Use an FD for a lump sum you may need in 1–5 years, an RD to build a fixed goal from monthly savings, and PPF for long-term money you will not touch for 15 years. PPF currently pays 7.1% and is fully tax-free, so its post-tax return usually beats FDs and RDs for anyone in the 20% or 30% slab. FD and RD interest is taxed at your slab rate, and banks deduct TDS on FD interest above the threshold.
Quick comparison
- Interest rate: FD and RD rates are set by each bank and change often — for major banks they have recently been roughly 6%–7.5% for 1–5 year tenures, with slightly higher rates for senior citizens. PPF is 7.1% at present, revised quarterly by the government.
- Tenure: FD from 7 days to 10 years; RD usually 6 months to 10 years; PPF 15 years, extendable in 5-year blocks.
- Deposit: FD is one-time; RD is a fixed monthly amount; PPF allows ₹500 to ₹1.5 lakh per financial year, in one go or instalments.
- Liquidity: FD and RD can be broken early with a penalty; PPF allows partial withdrawal only from the seventh financial year and loans from the third year.
- Tax on returns: FD and RD interest is fully taxable; PPF interest and maturity are tax-free.
- Safety: bank deposits are insured by DICGC up to ₹5 lakh per depositor per bank; PPF is backed by the Government of India.
Fixed deposits: flexible but taxable
An FD locks a lump sum at a fixed rate for a chosen tenure. It suits emergency-fund tiers, money for a planned purchase, or income in retirement through monthly or quarterly payouts. Interest is added to your income and taxed at your slab rate every year, whether paid out or reinvested.
TDS on FD interest
Banks deduct TDS at 10% when your FD interest with that bank exceeds ₹50,000 in a financial year (₹1 lakh for senior citizens). Without a PAN on record, TDS is 20%. If your total income is below the taxable limit, you can submit Form 15G (or Form 15H if you are 60 or older) to avoid TDS. Remember that TDS is not your final tax — if you are in the 30% slab, you owe the balance when filing. Our TDS calculator shows how much will be deducted.
Worked example
₹5 lakh in a 5-year FD at an assumed 7% with quarterly compounding grows to about ₹7.07 lakh — roughly ₹2.07 lakh of interest. In the 30% slab plus cess, tax on that interest is about ₹64,700, so your effective post-tax return is closer to 4.9% a year.
Recurring deposits: an FD built monthly
An RD lets you deposit a fixed sum every month and earn an FD-like rate. It is useful for goals 1–5 years away — a vacation, a gadget, an insurance premium, or a down-payment top-up. ₹10,000 a month for 5 years at an assumed 7% grows to about ₹7.19 lakh on ₹6 lakh deposited. RD interest is taxed at your slab rate, and TDS rules apply to RD interest in the same way as FDs. Missing instalments may attract a penalty.
PPF: long lock-in, tax-free compounding
The Public Provident Fund is a 15-year government-backed scheme. Deposits qualify for the Section 80C deduction (old regime only), and both interest and maturity are tax-free in every regime. That makes it one of the few EEE (exempt-exempt-exempt) products available.
Deposit ₹1.5 lakh at the start of every year for 15 years at 7.1% and you build about ₹40.7 lakh on ₹22.5 lakh invested — all tax-free. To earn the same post-tax amount, a taxable deposit would need to yield over 10% for someone in the 30% slab. Interest is calculated on the lowest balance between the 5th and the last day of each month, so depositing before the 5th of April maximises it. Model it in the PPF calculator.
Which one should you choose?
- Emergency fund: a mix of savings account and short FDs (or a sweep-in FD). Not PPF — it is too illiquid.
- Goal in 1–3 years with a lump sum: FD for that tenure.
- Goal in 1–5 years built from salary: RD.
- Retirement or a child's education 15 years away, with no appetite for market risk: PPF, often alongside equity funds for growth.
- Low-income or retired investor in a nil or 5% slab: FDs lose little to tax, and senior citizens can also look at the Senior Citizens Savings Scheme.
Common mistakes
- Comparing pre-tax FD rates with tax-free PPF returns.
- Assuming TDS covers all tax due on FD interest.
- Breaking a long FD early for a small need — the penalty and lower rate can wipe out a chunk of the interest earned.
- Locking emergency money into PPF.
- Putting more than the DICGC cover in a single bank without considering the risk.
Compare the maturity values for your own amounts with the FD calculator, RD calculator and PPF calculator.