Two different shapes
A fixed deposit takes one lump sum for a fixed term at a fixed rate. A recurring deposit takes a fixed instalment every month for a fixed term at a fixed rate.
Each suits a different situation, and the situation is usually decided for you. If you already have the money, an FD applies. If you are saving out of monthly income, an RD is the instrument that fits — you cannot deposit a lump sum you do not have.
So the comparison is rarely a genuine choice. What matters is understanding what each actually returns, because on that the two are routinely misread.
Why a 7% RD does not return 7%
This is the point of the article, and it is the same arithmetic that makes a SIP's return different from a lumpsum's.
An FD at 7% for three years earns 7% a year on the whole sum, for the whole three years. Straightforward.
An RD at 7% for three years earns 7% a year on each instalment, for however long that instalment has been deposited. The first instalment earns for 36 months. The last earns for one. On average, your money has been in for roughly half the term.
| FD | RD | |
|---|---|---|
| Quoted rate | 7% | 7% |
| What the rate applies to | The whole sum, the whole term | Each instalment, for its own remaining term |
| Average time invested | Full term | Roughly half the term |
| Return on total deposited | Close to the quoted rate | Well below it |
Neither bank is misleading you. Both quote an annualised rate applied correctly. The confusion comes from comparing that rate against total money deposited, which is exactly the absolute-return trap that makes SIP figures look wrong.
The honest comparison uses XIRR for the RD — the rate that reconciles each instalment on its own date with the maturity value — against the FD's straightforward rate. Compared that way, the two are directly comparable and usually close, because they are the same product with different cashflow timing.
How interest is credited
Both usually offer a cumulative option, where interest compounds and is paid at maturity, and a non-cumulative option, where it is paid out periodically.
Cumulative produces more at maturity because the interest itself earns interest. Non-cumulative produces income along the way and therefore compounds less. Neither is better — one is for growing a sum, the other for drawing an income from it.
One thing worth knowing regardless of which you choose: tax on the interest is generally due as it accrues, not when it is paid. On a five-year cumulative FD you may owe tax each year on interest you have not received. Banks also deduct TDS above a threshold. Rates, thresholds and forms change with the Finance Act — check the current position rather than an archived summary.
That accrual treatment is the structural difference against a debt fund, where tax generally falls due only on redemption and the deferred amount keeps compounding.
What breaking one costs
Both can be closed early, and both charge for it.
Interest is typically recomputed at the rate that would have applied to the period actually held, often less a penalty. The important detail: on an FD, this applies to the entire deposit, even if you only needed a fraction of it.
Which is the case for laddering — instead of one deposit of ₹5 lakh, five of ₹1 lakh. Needing ₹1 lakh then breaks one, and the other four continue at their original rate. Same money, same rate, materially less exposure to a single decision.
Laddering across maturities as well as amounts adds a second benefit: something matures regularly, so you are never forced to break anything, and reinvestment happens at whatever rates prevail rather than all at one moment.
Which one for which job
| Situation | Fits |
|---|---|
| You have a lump sum and a known date it is needed | FD matched to that date |
| You are saving from monthly income towards a goal | RD, or a monthly transfer into a low-duration fund |
| Emergency money | Sweep account, or laddered short FDs |
| Money that might be needed unpredictably | Laddered FDs, so breaking one does not disturb the rest |
| Long-horizon growth | Neither — a deposit's rate rarely beats inflation by much after tax |
That last row is the one worth sitting with. Deposits are excellent at certainty and poor at growth. Using them for a twenty-year goal is a slow, near-certain loss of purchasing power dressed as prudence.
Where it goes wrong
- Comparing an RD's headline rate to total deposited. Produces a figure that looks disappointing and is simply the wrong calculation.
- One large FD instead of several. Guarantees that any early need breaks the whole thing.
- Forgetting tax accrues annually on cumulative deposits, producing a liability on interest not yet received.
- Auto-renewal on autopilot. Deposits often renew at whatever rate prevails, which may be well below what was available elsewhere that day.
- Holding long-horizon money in deposits because they feel safe. Certainty of nominal value is not the same as safety of purchasing power.
- Ignoring the insured limit. DICGC cover applies per depositor per bank across all deposits, so large holdings concentrated at one bank are partly uncovered.
Comparing on the same basis
The only fair comparison between a deposit and anything else is on the same cashflow pattern and the same measure — XIRR where money goes in on many dates, and a plain annualised rate where it goes in once.
FNOTrader's Mutual Funds app runs any contribution schedule against real NAV history — around 34 million NAV rows — reporting XIRR and the worst drawdown along the way. Running the same monthly amount as an RD against a low-duration fund puts the two on identical footing, which is the only way the comparison means anything.
Common questions
What is the difference between an FD and an RD?
An FD takes one lump sum for a fixed term at a fixed rate; an RD takes a fixed monthly instalment over a term at a fixed rate. Which applies is usually decided by whether you already have the money or are saving it out of income.
Why does a 7% RD not return 7% on the money I deposited?
Because the rate applies to each instalment for however long that instalment has been in. The first earns for the full term and the last for a single month, so on average your money has been invested for roughly half the term — the return on total deposited is therefore well below the quoted rate.
How should I compare an RD's return with an FD's?
Use XIRR for the RD — the rate that reconciles each instalment on its actual date with the maturity value — against the FD's straightforward annualised rate. Compared that way the two are directly comparable and usually close.
Is tax on FD interest paid at maturity?
Generally tax is due as interest accrues rather than when it is paid, so a multi-year cumulative deposit can create a liability each year on interest not yet received. Banks also deduct TDS above a threshold — rates and thresholds change with the Finance Act.
What happens if I break a fixed deposit early?
Interest is typically recomputed at the rate applicable to the period actually held, often less a penalty, and it applies to the entire deposit even if you only needed part of it. Splitting one large deposit into several smaller ones limits that damage.
What is FD laddering?
Splitting a sum across several deposits rather than one, ideally across different maturities. An early need then breaks only one while the rest continue at their original rate, and something matures regularly so reinvestment is spread across rate environments.
Are FDs good for long-term goals?
They are excellent at certainty and poor at growth. A deposit rate rarely beats inflation by much after tax, so using deposits for a twenty-year goal is a slow and near-certain loss of purchasing power that feels prudent.
Are recurring deposits insured?
DICGC cover applies per depositor per bank across savings, current, fixed and recurring deposits together, up to a limit set by regulation. Because it is per bank rather than per account, large holdings concentrated at one bank are partly uncovered.
Continue reading
More in Banking · App: Mutual Funds · Definitions: glossary · Free tools: calculators · All: every article