Difference Between Fixed Deposit & Recurring Deposit | Benefits
The most important thing to invest your money in is to create a safe financial future. Two of them are FDs and RDs. The two are safe, reliable, and are issued by the post office
and banks. However, they are unable to perform the same purpose at a financial level. If you’re wondering about the difference between fixed deposit and recurring deposit, this blog breaks it down in a simple, engaging way to help you decide between RD or FD, which is better for you.
Understanding the Basics of Fixed Deposit (FD) and Recurring Deposit (RD)
A fixed deposit, also known as a term deposit, is a kind of investment that banks and other financial institutions provide. It is a type of savings account where individuals can deposit a large amount of money and earn a rate of interest on FD at a certain level over a certain period of time.
RD’s full form is a recurring deposit. It is a banking or other financial company savings account. which allows individuals to save an amount of money at a fixed rate over a period of time, normally once in a month. It is one of the typical methods of saving money and receiving interest within a fixed period of time.
Key Features – Difference Between Fixed Deposit and Recurring Deposit
Without any waiting, we will look into the core difference between fixed deposit and recurring deposit by comparing their key features.
ConditionsFixed DepositRecurring Deposit
Tenure of the Deposit:Seven days – 10 yearsSix months – 10 years
Minimum Amount of Deposit for the Schemes:Rs. 100Rs. 10
Deposit Frequency of the Schemes:Single DepositMonthly deposit
Interest Rates:Minimum FD interest rate is 3%. Maximum interest on fixed deposits is 7%RD interest rate comes between 3.50% and 8.50%
Payout of the Schemes:Monthly, quarterly, or yearly withdrawals are possible with FDs. As a result, they provide a reliable source of income.Returns from RD are only realized when the scheme reaches maturity. At the end of the investment period – the investors are entitled to a lump-sum payment.
Withdrawals of the Scheme:This item is not available. Depositors, on the other hand, have the option of discounting their investment and withdrawing the funds. However, there is less attention to such cases.This item is not available. Depositors, on the other hand, have the option of discounting their investment and withdrawing the funds. However, there is less attention to such cases.
Auto-Renewal Facility of the Scheme:The facility is available to FDs.It is not available to RD schemes.
Default:Investors cannot default because the entire payment is made at the start of the term.The bank or institution has the right to cancel the account if the depositors fail to make RD payments for six months in a row.
Taxes on the Schemes:Interest income above INR 40,000 is taxed at 10%, and senior citizen depositors are taxed at INR 50,000. If your PAN isn’t submitted, you’ll get a 20% discount.Interest income above INR 40,000 is taxed at 10%, and senior citizen depositors are taxed at INR 50,000. If your PAN isn’t submitted, you’ll get a 20% discount.
Tax-Saving Facility:Deposits with a 5-year lock-in duration are available.Not available to this scheme.
Investment Type:FDs are one-time investment choices that do not encourage depositors to make ongoing investments.RDs are monthly investment choices that require participants to invest every month for the length of the scheme. As a result, depositors will develop an investment habit.
Insurance Over the Deposit:FDs have insurance coverage.RDs have insurance coverage.
Real-Life Examples – FD vs RD
Fixed Deposits: FDs may be utilized in a number of ways. They assist you in saving to make large purchases, they also provide income to those who are in retirement, as well as giving you access to cash on various occasions due to the delay in their developing stage. This means that seniors will get better rates and tax breaks. Another way through which people can access money is by using overdraft facilities without drawing on their deposits.
Recurring Deposits: RDs can be used to save towards future goals such as vacation, education, down payment on a car, or retirement. To help achieve these financial goals, they promote disciplined saving. In which the person deposits a set sum regularly and lets the compound interest grow with time.
Types of Fixed Deposit and Recurring Deposit Options
Types of FD You Can Choose
1. Cumulative Fixed Deposit: When you invest in a cumulative fixed deposit, the interest rate is compounded on the principal, and it is reinvested into the account. The capital and the interest are paid around the due date. This type of fixed account will suit all those who wish to see their savings increase with time because the account is earning some interest.
2. Non-cumulative fixed deposit: Non-cumulative fixed deposit pays interest on a normal basis either monthly, thrice a year, six months, or annually, as compared to a cumulative fixed deposit. This type of fixed deposit should be used by people with a constant flow of income based on their savings.
3. Company deposits: Non-Banking Financial Company (NBFCs) accept company deposits, which normally attract higher interest rates than bank deposits. However, they also carry a certain risk. These risks include mainly:
• Capacity of the company to repay the loan
• Credibility of the company
Variants of RD Available
1. Recurring Deposit Account or RD: This is the kind of account that any person above the age of 18 can open in most Indian banks and non-banking financial companies (NBFCs). With accounts, you choose a recurring amount and term and interest may be computed in either an un-compounded or compounded manner. One cannot deposit any additional money during the term. But in the end, one can withdraw large amounts.
2. RD Account with minors: Banks allow individuals below the age of 18 to open RD accounts, provided they have a parent to oversee the account. In this manner, parents will be able to save up money to send their kids to college and other necessities. This plan may offer the same returns as regular accounts, or it may offer larger returns.
3. Senior Citizens Recurring Deposit Account: Senior citizens are also allowed to open RDs, and most banks will give them a higher rate than the standard rates. The bank specifies a limit and a duration of this. The interest will be added to the principal every three months. Instead of the normal rates, most banks offer interest rates that are an extra 0.50% to 0.75% higher.
Pros and Cons – FD vs RD
Advantages of Fixed Deposit
• FDs help investors to save substantial money over a specified period of time.
• Section 80C provides you with tax exemption on your investments in a fixed savings deposit.
• Fixed deposits are a safe form of investing your money, as it guarantee returns on the money in the form of interest.
• A fixed deposit term could range from one week to ten years. The length of investment is up to the investor to choose.
• Fixed deposits have better interest rates than savings accounts. A fixed deposit calculator will help you determine the amount of interest you will earn on your FD.
• FDs are a type of liquid investment. Although the term is fixed, investors will be able to withdraw their money at any moment, but they will be charged.
Advantages of Recurring Deposit
• RD investments have a duration of 6 months to ten years.
• Investors may determine the duration of the RD by examining their investment objectives.
• Regular Deposits will help you to save little by little. They act to create financial discipline as they regularly invest a certain amount.
• All investments in Post Office RDs are tax-free under Section 80C.
• Due to borrowing against their RD investments, investors can make their funds more accessible.
• Investing in RDs is a risk-free undertaking that can provide you with a dependable source of income in the form of interest.
• The interest rate on an RD is also cheaper than that of a normal savings account at a bank. A recurring deposit calculator would help you determine the amount of interest you will earn on your RDs.
Limitations of FD and RD
The major limitation of FDs is that they are not flexible. When you put your money in a fixed deposit, remember that you will not be able to take the money out before the maturity date without a penalty. The liquidity ratio is far less than most other investment choices. Some people feel anxious about being unable to get funds to cover emergency situations, but an overdraft service can alleviate this fear to a certain extent.
There are some limitations of a recurring deposit (RD), such as:
• You may not be able to withdraw money early
• The lack of flexibility in how much you can save
• How long you can hold it
• The interest rates on such deposits tend to be lower than on other investments (fixed deposits or mutual funds).
You will also be required to make a monthly installment and this can restrict your access to your money within the term of the lock-in. Also, inflation will start to eat up on your buying power and you are not going to enjoy any tax benefit under Section 80C of the Income Tax Act and the interest you get will be taxable.
Recurring Deposit vs Fixed Deposit – Which Suits You Best?
One could use a recurring deposit (RD) if they don’t have enough cash to put into a fixed deposit (FD). But only a small amount of their monthly income. The FD and the RD are both very good investments because they are risk-averse and are largely in the lowest tax bracket. Pick a recurring deposit calculator on the Internet to identify the option which best suits the amount of money you wish to invest.
There is no single type of investment that can suit all the needs. But an RD is favored by many people due to its affordable costs and having the same returns as those of an FD.
How to Get the Best FD Interest Rates and RD Returns
• Compare the difference between the FD and RD rates among banks and NBFCs. This is made easy via online platforms.
• Choose longer FD rates.
• Look to check senior citizens/special schemes to get better returns.
• Calculate estimate returns in RD calculators and choose low cost monthly supplements.
Expert Advice – Choosing Between FD and RD
A fixed-rate deposit (FD) is a good way to put money when you want to get a high return on it. If you get the same amount of money every month, then choose RD. It assists you in saving to buy a new house or car. Ultimately, both are low-risk and fixed-interest, although FDs normally have a marginally higher interest rate than RDs.
Final Thoughts – FD vs RD, Which is Right for You?
The difference between a fixed deposit and recurring deposit is in their setup or usage, which makes them different. FDs are more appropriate when lump-sum investments have a higher payoff, whereas RDs are appropriate when the investor prefers to save on a regular basis. They are both safe, low-risk alternatives, but which one you pick is up to your financial discipline, money at hand, and objectives. Compare to make an informed decision: compare rates, evaluate tenures and online calculators.
FAQs
Which is better: fixed deposit or recurring deposit?
In comparing returns in FD or RD, it appears FD yields high returns.
What are the typical tenure options for FDs and RDs?
In the case of FD, the average tenure is 7 days to 10 years. On the other hand, RD is between six months and 10 years.
Can we withdraw RD anytime?
There is no such thing as early withdrawal of a Recurring Deposit account; it is most of the times penalized or given lower interest rates. Check with your bank on the rules, as they are different at each bank.
Can I get a loan against my FD or RD?
A bank can provide you with a loan against recurring and Fixed Deposits, using the deposits as security.
Who can invest in an RD?
A Recurring Deposit (RD) can be invested by individuals (non-residents, minors under guardianship), or non-resident Indians (NRIs) and the senior citizens. It is also applicable to the corporate bodies like companies and proprietorships.