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.
As the name suggests, a fixed deposit is 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.
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.
Let us have a look at the commonalities between fixed deposits and recurring deposits.
Some of the facilities offered by fixed deposits and recurring deposits are as follows:
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 |
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.
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.
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.
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 favourite investment option for many investors.