FD vs RD
A fixed deposit and a recurring deposit at the same rate pay very different amounts of interest, and the reason is not the rate. What each is for, and how to compare them fairly.
Compare them on your own figuresThe rates are the same. The time is not.
Put ₹1,20,000 into a fixed deposit for two years at 7% and you earn about ₹17,900. Pay ₹5,000 a month into a recurring deposit for the same two years at the same 7% and you earn about ₹9,000 - roughly half, on the same total and the same rate.
Nothing is wrong with the recurring deposit. Your money simply was not there. The first instalment earns almost two years of interest and the last earns one month; averaged over the term, only about half of your ₹1,20,000 has been in the account at all.
So how do you compare them fairly?
By the rate, not by the interest. If a bank offers 7% on both, the two products are paying you identically for the time your money is with them. Comparing the interest figures is comparing two different amounts of deposit-years and concluding that the smaller one is worse.
The fair question is not 'which pays more' but 'do I have the money now'. If you do, a fixed deposit puts all of it to work immediately. If you do not, a recurring deposit is what earns anything at all on money you have not been paid yet.
What they are actually for
A fixed deposit is for a sum you already hold and do not need for a defined period: a bonus, a maturity, a house deposit waiting for a purchase. It locks a rate for the term, which is worth a great deal when rates are falling and costs you when they are rising.
| Fixed deposit | Recurring deposit | |
|---|---|---|
| You need | A lump sum today | A monthly amount |
| Rate | Fixed for the term | Fixed for the term |
| Interest on ₹1,20,000 over 2 years at 7% | About 17,900 | About 9,000 |
| Missing a payment | Not applicable | Small penalty per instalment |
| Breaking early | Rate reduced, penalty applied | Rate reduced, penalty applied |
| Best for | Money you already have | Money you are about to earn |
The compounding basis is worth a look
Both are usually compounded quarterly on rupee deposits, which means an advertised 7% is worth 7.186% over a year. Banks print both figures and readers routinely compare one bank's nominal rate against another's yield, which is the easiest way to choose the worse of two deposits.
Where the two products differ is that a recurring deposit compounds each instalment for a fractional number of quarters - an instalment paid in the second month of a quarter earns a third of that quarter twice over. That is why the maturity figure a bank quotes rarely matches a simplified monthly formula.
What neither figure includes
Tax. Interest on both is taxable as income in India and is subject to deduction at source above a threshold, which means the figure that reaches you is lower than the maturity amount on both products. How much lower depends on your other income, which is why neither calculator applies it.
It is worth noting that tax does not change the comparison between them. Both are taxed the same way, so a product that looks better before tax looks better after it.