Investing · 5 min read

FD vs. RD: Which One Actually Fits What You're Saving For

They're not competing for the same money — one is for a lump sum you already have, the other for building one up.

What each one is for

A Fixed Deposit (FD) locks in a lump sum you already have, for a fixed tenure, at a fixed rate. A Recurring Deposit (RD) is for building up an amount over time from monthly contributions, when you don't yet have a lump sum but do have steady monthly income.

The honest comparison isn't 'which has a better rate' — it's 'which matches what you actually have to save right now.' If you have ₹1,00,000 sitting idle, that's an FD question. If you have ₹5,000/month you can set aside but no lump sum yet, that's an RD question.

Why RD grows less than an FD of the 'same' total

An RD's first monthly deposit compounds for the whole tenure; its last deposit barely compounds at all, since it's only in the account for the final period. An FD of the equivalent total, deposited all at once, has every rupee compounding for the full tenure from day one. This is why an RD's maturity value is always somewhat lower than an FD holding the same total principal for the same period and rate — it's not a worse product, it's a mathematically different one for a different starting situation.

Both are taxed the same way

Interest from both FDs and RDs is added to your income and taxed at your full marginal slab every year it accrues — there's no long-term capital-gains-style concession for either, unlike equity investments. This matters when comparing after-tax returns against other options like debt mutual funds.

Worked example — ₹1,00,000 FD vs. ₹5,000/month RD for roughly the same period

FD: ₹1,00,000 at 7% for 5 years (quarterly compounding) matures to approximately ₹1,41,478.

RD: ₹5,000/month at 6.8% for 3 years (a total of ₹1,80,000 deposited) matures to approximately ₹2,01,184 — more total money in, but note the RD's total contribution (₹1,80,000) is nearly double the FD's principal (₹1,00,000), so this isn't an apples-to-apples 'which is bigger' comparison, it's showing each product doing its own job with the money actually available for it.

Common mistakes

Comparing an RD's total maturity value directly against an FD's without accounting for how much total money went into each.
Forgetting that RD/FD interest is taxed annually at your full slab, unlike equity's more favorable long-term capital gains treatment.
Choosing between them based on rate alone, when the real deciding factor is usually just whether you have a lump sum or a monthly surplus.

Frequently asked questions

What's the difference between an FD and an RD?

An FD locks in a lump sum you already have at a fixed rate for a fixed tenure; an RD builds up an amount over time from monthly contributions when you don't yet have a lump sum. They fit different starting situations, not a 'which is better' question.

Are FD and RD interest taxed the same way?

Yes — interest from both is added to your income and taxed at your full marginal slab every year it accrues, unlike equity investments which get long-term capital-gains treatment.