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 |