FD vs RD: Which Is Better for You? Returns, Tax and Rules Compared

The main differences

Same rate, same total: which earns more?

People often assume an RD and an FD at the same rate give the same result. They do not. Take ₹3 lakh over 5 years at 6.5%. If you put all ₹3 lakh in an FD today, the FD calculator shows ₹4,14,126 at maturity. If you instead deposit ₹5,000 every month, the RD calculator shows ₹3,54,954. Both involve ₹3 lakh of your money in total, but the FD earns ₹59,172 more, because every rupee of the FD earns for five years, while an RD instalment earns only for the months it has been in the account.

This is not a reason to avoid RDs. Most people do not have ₹3 lakh sitting idle. The RD is how you create that lump sum in the first place.

How an FD grows

A ₹1,00,000 FD at 7% for 5 years, with interest added every quarter, matures at ₹1,41,478. Your interest is ₹41,478, and the effective yearly return is 7.186%, a little higher than the quoted 7% because you earn interest on interest. The table on the FD calculator shows each year, so you can see what you would hold if you had to break the FD part-way.

How an RD grows

An RD is slower at first. For ₹5,000 a month at 6.5% for one year, you deposit ₹60,000 and the RD calculator shows ₹62,143 at maturity. That is only ₹2,143 of interest on ₹60,000, because most of the instalments stay in the account for just a few months. The longer the RD, the more compounding helps: over 5 years the same ₹5,000 a month earns ₹54,954 of interest.

Tax and TDS

Interest on both is added to your income and taxed at your slab rate. You owe the tax each year as the interest accrues, even if the bank pays it only at maturity. Banks deduct TDS at 10% (20% if you have not given your PAN) when the interest you earn from one bank in a year is above ₹50,000, or above ₹1,00,000 if you are a senior citizen. This applies from 1 April 2025. When TDS applies, it is cut on the whole interest, not just the amount above the limit. TDS is an advance payment, so you can claim it back if your own tax is lower. If you are in the 30% slab, a 7% FD is closer to a 4.9% return after tax, before any surcharge or cess. Use the income tax calculator to see your slab.

When each makes sense

• Pick an FD when you have a bonus, maturity money or savings to park for a known goal, such as next year's school fee.
• Pick an RD when you want a disciplined monthly habit, and want a fixed return with no market risk.
• Look beyond both for goals more than five years away. A PPF gives tax-free interest, and a SIP in an equity fund can grow faster over a long time but its returns are never guaranteed.

Safety and access

Bank FDs and RDs are among the safest places for money, but safety has limits. Deposit insurance covers principal and interest up to ₹5 lakh per depositor per bank, across all branches and all your accounts there. If you hold ₹8 lakh in one bank, ₹3 lakh is outside the cover. Splitting large amounts across banks is a simple fix. Also read the premature-withdrawal terms: you can usually close both early, but you will earn a lower rate, so keep your emergency fund in a savings account or a liquid option, not in a long FD.

Common mistakes

• Putting more than ₹5 lakh, principal and interest together, in one bank. Insurance covers only up to that limit per bank.
• Breaking an FD early without checking the penalty. Banks usually pay a lower rate for the period the money stayed.
• Missing RD instalments. Banks charge a penalty, and many close the account after several missed payments.
• Comparing only the quoted rate. Check how often interest is added.