FD vs RD for 5 years: Which gives higher returns and better tax benefits on Rs 5 lakh?

The biggest difference between fixed deposits (FDs) and recurring deposits (RDs) lies in the investment method. In an FD, investors deposit a lump sum amount at one time and earn interest on the full amount throughout the tenure. In an RD, investors deposit a fixed amount every month, which means each instalment earns interest only for the remaining tenure. Because of this difference, FDs generally generate higher returns, while RDs are preferred by salaried individuals and investors looking to build savings gradually through disciplined monthly contributions.

For this comparison, we are assuming a five-year tenure and a 7 per cent annual interest rate. In the fixed deposit example, a lump sum amount of Rs 5 lakh is invested in one go for five years. In the recurring deposit example, the investor contributes around Rs 8,333 every month for five years, taking the total investment close to Rs 5 lakh over the full tenure. The maturity calculations below are indicative and based on quarterly compounding commonly used by banks.

If an investor deposits Rs 5 lakh in a fixed deposit for five years at an annual interest rate of 7 per cent compounded quarterly, the estimated maturity amount would be around Rs 7.07 lakh. In this case, the estimated interest earned over five years would be approximately Rs 2.07 lakh. Since the full investment amount starts earning interest from day one, fixed deposits benefit significantly from long-term compounding and usually deliver higher overall returns.

To build a corpus close to Rs 5 lakh through a recurring deposit over five years, an investor would need to deposit around Rs 8,333 every month. Assuming a 7 per cent annual interest rate compounded quarterly, the estimated maturity amount would be around Rs 5.99 lakh after five years. In this case, the estimated interest earned would be nearly Rs 99,000. Since RD instalments are invested gradually every month instead of together at the beginning, the overall compounding benefit remains lower compared to fixed deposits.

Fixed deposits generally offer higher returns than recurring deposits when the total investment amount and tenure are similar. This is because the entire lump sum invested in an FD earns interest throughout the tenure, whereas in an RD, each monthly contribution starts earning interest only after it is deposited. For investors who already have a lump sum amount available, fixed deposits usually provide stronger maturity value and better long-term compounding benefits.

Tax-saving fixed deposits with a mandatory five-year lock-in qualify for deduction under Section 80C of the Income Tax Act under the old tax regime. Investors can claim deductions of up to Rs 1.5 lakh annually through eligible tax-saving FDs. Recurring deposits, however, do not provide Section 80C tax benefits under either the old or new tax regime. Interest earned from both FDs and RDs is taxable according to the investor’s income tax slab, while banks may deduct TDS if annual interest income exceeds Rs 40,000 for regular citizens and Rs 50,000 for senior citizens. For investors specifically seeking tax-saving benefits, FDs hold a clear advantage over RDs.

Recurring deposits are often considered better for disciplined monthly savings because they allow investors to deposit a fixed amount every month instead of arranging a large lump sum. RDs are particularly useful for salaried individuals planning goals such as emergency funds, travel, school fees, gadget purchases or wedding expenses. For investors who find systematic monthly investing easier than one-time investing, recurring deposits can work like a structured savings plan.

Both fixed deposits and recurring deposits allow premature withdrawal, although banks may impose penalty charges for early closure. Fixed deposits generally offer better liquidity because investors can also take loans against FDs without breaking the deposit. Recurring deposits are comparatively less flexible because investors are expected to continue monthly contributions during the tenure to maximise returns and avoid penalties or lower interest payouts.

Fixed deposits are generally suitable for investors who already have a lump sum amount and want stable, low-risk returns. They may suit retirees seeking regular income, conservative investors avoiding market-linked volatility, people planning medium-term financial goals and investors looking for tax-saving benefits under the old tax regime. FDs are also popular among senior citizens because banks usually offer higher interest rates to them.

Recurring deposits are generally suitable for salaried employees, first-time investors and young earners looking to build disciplined savings habits. They may also work well for people planning smaller financial goals and investors who prefer monthly contributions instead of one-time lump sum investing. RDs help investors gradually build a savings corpus over time without creating significant financial pressure.