FD vs RD for short-term savings

How each product works

Banks and post offices in India offer both products, and many other countries have close equivalents, such as term deposits, certificates of deposit and regular saver accounts. The mechanics are simple, and the difference is in how money enters the account.

• Fixed deposit. You deposit one amount, choose a tenure from a few days to several years, and receive the maturity amount at the end. Interest is commonly compounded quarterly if you choose the cumulative option, or paid out monthly, quarterly or yearly on the payout option.
• Recurring deposit. You commit to a fixed monthly instalment for a fixed number of months, commonly 6 months to 10 years. Interest is usually compounded quarterly, and the maturity amount is paid at the end. Missing instalments can bring a penalty.

Both give a rate that is set at the time of opening, which makes the outcome predictable. That predictability is why they suit goals with a date, such as school fees, a vehicle down payment or travel next year. They do not suit goals where you hope to beat inflation by a wide margin, because the rate is modest and interest is taxable.

When each helps

Choose an FD when you already have a lump sum and want a known maturity date. Choose an RD when you want to save from monthly income toward a goal a few months or years away. A short list helps.

How to compare them step by step

1. Write your goal amount and the months you have.
2. If cash is ready now, check maturity with the FD calculator.
3. If you will save monthly, check the RD calculator and compare interest earned for similar tenures.
4. Use the rate printed on the bank's advice, since rates differ by tenure, bank and customer type.
5. Estimate tax on the interest at your slab and subtract it to get the after-tax result.
6. Compare the after-tax result with inflation over the same period.

The FD calculator answers page and the RD calculator answers page explain the inputs and the compounding options. For step-by-step screens, see the FD calculator guide and the RD calculator guide.

Worked example: 2 lakh FD against a 5,000 a month RD

FD. ₹2,00,000 at 7% for 3 years, compounded quarterly. The quarterly rate is 7 / 4 = 1.75%. There are 12 quarters. Maturity = 2,00,000 x (1.0175)¹² = 2,00,000 x 1.2314 = about ₹2,46,288. Interest earned is ₹46,288. With simple interest the same deposit would give ₹2,42,000, so quarterly compounding adds about ₹4,288.

RD. ₹5,000 a month for 36 months at 7%, with quarterly compounding. Total deposited is 5,000 x 36 = ₹1,80,000. The first instalment earns for 36 months, the last for 1 month. Maturity is about ₹2,00,686 and interest is about ₹20,686. The average instalment sits in the account for about 18 months, so interest is a fraction of what the FD earned.

Like for like. If you had ₹1,80,000 on day one and placed it in an FD for the same 3 years, you would have ₹2,21,659. That is ₹20,973 more than the RD. The gap does not mean the FD is a better product. It shows the cost of not having the money upfront, which is the situation an RD is made for.

Working backward from a goal date

Most people start with a goal, not a deposit. Suppose you need ₹3,00,000 in 2 years and the bank offers 7% on both products.

1. One-time FD. Deposit = 3,00,000 / (1.0175)⁸ = about ₹2,61,123 today.
2. RD. Monthly instalment for 24 months = about ₹11,619, so you deposit ₹2,78,856 in total.
3. Difference in cash committed. The RD route needs ₹2,78,856 of your money in total. The FD route needs ₹2,61,123. The extra ₹17,732 in the RD route is the extra principal required because each instalment earns for a shorter time.

For a smaller one-year goal of ₹1,00,000 at 6.5%, an FD today needs about ₹93,756, while an RD needs about ₹8,046 a month, a total of ₹96,551. In a one-year horizon the difference between the two paths is limited, so the real question is whether you can spare the lump sum or the monthly amount. The blog on FD or RD for a one year goal works through that choice, and the savings calculator projects a general savings plan with monthly additions.

How an RD builds up instalment by instalment

The RD formula looks opaque, so it helps to see one built from pieces. Take a 12 month RD of ₹10,000 a month at 7% with quarterly compounding. Each instalment is treated as a separate small deposit that earns for the months left. The growth for an instalment with m months left is 10,000 x (1.0175)^{m / 3}.

Summing all twelve instalments gives a maturity of about ₹1,24,621. Total deposits are ₹1,20,000, so interest is ₹4,621. Compare that with a 12 month FD of ₹1,20,000 at 7%, which would mature at about ₹1,28,623, with interest of ₹8,623. The RD earns about 54% of the FD's interest because the average instalment is invested for roughly half the year. The effective yield on the RD, measured against the money you deposited on average, is similar to the FD rate. Do not read the lower interest as a lower rate.

How rate and tenure move an FD

A deposit is easy to size once you see how sensitive it is to each input. Here are maturity values for ₹1,00,000 in an FD with quarterly compounding.

A half point of rate on ₹1,00,000 is worth about ₹528 in the first year and about ₹3,517 over 5 years. That is real money, but it is small next to the effect of choosing a tenure that matches your goal date. Locking funds for 5 years to earn 0.5% more makes no sense if you need the money in 2 years and will pay a penalty to get it out.

Equivalents outside India

The names change, but the logic carries over. In the USA, a certificate of deposit (CD) works like an FD, with early withdrawal penalties usually stated as months of interest. In the UK and Australia, term deposits and regular saver accounts play the same roles. Some European banks offer fixed-term deposits (Festgeld, dépôt à terme) and monthly savings plans. Regular saver accounts often cap the monthly amount and pay a higher rate for a limited 12 month period, which is similar to an RD.

If you use the calculators for another currency, type the amounts in that currency and use the bank's quoted rate and compounding. Many non-Indian deposits compound monthly or annually, not quarterly. A ₹1,00,000 equivalent at 5% compounded annually for 3 years gives ₹1,15,763, while quarterly compounding gives ₹1,16,075. The gap is small but real, so match the compounding in the tool to the product. Deposit rules, tax treatment and protection schemes vary, so rely on your local bank and tax authority for final details.

Sizing an RD instalment for a fixed goal

Say you want ₹1,50,000 for a course fee in 18 months and the bank offers 6.8% on an 18 month RD. The instalment that reaches the goal is about ₹7,897 a month (a total deposit of ₹1,42,142). Rounded to a practical ₹8,000, the maturity would be about ₹1,51,960, which clears the target with a small cushion.

If your budget allows only ₹7,000 a month, the maturity is about ₹1,32,965, which leaves a gap of ₹17,035. You have three ways to close it: lengthen the tenure, add a one-time FD of ₹15,500 today to cover the gap, or reduce the goal. The third option is often the honest one. Run each in the RD calculator and keep the one that fits your cash flow without strain.

A last practical point is timing. If the course fee is due in month 18, set the RD to mature in month 17 or earlier. A deposit that matures a week after the due date forces a bridge loan or a late fee, and both cost more than the interest you earned.

Year by year on the 2 lakh FD

Interest grows each year because it earns interest itself: ₹14,372 in year 1, ₹15,405 in year 2 and ₹16,512 in year 3. The table also shows the amount that is taxable in each year on a cumulative deposit, which is what the tax section below uses.

What tax does to the result

Interest on FD and RD is generally taxed as income at your slab rate in India, and it is taxed each year as it accrues on cumulative deposits, not only at maturity. Say ₹2,00,000 earns about ₹14,372 in year one at 7% with quarterly compounding. For someone in the 30% slab, tax is about ₹4,312 (before cess). The after-tax interest is ₹10,060, which is an effective yield of 5.03%.

Against inflation of 5%, the real return is 0.03% for the 30% slab. For someone with no tax payable, the real return is 2.08%. This is why a deposit is a good place for money you need by a date, but a weak choice for money you want to grow over many years. The inflation impact calculator shows how the purchasing power of a goal changes, and the blog on real return after inflation and tax walks through the arithmetic.

Banks may deduct TDS when yearly interest from deposits at a bank crosses a threshold, and the threshold differs for senior citizens. Check the current limit with your bank. If your total income is below the taxable level, a form submitted to the bank can stop TDS. TDS is an advance on your tax, not an extra tax, and you can claim credit for it in your return.

Breaking a deposit early

Premature closure reduces the rate. A common bank rule is to pay the rate applicable for the period the deposit actually ran, minus a penalty such as 0.5% to 1%. Take the ₹2,00,000 FD at 7% for 3 years. You close it after 18 months. Suppose the bank's rate for an 18 month deposit was 6.5% and the penalty is 1%. You earn 5.5% for 1.5 years: 2,00,000 x (1 + 0.055 / 4)⁶ = about ₹2,17,078. Interest is ₹17,078. If you had held to maturity at 7%, interest over the first 18 months would have been ₹21,940. The penalty cost you ₹4,863.

RDs have a similar rule. A closed RD usually earns at the rate for the period the instalments ran, less a penalty. Skipped instalments can attract a fee per missed deposit. If your income is uneven, choose an instalment you can pay even in a lean month, not the highest figure that looks good on paper.

Splitting a lump sum with a ladder

If you are unsure when you will need the money, a ladder spreads the dates. Instead of ₹3,00,000 in one 3 year FD, split it into three deposits of ₹1,00,000 with tenures of 1, 2 and 3 years. Each year one deposit matures. You can reinvest it at the then-current rate or spend it. If rates rise, you can renew at the higher rate. If rates fall, the longer deposits are still earning the older, higher rate. Compare the average rate of the ladder with a single FD and check that the lower early-tenure rates do not cost more than the flexibility is worth.

Use the same idea with RDs. Run a 12 month RD for a near goal and a 36 month RD for a longer one, with instalments sized to your budget. Both carry the same rules, so you can mix them with an FD that holds a lump sum.

Safety, liquidity and what else to consider

• Deposit insurance. In India, deposits at banks are insured up to a limit per depositor per bank. In the USA, the limit is set per depositor, per bank and per ownership category. Check the current limit for your country.
• Liquidity. You can usually close early, at a cost. For true emergency money, keep a portion in a savings account.
• Rate risk. The rate is locked at opening. If rates rise later, your deposit keeps the older rate.
• Inflation. After tax, a deposit may barely beat price rises. For goals more than 5 years away, compare other options with your own risk profile.
• Alternatives. The PPF calculator covers a long-term tax-advantaged option in India, and the SIP calculator covers market-linked investing, which carries risk of loss.

For emergency money, read the guide on how many months of expenses to keep aside and the blog on how much emergency fund you need in 2026. An RD can fund an emergency pot over time, but the pot itself should sit where you can reach it quickly.

Limits

• Premature withdrawal penalties can cut returns.
• TDS and payout (non-cumulative) options need your bank rules.
• After tax, some FDs barely beat inflation. Check real return for longer goals.
• Rates and compounding rules vary by bank and tenure.
• Calculator results are estimates and may differ slightly from the bank's maturity value because of day-count and rounding rules.

If your goal is further away, the blog on a goal amount that buys less shows why the target itself may need to rise with inflation.

Frequently asked questions