Fixed Deposit (FD) Vs Recurring Deposit (RD): Which is best?

In India, since childhood, we are taught to save money for any contingency. You would have seen your parents investing money in Fixed Deposits and Recurring Deposits but do you know the difference between the two? Do you know which one is better? We are going to discuss all these points today and we will share a lot of information about RD and FD to answer all your questions.

Basic Features of Fixed Deposit

Below are some of the key points explaining the definition and features of Fixed Deposit

  • Amount and Tenure – In Fixed Deposit, you decide an amount and tenure for the deposit. The minimum amount can be Rs 5,000 and there is no limit to the maximum amount. In addition to this, the tenure of the fixed deposit can be between 7 days to 10 years.
  • Interest Payment – You can choose to get the interest in your account on a monthly or quarterly basis. You can even choose to get the interest at maturity.
  • Liquidity – It is possible to liquidate the Fixed Deposit when you need money in an emergency. Most of the banks have started offering this facility via net banking as well.

Basic Features of Recurring Deposit

Below are some of the key points explaining the definition and features of Recurring Deposit

  • Amount – In FD, you make a lump sum payment at one time but this is not the case with recurring deposit. It is more like an EMI plan where you make small payments every month. In RD, you basically set an amount at starting of the year and the minimum amount is between Rs 500 to Rs 1000. This depends on the bank.
  • Tenure – The minimum tenure in Recurring Deposit is 1 year however, some of the banks have started offering RDs with 6 months of tenure as well.
  • Interest Payment – The interest is paid to the account holder at maturity along with the principal amount.

Fixed Deposit

Advantages of RD and FD

Advantages of Recurring Deposit and Fixed Deposit are listed below

  • Risk Free Returns – The funds earn a risk-free return and this means that you get a fixed return no matter how the market performs. Suppose, the bank is offering an interest rate of 7.5% then you will earn Rs 7,500 on an investment of Rs 1 Lakh. There won’t be any change to the returns that you earn.
  • Savings – The amount is locked and you can’t use that amount. The advantage of this is the fact that you won’t be able to use the amount for your personal account and hence this becomes a saving for you. However, in case of emergency, you can liquidate your deposit and get cash as per your requirement.

Also Read: Fixed Deposit (FD) Vs Public Provident Fund (PPF) – Which is a Better Option?

Basic Difference between FD and RD

We have shared the features and definition of Fixed Deposit and we have also shared the features and definition of Recurring Deposit. We would now like to highlight the difference between the two in a more transparent manner. This will help you in understanding what exactly is better for you. If you are still not able to answer that question then we will share the answer in two steps.

When is Fixed Deposit Better?

We have shared all the details about Fixed Deposit now and hence it would be clear for you if FD is better for you or if RD is better for you. If you are still looking for an answer, then let us tell you that Fixed Deposit is better for you if you have a lump sum amount available for investment.

When is Recurring Deposit Better?

If you do not have the lump sum amount available with you at the moment and if you wish to make the investments in a small amount from your salary or income every month then we would suggest you to opt for recurring deposit. It is a better way as the RD will ensure that you are saving money and not spending it.

Which Earns More Interest for Me?

The blunt and straightforward answer to this question is that the fixed deposit will earn you more interest when compared to Recurring Deposit. You can look at the example below and then we will explain to you why it happens.

Refer to the tables below to get an idea about the interest that you will earn with Fixed Deposit and Recurring Deposit.

Fixed Deposit
Investment Amount Tenure Interest Rate Maturity Amount Interest Earned
Rs 60,000 1 Year 7.30% Rs 64,501 Rs 4,501

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Recurring Deposit
Investment Amount Tenure Interest Rate Maturity Amount Interest Earned
Rs 5,000 per month 1 Year 7.30% Rs 62,422 Rs 2,422

So, you would have noticed here that you earn more interest in Fixed Deposit and it is surely significantly higher in case of Fixed Deposit.

But the fact is that you have deposited a lump sum amount in FD whereas you deposit a partial amount in Recurring Deposit. Look at the points below

  • In fixed deposit, you deposited Rs 60,000 at the start of the year and hence you started earning interest on Rs 60,000 from day 1.
  • In recurring deposit, you were depositing Rs 5,000 every month so for the first month, you were earning interest on Rs 5,000. Same ways, for the second month you were earning interest on Rs 10,000 and so on. We didn’t consider the compounding factor in this point to help you in explaining the point.
  • This means that the reason why you earn more interest in Fixed Deposit is because of the fact that the investments are higher and they are made in a lump sum way. This means that actually, there is no difference between the returns if you consider the actual time value of money.

What is a better strategy?

In this paragraph, we will combine whatever we said until now. The better strategy is to open a Fixed Deposit if you have funds available,however, if you wish to go for RD then you can select the tenure of RD as 1 year. After the maturity, move the amount to a fixed deposit and create a new RD.

We will explain this with an example. If you wish to invest Rs 5,000 every month, open an RD for a year. At end of the year, you will receive Rs 62,422. Now, create an FD with this maturity amount and at the same time, create a new RD with Rs 5,000 so that you stay disciplined when it comes to investments.

We hope that we have answered all your questions now. There are some other aspects of Fixed Deposit and Recurring Deposit which are majorly about the tax savings and tax deductions. We have answered those questions in FAQ part for you.

Frequently Asked Questions

I need a Regular Interest Income, What mode of investment is Preferred for me?

If in case, you need a fixed income then you must opt for FD and while booking the FD, select the option for interest payable on a monthly basis. This will ensure that you receive interest on a monthly basis and it will act as a continuous flow of income for you. Some of the banks deduct TDS in this monthly payment so ensure that you submit the declaration to the bank so that the TDS is not deducted.

Can I get Tax Saving Benefits with Fixed Deposit or Recurring Deposit?

You can’t get the benefits of tax saving in Recurring Deposit however, you can get the benefits of tax saving in Fixed Deposit under specific conditions. To get the tax-benefits under Fixed Deposit, you need to park your money in a Tax Saver Fixed Deposit where the tenure is 5 years. In addition to this, you won’t be able to liquidate the funds easily if required. The process is very much complicated and you will also have to pay the tax for the assessment year where you availed tax benefits because of Fixed Deposit.

Are there going to be any Tax Deductions in Interest Earned via Fixed Deposit or Recurring Deposit?

The answer to this question depends on your interest income. If you are earning over Rs 10,000 as the interest in an annual year then you will be taxed. The taxable amount will be the interest that is over and above Rs 10,000.

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