Fixed Deposit (FD) vs Recurring Deposit (RD): Understanding the Differences

A Fixed Deposit is a savings option where a lump-sum amount is deposited for a fixed period at a predetermined interest rate. The tenure may range from a few days to several years, and the interest rate remains the same throughout the chosen period.

FDs are straightforward: once the deposit is made, the amount stays locked until maturity unless withdrawn earlier. At the end of the tenure, the depositor receives the original amount along with accumulated interest, based on the bank’s compounding policy.

FDs are often preferred for their clarity and stability. The returns are known in advance, and deposits up to ₹5 lakh per bank are covered under the DICGC insurance scheme. One point to keep in mind is that interest earned is taxable, and premature withdrawal may involve reduced interest or penalties as per the institution’s rules.

A Recurring Deposit allows individuals to deposit a fixed amount every month for a chosen tenure. This deposit method is suitable for those who prefer building savings gradually rather than investing a lump sum at once.

For example, when a person commits to depositing a fixed monthly amount for a specific duration, interest is applied on each installment according to the bank’s compounding rules. Over time, these monthly contributions accumulate into a final maturity value.

RDs are especially useful for individuals who receive regular monthly income and want to follow a systematic saving pattern. Minimum monthly deposit requirements are generally low, making RDs accessible to a wide range of savers. Like FDs, interest earned on RDs is taxable, and missing installments may attract penalties depending on bank policies.

Although both FDs and RDs offer assured returns, there are several structural differences between them:

• Deposit Method: FD requires a one-time lump-sum deposit, whereas RD involves monthly deposits over the tenure.
• Interest Rates: Banks often offer similar rates for both, but in some cases, FD rates may be slightly higher. Rates vary depending on tenure and institution.
• Flexibility: FDs allow deposits of any amount above the minimum requirement. RDs require a fixed monthly deposit that remains constant throughout the tenure.
• Compounding: In FDs, interest is calculated on the entire amount from the beginning. In RDs, interest is applied to multiple monthly installments, resulting in a different compounding structure.
• Premature Closure: Both options generally allow early withdrawal, subject to penalties or revised interest, depending on bank policy.

These differences make each option suitable for different saving preferences and cash-flow patterns.

Interest earned from both FDs and RDs is considered taxable income under the head ‘Income from Other Sources.’ The applicable tax depends on an individual's income slab. Banks deduct TDS (Tax Deducted at Source) when the annual interest earned exceeds ₹40,000 (₹50,000 for senior citizens).

If a depositor’s total income is below the taxable limit, they may submit Form 15G or 15H to avoid TDS deduction. It is important to note that regular FDs and RDs do not provide tax benefits under Section 80C unless invested in designated tax-saving variants.

Senior citizens may receive slightly higher interest rates on both FDs and RDs, depending on the institution’s policy.

FDs and RDs are used in different situations based on individual preferences and financial flow. Some general patterns include:

• FDs: Often chosen when individuals have a lump-sum amount available, such as bonuses, maturity proceeds, or accumulated savings.
• RDs: Commonly selected by individuals who prefer systematic monthly saving rather than depositing a large amount at once.
• Combination Use: Many people use FDs for storing emergency funds and RDs for building goal-based savings gradually.

Both instruments are considered helpful for disciplined savings and short- to medium-term financial planning.