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Fixed Deposits (FD) and Recurring Deposits (RD) are the two most popular investment options where lakhs of people lock-in their money every month, in the hope of reaping good returns.
One of the main advantages of investing in an FD or RD is that they are risk-free investments where you are assured of getting their original principal back along with interest, unlike equity investments, which are dictated by market terms. The secured nature of these deposits with flexible tenures and competitive interest rates make them a preferred deposit scheme irrespective of age, gender, and occupation.
So, which one should you invest in? Which investment will fetch better returns? If you are looking for answers to these questions, then continue reading as we explain the features of Fixed Deposits vs Recurring Deposits along with a comparative study.
Even though Fixed Deposits and Recurring Deposits are one of the best available investment options, not many people are aware of their features or how they work. Let us look at some of the salient features of Fixed Deposits (FD) and Recurring Deposits (RD). Fixed Income Products
Both FDs and RDs are fixed income products where the bank or financial institution pays the investors a fixed rate of interest on the invested funds.
The frequency of these interest payments can vary from monthly to quarterly. The interest payment is added to the principal amount and can be withdrawn at the time of maturity.
The interest rate stays the same throughout the tenure of the deposit. Currently, banks and financial institutions are offering high rates of interest due to market conditions, which makes these deposit schemes even more attractive.
In the case of Fixed deposit schemes , the interest income which is accrued on the invested amount can be withdrawn on a monthly or quarterly or half-yearly or yearly basis. This means that if you invest a lump sum amount of money, you can withdraw the interest generated on it and use it as financial income. At the end of the deposit tenure, you will get back your originally invested principal. In the case of Recurring Deposits, it is not possible to withdraw the interest amount as the deposits are made every month and interest is calculated on them on a compounding or simple interest basis.
It is usually recommended that Fixed Deposits and Recurring Deposits should not be prematurely withdrawn until the money is required for an urgent reason or for a better investment opportunity. The reason being that a penalty is levied on the deposits, which leads to reduced interest income.
For example, if an FD of Rs. 4 Lakhs was made for five years at an interest rate of 7.5 %, but due to some unforeseen reason, the FD was withdrawn after two years. In this case, an interest rate applicable for a two-year FD term, 6 % will be levied on the deposit amount and not 7.5 %. Some banks levy a 1 % lesser interest rate penalty, which means that instead of a 6 % interest rate in the above case, 5 % will be levied on the deposit. This leads to huge loss of interest income and thus, should be avoided.
The interest income on Fixed and Recurring Deposits is subject to tax as per the depositor’s tax slab. Thus, if the investor falls in the 30% tax slab, the proportionate tax will be levied on the interest income.
The interest earned on Fixed Deposits deducts tax at source or TDS while Recurring Deposits do not levy TDS, making them more attractive for the depositor. Fixed Deposit Interest income above Rs. 40,000 is subject to TDS.
Both Fixed Deposits and Recurring Deposits can be used by investors as collateral to avail loans from banks. Banks provide up to 90% of the Recurring Deposit or Fixed Deposit amount as loan.
This is a good option when the depositor requires funds, but does not wish to break the deposit scheme or withdraw the money.
Both Fixed and Recurring Deposit schemes require the depositor to provide a nominee who will be the beneficiary of the funds in the event of primary depositor’s death. This is a general feature with all investment options as well as savings accounts, etc.
The main idea behind investing in deposit schemes is to generate interest income and increase the value of the deposit. Both Fixed Deposit and Recurring Deposit schemes, offered by a particular bank, provides the same interest percentage, yet it is seen that one type of deposit tends to generate higher interest income as compared to the other.
For example, if we invest Rs. 36,000 in an FD for 1 year at an interest rate of 7% and at the same time invest Rs. 3,000 in an RD for 12 months at the same interest rate of 7%, we will observe that the FD deposit gives us a higher interest income as compared to the RD as explained in the table below:
|Fixed Deposit||Recurring Deposit|
|Deposit Amount||36,000||3000 p.m|
|Interest Rate||7% compounded Annually||7% compounded Quarterly|
|Interest earned in a year||2,602||1,395|
|Total deposit after one year||38,602||38,602|
The table above shows us that Rs. 36,000 in a Fixed Deposit scheme for one year will fetch us an interest of Rs. 2,602 while a Recurring Deposit for Rs. 3,000 for one-year totaling INR 36,000 will give us only INR 1,395 in interest.
The reason behind this difference is that for a Fixed Deposit, the interest is calculated on the entire amount, i.e. INR 36,000. Whereas, for a Recurring Deposit, the interest is calculated on Rs. 3,000 for twelve months, then for Rs. 6,000 for eleven months, and Rs. 9,000 for ten months, and so on., thereby leading to a lower interest income.
Thus, investing in a Fixed Deposit scheme is found to be more beneficial than in a Recurring Deposit scheme. But not everyone can deposit lump sum money in a Fixed Deposit and would want to invest small amounts every month in a Recurring Deposit. Both the deposit schemes are good and can benefit different types of investors. It is recommended that investors deposit in either of the schemes based on their financial requirement and comfort. Also, Fixed Deposit and Recurring Deposit schemes are most beneficial for investors with low taxable income as it reduces their tax liability, but at the same time provides higher interest income.
What is the difference between a Fixed Deposit and a Recurring Deposit?
A Fixed Deposit is a saving scheme where the investor is required to invest a lump sum amount of money for a given tenure and pre-decided interest rate. On the other hand, a Recurring Deposit requires the investor to deposit a fixed sum of money every month for a given tenure.
A Fixed Deposit can be made for seven days up to ten years, while a Recurring Deposit can be made for a minimum of six months up to a maximum of ten years. The interest rates provided by a bank or financial institution for a Fixed Deposit or Recurring Deposit may be same or different. Even so, Fixed Deposits provide a higher interest income as compared to Recurring Deposits and thus are more popular.
Which bank is best for Fixed Deposit?
All banks provide different interest rate based on the base interest rate prevalent in the market and usually range between 4% - 8%. The top 10 banks Fixed Deposit interest rates in India 2019 is provided below for your reference.
Which is the best bank for Recurring Deposits?
Recurring Deposits can be made for a minimum of six months or up to ten years. The interest in the Recurring Deposit cannot be withdrawn mid-term and are ideal for investors looking for small monthly investments.
What should you choose, FD or RD?
The choice between an FD and an RD depends upon an individual’s financial requirement. If one has the lump sum amount of money accumulated say, from savings, or through inheritance, or PF withdrawal etc., then they can easily invest in a fixed deposit and earn interest on the same. However, if an individual does not have lump sum money for investing and would prefer to invest smaller amounts of money at regular intervals, then a recurring deposit is the best option. One deposit scheme cannot fulfil all the requirements. Thus, the decision between a Fixed Deposit and a Recurring Deposit is largely based on the investor. It is important to note that one can open multiple FDs and RDs with the same or different bank.
What is the minimum amount of deposit required?
The minimum amount required to open a fixed deposit is usually Rs. 1,000 while a recurring deposit account can be opened with the denomination as small as Rs. 10 or 100.