FD vs RD: Same 7% Rate, So Why Does the FD Earn Almost Double?

Put ₹1,20,000 into a one-year FD at 7% and you collect ₹8,623 of interest. Feed the same ₹1,20,000 into an RD at ₹10,000 a month and you collect ₹4,621. People see that gap and conclude the RD is the worse product. It is not. It is the same rate applied to money that arrives later.

You can reproduce both figures in the FD calculator and the RD calculator; what follows is why they differ and which one you actually need.

The worked example

Both deposits at 7%, compounded quarterly, closed after 12 months:

	FD	RD
Money in	₹1,20,000 on day one	₹10,000 on the 1st of each month
Total deposited	₹1,20,000	₹1,20,000
Average balance through the year	₹1,20,000	₹65,000
Interest earned	₹8,623	₹4,621
Maturity	₹1,28,623	₹1,24,621

The RD's average balance is ₹65,000 because the first instalment works for twelve months and the last one for a single month. Seven percent on ₹65,000 for a year is ₹4,550; quarterly compounding lifts it to ₹4,621. Nothing was lost. The rupees simply were not there yet.

So which one do you need?

One question decides it: do you have the lumpsum today?

• You have it: FD. Every rupee compounds from day one, and no RD beats that at the same rate.
• You do not have it, but you will have ₹10,000 spare every month: RD. The alternative is not an FD. It is twelve months of the money sitting in a savings account at 2.5–3%, earning less than half of the RD's ₹4,621.

The RD's real competitor is an unfunded intention. Its job is to turn a monthly surplus into a lumpsum, which you then move into an FD when it matures.

Monthly deposits, quarterly compounding

Most banks compound both FDs and RDs quarterly, so compounding frequency is not where the gap comes from. What does matter:

• In a cumulative FD, interest is added to principal every quarter and the whole balance earns for the full tenure. Annual compounding on the same ₹1,20,000 would give ₹8,400; quarterly gives ₹8,623.
• In an RD, each instalment is compounded quarterly from the date it lands, so the December instalment of a January-to-December RD earns for one month only.
• FDs shorter than about six months usually earn simple interest, not compound.

TDS, and the tax you still owe

Banks deduct 10% TDS under Section 194A once the interest they pay you in a financial year crosses ₹50,000, or ₹1,00,000 for senior citizens. Both thresholds were raised in Budget 2025 and apply from FY 2025-26. RD interest counts towards the same threshold, and has since 2015.

Two things people misread:

• TDS is not the tax. FD and RD interest is added to your income and taxed at your slab. In the 30% bracket, the bank's 10% is a down payment and the balance is due at filing.
• If your total income is below the taxable limit, submit Form 15G (15H for seniors) at the start of the year and the bank deducts nothing.

Interest on a cumulative FD accrues every year even though you receive it at maturity; report it each year, because the AIS already shows it.

Breaking it early

Both products can be closed early. The penalty is the smaller part; the repricing is the larger:

	What happens
FD closed early	Interest is recalculated at the rate for the period you actually stayed, then 0.5–1% is knocked off that
RD closed early	Same repricing and the same penalty at most banks
RD instalment missed	Default charge of roughly ₹1–2 per ₹100 per month of delay; repeated defaults can get the account closed

Example: a two-year FD booked at 7.25% and broken at twelve months, where the one-year card rate is 6.8% and the penalty is 1%, earns 5.8%. On ₹2,00,000 that is ₹11,855 instead of the ₹14,899 a one-year FD at 7.25% would have paid.

The fix is laddering, not avoiding FDs. Split ₹6,00,000 into three FDs of ₹2,00,000 maturing at one, two and three years. Something matures every year, you are never forced to break the whole sum, and each maturity is rebooked at the prevailing rate.

Senior citizens

Most banks add 0.25–0.50 percentage points for depositors over 60, on RDs as well as FDs. At 7.5% instead of 7%, the ₹1,20,000 FD earns ₹9,256 rather than ₹8,623. Under the old regime, seniors also get Section 80TTB, a deduction of up to ₹50,000 on deposit interest. Everyone else gets 80TTA, which is ₹10,000 and covers savings account interest only, not FDs or RDs.

What people get wrong

• Comparing rupees of interest instead of the rate. The RD earned less because it held less. Compare rates, then choose by whether the money exists today.
• Booking one giant FD. One emergency and the whole amount gets repriced. Ladder it.
• Parking an emergency fund in a 5-year tax-saver FD. It cannot be broken at all. That product is for Section 80C, not liquidity.
• Treating TDS as settled tax. Your slab, not the 10%, decides what you owe.
• Ignoring the ₹5 lakh DICGC cover. Deposit insurance is per depositor per bank. Above that, spread across banks.

The RD for equity

If the goal is more than five years away, the RD's monthly-discipline logic applies to a mutual fund SIP too, with market returns instead of a fixed 7% and no guarantee. Compare a ten-year RD against the SIP calculator at a conservative return and you will see why the RD is a short-horizon tool. For anything with a fixed rate, the compound interest calculator shows how the compounding frequency changes the result.

FAQ

Is RD interest taxable?

Yes, at your slab rate, exactly like FD interest. TDS applies once total interest from the bank crosses ₹50,000 in a year (₹1,00,000 for seniors).

Does an RD qualify for Section 80C?

No. Only the 5-year tax-saver FD qualifies, and it comes with a lock-in and no premature withdrawal.

Can I increase my RD instalment later?

No. The instalment is fixed at opening. Open a second RD for the extra amount.