The difference between fixed deposit (FD) and recurring deposit (RD) is usually blurred due to the many similarities between the instruments. Both FDs and RDs are popular choices amongst people who like safety, stability, and predictability in their investments. FDs and RDs offer fixed returns for predefined periods and come with almost no risk.
What is a Fixed Deposit?
An FD, offered by banks and non-banking financial companies, offers differential rates of interest on time deposits.
Some of the salient features are listed below:
1. You may invest money for tenures ranging from 7 days to 10 years at predefined interest rates.
2. Once you open an FD, the interest rate is fixed and unaffected by market movements and fluctuation in interest rates in line with RBI directions.
3. The assured interest is guaranteed, and you receive the principal plus accrued interest at the end of the term of FD.
4. If you opt for periodic interest pay outs, you will receive the same at intervals that you choose.
5. You cannot normally withdraw money from an FD. Premature withdrawals are permitted only with a penalty.
6. There are 5-year tax saving FDs which come under the purview of section 80C of the Indian Income Tax Act. These FDs are locked-in for 5 years. You cannot withdraw even with a penalty. Investment in the 5-year tax saving FD is deductible, from your taxable income.
7. You can avail of loans and overdrafts against FDs. The terms and interest rates vary across banks
8. Most banks insist on opening a savings bank account if you want to place an FD with them. Crediting interest, transferring proceeds on maturity etc become easier if you have a savings bank account with the same bank.
Example: You invest Rs 10,000 in a fixed deposit at an interest rate of 6% per annum for 5 years. At the end of 5 years, your investment would have grown to ~Rs 13,469.
What is a Recurring Deposit?
An RD is a type of term deposit that allows you to systematically invest money over a period and earn guaranteed returns.
Some of the salient features of a recurring deposit are listed below:
1. Allows you to make regular deposits and earn returns that are higher than those offered for savings accounts
2. Flexible as you can invest periodically instead of in one lumpsum
3. RD tenure ranges from 6 months to 10 years
4. Fixed interest rate depending on tenure chosen. Interest rate unaffected by subsequent changes due to market forces
5. You may invest as low as Rs.1000 each month
6. Premature withdrawals are subject to a penalty just like in FDs
7. Helps inculcate a sustainable habit of saving
8. You may give standing instructions to auto-debit the recurring amount. Saves you time, energy and effort of transferring/depositing the amount at a defined frequency.
If you invest Rs 833 per month in a recurring deposit at an interest rate of 6% per annum for 5 years. At the end of 5 years, your investment would have grown to ~Rs 58,361
Difference Between FD and RD
In an FD, you deposit only once and watch the principal grow over a predefined tenure, whereas, in an RD, you must deposit money periodically over the defined tenure. Finer differences are tabulated below:
|Features||Fixed Deposit (FD)||Recurring Deposit (RD)|
|Tenure||7 days to 10 years||6 months to 10 years.|
|Investment type||One time||Recurring|
|Investment Limit||Minimum Rs 1000 (in public sector banks
Minimum Rs 5000 in other banks
|Minimum Rs 50 (in Canara Bank/public sector banks)
Minimum Rs 1000 in other banks
|Rate of Return||Even at the same rate of interest, FD would earn more interest as compared to RD||Even at the same rate of interest RD would earn less interest as compared to FD|
|Tax Benefits||5 Year locked-in FDs are eligible for tax deduction u/s 80C||No benefits on investment|
|TDS on Interest||10% TDS on cumulative interest > Rs 40,000||10% TDS on cumulative interest > Rs 40,000|
|Loans||Loan and OD Facility||Generally not offered|
|Withdrawal||Premature withdrawal is allowed (for non-tax saving FDs) with a penalty.||Premature withdrawal is allowed with a penalty.|
Types of Fixed Deposit
FDs are different types and are offered by different entities. A few of the popular ones are listed below:
1. Bank Deposits:Offered by the public sector and private sector commercial banks. Interest rates are generally lower than those offered by non-banking financial companies and corporate houses.
2. NBFC/Company Deposits:A company FD or NBFC deposit is issued by companies that want to raise funds from the general public. These deposits are rated by agencies such as ICRA, CARE, CRISIL, etc.
3. Post Office FD:A post office FD, also called post office term deposit, is issued by the Indian Postal Services and is backed by the sovereign guarantee of the Indian Government.
4. Tax Saving FD:Investments in tax-saving FDs are eligible for a deduction, from taxable income, u/s 80C of the Indian Income Tax Act. Tax-saving FDs have a lock-in period of 5 years.
Types of Recurring Deposit
RDs can be opened in banks, post offices and NBFCs. The different types of RDs are listed below:
1. Post Office RD:Minimum INR 100 per month or any amount in multiples of INR 10 can be invested in a post office RD. There is no maximum limit. After 12 consecutive instalments, and if an account is continued for 1 year without any breaks you may avail loan facility up to 50% of the balance available in the account.
2. Bank RD:A bank RD is a term deposit which requires periodic investment and gives you a predictable, guaranteed return on that investment.
3. RD for Senior Citizens:Senior Citizens get an additional interest rate of 0.25% to 0.75% over and above the regular interest rate offered by the bank.
Alternatives to Long Term FDs and RDs
There are other credible, equally safe investment avenues that you can explore as an alternate to FDs and RDs. Some of them are listed below:
1. Endowment Plans:Endowment plan is a safe investment strategy to build a corpus and give your family a financial cushion (through an insurance component) in case of your untimely demise. Endowment plans help you save money, protect your life and also save on taxes both on investment and during withdrawals.
2. Public Provident Fund (PPF):The current rate of interest is 7.1% and is a safe option if you want risk-free, stable returns in the medium-to-long term. You must deposit a minimum of Rs 500 and may deposit a maximum of Rs 1.5 lakhs each year in your PPF account.
3. Unit Linked Insurance Plans (ULIPs):Periodic investments in the form of premiums. Option to invest a large chunk into debt funds if you are risk averse. Other features of ULIPs for the long-term:
- Option to invest in equity funds
- Bonus additions for long-term investors
- Option to invest up to the age of 99 – Meet, retirement, pension and legacy goals with a single plan
- Partial withdrawals allowed after 5 years
- Withdrawals and maturity values are tax-free
- A life cover along with your investment
Alternative Fixed Income Options for Growth
If you do not have a lump sum to invest in an FD, you may explore RDs. Both RD and FD are ideal options to earn guaranteed interest over predefined periods. Use an online FD/RD calculator to evaluate what suits you best. There are equally good avenues such as ULIPs and endowment funds that give stable returns and give additional benefits as well. Compare those too and put in your money wisely by diversifying your investments.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.