Fixed Deposits vs Recurring Deposits: Which is Better?
- What is a Fixed Deposit (FD)?
- What is a Recurring Deposit (RD)?
- FD vs RD: Key Differences
- Advantages of Fixed Deposits
- Advantages of Recurring Deposits
- Which Gives Better Returns?
- When to Choose FD vs RD
- Choose Fixed Deposit if:
- Choose Recurring Deposit if:
- FD and RD Taxation in India
- Expert Insights
- Common Mistakes to Avoid
When it comes to safe investments in India, two products stand out—Fixed Deposits (FDs) and Recurring Deposits (RDs). Both are offered by banks and post offices, both are secure, and both guarantee returns. But they work differently and suit different types of savers. This article explains fixed deposit vs recurring deposit in detail so you can decide which is better for your financial goals.
What is a Fixed Deposit (FD)?
A Fixed Deposit is a lump sum investment with a bank or post office for a fixed tenure at a fixed interest rate. You invest once, lock your money, and earn interest until maturity.
- Minimum investment: As low as ₹1,000 (varies by bank).
- Tenure: 7 days to 10 years.
- Interest: 5%–8% per annum, higher for senior citizens.
- Payout: Interest can be received monthly, quarterly, annually, or at maturity.
What is a Recurring Deposit (RD)?
A Recurring Deposit is a systematic savings product where you deposit a fixed amount every month for a chosen tenure, earning interest like an FD.
- Minimum deposit: Usually ₹500 per month.
- Tenure: 6 months to 10 years.
- Interest: 5%–7.5% per annum, same as FDs in most banks.
- Payout: Principal + interest at maturity.
FD vs RD: Key Differences
| Factor | Fixed Deposit (FD) | Recurring Deposit (RD) |
|---|---|---|
| Investment Style | Lump sum one-time investment | Small monthly deposits |
| Best For | People with surplus funds | Salaried employees, disciplined savers |
| Tenure | 7 days – 10 years | 6 months – 10 years |
| Interest Rates | 5%–8% | 5%–7.5% |
| Payout Option | Monthly/quarterly/annually or on maturity | Only on maturity |
| Flexibility | Can choose payout frequency | Fixed monthly contribution required |
| Premature Withdrawal | Allowed with penalty | Allowed with penalty, but strict rules |
| Taxation | Interest taxable; TDS if >₹40,000 per year | Same as FD |
Advantages of Fixed Deposits
- Higher flexibility in choosing interest payout.
- Good for lump sum investments like bonuses, inheritances, or maturity proceeds.
- Senior citizens earn additional 0.25%–0.5% interest.
- Option to take loan against FD (up to 90% of value).
Advantages of Recurring Deposits
- Encourages disciplined monthly savings.
- Suitable for salaried individuals and students.
- No need for large initial capital.
- Ideal for short-term goals like travel, gadgets, or school fees.
Which Gives Better Returns?
Returns depend on interest rates and tenure, but typically:
- FDs may yield slightly higher returns since the entire amount earns interest from day one.
- In RDs, deposits are staggered monthly, so the overall return is slightly lower.
Example:
– ₹1,20,000 invested in FD at 7% for 1 year → ~₹1,28,400 at maturity.
– ₹10,000 per month in RD at 7% for 1 year → ~₹1,23,800 at maturity.
FD earns more since interest compounds on the full amount upfront.
When to Choose FD vs RD
Choose Fixed Deposit if:
- You have a lump sum amount to invest (bonus, inheritance, savings).
- You want regular interest income (monthly pension supplement).
- You prefer higher flexibility and option to take loans against deposit.
Choose Recurring Deposit if:
- You want to build savings habit with small monthly deposits.
- You have predictable income (salaried job).
- You are saving for short-term goals like school fees, gadgets, or a trip.
FD and RD Taxation in India
- Interest from both FD and RD is fully taxable as “Income from Other Sources.”
- TDS is deducted if interest exceeds ₹40,000 in a financial year (₹50,000 for senior citizens).
- No tax benefit unless you invest in a 5-year tax-saving FD (eligible under Section 80C).
Expert Insights
“Both FD and RD are excellent for conservative investors. The choice depends on whether you have surplus cash or want to save systematically,” says Adhil Shetty, CEO of BankBazaar. “For wealth creation, complement them with mutual funds or equities, but for safety and discipline, FD and RD remain unmatched.”
Common Mistakes to Avoid
- Breaking FDs/RDs frequently and losing interest.
- Not comparing rates across banks and post offices.
- Assuming FDs/RDs beat inflation—long-term, they don’t.
- Ignoring tax impact on returns.
FAQs
Which is safer, FD or RD?
Both are equally safe, as they are backed by banks and insured up to ₹5 lakh by DICGC.
Can I withdraw money before maturity?
Yes, but penalties apply. Banks may cut 0.5%–1% from the interest rate.
Which gives higher returns—FD or RD?
FD usually gives slightly higher returns since the lump sum earns interest from day one.
Can I open FD and RD both?
Yes, many investors use FDs for lump sums and RDs for monthly savings goals.
Key Takeaways
- FD: Best for lump sum investment, higher returns, regular income.
- RD: Best for salaried employees to save monthly and build discipline.
- Both are safe, guaranteed-return options but not ideal for beating long-term inflation.
- FD slightly outperforms RD in returns, but RD suits those without lump sums.
- For balanced savings, many Indians use both together.
FDs and RDs are not rivals—they are complementary. Choose based on your cash flow and goals, and use them as the secure foundation of your financial plan.
