Fixed Deposit vs. Recurring Deposit: When looking for safe and reliable investment options, many people turn to Fixed Deposits (FDs) and Recurring Deposits (RDs). These investment avenues offer guaranteed returns, making them ideal for those who prefer stability over high-risk investments. However, choosing between them depends on financial goals, income structure, and liquidity needs.
Fixed Deposits allow individuals to invest a lump sum for a fixed tenure and earn interest at a predetermined rate. In contrast, Recurring Deposits require monthly contributions, helping individuals build savings gradually while earning interest. Understanding the differences between these options can help in selecting the one that aligns with personal financial objectives.
Fixed Deposit vs. Recurring Deposit
Both FD and RD provide secure investment options, but they differ in terms of deposit method, returns, and suitability for different investors.
Overview Table
| Feature | Fixed Deposit (FD) | Recurring Deposit (RD) |
| Investment Type | One-time lump sum deposit | Monthly deposits |
| Interest Rate | 5.5% – 7.5% (varies by bank) | 5% – 7% (varies by bank) |
| Tenure | 7 days to 10 years | 6 months to 10 years |
| Liquidity | Can be withdrawn prematurely with penalties | Premature withdrawal allowed with penalties |
| Tax Benefits | Tax-saving FD (5-year tenure) qualifies under Section 80C | No tax benefits available |
| Best For | Investors with a lump sum amount | Those who prefer monthly savings |
Understanding Fixed Deposits (FDs)
A Fixed Deposit is a type of investment where a lump sum amount is placed with a bank or financial institution for a specific period. The interest rate remains fixed throughout the tenure, ensuring stable returns.
Benefits of Fixed Deposits
- Offers higher interest rates compared to regular savings accounts.
- Ensures guaranteed returns with no impact from market fluctuations.
- Provides flexible tenure options ranging from seven days to ten years.
- Certain tax-saving FDs offer deductions under Section 80C of the Income Tax Act.
- Allows individuals to take loans against their FD in case of financial emergencies.
Example Scenario
Amit invests ₹3,00,000 in an FD with an annual interest rate of 6.5% for five years. At maturity, his investment grows to approximately ₹3,58,500, making it a stable and predictable way to grow his money.
Understanding Recurring Deposits (RDs)
A Recurring Deposit is an investment option that enables individuals to deposit a fixed amount every month for a chosen period. It is designed for people who prefer a systematic savings approach.
Benefits of Recurring Deposits
- Encourages financial discipline through regular monthly deposits.
- Requires a lower initial investment, making it accessible for all income groups.
- Provides a fixed interest rate throughout the tenure, ensuring predictable returns.
- Offers flexible tenure options, ranging from six months to ten years.
Example Scenario
Meena deposits ₹7,000 per month in an RD with an annual interest rate of 6%. After five years, she accumulates around ₹4,85,000, helping her build a significant savings corpus over time.
Choosing Between FD and RD
The decision between FD and RD depends on investment goals and financial capabilities.
Opt for FD if:
- A lump sum amount is available for investment.
- Higher interest rates and fixed returns are preferred.
- Tax-saving benefits under Section 80C are important.
- A long-term investment with minimal transactions is the goal.
Opt for RD if:
- Monthly savings are preferred over a one-time investment.
- There is no lump sum available, but small amounts can be saved regularly.
- A short- to medium-term investment is needed.
- A systematic and budget-friendly savings option is required.
Taxation on FD and RD
FDs and RDs are subject to taxation, with FDs offering some tax-saving advantages.
- Fixed Deposit Interest Taxation: Interest earned on FDs is taxable under “Income from Other Sources.” Banks deduct TDS at 10% if annual interest exceeds ₹40,000 (₹50,000 for senior citizens).
- Recurring Deposit Interest Taxation: RD interest is fully taxable and does not qualify for Section 80C deductions. TDS is deducted if the interest surpasses ₹40,000 per year.
Ways to Save Tax on FD and RD
- Investing in a 5-year tax-saving FD allows deductions under Section 80C.
- Splitting FD investments across multiple banks helps reduce TDS deductions.
- Submitting Form 15G/15H can prevent TDS deductions for those with incomes below the taxable limit.
How to Open an FD or RD Account
Both FD and RD accounts can be opened easily through banks or financial institutions, either online or offline.
Steps to Open an FD
- Visit the bank’s website or nearest branch.
- Select the desired tenure and deposit amount.
- Provide necessary KYC documents (Aadhaar, PAN, etc.).
- Transfer the lump sum amount.
- Receive the FD receipt and monitor it through net banking.
Steps to Open an RD
- Log in to the bank’s net banking portal.
- Choose the RD option and enter the monthly deposit amount.
- Select the preferred tenure (6 months to 10 years).
- Set up an automatic debit from the linked savings account.
- Begin earning interest on regular deposits.
Conclusion
Both Fixed Deposits and Recurring Deposits provide secure investment options with assured returns. While FDs are suitable for those with a lump sum amount looking for higher interest rates and tax benefits, RDs work well for those who want to build savings gradually through monthly deposits.
Before making a decision, investors should consider their financial goals, liquidity needs, and tax implications. Evaluating these factors can help choose the best investment strategy for long-term financial stability.
Frequently Asked Questions (FAQs)
Which investment provides better returns, FD or RD?
FDs generally offer higher returns since the full amount is invested upfront, allowing the bank to generate more interest over time.
Are Fixed Deposits and Recurring Deposits safe?
Yes, both are among the safest investment options as they are regulated by the Reserve Bank of India (RBI).
Can FD or RD be withdrawn before maturity?
Yes, but premature withdrawals attract penalties, usually ranging from 0.5% to 1% of the applicable interest rate.
Can I get a loan against FD or RD?
Most banks allow loans against FD, covering up to 90% of the deposit amount. Some banks also provide loans against RD, but the terms are stricter.
Does the post office offer FD and RD schemes?
Yes, India Post provides both FD and RD options under the Post Office Savings Schemes with competitive interest rates.
