RD and FD both pay a fixed, pre-declared interest rate and both sit in the same "safe deposit" bucket in a bank's product list. But they solve different problems: an FD is for money you already have sitting idle; an RD is for money you haven't saved yet and want to force yourself to.
How each is structured
| Fixed Deposit | Recurring Deposit | |
|---|---|---|
| Investment | One lump sum, upfront | Fixed amount every month |
| Interest | Compounds on full principal from day one | Each installment compounds only from its own deposit date |
| Best for | A lump sum you don't need soon — bonus, maturity payout, sale proceeds | Building toward a goal from monthly income |
Why the same rate gives different effective returns
A bank might quote 7% on both an FD and an RD, but you shouldn't expect the same rupee return for the same total money in. In an FD, the entire principal earns 7% for the full tenure. In an RD, only the first installment earns interest for the full tenure — the last installment might earn interest for just one compounding cycle before maturity. The effective yield on an RD is always lower than the same nominal rate on an FD, simply because your money is invested for less time on average.
Tax treatment is identical
Interest from both is added to your income and taxed at your slab rate — there's no separate concessional rate for either. Banks deduct TDS under Section 194A once your interest income from that bank crosses ₹40,000 in a year (₹50,000 for senior citizens), across both RD and FD interest combined at that bank. You can avoid TDS (not the tax itself) by submitting Form 15G/15H if your total income is below the taxable threshold.
Premature withdrawal
Both typically carry a penalty — usually 0.5-1% shaved off the applicable rate for the period the deposit actually ran. An RD closed early loses the compounding benefit on every remaining installment you hadn't yet made, which makes breaking an RD proportionally more costly relative to its size than breaking an FD of the same value.
Picking between them
If you have a lump sum today and no immediate need for it, an FD earns more for the same rate. If you're saving toward something from monthly salary — and the alternative is not saving that money at all — an RD's slightly lower effective yield is a small price for the discipline of a fixed monthly commitment.
RD and FD aren't the only fixed-return options either — see how they stack up against PPF, NSC, and KVP in PPF vs NSC vs KVP vs FD: Which Should You Choose?
Compare the numbers
Use the RD Calculatorto project a recurring deposit's maturity value, or the FD Calculator for a lump sum, at your own rate and tenure.