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Fixed Deposit vs Recurring Deposit

Which is better FD or RD?

Last Updated 23rd Sep 2020

Parameters Fixed Deposit Recurring Deposit
Interest rate 2.25% to 7.50% 3.00% to 9.00%
Tenure 7 Days to 10 Years 6 months to 10 years
Minimum investment ₹ 100 ₹ 10
Periodic interest payout Allowed Not allowed
Periodic investment Not allowed Allowed
Premature Closure Allowed Allowed

What are the difference between FD and RD?

Fixed Deposit or FD and Recurring Deposit or RD are among two popular investment options in the country. Both of these investment tools allow investors to invest a fixed amount and gain returns at a fixed rate. The guaranteed returns and low risk make FD and RD alluring for many investors. Before, coming to any conclusion on the debate of Fixed Deposit vs Recurring Deposit, a thorough comparative study is required.

What is a Fixed Deposit?

Fixed Deposit is an investment instrument in which investors can invest a lump sum for a specific tenure, at a fixed interest rate and opt for a periodic payout. Investors can choose either a non-cumulative plan or a cumulative plan. With the non-cumulative plan, the principal amount is invested for a selected tenure and interest accumulated on the principal is paid back on a yearly, quarterly or monthly basis as opted by the investors. On the contrary, interest gained under cumulative FDs is accumulated in the compounding method and is reinvested along with the principal amount. The total amount, including the accrued interest and the invested amount, is paid back to the investors at maturity.

What is Recurring Deposit?

By opting for a recurring deposit, investors can choose an amount as per their requirement and keep investing the selected amount every month for a selected tenure. The principal amount, along with the accumulated interest, is paid to the investors at maturity. The interest rate remains the same throughout the tenure. Investors can opt for a short-term, mid-term or long-term tenure.

Benefit of FD and RD

Investors can enjoy wide-ranged benefits by investing in Fixed Deposits and Recurring Deposits. FD and RD have some common features. However, the difference between RD and FD cannot be denied.

Guaranteed returns

The interest rate offered under both FD and RD remains the same throughout the tenure. It does not get affected by any market turbulence. Therefore, the returns are assured for both Fixed Deposits and Recurring Deposits.

Flexible tenure and payout

One can make an investment in a Fixed Deposit for a minimum of 7 days and a maximum of 10 years. On the contrary, the minimum tenure for Recurring deposits is 6 months. The maximum tenure for RD is the same as the FD. Investors can select the tenures as per their convenience.

FDs provide flexibility in interest payouts by allowing periodic payouts. One can opt for monthly, quarterly or yearly payout. However, RD is not flexible when it comes to payout. Investors get the total sum, including the principal amount and the gained interest at maturity.

Premature closure allowed

Premature closure means closing the FD before its pre-decided maturity. Many FD providers allow premature closure. However, the penalty charge is also levied for closing the FD prematurely. Premature closure is allowed in Recurring Deposits with a penalty as well.

Tax benefits

With tax-saving FDs, investors can reduce their taxable income and hence can reduce the tax amount to be paid. Investors can avail tax exemption up to ₹ 1,50,000 under Section 80C of the Indian Income Tax Act of 1996, by investing in FDs. There are tax-saving Recurring Deposits as well. However, the options available for tax-saving RDs are limited.

Tax deducted at source or TDS is applicable on both Fixed Deposits and Recurring Deposits. TDS applies when the amount of gained interest crosses a certain amount in a financial year. Earlier the limit for Fixed Deposits was ₹ 10,000. However, currently, TDS is deducted if the interest gained on FD is more than ₹ 40,000 in a financial year. The limit is the same for Recurring Deposits.

Low risk

Fixed Deposits and Recurring Deposits are not market-driven. Therefore, the low chance of getting affected by market turmoil and the assured returns make both the investment tools less risky.

Which deposit gives you more return - FD or RD?

Investors invest in both Fixed Deposits and Recurring Deposits with the aim of earning money. Hence, in the discussion of FD vs RD, the most important aspect is which generates more returns. Below is an illustration to show the difference between FD and RD in terms of returns.

For instance, suppose one investor has invested ₹ 24,000 in a fixed deposit at an interest rate of 8.5% for 2 years. At maturity, the investor will be paid ₹ 28,430, which includes the principal amount of ₹ 24,000 and accumulated interest of ₹ 4,430.

Another investor has invested the same amount, i.e., ₹ 24,000 at the same interest rate of 8.5% and with the same tenure, i.e., 2 years. However, instead of depositing a lump sum, the investor has invested ₹ 1,000 on a monthly basis for 24 months in a Recurring Deposit. At maturity, the investor will receive ₹ 26,345 including the principal amount of ₹ 24,000 and accrued interest of ₹ 2,245.

Investment Tool Principal Amount Interest Rate Tenure Maturity Amount Accumulated Interest
FD ₹ 24,000 8.5% 2 years ₹ 28,430 ₹ 4,430
RD ₹ 1,000 8.5% 2 years ₹ 24,345 ₹ 2,245

Here, the difference between RD and FD is evident. The same amount of money, invested for the same tenure and at the same interest rates FD fetches an interest of ₹ 4,430, whereas RD fetches ₹ 2,245. Hence, FD generates ₹ 2,185 more than RD. The reason behind this difference is the method of interest accumulation. In case of an FD investment, the principal amount earns interest for an entire financial year. In case of an RD investment, the first deposit earns interest for an entire financial year, i.e., for 12 months. However, the second investment earns for the rest of the financial year, i.e., 11 months, and the third investment earns interest for the remaining 10 months.

FD v/s RD. Which is Better?

Fixed Deposit vs Recurring Deposit, to understand which is better, one needs to compare all aspects.

Parameters Fixed Deposits Recurring Deposits
Interest rates The interest rate for FD ranges from 2.25% to 7.50%. The interest rate for RD can be 3.00% to 9.00%.
Minimum deposit amount The minimum deposit required to open a FD account is ₹ 100. The minimum amount to be invested in Recurring Deposits can be as low as ₹ 10.
Payout Fixed Deposits allow monthly, quarterly and yearly payouts. Thus FDs can be a regular source of income. Investors receive the money invested in RDs at maturity. Hence, it cannot be used as a regular source of income.
Premature withdrawal/closure Premature withdrawal is not allowed. However, an investor can choose to discontinue the FD in between the tenure and withdraw the amount. In such a case, the interest will be calculated on a reduced rate as a penalty for premature closure of deposit. In case of Recurring Deposit, any partial or mid-term withdrawal is not allowed. However, same as FD, an investor can discontinue the deposit in between tenure. The return on deposit in such a case will be calculated on a reduced rate as a penalty for premature closure of deposit.
Investment habit Investors make a one-time investment in FDs. This does not create a habit of regular investment. Investors are required to keep investing a certain amount of money at a regular interval for a specific tenure. It creates an investment habit in investors.

What Should you choose - RD or FD?

Selecting one from FD vs RD will depend on individual financial objectives. Both investment tools generate decent interest and have low risk. One should choose the investment tool in accordance with their requirement.

FAQs

Who should choose FD?

The difference between FD and RD helps the investors to make the correct decision. If you want a regular source of income, then you should go for Fixed Deposits, as it allows you to opt for periodic payout. Moreover, FD is suitable for if you want a greater interest. Senior citizens and retired individuals should go for this investment tool.

Who should choose RD?

Investors who do not have a huge amount of sum to invest at one go should opt for Recurring Deposits; it will allow them to invest in small portions and instil a sense of regular investment in them.

Who are RD and FD account?

RD and FD accounts are two investment tools that generate assured returns. FD account requires one to invest a lump sum and generates periodic payout. On the contrary, an RD account requires periodic investment and generates a lump sum at maturity.

Which is good investment FD or RD?

FD is a good investment for those who can make a one-time lump sum investment and those who want a regular payout. Those who can’t afford or are unwilling to make a one-time investment and want to opt for regular investment should go for RD.

Which gives more interest RD or FD?

FD earns interest on the invested amount throughout the tenure. Contrarily, in case of RD, only the first deposit earns throughout the tenure. The second deposits earn interest from the second month of the tenure. The third investment starts making interest from the third month, and so on.


Our News - Sep 2020
  • 2020-09-17 : ICICI Bank changed its Fixed deposit rates
    ICICI Bank changed its FD rates effective from 11 September 2020. The FD rate for 7 to 29 days is 2.50%, the rate for 30 to 90 days is 3%, and it stands at 3.50% for 91 to 120 days. Further, the fixed deposit rate for 121 to 184 days is 3.50%, for 185 to less than 1 year it is 4.40% and for 1 year to less than 18 months it is 5%. The rate for 18 months to two years is 5.10%, and for 2 years 1 day to 3 years is 5.15%. The rate for 3 year one day to 5 years is 5.35% and it stands at5.50% for 5 years one day to 10 years.
  • 2020-09-17 : Punjab National Bank changed FD rates
    Punjab National Bank revised its FD rates effective from 1 September 2020. The FD rates for 7 to 45 days is 3%, for 46 to 90 days it is 3.25 and for 91 to 270 days it is 4.40%. The rate for long tenors of 271 days to less than one year is 4.50% and the rate for one year to up to 3 years is 5.25%. Further, the FD rate for above 3 years to 10 years is 5.30%.
  • 2020-09-17 : SBI changed its Fixed deposit rates
    State Bank of India changed its fixed deposit rate. The FD rate for 7 to 45 days is 2.90%, it is 3.90% for 46 to 179 days and 4.40% for 180 days to 1 year. Further, the fixed deposit rate for one year to less than three years is 5.10%, and for three years to less than five years it is 5.30%. The rate for 5 years upto ten years is 5.40%. The revised rates will be effective from 10 September 2020.
  • 2020-09-15 : SBI special FD scheme for senior citizens extended till December 31
    SBI special fixed deposit scheme for senior citizens has been extended. The scheme was launched to provide a higher interest rate to senior citizens in the current falling interest rate scenario. The special FD scheme for senior citizens will be available till year December 31.
  • 2020-08-27 : HDFC Bank revised its FD rates
    With effect from 25 August 2020, HDFC Bank revised its FD rates. The FD rates for 7 to 29 days is 2.50%, and it is 3% for 30 to 90 days. The fixed deposit rates for 91 days to six months is 3.50%, for six months one day to one year is 4.40%. Further, the FD rate for one year one day to two years is 5.10%, and it is 5.15% for two years one day to three years. FD rates for three years one day to ten years stands at 5.30%.
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