Fixed Deposits(FD) and Recurring Deposits(RD) are two of the most popular investment instruments available in the market. Almost every Indian household has some money deposited in an FD or RD, to save for their child’s wedding or building a house. And this leads to a query of which is better in FD vs RD comparison?
First, let’s have a look at their basic definitions:
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What is a Fixed Deposit?
A Fixed Deposit or FD, is a popular investment option offered by Banks, Post offices, and NBFCs that requires you to deposit a lump sum at the start of the investment, instead of small periodic investments.
FD interest rates are fixed at the time of opening the deposit and continue to stay the same throughout the maturity tenure irrespective of the market fluctuations.
What is a Recurring Deposit?
Recurring Deposit or RD is another popular investment option offered by banks, NBFCs, and post offices in India. It allows depositors to save through small periodic investments and is used to build a savings corpus over the long and short term.
What makes it popular in households, is that a depositor doesn’t need a lump sum to start an RD. One can start an RD even if they have only a small amount of money
After learning their basic definition, let’s explore the many differences between an FD and RD:
FD vs RD: Features & Differences
Bank deposits like FD and RD are easy to open, operate, and withdraw money from. While both instruments are safe and conservative investment options, they have multiple differences as well.
Building a corpus to meet your financial goals becomes much easier when you set aside a fixed amount in a bank deposit.
The reason for this popularity can be attributed to the security they provide by offering fixed returns throughout the tenure. The mitigation of market-linked risks is what makes them a popular investment in comparison to their equity and debt counterparts.
Investment Type
FD – The investment amount for an FD needs to be deposited in one go as a lump sum in the bank, NBFC, or any other financial institution.
RD – The investment amount for an RD needs to be deposited in the form of small periodic installments.
Maturity Tenure
FD – The minimum tenure for starting an FD is 7 days and the maximum tenure for continuing the deposit is 10 years.
RD – The minimum tenure for starting an RD is 6 months and the maximum tenure for continuing the deposit is 10 years.
Returns
FD – On a comparison between an FD and RD, results show that an FD offers you more income than a recurring deposit. The reason is that the FD amount is deposited once, and is a lump sum that earns a higher interest rate.
RD – RD offers an investor a lesser amount of income at the time of maturity as compared to an FD since the account holder deposits monthly and therefore, the interest is also earned accordingly. Clearly, the interest earned on a small sum, say Rs. 500 will be much lesser than the interest earned on Rs. 5,000 keeping the tenure constant.
Interest Payout
FD – One of the best features of an FD is that it can be used as a source of regular income. Fixed Deposits allow monthly, quarterly, and yearly payouts. It is a great option for senior citizens since they can get a sum regularly after retirement.
RD – A RD cannot be used as a source of regular income. Investors can only receive the money invested in RDs at maturity along with the capital amount.
Premature Withdrawal/Closure
FD – Premature withdrawal is not allowed. However, an investor can choose to discontinue the FD in between the tenure and withdraw the amount. In such a case, the interest will be calculated at a reduced rate as a penalty for premature closure of the deposit.
As far as premature closure is concerned, many FD providers allow premature closure. However, the penalty charge is also levied for closing the FD prematurely.
RD – The rule for partial withdrawal from an RD is different from one bank to another. Most banks however allow a partial or premature withdrawal, after charging around 1-2% on the interest incurred by the investor. In other cases, a bank may allow for one partial withdrawal of upto 50% of the invested amount, free of any kind of penalty.
In the case of a Post Office, one can withdraw the permissible amount which is 50% of the balance after one year. However, it needs to be repaid in lump-sum along with the interest applicable. As far as premature closure is concerned, many RD providers allow premature closure. However, the penalty charge is also levied for closing the RD prematurely, same as FD.
Income Tax Saving Option
FD – Tax-saving FDs are a popular investment option among investors. They are available with a 5 years lock-in period and are amongst the best tax saving schemes under section 80C of the Income Tax Act, 1961. The amount invested cannot be withdrawn in between.
Tax saving FDs offer a higher interest rate compared to regular FDs. However, the interest earned at the end of 5 years is fully taxable.
RD – RDs don’t offer an income tax saving option at all.
Similarities Between FD and RD – Taxation
The amount in an FD or RD account is taxable under the same rules. And by the amount we mean the interest you earn on your deposited money.
TDS or Tax Deducted at Source is applicable on Fixed Deposits and Recurring Deposit.
If you provide your PAN card then TDS is deducted @10%, but there are few conditions to it. Also, if you provide Form 15, you can actually save on this TDS. Read about how and when to use Form 15 here.
Interest greater than Rs. 40,000 – TDS of 10% is charged on the interest amount you earn if it is greater than Rs. 40,000. Before budget 2019, the limit of TDS on interest income was Rs. 10,000.
Interest less than Rs. 40,000 – If the interest amount is lesser than Rs. 40,000, in that case, no TDS is charged. Before budget 2019, the limit of TDS on interest income was Rs. 10,000. This has been done keeping in mind the interest of small depositors.
If you don’t provide your PAN card then TDS is deducted @20%:
However, if you fail to provide your PAN card then the TDS will be deducted at the rate of 20%. The TDS deducted also depends on your income.
What Should You Finally Choose – FD or RD?
FD and RD are two of the safest tools for investment, however, both are suitable for a different category of investors. For depositors, who do not have a considerable sum of money to invest but can afford a small sum every month should go for an RD instead of an FD. Deposits will be made every month and the total amount or the maturity amount will be credited to your linked savings or current account at the completion of the RD tenure.
However, depositors who have a lump sum amount to invest can choose an FD. An investor will be able to get more interest as the principal amount is bigger right from step one.
Also, to get better returns, you should opt for a cumulative FD. Here, the interest earned in one cycle (per month, every quarter, semi-annually, or annually) will not be credited to your linked account but will be reinvested with the initial deposit amount. This will increase the principal and in the next cycle, the interest will be calculated on a higher principle, thus giving you higher returns.
