Fixed Deposit, Recurring Deposit or Public Provident Fund — which is best for a 5-year goal? Real numbers, post-tax returns, and the clear winner for each type of investor.
You have a 5-year goal — a car, a wedding, a house down payment. You do not want stock market risk. You want guaranteed returns. The three standard options are Fixed Deposit (FD), Recurring Deposit (RD), and Public Provident Fund (PPF). They look similar. They are not. The wrong choice can cost you Rs 30,000-50,000 in missed returns over 5 years. Here is the comparison with real numbers and post-tax calculations.
The three options, explained simply
Fixed Deposit (FD): You deposit a lump sum once. It earns interest at a fixed rate for a fixed tenure. Interest can be paid monthly, quarterly, or at maturity. Premature withdrawal is possible with a small penalty.
Recurring Deposit (RD): You deposit a fixed amount every month — like a monthly SIP, but into a bank deposit rather than a mutual fund. Each monthly instalment earns interest for its specific tenure. All instalments mature together.
PPF (Public Provident Fund): A government-backed 15-year scheme. You can deposit any amount (minimum Rs 500, maximum Rs 1,50,000) in up to 12 instalments per year. Partial withdrawal is allowed from year 7. Interest is fully tax-free.
Interest rates — July 2026
| Instrument | Rate (as of Q2 FY 2026-27) | Compounding | |---|---|---| | FD (SBI, 5-year) | 6.5% | Quarterly | | RD (SBI, 5-year) | 6.5% | Quarterly | | PPF | 7.1% | Annual |
PPF rate is set quarterly by the government. Bank FD/RD rates vary by bank, tenure, and whether you are a senior citizen (who typically get 0.5% extra).
Worked example: Rs 1,00,000, 5 years
### FD: Rs 1,00,000 lump sum, 6.5%, quarterly compounding
Maturity = Rs 1,00,000 × (1 + 0.065/4)^(4×5) = Rs 1,38,042.
Pre-tax gain: Rs 38,042.
### RD: Rs 1,667/month (total Rs 1,00,000 deposited over 5 years), 6.5%
This is NOT a lump sum. Each monthly instalment earns interest for a different number of quarters. The first Rs 1,667 earns interest for 20 quarters. The last Rs 1,667 earns interest for 1 quarter.
Maturity ≈ Rs 1,17,500.
Pre-tax gain: Rs 17,500.
### PPF: Rs 20,000/year (total Rs 1,00,000 over 5 years), 7.1%
PPF compounds annually, and deposits made before the 5th of a month get interest for that full month. Assuming Rs 20,000 deposited on 1 April each year:
Balance after 5 years ≈ Rs 1,21,500.
Pre-tax gain: Rs 21,500.
But PPF cannot be fully withdrawn at year 5 — partial withdrawal is only allowed from year 7. So this comparison is illustrative only; for a genuine 5-year goal, PPF is not the right vehicle.
Post-tax comparison — this is where it matters
| | FD (5-year) | RD (5-year) | PPF (illustrative 5-year) | |---|---|---|---| | Pre-tax gain | Rs 38,042 | Rs 17,500 | Rs 21,500 | | Tax rate (20% bracket) | 20% + 4% cess = 20.8% | 20.8% | 0% | | Tax on gain | Rs 7,913 | Rs 3,640 | Rs 0 | | Post-tax gain | Rs 30,129 | Rs 13,860 | Rs 21,500 | | Effective post-tax return | 5.3% | ~4.2% | 7.1% |
PPF wins on post-tax returns — but you cannot withdraw it at year 5. For a genuine 5-year goal with guaranteed returns and full liquidity, a 5-year FD is the right tool. A 5-year tax-saving FD adds an 80C benefit but locks your money for 5 years with penalty on premature closure.
The clear winner for each scenario
| Scenario | Best pick | Why | |---|---|---| | Lump sum available today, need money in exactly 5 years | 5-year FD | Highest guaranteed post-tax return among accessible options | | Monthly savings, need lump sum at year 5 | RD | Matches the cash flow pattern | | Long-term safety, do NOT need money at year 5 | PPF | Tax-free, sovereign guarantee, higher rate | | Monthly savings, want equity upside, can handle risk | SIP in index fund | Over 5+ years, equity SIP historically beats FD/RD post-tax | | Senior citizen | Senior Citizen FD or SCSS | Higher rates, quarterly payout option |
What about the 5-year tax-saving FD?
Banks offer a 5-year tax-saving FD that qualifies for Section 80C. The interest rate is the same as a regular FD (6.5% for SBI, higher for some private banks), but the lock-in is strict — no premature withdrawal, no loan against the deposit. Interest is fully taxable. The 80C benefit makes it competitive if you are comparing pre-tax, but on a post-tax basis, a regular 5-year FD is often more tax-efficient than a tax-saving FD because of flexibility.
Frequently Asked Questions
### Is FD better than RD for the same amount? If you have a lump sum, FD is better — your entire amount earns interest from day 1. In an RD, each monthly instalment starts earning interest only from the month it is deposited, so the total interest earned is lower for the same total deposit.
### Can I break an FD before 5 years without penalty? Most banks charge 0.5-1% penalty on the applicable interest rate for premature withdrawal. Some banks offer 'no-penalty' FDs for specific tenures. Check before depositing.
### Is PPF interest really tax-free? Yes. The interest earned, the accumulated balance, and the maturity proceeds are all fully exempt from tax. PPF enjoys EEE (Exempt-Exempt-Exempt) status under the Income-tax Act.
### Can I invest in all three — FD, RD, and PPF? Yes. They serve different purposes. An example portfolio: PPF for the ultra-long-term tax-free component, FD for the medium-term guaranteed component, RD if you prefer disciplined monthly saving without market risk.
### What is a better 5-year investment than FD/RD? For a 5-year horizon, a conservative hybrid mutual fund (equity savings fund or arbitrage fund) may deliver 7-9% with better post-tax efficiency (equity taxation applies to some categories). This is market-linked and not guaranteed. For a guaranteed return, FD/RD remain the standard.
Disclaimer
This article is for educational purposes only. FD and RD rates vary by bank and are subject to change. PPF rate is set quarterly by the government. Verify current rates before investing.