Investing 5 lakh rupees wisely can significantly impact your financial future. Two of the safest and most popular investment options in India are Fixed Deposits (FDs) and Recurring Deposits (RDs). But which one gives better returns? How much profit will you earn from each option? This guide will break down the pros, cons, and exact returns with easy-to-understand calculations.
Where Should You Invest 5 Lakh Rupees: FD or RD?
| Aspect | Fixed Deposit (FD) | Recurring Deposit (RD) |
|---|---|---|
| Investment Type | Lump sum | Monthly contributions |
| Interest Rate | 5% to 8% (varies by bank) | 4.5% to 7.5% (varies by bank) |
| Compounding Frequency | Quarterly | Quarterly |
| Tenure | 6 months to 10 years | 6 months to 10 years |
| Maturity Calculation | Interest earned on entire amount | Interest earned on monthly contributions |
| Best for | Lump sum investors | Regular savers |
| Potential Earnings (1 year @ 7%) | ₹35,885 (approx.) | ₹21,000 (approx.) |
If you want higher returns and have a lump sum, a Fixed Deposit (FD) is the better option. If you prefer saving monthly, a Recurring Deposit (RD) works best. Always compare bank interest rates before investing to maximize your gains.
What is a Fixed Deposit (FD)?
A Fixed Deposit (FD) is a safe investment where you deposit a lump sum amount for a fixed period at a predetermined interest rate. The longer you keep your money, the higher the interest you earn. Banks typically offer FD interest rates ranging between 5% and 8%, depending on the tenure and institution.
FD Interest Calculation Example
Suppose you invest ₹5,00,000 in an FD at 7% annual interest rate for 1 year, compounded quarterly.
Formula: A=P(1+rn)n×tA = P \left(1 + \frac{r}{n}\right)^{n \times t}
Where:
- A = Maturity amount
- P = Principal (₹5,00,000)
- r = Annual interest rate (7% or 0.07)
- n = Number of times interest is compounded per year (4 for quarterly compounding)
- t = Time in years (1 year)
Plugging in the values: A=5,00,000×(1+0.074)4×1A = 5,00,000 \times \left(1 + \frac{0.07}{4}\right)^{4 \times 1} A=5,00,000×(1.07177)A = 5,00,000 \times (1.07177) A≈₹5,35,885A \approx ₹5,35,885
Total Interest Earned: ₹35,885
see also: Post Office Scheme: Get a fund of Rs 8 lakh by investing just Rs 1000
What is a Recurring Deposit (RD)?
A Recurring Deposit (RD) allows you to invest a fixed amount every month, earning interest at a fixed rate. It’s ideal for individuals who want to save regularly rather than invest a lump sum.
RD Interest Calculation Example
Let’s assume you deposit ₹41,666.67 per month (₹5,00,000 over 12 months) in an RD at a 7% annual interest rate, compounded quarterly.
Formula: M=P×(1+r/n)n×t−11−(1+r/n)−1/nM = P \times \frac{(1 + r/n)^{n \times t} – 1}{1 – (1 + r/n)^{-1/n}}
Where:
- M = Maturity amount
- P = Monthly deposit (₹41,666.67)
- r = Annual interest rate (7%)
- n = Number of times interest is compounded per year (4 for quarterly compounding)
- t = Time in years (1 year)
Plugging in the values: M=41,666.67×(1.07177−1)(1−0.98276)M = 41,666.67 \times \frac{(1.07177 – 1)}{(1 – 0.98276)} M=41,666.67×4.164M = 41,666.67 \times 4.164 M≈₹5,21,000M \approx ₹5,21,000
Total Interest Earned: ₹21,000
FD vs. RD: Which One Should You Choose?
| Factor | FD | RD |
|---|---|---|
| Return on Investment | Higher (₹35,885) | Lower (₹21,000) |
| Risk | Low | Low |
| Flexibility | Less flexible | More flexible (monthly deposits) |
| Best for | Lump sum investors | Regular savers |
Additional Factors to Consider Before Investing
1. Tax Implications
- FD Interest: Taxable under Income Tax Act; TDS applicable if interest exceeds ₹40,000 (₹50,000 for senior citizens).
- RD Interest: Fully taxable under your income slab; no TDS applicable.
2. Inflation Impact
- Inflation can erode returns on both FDs and RDs, so consider options like mutual funds or PPF for long-term wealth growth.
3. Premature Withdrawal Rules
- FD: Penalty charges apply; reduced interest rate.
- RD: Banks may not allow partial withdrawal; full closure incurs penalties.
see also: PNB RD Scheme: On investing ₹7,500, you will get a return of ₹5,39,499 after 5 years
Where Should You Invest 5 Lakh Rupees: FD or RD? FAQs
1. Which bank gives the highest FD and RD interest rates?
Interest rates vary by bank and tenure. Check the latest rates on the RBI Official Website.
2. Is FD safer than RD?
Both are equally safe as they are backed by banks and financial institutions.
3. What happens if I withdraw FD or RD early?
- FD: You may get a lower interest rate and a penalty.
- RD: Partial withdrawal is usually not allowed; early closure may incur penalties.
4. Can I open multiple FDs or RDs?
Yes, you can have multiple accounts in different banks to diversify risk.
5. Which is better for tax savings, FD or RD?
- FD: Offers tax-saving options under Section 80C (5-year lock-in required).
- RD: No tax benefits.
