’s site, not in this guide. Neither product is tax-free, and only a five-year “tax-saver” FD at a bank qualifies for a Section 80C deduction, with no premature withdrawal.
5. Rate for the whole term. Both lock the rate. If rates rise after you open, a long FD or RD keeps the old rate; if rates fall, it keeps the higher old rate. Nobody can tell you which way they will move, which is another argument for laddering FDs.

The combination most people actually need

The question “FD or RD” usually has the answer “both, for different money”:

• Lump sums go into FDs, ideally laddered across one to three years so something matures every year.
• Monthly savings go into an RD until they become a lump sum, then roll the maturity into an FD.
• Money you will not need for five years or more may belong elsewhere: our PPF guide covers a tax-free alternative with its own lock-in, and the SIP vs lumpsum guide covers equity, which is a different risk altogether.

Common mistakes

• Choosing the RD because “it has the same rate”. Same rate is not same interest. ₹60,000 as an FD earned ₹4,311.54 in the example above; the same ₹60,000 as an RD earned ₹2,310.66. If the money is already with you, use the FD.
• Choosing the FD and then not funding it for months. If you plan to save ₹5,000 a month and then open an FD with the pile at year-end, your money earned savings-account interest for an average of six months. The RD would have paid deposit rates from month one.
• Comparing a bank’s “effective yield” with its “rate”. Some advertisements quote the annualised yield after compounding for long terms, which is higher than the rate. Our FD calculator shows the effective yield separately so you can compare like with like; for the five-year FD above it is 7.19% against the stated 7%.
• Forgetting tax. A 7% deposit for someone in the 30% slab keeps roughly 4.9% after tax, before cess. Compare post-tax figures when you weigh deposits against other options.
• Ignoring the deposit insurance limit. Bank deposits are insured by DICGC up to a limit per depositor per bank; the current limit is on DICGC’s site. Very large sums may be safer spread across banks.

The formulas our calculators use

FD, cumulative, compounded n times a year:
  A = P × (1 + r/n)^(n × t)
  P = principal, r = annual rate ÷ 100, t = years, n = 4 for quarterly

RD, quarterly compounding, each instalment held for its own months:
  M = Σ (k = 1 to n)  R × (1 + r/4)^((n − k + 1) ÷ 3)
  R = monthly instalment, n = months

Change the rate, amount and term in the FD calculator or the RD calculator to see your own numbers.

Frequently asked questions

Is an RD better than an FD? Not for the same money on the same day: an FD of the whole amount earns more because all of it compounds for the whole term. An RD is better than waiting to build a lump sum, because each instalment starts earning the month it is deposited.

Can I open an RD with a lump sum? You can, but there is no reason to. Open an FD instead; it earns more on the same amount at the same rate.

Which is safer? Both are deposits with the same bank or post office, covered by the same deposit insurance at banks and the same sovereign backing at the post office. Neither carries market risk.

Does the post office RD work the same way? The post-office RD has its own fixed term, instalment rules and penalties, published on India Post’s site. The quarterly-compounding arithmetic in our calculator is the same.

What rate should I use in the calculator? The one your bank or the post office is actually offering for that term and that amount, today. The 7% in this guide is an illustration, nothing more.