Key differences between Fixed Deposit and Recurring Deposit

Fixed Deposit

Fixed Deposit (FD) is a financial instrument provided by banks and other financial institutions that allows individuals to deposit a lump sum of money for a fixed period at a predetermined interest rate. The interest rate on an FD is typically higher than that of a regular savings account, and it remains constant throughout the tenure, regardless of market fluctuations. Fixed Deposits offer guaranteed returns, making them a popular low-risk investment option. However, premature withdrawal may result in penalties or reduced interest earnings. FDs are used for wealth preservation and short- to long-term financial planning, offering flexible tenures ranging from a few months to several years.

Features of Fixed Deposit:

• Fixed Tenure:

FDs are investment products where the money is locked in for a specified period, which can range from a few months to several years. The tenure is decided by the investor at the time of opening the account, and it remains fixed throughout the term.

• Guaranteed Returns:

One of the most attractive features of a fixed deposit is the assurance of guaranteed returns. The interest rate is fixed at the time of investment and does not fluctuate with market conditions, ensuring that investors know exactly what they will earn at the end of the tenure.

• Higher Interest Rates:

Compared to regular savings accounts, FDs offer a higher interest rate. The interest rates on FDs are generally determined by the duration of the deposit and the prevailing rates set by the bank or financial institution. Longer tenures typically offer higher rates.

• Premature Withdrawal:

Though fixed deposits are intended for long-term savings, they offer the flexibility of premature withdrawal. However, withdrawing funds before the end of the tenure usually incurs a penalty, such as reduced interest earnings or a fee. Some FDs also offer a premature withdrawal facility without a penalty, but this is rare.

• Flexible Tenure Options:

Fixed deposits provide flexibility in terms of choosing the deposit period. Investors can select a tenure based on their financial goals, ranging from as short as 7 days to as long as 10 years, depending on the bank’s policy.

• Reinvestment Option:

Upon maturity, many banks offer the option of reinvesting the principal amount along with the accrued interest into a new fixed deposit. This allows investors to take advantage of compounding returns, further growing their savings.

• Loan Against FD:

Fixed deposits can also be used as collateral to secure loans from the bank. This is an attractive feature for those who need funds but do not wish to break their FD. Banks typically offer loans up to 90% of the FD’s value at a relatively low interest rate.

• Taxability:

Interest earned on FDs is taxable as per the investor’s income tax slab rate. If the interest earned exceeds a certain threshold, banks are required to deduct Tax Deducted at Source (TDS). Investors can avoid this by submitting tax-saving declarations like Form 15G or 15H if they meet the eligibility criteria.

• Safe Investment:

FDs are considered one of the safest investment options, as they are not subject to market volatility. Banks are insured by deposit insurance schemes, which cover deposits up to a certain limit, providing additional security to investors.

Recurring Deposit

Recurring Deposit (RD) is a savings scheme offered by banks and financial institutions, where individuals can invest a fixed amount of money at regular intervals, usually monthly, over a specified period. RDs offer a guaranteed return with a predetermined interest rate, which is typically higher than a savings account but lower than fixed deposits. At maturity, the depositor receives the invested amount along with the accrued interest. Recurring deposits are ideal for individuals who prefer disciplined savings and want to grow their funds systematically. The tenure for RDs usually ranges from 6 months to 10 years, and premature withdrawals may result in penalties or reduced interest earnings.

Features of Recurring Deposit:

• Regular Investments:

In an RD, the investor deposits a fixed sum of money at regular intervals, typically on a monthly basis. This feature helps individuals develop a systematic savings habit and is ideal for those who cannot invest a lump sum but want to accumulate wealth over time.

• Guaranteed Returns:

Like fixed deposits, recurring deposits offer guaranteed returns. The interest rate is predetermined at the time of opening the RD and remains fixed throughout the deposit term. This ensures that investors know the exact maturity value of their savings, providing security and predictability.

• Higher Interest Rates:

The interest rates on recurring deposits are generally higher than those offered on regular savings accounts. The rate is comparable to fixed deposits and depends on the bank’s policies and the tenure chosen. This makes RDs an attractive option for risk-averse investors seeking better returns than a savings account.

• Fixed Tenure:

RD accounts come with a fixed tenure, which is chosen by the investor at the time of account opening. The tenure typically ranges from 6 months to 10 years. Once the tenure is decided, it cannot be changed, and the investor must continue making regular payments until maturity.

• Premature Withdrawal:

Although RDs are intended for long-term savings, they offer the flexibility of premature withdrawal. However, breaking the RD before maturity usually results in a penalty or reduced interest rates. The exact terms depend on the bank’s policy, but early withdrawals may undermine the potential earnings.

• Partial Withdrawal Not Allowed:

Most banks do not allow partial withdrawals from recurring deposits. The investor must wait until the maturity of the RD to access the full amount, which includes both the principal and the accumulated interest.

• Flexible Amounts:

Investors have the flexibility to choose the amount they wish to deposit each month. This makes RDs accessible to a wide range of people, from salaried individuals to students and retirees. The minimum deposit amount varies by bank, making it suitable for different financial capacities.

• Loan Against RD:

Some banks offer loans against the value of the recurring deposit, similar to fixed deposits. This allows investors to borrow a certain percentage of their deposit, usually up to 90%, without having to break the RD prematurely. The loan is provided at relatively lower interest rates since the RD acts as collateral.

• Taxability:

Interest earned on recurring deposits is taxable as per the investor’s income tax slab. Banks are required to deduct Tax Deducted at Source (TDS) if the interest income exceeds a specified threshold. Investors can submit tax-saving forms such as Form 15G or 15H to avoid TDS if eligible.

Key differences between Fixed Deposit and Recurring Deposit

Key Similarities between Fixed Deposit and Recurring Deposit

• Guaranteed Returns:

Both Fixed Deposit and Recurring Deposit offer guaranteed returns. The interest rates are fixed at the time of deposit and remain constant throughout the tenure.

• Low Risk:

Both FD and RD are considered low-risk investment options, as they are not affected by market fluctuations, making them safe choices for conservative investors.

• Offered by Banks:

Both types of deposits are offered by banks and financial institutions, providing easy access to these saving schemes for individuals.

• Interest Rates:

The interest rates on both FD and RD are generally similar and higher than savings account rates, though they may vary slightly based on the bank and tenure.

• Tenure Choice:

Both FD and RD offer flexibility in choosing the tenure, which can range from a few months to several years, depending on the financial institution’s offerings.

• Loan Facility:

Both Fixed Deposit and Recurring Deposit accounts offer the facility to take loans against the deposited amount, usually up to 90% of the deposit value.

• Premature Withdrawal:

Both FD and RD allow premature withdrawals, but typically with a penalty or reduced interest rate, depending on the bank’s policies.

• Taxable Interest:

The interest earned on both FD and RD is taxable under the investor’s income tax slab, and banks may deduct TDS (Tax Deducted at Source) if the interest income exceeds the prescribed limit.

• No Market Dependence:

Both FDs and RDs are independent of stock market performance, meaning the returns are not influenced by economic or market changes, ensuring stability for the investor.