FD vs RD vs Overdraft: Which One Your Money Actually Belongs In

The FD vs RD question is asked in the wrong order by almost everyone who asks it. People open two rate cards, compare the percentages, find them nearly identical, and conclude the choice barely matters. The percentages are nearly identical — at most banks a recurring deposit simply pays the term deposit rate for the same tenure. What differs is not the rate. It is how long each rupee actually sits in the bank, and that single difference decides the outcome far more than any rate comparison ever will.

Then there is the third product, which belongs in this comparison only because banks sell it from the same page: the overdraft against a deposit. It is not a way of saving money. It is a way of borrowing against money you have already saved, and it exists mainly to stop you doing the single most expensive thing a depositor can do, which is breaking a deposit early. Most people who need cash mid-term have never been told this facility exists.

This guide works all three through with the arithmetic shown. Every rupee figure below was calculated, not estimated, and each example states the rate and compounding assumption it uses so you can redo it with your own numbers when the rate card changes — which it will.

The three products, and why one of them is not like the others

The fixed deposit

You hand the bank a lump sum, it is locked for a chosen tenure, and interest compounds — quarterly, at almost every Indian bank, unless you have elected to take the interest out monthly or quarterly as income. Tenures run from seven days to ten years. The rate is fixed at booking and does not move afterwards, which is the product's genuine advantage and its genuine risk: you are protected if rates fall and stuck if they rise.

The recurring deposit

You commit to paying a fixed instalment every month for a chosen tenure. At State Bank of India the minimum is ₹100 a month in multiples of ₹10, and the tenure runs from 12 to 120 months. Each instalment earns the term deposit rate for the time it remains in the account, compounded quarterly — so the first instalment earns for the whole tenure and the last one earns for a month. The commitment is the point: the bank debits it whether or not you were feeling disciplined that month.

The overdraft against a deposit

You keep the deposit and borrow against it. The bank marks a lien on the deposit, gives you a credit limit against it, and charges interest only on what you actually draw and only for the days you keep it. At SBI the terms published for the facility are a minimum of ₹5,000, up to 90% of the deposit's value, interest at 1% above the rate on that deposit, calculated on daily reducing balance, no processing charge and no prepayment penalty.

FD vs RD: identical rates, very different money

Here is the comparison people expect to be close. Take ₹1,20,000 and 6.5% a year with quarterly compounding. In one case the whole ₹1,20,000 goes in on day one as a fixed deposit. In the other it goes in as ₹10,000 a month for twelve months as a recurring deposit. Same money, same rate, same year.

The recurring deposit earns barely more than half the interest at exactly the same rate. Nothing has gone wrong. The twelfth instalment was in the bank for one month; the first was in for twelve; the average rupee was in for about six and a half. An RD is not a worse product than an FD — it is the same product applied to money that does not exist yet.

Over longer tenures the gap widens in absolute terms, for the same reason:

What the rate card looks like right now

Deposit rates follow the RBI's policy rate with a lag. The Monetary Policy Committee held the repo rate at 5.25% at its August 2026 meeting, its fourth consecutive hold, keeping a neutral stance. Banks have followed: SBI cut bulk deposit rates by up to 25 basis points in late August while leaving retail rates below ₹3 crore unchanged, with its retail card topping out around 6.45% for general depositors and 7.05% for senior citizens on its special 444-day tenure.

Smaller banks pay considerably more. Several small finance banks were advertising rates around 8–8.5% on longer tenures over the same period, which is a genuine 1.5 to 2 percentage point premium over the large public sector banks.

The overdraft: never break a deposit you can borrow against

This is the section worth the most money, and it is the one least often explained. Breaking a fixed deposit early is punished twice, and most people only know about the first punishment.

The first is the penalty: at SBI, 0.50% for deposits up to ₹5 lakh and 1% above that. The second, and much larger, is the rate reset. You do not keep the rate you booked. The bank recalculates your interest at the card rate applicable to the period the deposit actually ran, and then deducts the penalty from that. Break a three-year deposit after eighteen months and you are paid the eighteen-month rate minus the penalty, on the entire balance, for the entire period — not just on the part you needed.

The penalty is the small half of the cost. The rate reset applies to all of the money, for all of the time it was invested.

So put the two routes side by side. You hold a ₹5,00,000 deposit booked for three years at 6.5%. Eighteen months in, you need ₹1,00,000 for about three months.

Nearly ₹15,000 on a ₹5 lakh deposit, for the sake of knowing that a facility exists. And the structural reason the overdraft wins is worth stating plainly, because it generalises beyond this example: the overdraft costs a 1% spread on part of the money for part of the remaining time, while breaking the deposit costs a penalty plus a rate reset on all of the money for all of the time it was invested. Whenever you need some of the money for some of the time, the arithmetic points the same way.

When breaking the deposit is actually the right call

There are real cases, and a guide that pretended otherwise would be selling something:

• You need essentially all of it, for good. There is nothing left to preserve, so the lien serves no purpose.
• Rates have risen sharply since you booked. If a new deposit pays enough more to recover the penalty and the reset within the remaining tenure, breaking and rebooking can genuinely win. Do the arithmetic rather than assuming it — the reset applies to the whole period already served, which is a large sunk cost to recover.
• You would otherwise borrow at a much higher rate. A deposit paying 6.5% while a credit card charges 36–42% a year is not a close call. Breaking the deposit is also better than that, but borrowing against it at 7.5% is better still.

The penalties nobody reads until they are charged

The RD delay penalty deserves converting into a number people can feel. ₹1.50 per ₹100 per month is 1.5% a month — about 18% a year. On a ₹10,000 instalment that is ₹150 for every month you are late. That is expensive credit, and it is the reason an RD instalment should be sized against the month you earn least rather than the month you earn most. An RD you can always pay at ₹5,000 beats one you miss twice a year at ₹10,000.

Tax: TDS is not the tax bill

This is the most common and most expensive misunderstanding in the whole subject. TDS is an advance instalment of your tax, deducted by the bank and credited to you. It is not the final liability, and having it deducted does not mean the matter is settled.

Three consequences follow, and all three cost people money every year:

• Interest is taxed at your slab rate, not at 10%. In the 30% bracket, a 7% deposit returns about 4.9% after tax. That — not 7% — is the number to compare against any alternative. TDS of 10% is simply a credit against the 30%.
• Staying under the TDS threshold does not make interest tax-free. Interest below ₹50,000 is still taxable income; the bank has just not deducted anything, which means the whole liability is yours to pay at filing.
• A cumulative deposit can create a tax bill in a year it pays you nothing. Banks deduct TDS as the interest accrues each year, not when the deposit finally pays out, so a five-year cumulative FD produces reportable interest in each of those five years.

Charges on the other side of the ledger move in the same direction — quietly, through the fine print, and usually in a way headlines describe backwards. The recent change to merchant discount rates on UPI payments is a good example of reading the structure rather than the announcement.

Choosing, in five questions

Rate comparison is the last step, not the first. Work through these in order and the choice usually makes itself.

The second row is worth a sentence of its own. Splitting a large deposit across several tenures — a ladder — means something matures every few months, so a need for cash rarely requires breaking anything at all. Combined with the overdraft facility, it removes almost every scenario in which a penalty gets charged.

Five mistakes that cost real money

• Breaking a deposit when an overdraft would do. Roughly ₹15,000 on a ₹5 lakh deposit in the worked example above, and the facility takes minutes to arrange.
• Booking a tenure longer than the plan. The penalty and the rate reset are both charged for early exit. Matching the tenure to the date avoids both entirely.
• Comparing pre-tax rates with post-tax alternatives. A 7% deposit in the 30% bracket returns about 4.9%. Compare like with like.
• Sizing an RD instalment optimistically. At ₹1.50 per ₹100 per month, missing instalments can cost more than the deposit earns.
• Letting one bank balance drift past ₹5 lakh. Interest counts toward the insurance limit. A deposit booked just under it grows past it.

Final verdict

FD vs RD was never really a competition. A fixed deposit is what you use for money you already hold and know the return date for; a recurring deposit is what you use for money you are still earning. Choosing between them by comparing rate cards is choosing on the one variable that is almost identical between the two, while ignoring the one — how long each rupee is actually invested — that determines the answer.

The overdraft is the part most readers gain most from. It does not belong in the FD vs RD comparison at all, because it is credit rather than saving, but it belongs in the decision, because it is what stops a mid-term cash need from destroying a deposit's returns. One percentage point over your own deposit rate, charged only on what you draw and only for the days you hold it, against a penalty plus a rate reset on the entire balance for the entire period. On the numbers above that is a ₹14,950 difference on a single ₹5 lakh deposit.

And the rate you are comparing is not the rate you receive. Interest is taxed at your slab, so the 30% bracket turns 7% into roughly 4.9% — while deposit insurance of ₹5 lakh per bank makes a small finance bank's 8% as protected as a large bank's 6.4%, provided the balance stays inside the limit. Get the product right, get the tenure right, keep the insurance limit in view, and borrow against the deposit rather than breaking it. The rate is the last decision, and the smallest.