Fixed Deposits and Recurring Deposits Explained

How fixed and recurring deposits work, how interest is calculated, and when they make sense compared with other savings options.

Fixed deposits and recurring deposits are among the most popular ways to save in India and many other countries. They offer predictable returns with low risk.

Fixed deposits

A fixed deposit, or FD, is money placed with a bank for a fixed period, from a few days to several years, at an interest rate set at the start. Interest can be paid out regularly or added to the deposit until it matures.

FDs usually pay higher interest than savings accounts, because the bank can use the money for a known period. Senior citizens often receive slightly higher rates.

Recurring deposits

A recurring deposit, or RD, lets you deposit a fixed amount every month for a set period. It helps build a savings habit, and the interest rate is often similar to that of FDs. At the end, you receive your deposits plus interest.

Key features

Safety: in India, bank deposits are insured by the Deposit Insurance and Credit Guarantee Corporation up to 5 lakh rupees per depositor per bank.
Premature withdrawal: you can usually break an FD early, but banks may charge a penalty or pay a lower interest rate.
Taxation: interest is taxable as income. Banks may deduct tax at source if interest exceeds certain limits.

Comparing with inflation

The key question is the real return: interest minus inflation, and after tax. If an FD pays 7 percent and inflation is 5 percent, the real return before tax is about 2 percent. After tax, it may be much lower for people in higher tax brackets.

Building savings with an RD

A young worker sets up a recurring deposit of 2,000 rupees a month for two years. The money is automatically moved from their salary account each month. At the end, they have 48,000 rupees of deposits plus interest, ready for a planned expense like a course or a laptop. The automatic, fixed schedule makes saving easier.

When they make sense

FDs and RDs suit short- to medium-term goals, emergency funds and people who want safety and predictability. For long-term goals like retirement, many advisers suggest also considering investments that may grow faster than inflation over time, accepting more short-term risk.

Thinking a fixed deposit can never lose value

The rupee amount in an FD is safe, but its purchasing power can fall if inflation is higher than the after-tax interest rate. Safety of the amount is not the same as safety of real value.

Key takeaways

Fixed deposits lock money in for a set period at a fixed interest rate.
Recurring deposits build savings through regular monthly deposits.
Indian bank deposits are insured up to 5 lakh rupees per depositor per bank.
Compare returns with inflation and tax to judge their real value.