FD vs RD: the difference, with an example
In a fixed deposit (FD) you put a lump sum in a bank for a fixed period at an agreed interest rate. In a recurring deposit (RD) you put in a fixed amount every month for a fixed period. Both pay interest, but an FD suits money you already have, and an RD suits saving from regular income.
Updated: · For education only. Not investment advice.
How an FD works
You deposit a lump sum for a period you choose, for example one year. The bank fixes the interest rate when you open the FD. You can take the interest at maturity along with the principal (cumulative), or receive it monthly or quarterly (non-cumulative), depending on the options your bank offers.
How an RD works
You choose a monthly amount and a period, and you deposit that amount every month. Each instalment earns interest only for the time it stays in the account, so the first instalment earns the most. At the end of the period you receive all the instalments plus the interest. Missing an instalment can attract a penalty, which differs from bank to bank.
A simple example (hypothetical rate)
Assume a rate of 7% a year, compounded quarterly, for one year. This rate is only for explanation. FD: you deposit Rs 1,00,000 once and receive about Rs 1,07,186 after one year, so the interest is about Rs 7,186. RD: you deposit Rs 5,000 every month for 12 months, so you put in Rs 60,000 in total and receive about Rs 62,311 at the end, so the interest is about Rs 2,311. The RD interest is smaller because most of the money stays in the account for less than a year. Real banks may compound differently, so use your bank figures.
The main differences
An FD needs the whole amount on day one, while an RD is built month by month. An FD earns interest on the full amount for the whole period, while each RD instalment earns interest only from its own date. An FD can give interest payouts during the term, while an RD pays at the end. Interest rates for both depend on the bank and the period, and an RD is not automatically higher or lower than an FD.
Safety, early exit and tax
Bank deposits are insured by DICGC up to Rs 5 lakh per depositor per bank, including principal and interest, and this covers all your deposits in that bank together. The limit can change, so check the DICGC website. If you break an FD or RD before maturity, the bank may charge a penalty or pay a lower rate. Interest is taxable as per the income tax rules, and the bank may deduct TDS; please check the current rules.
Common misunderstandings
- Assuming an RD always pays a higher rate than an FD, or the other way round. The rate depends on the bank and the period, so compare the actual rates.
- Ignoring the early-exit penalty. Breaking a deposit early can reduce the interest you earn.
- Forgetting that the DICGC cover is per bank, not per account, and includes interest.
Keep learning
Frequently asked questions
Can I break an FD before maturity?
Most banks allow it, but they may charge a penalty or pay a lower rate. Some special deposits do not allow early exit. Check your bank terms before opening.
What happens if I miss an RD instalment?
Many banks charge a small penalty for a late instalment, and repeated misses can lead to the RD being closed early. The rules differ by bank, so read the terms.
Is FD or RD interest taxable?
Yes, interest on deposits is taxable as per the income tax rules, and a bank may deduct TDS above certain limits. The limits can change, so check the Income Tax Department website or ask a tax professional.
Are bank deposits safe?
Deposits in banks regulated by the RBI are insured by DICGC up to Rs 5 lakh per depositor per bank, including interest. Any amount above that limit is not covered by this insurance.
Sources and further reading
This page is general education. It does not recommend any bank, deposit or interest rate. Rates, charges and tax rules change, so please check the latest details with your bank and the official sources.