What the calculator computes
The calculator applies the standard bank RD formula — which compounds quarterly on the growing balance as each monthly instalment is added — to your monthly deposit amount, annual interest rate, and tenure, to project the total maturity value at the end of the term, along with a breakdown of total deposited versus interest earned.
Why an RD earns less interest than a lumpsum FD at the identical rate
This is the detail most people miss: even at the exact same interest rate, an RD earns meaningfully less total interest than an FD holding the same total amount, purely because of how the money enters the account. In an FD, the entire sum starts earning interest from day one. In an RD, only the first instalment has been in the account since the start — the last instalment has barely earned any interest at all by the time the tenure ends, since it was only deposited in the final month.
Take a 5-year RD of ₹10,000/month at 6.5%, totalling ₹6,00,000 deposited. This produces meaningfully less total interest than a single ₹6,00,000 FD held for the same 5 years at the same 6.5% rate — not because the rate differs, but because the RD's later instalments simply haven't had time to compound the way an FD's full sum does from day one. This isn't a flaw in the RD product; it's an accurate reflection of the fact that RD money arrives gradually, not all at once.
Why quarterly compounding matters slightly, though less than the deposit pattern
The RD formula's quarterly compounding is a secondary factor compared to the deposit-timing effect above — it produces a small additional boost compared to annual compounding on the same nominal rate, similar to how monthly versus annual compounding produces a modest difference on an FD. This detail is worth knowing but shouldn't be confused with the much larger effect of gradual versus lumpsum deposits, which is the real reason RD and FD returns diverge on paper even at an identical stated rate.
When an RD is still the right choice despite earning less than an equivalent FD
The comparison above isn't a reason to avoid RDs — it's a reason to understand what they're actually for. An RD suits situations where you don't have a lumpsum to deposit in the first place and are instead building savings gradually from monthly income, which is a genuinely common and reasonable situation, not a lesser alternative to an FD. Comparing an RD to an FD only makes sense if you're choosing between depositing a lumpsum today versus saving the same total gradually — if the lumpsum doesn't exist yet, the RD is simply the mechanism that matches your actual financial situation.
It's also useful for a specific, disciplined savings goal with a fixed target date — since the tenure and monthly amount are both locked in upfront, an RD can function as a forced-savings habit toward a known near-term goal, in a way that's harder to maintain with a flexible investment that doesn't have the same monthly commitment structure.
Common mistakes when using an RD calculator
Comparing an RD's total interest directly against an FD's without accounting for the deposit pattern. The lower total interest at an identical rate isn't a worse deal — it reflects that less money, on average, has actually been sitting in the account earning interest over the tenure.
Forgetting RD interest is fully taxable. Like FD interest, RD interest is taxed at your income slab rate, with TDS deducted by the bank above a threshold — the maturity figure the calculator shows is pre-tax.
Choosing RD for a goal where a SIP might serve better. If the goal is genuinely long-term (7+ years) and you can accept some return variability for potentially higher growth, a SIP into a mutual fund is worth comparing against an RD's guaranteed but lower return.