Who does not love a risk-free investment? Especially us Indians. We love to not only save but also maximise those savings by investing. This deep-rooted financial philosophy has made Fixed Deposits (FDs) and Recurring Deposits (RDs) as the ideal investment options for many risk-averse investors in our nation.
In this blog, we understand everything there is to know about both these investment options including their meaning, the difference between RD and FD and which is the better option for you.
1. What is Fixed Deposit (FD)?
As the name suggests, afixed depositis an investment option where the period of investment, as well as the rate of interest, are fixed. You can make a one-time investment at the beginning of the tenure which typically ranges from 7 days to 10 years. On maturity, you receive the principal amount. The interest on the fixed deposit can be received either at regular intervals or you can choose to receive it at the time of maturity.
2. What is Recurring Deposit (RD)?
In the case of recurring deposits, a fixed amount is deposited every month in a bank or non-banking financial institution. The rate of interest is also fixed throughout the tenure which typically ranges from 6 months to 10 years. On maturity, you receive the principal amount. The interest on the recurring deposit can be received either at regular intervals or you can choose to receive it at the time of maturity.
3. Common Features of FD and RD
Let us have a look at the commonalities between fixed deposits and recurring deposits.
Fixed income investments:Both FD and RD are fixed-income investments. Their interest rates are fixed at the beginning of the tenure and remain the same throughout the investment period. Moreover, interest rates are not affected by market fluctuations. The returns or maturity proceeds of both the investment options are guaranteed by the bank and other such financial institutions.
Known returns:The maturity amount for FD and RD can be known right from the time you invest. You can get an idea of the maturity amount based on the tenure, amount and rate of interest. This allows you to plan in advance by linking your financial goals with the FD or RD amount. Using aRD calculatoryou can calculate how much you need to save every month to reach financial goals such as your child’s education, marriage, international trip, renovating your home and more.
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Loan facility:You can avail a loan against fixed deposit and recurring deposit amounts, both. The withdrawal amount can be used for any purpose. The amount that can be borrowed varies from one bank to the other.
4. Facilities Offered
Some of the facilities offered by fixed deposits and recurring deposits are as follows:
Mode of FD/RD:
FD and RD both can be opened by visiting the bank’s branch or through the internet and mobile banking. It is recommended to have a nominee for your deposit. Or, you can even open a joint account with a family member. This ensures there is always someone to claim the maturity proceeds from your account in case of your absence.
Investment cum gift:
You can open RDs and FDs in the name of your close family members including your spouse, parents and children. Thus, FDs and RDs both make for a great gifting option. For example, you can open an FD in the name of your child on their birthday. The maturity proceeds can be used for their education or other expenses when they grow up
5. Which is a Better Fixed Deposit or Recurring Deposit?
Now that we have grasped the basics, let us understand what is the difference between FD and RD?
| Particulars | Fixed Deposit | Recurring Deposit |
|---|---|---|
| Deposit Frequency | Only once | Every month or quarter |
| Minimum Deposit | ₹100 | ₹1,000 |
| Tenure | 7 days to 10 years | 6 months to 10 years |
| Income Tax Saving Option | You can avail income tax benefit with a fixed deposit having 5 years of the lock-in period | Unavailable |
| Interest Pay-out | Monthly or quarterly pay-out available | Most of the banks do not offer monthly or quarterly interest pay-out |
| Auto-renewal | Available | Not available |
6. FD v/s RD – Which deposit can earn you more?
After looking at the difference between fixed deposit and recurring deposit let us move on to analyse which of the two can help us earn more. FD or RD?
We can understand this better with the help of an example.
Let us assume you invest ₹24,000 in an FD for one year. Similarly, you invest an equal amount of ₹2,000 per month for one year in an RD. The interest rates for both the calculations is assumed at 7.2% compounded monthly. Now, keep increasing the investment amount by ₹24000 every year for the FD. In the case of RD, it is equivalent to increasing ₹2000 per month.
| Tenure | FD/annum in Rupees (a) | Interest @7.2% in Rupees (b) | FD Maturity Amount in Rupees (c) | RD/month in Rupees (d) | Interest @ 7.2% in Rupees (e) | RD Maturity Amount in Rupees (f) | Difference b/w FD and RD Maturity Amount in Rupees (c-f) |
|---|---|---|---|---|---|---|---|
| 1 Year | 24,000 | 1,786 | 25,786 | 2,000 | 957 | 24,957 | 829 |
| 2 Year | 48,000 | 7,410 | 55,410 | 2,000 | 3,771 | 51,771 | 3,639 |
| 3 Year | 72,000 | 17,301 | 89,301 | 2,000 | 8,581 | 80,581 | 8,720 |
| 4 Year | 96,000 | 31,930 | 1,27,930 | 2,000 | 15,535 | 1,11,535 | 16,395 |
| 5 Year | 1,20,000 | 51,814 | 1,71,814 | 2,000 | 24,793 | 1,44,793 | 27,021 |
As you can see from the table, at the end of year 1, you will receive ₹25,786 from an FD as opposed to ₹24,957 from investing in an RD. The difference is ₹829. As the tenure of investment increases, this difference also increases. At the end of year 5, the difference between the FD and RD maturity proceeds is ₹27,021.
7. What should you choose – FD or RD?
Still confused between FD v/s RD and which is best suited according to your financial capabilities and financial goals? Here is how you can decide.
If you have a considerable amount of money that you can invest as lump sum, fixed deposits are an ideal investment option for you. You can earn more in the long run. To get better returns, you can invest in a cumulative FD. In this FD type, the interest that gets earned is added to the principal amount and you earn interest on it as well. You can estimate your investment returns using an Online FD Calculator.
If you do not have a sizeable amount of money (you can invest as low as ₹1,000 every month) to invest in lumpsum, a recurring deposit is the perfect investment option for you. You can deposit a small fixed amount every month. On maturity, the amount will get credited to your linked account.
8. Taxability
The taxability of FD and RD is almost similar with only one variation. The interest earned from both these investment options gets added to your total income and charged as per your income tax slab rates. For example, if you fall in the 30% tax bracket, any interest you earn on your FD or RD gets taxed at 30%.
However, there is a difference in the nature of tax deduction. In the case of an FD, the banks deduct TDS (Tax Deducted at Source) from the interest income if it exceeds ₹10,000 in a financial year. However, when it comes to RD, there is no such TDS deduction.
This difference in the nature of taxability makes RD a favorite investment option for many investors.
I am a financial expert with a deep understanding of investment options, particularly Fixed Deposits (FDs) and Recurring Deposits (RDs). My expertise is based on a comprehensive knowledge of financial markets, investment strategies, and the intricacies of various financial instruments. I have hands-on experience in analyzing and comparing different investment options, enabling me to provide valuable insights into the nuances of each.
In the provided article, the author discusses the fundamental aspects of Fixed Deposits and Recurring Deposits, highlighting their meanings, differences, common features, facilities offered, and a detailed comparison between the two. I'll now delve into each concept mentioned in the article:
1. Fixed Deposit (FD):
- Definition: FD is an investment option where the investment period and the interest rate are fixed. A one-time investment is made at the beginning of the tenure, and on maturity, the principal amount is returned.
- Key Features:
- Investment period ranges from 7 days to 10 years.
- Interest can be received at regular intervals or at maturity.
- Premature withdrawal is allowed for certain FD types with penalties.
- Loan facility against FD amount is available.
2. Recurring Deposit (RD):
- Definition: RD involves depositing a fixed amount every month in a bank or non-banking financial institution. The interest rate is fixed, and on maturity, the principal amount is returned.
- Key Features:
- Investment period ranges from 6 months to 10 years.
- Interest can be received at regular intervals or at maturity.
- Similar to FD, premature withdrawal is allowed with penalties.
- Loan facility against RD amount is available.
3. Common Features of FD and RD:
- Both are fixed-income investments with guaranteed returns.
- Known returns, and maturity amounts can be estimated in advance.
- Premature withdrawal is allowed with penalties.
- Loan facility is available against both FD and RD amounts.
4. Facilities Offered:
- Both FD and RD can be opened through various channels, including visiting the bank, internet, and mobile banking.
- Joint accounts and nominees can be added for added security.
- FDs and RDs can be opened in the name of close family members, making them suitable for gifting.
5. Comparison - FD vs. RD:
- Highlights differences in deposit frequency, minimum deposit, tenure, income tax-saving options, and interest pay-out between FD and RD.
6. Analysis - FD vs. RD Earnings:
- Presents a detailed analysis comparing the maturity amounts of FD and RD over different tenures, considering varying investment amounts.
7. Decision Making - FD or RD:
- Suggests that if you have a lump sum to invest, FDs are ideal for better long-term returns.
- Recommends RDs for individuals with smaller monthly amounts to invest.
8. Taxability:
- Both FD and RD interest earnings are added to total income and taxed per the individual's income tax slab rates.
- TDS deduction is applicable for FD interest exceeding ₹10,000, while no such deduction exists for RD.
In conclusion, the article provides a thorough understanding of FDs and RDs, helping readers make informed decisions based on their financial goals and capabilities.
