Fixed Deposit VS Recurring Deposit: Which is Better?

Fixed deposit (FD) and recurring deposit (RD) are the most popular investment products in the country. It helps investors save and invest regularly without any risks. What makes FD and RD popular are its features offering fixed returns and risk-free investment options.

These schemes allow the investors to invest a specific amount on which the interest is calculated. Investors receive both the amount and the interest at the end of the tenure. All major banks and financial institutions offer FDs and RDs and are a safer investment option as they are not subject to market risks. Given below are all the details of recurring deposit vs fixed deposit.

What is FD?

Fixed deposits earn a fixed return and are a low-risk saving option. Investors can choose a tenure from 7 days to 10 years. The rate of interest differs according to the duration of the fixed deposit, the policy of the concerned financial institution, and the overall rate in the economy. The interest on the amount is credited to the depositors account on a monthly or quarterly basis. Usually, the interest rates offered on deposits above Rs.1 crore is less than that provided on deposits below Rs.1 crore. Fixed deposits do not involve any risk and provide good returns. FDs offer a higher interest rate compared to the savings account. Usually, there are limits on the amount deposited and is an efficient method to save tax. However, the minimum deposit amount can be as low as Rs.100. All residents of India and minors, along with HUFs (Hindu Undivided Families) are eligible to open an FD account. NRIs can also book FDs but at different interest rates than what is offered to the residents of India.

There are many schemes under fixed deposits as well. Each category offers attractive features which differ from another such as loan against fixed deposit and sweep-in facilities. There is also a particular category of fixed deposits known as the tax-saver fixed deposits. This type of fixed deposit offers a deduction for an investment of up to Rs.1.5 lakh per annum. While, the tenure for a normal fixed deposit may range from 7 days to 10 years, the term for tax-saver fixed deposit range from 5 years to 10 years.

What is RD?

Recurring deposit is a type of term deposit wherein the investor has to make regular deposits to earn returns at a percentage stated by the bank. It is a useful investment cum deposit tool for those looking for short-term investment options. The most significant difference between RD vs FD is that the former is comparatively more flexible. Recurring deposits offers the flexibility to choose a specific tenure as well as the amount to be deposited regularly.

Recurring deposits earn interest at a pre-specified rate for a tenure that the investor chooses. The interest rate can either be compounded monthly or quarterly. The factors affecting the interest rates of recurring deposits are the tenure, the selected bank, investor’s age, and the account type. The interest is added to the investment at a certain frequency or at the time of maturity. At the time of maturity, investors get the actual amount and the total interest earned.

The minimum investment can even be as low as Rs.10 and can vary from bank to bank. The tenure can range from 6 months to 10 years. All residents of India and HUFs (Hindu Undivided Families) are eligible to open an RD account. Since, the main aim of recurring deposit is to encourage people to save money and to inculcate the habit of saving, many banks also allow minors to open an RD account. Nevertheless, minors must have guardians to supervise their finances.  

Features of FD and RD

Here are some of the significant differences between recurring deposit and fixed deposit along with their features.

Returns on Investment

In case of fixed deposit, investors can earn interest on the entire amount deposited on a monthly, quarterly or half yearly basis. On the other hand, when it comes to a recurring deposit, the interest is on a recurring basis.

Investment Tenure

Tenure ranges from 7 days to 10 years in case of fixed deposit whereas the tenure ranges from 6 months to 10 years in RD.

Tax Benefits

Both the schemes come with the same tax liability. The interest received from a savings account, FDs and RDs are added to the investor’s total annual income and taxed at the investor’s personal rate. If the investor falls under the 30% tax slab, the interest earned is taxed at the same percentage rate. Banks deduct TDS and taxes are charged if the interest amount in a year exceeds Rs.10,000. No tax is deducted if the total interest earned is less than Rs.10,000 in a year.

Read about Tax Saving Fixed Deposit

Interest Rates

Although the interest rates of both the schemes are somewhat similar, investors earn more with FD than on RD with the same tenor and interest rate.

One can understand the major difference between FD and RD after studying the above-given points.

Which Investment Gives Higher Return FD or RD?

After comparing the difference between FD and RD, one can see that fixed deposit earns more income than the recurring deposit. The main reason being that the interest is calculated on the lump sum amount and the entire money earns interest for the specified period. But in RD, the first instalment earns interest for, say 12 month’s period, the second for 11 months, and so on. Fixed deposit earns more due to this variation.

Although FD gives higher returns than RD, FD may not be feasible for many. Inventors who do not have a lump sum amount to invest but can instead invest a small portion from their income every month can opt for RD instead of FD. But, if one has the lump sum money, they must opt for fixed deposit. Moreover, FD gives higher returns due to its compounding factor. Investors can also use online calculators to choose which is the better investment option between RD vs FD.