Difference Between Recurring Deposit and Fixed Deposit

For conservative investors who prefer to limit their exposure to market-linked risks, fixed deposits (FDs) and recurring deposits (RDs) have traditionally been the preferred investment avenues. If you are also looking for low-risk investment options that offer guaranteed returns, both FDs and RDs are worth considering. That said, you may have to choose between the two options. 

So, the RD vs FD comparison is crucial if you have room for only one low-risk investment avenue in your financial plan. In this article, we’ll delve deeper into the recurring deposit vs fixed deposit debate, explore their benefits and discover the key differences between FDs and RDs.

Understanding Fixed Deposits (FD)

A fixed deposit is an investment where a lump sum amount is deposited with a bank or a financial institution over a fixed term. Also known as a term deposit, an FD offers interest on the lump sum amount invested at the outset. The rate of interest depends on the amount deposited, the investment tenure and the bank’s policies. 

The interest thus earned on the FD is taxable as income from other sources. So, banks typically deduct tax at source on the interest paid out (if the annual interest exceeds ₹40,000 for depositors below the age of 60 or ₹50,000 for senior citizens). If your income does not exceed the basic exemption limit, you can submit Form 15G (or Form 15H if you are a senior citizen) to prevent tax deductions at the source.  

Read More About Form 15G and 15 H

The key features of fixed deposits include the following: 

• The minimum investment amount for FDs can be as low as ₹5,000. 
• The maturity period of FDs is fixed and can range from 7 days to 10 or more years.
• The interest rates on FDs are generally higher than the interest rates on regular savings bank accounts.
• The interest earned on FDs can be reinvested in the deposit account or paid out at regular intervals to the investor. 
• Tax-saver FDs offer tax deduction benefits u/s 80C of the Income Tax Act equal to the amount deposited (up to ₹1,50,000). 
• Fixed deposits can be automatically renewed at the end of the deposit term. 

Benefits of Fixed Deposit (FD)

To fully understand the RD vs FD comparison, you need to know the benefits of each of these investment avenues. The advantages of fixed deposits include the following:

• Guaranteed Returns 

Fixed deposits offer guaranteed returns to the depositor. The interest rate is predetermined, so you can compute the total interest that you will earn from your fixed deposit over the investment tenure at the outset itself. 

• Flexible Investment

Fixed deposits can be customised to a certain extent to align with your financial preferences. The tenure can range from 7 days to 10 or more years, so you can choose a deposit term that aligns with the timeline of your associated financial goals. 

• Compound Interest

Fixed deposits offer the advantage of compounding over the long term. By choosing to reinvest your FD interest, you can earn returns on that interest as well as on the original amount deposited. 

• Liquidity 

Liquidating your FD is also quite easy. Premature withdrawals are allowed, although they are subject to penalties levied by the concerned banks. That said, it is advisable to remain invested throughout the tenure to leverage the benefits of compounding. 

Understanding Recurring Deposit (RD)

In a recurring deposit, you invest small sums regularly, as indicated by the name of the investment avenue. The deposit is usually made each month, although some banks also offer the option to invest in your RD every quarter. You earn interest on the amount deposited in your recurring deposit account. 

This interest is also taxable as income from other sources, just like FD interest. However, there is no comparable RD equivalent to tax-saver FDs, so you do not get any special tax benefits from recurring deposits. 

The key features of recurring deposits are as follows: 

• The permissible investment amount for RDs can range from ₹100 to ₹1,00,000 or more.
• RDs require multiple periodic investments over the deposit term. 
• They do not offer any special tax benefits. 
• Like FDs, recurring deposits also offer the option for auto-renewal, so you can continue to save in a disciplined manner. 
• Most leading banks allow you to avail of loans against your recurring deposits. 
• The interest earned on RDs is typically compounded quarterly. 

Benefits of Recurring Deposit (RD)

To continue the recurring deposit vs fixed deposit comparison, let’s delve into the advantages of RDs, which include the following: 

• Fixed and Safe Returns

Recurring deposits are safe investments that offer guaranteed interest on the amounts deposited in the RD account. The interest rate is also known upfront, making financial planning easier. 

• Disciplined Investments

Recurring deposits encourage disciplined investments because you need to deposit the fixed sum at periodic intervals. Whether the RD investment frequency is monthly or quarterly, it encourages you to save a part of your income diligently. 

• Accessible to All Investors

The minimum investment sum for RDs can be as low as ₹100 per month. This makes RDs accessible to investors across the financial spectrum, irrespective of the portion of their income that they can invest. 

• Flexible Investment Tenures

The investment tenures of recurring deposits can be as short as 6 months or as long as 10 years or more. This makes it easier to align your RD investment horizon with the timeline of the specific goal for which you are saving. 

Difference Between FD and RD

Now that you know the meaning and benefits of each of these two options, let’s take the recurring deposit vs fixed deposit discussion forward by comparing them across different parameters. The table below summarises the key differences between FDs and RDs. 

FD or RD: Which is Better?

Now that you have seen the recurring deposit vs fixed deposit comparison in detail, you can make a more informed decision about which of these two investment avenues may be better suited for your financial portfolio. 

Here’s a breakdown of the insights to help you make a clear decision. A recurring deposit may be suitable for you if you want to save a fixed amount regularly instead of making a lump sum investment. They are also ideal if you earn a steady, regular income and want to set aside a part of your earnings for the future. 

On the other hand, a fixed deposit may be a better option for you if you have a lump sum amount readily available at the outset. They are also well-suited for investors who have a short-term, medium-term or long-term outlook because the tenure of FDs can range from 7 days to over 10 years. FDs may also be a good option to consider if you want to save taxes because tax-saver fixed deposits offer tax deduction benefits under section 80C of the Income Tax Act. 

Conclusion

The bottom line is that both recurring deposits and fixed deposits have many advantages. You can resolve the RD vs FD dilemma by comparing the rates of interest, the returns and the benefits of each financial scheme. If you have a lump sum amount at your disposal, a fixed deposit may be suitable. However, if you want to invest small sums periodically, you can choose a recurring deposit. 

That said, it need not always be a question of recurring deposit vs fixed deposit. You can include both financial products in your portfolio to leverage the advantages of FDs as well as RDs and obtain guaranteed and safe returns. 

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