Banking • Topic 3 of 3

Fixed Deposits and Recurring Deposits

What is a Fixed Deposit (FD)? A Fixed Deposit (FD) is an account where you deposit a lump sum of money for a fixed period (e.g., 6 months, 1 year, 5 years). You cannot withdraw before maturity without paying a penalty. FDs offer higher interest rates than savings accounts.

Key Features of FD:

Higher interest rate (5% to 8% typically)
Fixed tenure (7 days to 10 years)
Premature withdrawal allowed with penalty
Interest paid at maturity or periodically
Tax saving FDs (5-year lock-in under Section 80C)

What is a Recurring Deposit (RD)? A Recurring Deposit (RD) allows you to deposit a fixed amount every month for a specific period. It helps build savings gradually. At maturity, you receive the total deposits plus interest.

Key Features of RD:

Monthly fixed installment (e.g., ₹500, ₹1000)
Tenure usually 6 months to 10 years
Interest rate similar to FD (compound quarterly)
Maturity amount = Total deposits + Interest

Formulas for FD and RD:

For simple interest (basic problems): \[ I = \frac{P \times R \times T}{100} \] \[ A = P + I \]

For compound interest (real banks use this): \[ A = P \left(1 + \frac{R}{100 \times n}\right)^{n \times T} \] where n = number of times interest compounds per year

Comparison Table:

Feature	Fixed Deposit (FD)	Recurring Deposit (RD)
Deposit type	One lump sum	Monthly installments
Suitable for	Have large amount now	Save monthly from salary
Interest rate	Higher (7-8%)	Slightly lower (6-7%)
Lock-in period	Fixed tenure	Fixed tenure
Premature withdrawal	Penalty applies	Penalty applies

FIXED DEPOSIT (FD) TIMELINE

   Deposit ₹50,000
        ↓
   ┌────────────────────────────────────┐
   │  Year 1    Year 2    Year 3        │
   │     ↓         ↓         ↓          │
   │  Interest  Interest  Interest      │
   │   ₹4,000    ₹4,000    ₹4,000       │
   └────────────────────────────────────┘
                    ↓
              Maturity Amount
              ₹50,000 + ₹12,000 = ₹62,000

RECURRING DEPOSIT (RD) MONTHLY FLOW

Month 1:  Deposit ₹1,000
Month 2:  Deposit ₹1,000
Month 3:  Deposit ₹1,000
   .          .
   .          .
Month 12: Deposit ₹1,000
              ↓
         Total deposits = ₹12,000
              ↓
         Add interest (compounded quarterly)
              ↓
         Maturity amount ≈ ₹12,500-12,800

COMPARISON: FD vs RD

   ┌────────────────────────────────────────────┐
   │          FD              RD                │
   │  ┌──────────┐      ┌──────────┐           │
   │  │ ₹50,000  │      │ ₹1,000   │           │
   │  │ one time │      │ every    │           │
   │  │ deposit  │      │ month     │           │
   │  └──────────┘      └──────────┘           │
   │      ↓                  ↓                  │
   │  Higher            Lower                   │
   │  interest          monthly                 │
   │  rate              commitment              │
   └────────────────────────────────────────────┘

Solved Examples

Worked Example

Mrs. Verma deposits ₹20,000 in a fixed deposit for 3 years at 7% simple interest per annum. Find the maturity amount.

Solution

P = ₹20,000, R = 7%, T = 3 years
Interest = (20,000 × 7 × 3) / 100
= (4,20,000) / 100 = ₹4,200
Maturity amount = P + I = 20,000 + 4,200 = ₹24,200

Answer: ₹24,200.

Worked Example

Amit opens an RD of ₹500 per month for 2 years at 8% simple interest. Find the total interest and maturity amount.

Solution

Monthly deposit (P) = ₹500
Number of months (n) = 24
Total principal = 500 × 24 = ₹12,000
For RD, equivalent principal for interest = P × n(n+1)/(2×12)
= 500 × (24 × 25) / 24 = 500 × 25 = ₹12,500
Interest = (12,500 × 8 × 1) / (100) (T=1 year equivalent)
= ₹1,000
Maturity amount = 12,000 + 1,000 = ₹13,000

Answer: Interest = ₹1,000; Maturity = ₹13,000.

Worked Example

Calculate the maturity amount for an FD of ₹10,000 for 2 years at 10% compounded annually.

Solution

A = P(1 + R/100)^T
A = 10,000 (1 + 10/100)$^{2}$
= 10,000 (1.1)$^{2}$
= 10,000 × 1.21 = ₹12,100
Interest = 12,100 - 10,000 = ₹2,100

Answer: Maturity amount = ₹12,100.

Key Points

Fixed Deposit (FD): Lump sum deposit, higher interest, fixed tenure.
Recurring Deposit (RD): Monthly deposits, builds savings habit.
FDs and RDs offer higher interest than savings accounts.
Premature withdrawal results in penalty (lower interest).
For RD, average principal = monthly installment × n(n+1)/(2×12).
Interest can be simple or compound (banks use compound quarterly).

Quick Check — 4 MCQs

Tap an option to check your answer0 / 4

Q1.In a recurring deposit, equal installments are deposited:

Explanation: Monthly installments.

Q2.A fixed deposit is a:

Explanation: One-time lump sum.

Q3.In the RD interest formula, $n$ is the number of:

Explanation: Months (installments).

Q4.The maturity value of an RD equals:

Explanation: Deposits plus interest.

Practice more MCQs → 📝 Assignment · 35 marks