FD vs RD: Which Is Better?

Key Differences Between FD and RD

To make saving choices easier, let us first look at the difference between FD and RD with examples and then explore each in detail. The table below highlights the main differences:

What Is a Fixed Deposit (FD)?

Simply put, in FD, you give a sum of money to the bank or a financial institution for a stipulated period, and you get a guaranteed rate of interest on it. This certainty is why it is so popular with people who desire steady growth without fear of market fluctuations.

FD meaning is very simple—it's an agreement where your money remains locked for a specified period of time, say a week or ten years. The minimum amount required depends on the financial institution issuing the deposit, while there is no cap on the maximum investment. The rate of interest is determined when you invest and does not alter regardless of how the market goes. You can use an Fixed deposit calculator to get a clear idea of interest accrued over time.

For instance, if you deposit ₹1,00,000 in a 3-year FD at 7% interest, you get approximately ₹1,22,500 at maturity. This certainty and safety account for why FDs are still such a popular choice for most savers.

 

What are the Key Features of Fixed Deposits?

Fixed deposits come with certain standard features that make them a trusted savings option:

1. Lump sum investment: FDs are opened with a one-time deposit.
2. Flexible tenure: You can start an FD for as short as 7 days to as long as 10 years.
3. Assured returns: As the interest is fixed, the investor receives a guaranteed return throughout the tenure.
4. Interest rate: The interest rate varies across banks and financial institutions and depend on various factors. Senior citizens usually enjoy an additional interest rate on their deposits.
5. Payout choice: You can specify how you would like to receive the interest—monthly, quarterly, or at maturity.
6. Premature withdrawal: Premature withdrawals are allowed in FDs. However, they usually attract a penalty that reduces the effective return.
7. Loan facility: Some banks also extend loans against FDs, helping investors meet urgent cash needs without breaking their deposit. For instance, education or property loans can be availed using the FD balance as collateral.
8. Tax treatment: The interest you earn on FDs counts as part of your total income and is taxed according to your income tax slab¹. Banks also cut TDS on this interest. If you provide your PAN, the TDS rate is 10%; without PAN, it goes up to 20%. TDS is deducted only when annual interest crosses ₹50,000 for individuals below 60 years and ₹1 lakh in the case of senior citizens². If you choose 5-year FDs, you can enjoy tax deduction on the invested amount under Section 80C¹.
    

Benefits of Fixed Deposit

FDs offer safety coupled with certain growth, and hence are fit for short-term or long-term planning. Given below are the key benefits of FDs:

• Your capital is safe and gets fixed returns, independent of market volatility.
• Your FD tenure can range from 7 days to 10 years as per your requirements.
• FD interest rates tend to be higher compared to regular savings deposits.
• Withdrawals are possible in an FD before maturity, though a penalty may be imposed.
• Tax-saving FDs are eligible for deductions under Section 80C, up to ₹1.5 lakh.
• A fixed deposit calculator aids in financial planning by providing an estimate of interest and maturity value beforehand.
   

What Is a Recurring Deposit (RD)?

A recurring deposit is a disciplined method of saving money, particularly suited to salaried people or anyone with a regular income. Rather than keeping a lump sum, you pay a fixed amount of money each month into your RD account. Slowly but surely, these small monthly deposits, coupled with the assured interest provided by the bank, build up into a substantial maturity value. The term of an RD typically varies from 6 months to 10 years, providing flexibility according to your needs.

As RDs do not permit premature withdrawal, they induce regular savings. The interest is compounded quarterly and varies with banks, typically between 3% and 8.5%. Senior residents may receive an additional 0.5%–0.75% on deposits.

An online RD calculator can help you determine the interest accrued and amount available at maturity based on the investment amount, interest rate and tenure. For instance, if you deposit ₹5,000 every month for 5 years at a rate of 7% average interest rate, you may get approximately ₹3.6 lakh on maturity.

 

What are the Features of a Recurring Deposit?

Recurring deposits have a straightforward composition that simplifies them to comprehend and maintain. Listed below are some of the essential aspects of an RD account:

• Regular deposits: You invest a fixed amount every month for the specified tenure.
• Flexible beginning amount: Instalments can start with a low contribution, ensuring that RDs are available to everyone.
• Fixed maturity: The period of deposit is fixed beforehand, usually in the range of 6 months to 10 years.
• Competitive rates: Interest rates are usually comparable to fixed deposits for a similar period, with quarterly compounding.
• Discipline in savings: With monthly deposits, RDs encourage you to adopt a regular savings habit.
• Loan facility: Your bank can permit you to borrow against your balance of RD rather than encashing it.
• Auto-renewal option: A few banks offer automatic renewal on maturity so that your savings continue to grow.
• Taxation: The money you earn as interest on an RD is taxable. The original amount you deposit isn’t taxed, but the interest you receive gets added to your overall income and is taxed based on your income slab.
   

Benefits of Recurring Deposit

An RD is one of the simplest investment products to comprehend, hence it is suitable for new investors. Given below are the key benefits of opening an RD account:

• While market-linked products have variables, RDs guarantee fixed returns on your deposits.
• You can pick an investment duration between 6 months and 10 years, as per your needs.
• With a minimum deposit ranging from as low as ₹100 in certain banks, RDs are extremely accessible.³
• Certain banks allow early closure with minimal penalty, providing liquidity during emergencies.
• You may borrow 80–90% of your RD amount without splitting the deposit.³
• With its monthly contributions, RD assists in developing the habit of savings over a period of time.
   

Which Is Better – FD or RD?

The FD vs RD which is better question does not have a straightforward answer. It varies based on your financial circumstances and objectives. Both are secure, give fixed returns, and safeguard your capital, but the decision is in the way you want to save and utilise your funds.

A Fixed Deposit is the right option when you have a lump sum amount at your disposal already. It is particularly beneficial for individuals who need a consistent income, as banks permit monthly or quarterly interest payments. For example, numerous retirees invest their savings in FDs to create a regular income so that they can fund regular expenses. Even for young investors, an FD comes in handy when they earn an annual bonus or lump sum and want to park it safely.

A Recurring Deposit, however, is suited for disciplined savers who are able to deposit a fixed amount each month. It assists in building a sizable corpus over time without taxing your pocket. For instance, salaried persons usually create an RD to cover yearly expenses, such as school fees, or for future purposes like a holiday.

Thus, in choosing between FD and RD, think about your cash flow. If you have excess funds at the beginning, an FD may be considered; otherwise, an RD may be a convenient means of growing savings gradually.

 

Key Takeaway

1. Both Fixed Deposits (FDs) and Recurring Deposits (RDs) are safe, low-risk investments with guaranteed returns.
2. FD vs RD differ in terms of investment style, interest earned and payout, and tax-saving option.
3. FDs are one-time investments with assured returns and flexible maturity, suitable for retirees or regular income seekers.
4. RDs enable fixed monthly deposits of any small amount and suit salaried individuals.
5. Interest accrued on FDs and RDs is taxable under the Income Tax Act.
6. Liquidity is provided, but premature withdrawal incurs penalties in both FD and RD.
7. The decision between FD vs RD is based on your income stream, financial objective, and savings habits.
    

Conclusion

Recurring deposits and fixed deposits both provide you with secure and stable returns, but each is appropriate for a different purpose. If you have a sum of money to keep parked, FDs let you receive regular income and safeguard your capital. RDs, in contrast, enable you to save by making small monthly payments that accumulate over the period. The decision between the two is based on how much you can spare, your savings culture, and your long-term plans. Both plans promote financial security with minimal risk.

 

FAQs on FD vs RD

1. Can I break an RD before maturity?

   Yes, you can close an RD before maturity. However, banks will impose a penalty for the same, and the interest earned will be lowered too.

   
   

2. Which gives better returns: FD or RD?

   Both pay almost similar rates of interest. But FDs can give marginally higher returns because the entire amount is invested all at once, whereas for RDs, one invests monthly.

   
   

3. Is TDS applicable to FD and RD?

   Interest earned on FD and RD is taxable. A TDS of 10% is deducted if your annual interest exceeds ₹40,000 (₹50,000 for senior citizens). This increases to 20% if PAN details are not provided.³

   
   

4. Who should invest in RD instead of FD?

   RD suits salaried employees or anyone who wants to save small amounts at regular intervals but not invest a big amount all at once.

   
   

5. Are FD and RD safe investment options?

   Yes. Since RDs and FDs are not market-linked, they give assured returns.

   
   

6. Can I convert RD to FD later?

   Ideally, you cannot convert an RD directly to an FD. But after your RD matures, you can invest the maturity value into an FD.