💰 INVESTMENT · DIRECT ANSWER
RD vs FD: Why the Same Interest Rate Pays You Roughly Half
THE DIRECT ANSWER
An FD and an RD at the same rate do not pay the same interest. Put ₹1,20,000 into a 1-year FD at 7% and you earn about ₹8,623. Save the same ₹1,20,000 as ₹10,000 a month into a 1-year RD at 7% and you earn about ₹4,621: roughly 54% of the FD interest. Nothing is wrong with the RD. The money simply spends less time in the bank.
Is an RD or an FD better?
Neither is better. They answer different questions.
An FD (fixed deposit) is for money you already have. You hand the bank a lump sum today and it earns interest from day one.
An RD (recurring deposit) is for money you do not have yet. You commit to depositing a fixed amount every month, and each instalment starts earning only from the day it arrives.
The confusion starts when both are advertised at the same headline rate. People assume the same rate means the same return. It does not, and the gap is much larger than most savers expect.
Why does an RD earn less at the same rate?
Because interest is paid on money × time, and an RD gives the bank far less time.
In a 12-month FD, every rupee sits with the bank for the full 12 months.
In a 12-month RD, only the first instalment sits for 12 months. The second sits for 11. The last one sits for a single month. On average, your money is deployed for roughly half the period: so it earns roughly half the interest.
💡 THE KEY INSIGHT
The rate is not the return. The rate multiplied by how long each rupee is invested is the return. An RD at 7% and an FD at 7% are the same rate applied to very different amounts of time.
What do the actual numbers look like?
Same total money, same rate, same bank, same year.
| Fixed deposit | Recurring deposit | |
|---|---|---|
| How you pay in | ₹1,20,000 once | ₹10,000 × 12 months |
| Total deposited | ₹1,20,000 | ₹1,20,000 |
| Rate | 7% p.a. | 7% p.a. |
| Maturity after 1 year | ₹1,28,623 | ₹1,24,621 |
| Interest earned | ₹8,623 | ₹4,621 |
| Interest vs FD | 100% | 54% |
Over five years the gap widens in rupee terms:
| 5 years at 7% | Deposited | Maturity | Interest |
|---|---|---|---|
| FD (₹6,00,000 upfront) | ₹6,00,000 | ₹8,48,867 | ₹2,48,867 |
| RD (₹10,000 × 60) | ₹6,00,000 | ₹7,19,328 | ₹1,19,328 |
That is a difference of about ₹1.29 lakh on identical deposits at an identical rate: purely because of when the money arrived.
Assumptions
7% p.a. with quarterly compounding, the standard convention at most Indian banks. Rates are illustrative: check your bank's current card rate. Figures are pre-tax and exclude any penalty for missed RD instalments or premature withdrawal. Actual maturity can vary slightly with the bank's rounding and value-dating rules.
Which should I choose?
The honest answer is that the choice is usually made for you by whether the money already exists.
Choose an FD when
- You already hold the lump sum: a bonus, maturity proceeds, sale of an asset
- You know you will not need it before the term ends
- You want the maximum interest that a fixed rate can give you
Choose an RD when
- You are saving out of monthly salary and the lump sum does not exist yet
- You want the discipline of an automatic monthly debit
- You are building towards a near-term goal: a deposit, a fee, a trip
🟡 THE PRACTICAL POINT
Do not compare an RD against an FD and conclude the RD is a bad product. Compare the RD against what would otherwise have happened to that ₹10,000 a month: which, for most people, is that it gets spent. An RD earning ₹4,621 beats an intention earning nothing.
Is RD or FD interest taxed differently?
No. Interest from both is added to your income and taxed at your slab rate. Neither enjoys a special exemption. Banks also deduct TDS on deposit interest above a threshold, and that threshold differs for senior citizens.
Thresholds and TDS rules change between financial years: check the current limits on the Income Tax Department site before relying on a specific number.
The practical consequence: if you are in a higher tax bracket, the post-tax return on both products falls meaningfully, which is worth weighing before locking money in for five years.
The one-line summary
An FD pays more because the bank holds your money longer, not because it is a better product. Use an FD for money you have. Use an RD for money you are still earning. Just do not expect the same rate to produce the same rupees.
Frequently asked questions
Neither is better in isolation. An FD pays more interest on the same total money because every rupee is deployed for the full term. An RD is the right choice when you are saving from monthly income and do not have a lump sum. At 7% over one year, ₹1,20,000 in an FD earns about ₹8,623 while the same amount saved through a monthly RD earns about ₹4,621.
Because interest depends on how long each rupee stays invested. In an RD, only the first instalment earns for the full term; the final instalment earns for one month. On average your money is invested for about half the period, so it earns about half the interest.
At 7% p.a. with quarterly compounding, ₹10,000 a month for 60 months matures at roughly ₹7,19,328 on ₹6,00,000 deposited: about ₹1,19,328 of interest, before tax. The exact figure varies with your bank's rate and compounding convention.
Yes. Interest from both recurring and fixed deposits is added to your total income and taxed at your slab rate. Banks also deduct TDS above a specified threshold, with a higher threshold for senior citizens. Check current limits with the Income Tax Department, as they change between financial years.
Usually yes, but banks typically apply a penalty: commonly a reduction of around 0.5% to 1% on the applicable rate, and interest may be recalculated at the rate for the period actually completed rather than the rate you booked. Check your bank's specific premature-withdrawal terms before committing money you may need.
Work out your own numbers: FD calculator · RD calculator
All figures are illustrative and calculated at the stated assumptions. This is educational content for educational purposes only, not personalised investment advice. Deposit rates vary by bank and change over time. Please verify current rates with your bank and consult a SEBI-registered investment adviser for personalised advice.