Fixed vs Recurring Deposits: Which one fits your investment goals best?
Sound investments are a journey of wealth creation that demands discipline and effort. Millions of people today depend on traditional investments like term deposits for financial growth, and these deposits have unique advantages.
Term deposits include fixed deposits and recurring deposits. Both are popular in India due to their low risks, high ROI, safety, and guaranteed returns. However, they differ fundamentally in their structure and suitability for varying financial needs.
This article will discuss the core differences between fixed and recurring deposits to help make an informed financial choice.
About Fixed Deposits
A Fixed Deposit (FD) is an investment in which individuals deposit a lump sum amount in a financial institution for a fixed period at a fixed interest rate.
Significance of Fixed Deposits
- The initial deposit in fixed deposits is made only once as a lump sum payment. Additional deposits are treated as separate deposits or FDs.
- One can receive the interest payouts on their investment amount at regular intervals or on maturity.
- Individuals can withdraw their FD anytime, but it comes with penalties. This means that funds are limited until maturity.
- There is no higher deposit limit, which means one can open an FD of any amount. They can also consider reinvesting their principal and interest amount on maturity. Some institutions also offer automatic renewal.
- Interest earned on FD accounts is taxable. However, one can save taxes by investing in tax-saving FDs, which offer benefits under Section 80C of the ITA.
- FDs are one of the safest ways to invest because they offer guaranteed returns. Funds can be invested for seven days to ten years.
- Another benefit is the high interest rates offered. FDs offer higher interest amounts than regular savings accounts or even RD accounts.
8 Types of Fixed Deposits
Here are different types of fixed deposit accounts that you can consider:
| FD Types | Description |
| Cumulative Fixed Deposit | It offers higher interest rates. Interest is paid only at maturity; therefore, it is suitable for long-term savings. |
| Non-Cumulative Fixed Deposit | Interest is retrieved regularly, ideal for those expecting regular income, like retirees. The final maturity amount is less than cumulative FDs. |
| Bank Deposits | Banks offer it only with potentially lower interest rates than NBFCs. |
| Company Deposits | NBFCs offer higher interest rates than banks, which is ideal for organisations with high credit ratings. |
| Senior Citizen FD | It is tailored for individuals over 60 years, offering higher interest rates and flexible tenures. |
| NRI FDs | This is available for non-resident Indians with NRO accounts, which offer higher interest rates than regular savings accounts. |
| Regular FDs | It provides fixed interest rates for terms ranging from seven days to 10 years. |
| Tax-Saving FDs | Ensure tax exemption up to ₹1.5 lakh annually under Section 80C, with a 5-year lock-in period. |
About Recurring Deposits
A recurring deposit allows one to deposit a fixed amount monthly and earn interest over a specified period.
Significance of a Recurring Deposit Account
- The minimum deposit amount starts at ₹500 with a minimum tenure of six months and a maximum of 10 years.
- There is no limit to the number of RDs one can open. Even minors can open accounts under parental supervision.
- Partial withdrawals are not allowed. Individuals must ensure that the deposit stays for the prescribed tenure if they want to benefit from earning interest.
- Senior citizens get the benefit of getting high interest rates.
- If one invests in Post Office RDs, the deposit amount is exempt under Section 80C, which means they can save taxes on such accounts.
- Individuals can take a loan facility on these investments instead of making early withdrawals, which enhances liquidity.
- These are safe and secure deposits wherein market rates do not impact the interest rate, and a steady income stream is offered with guaranteed returns.
- The interest rates offered are better than regular savings accounts but lower than FD rates.
- Individuals can reinvest the matured RD amount into a new RD.
4 Types of Recurring Deposit Accounts
For investment purposes, you can consider the following types of RD accounts:
| RD Account Types | Description |
| Regular Recurring Deposit Account | Individuals over 18 years old with regular income are eligible. Interest rates depend on tenure and deposit amount. One can earn higher interest than regular savings accounts but lower than FD accounts. |
| RD for Minors | Individuals under 18 years old are eligible. However, the account must be opened by a guardian or parent. |
| RD for NRIs | It is specifically curated for Non-Resident Indians, offering attractive interest rates. |
| RD for Senior Citizens | It is curated for senior citizens, offering higher interest rates than regular RD accounts. |
Fixed Deposit vs Recurring Deposit: How are They Different?
Let us look at the basic differences between FD and RD accounts using this table:
| Parameters | Fixed Deposit | Recurring Deposit |
| Frequency of Making Deposits | The lump sum amount is deposited in one go. | One has to make regular deposits on a fixed date each month. |
| Eligibility Criteria for Opening the Account | Individuals can open an FD if they have a bank account. | Individuals with a regular income can open an RD through the bank or NBFC. After following the KYC process, they can also open it in other banks. |
| Deposit Amount | There is no higher limit to these deposits. | These deposits start at ₹500, and there is no higher limit for such deposits. |
| Term of Deposit | Seven days – 10 years | Six months – 10 years |
| Minimum Amount | ₹100 | ₹10 |
| Rates of Interest (This depends on factors including but not limited to tenure, history with the institute, nature of the institute where you have invested, market rates & others) | 2.75% – 8.25 (9) % | 2.75% – 7.15% |
| Payout | Monthly/quarterly/ annual withdrawals | Lump-sum payment at the time of maturity |
| Withdrawals | Available with penalties (There are exceptions, wherein some financial institutions may allow withdrawals without deductions or penalties) | Available with penalties (There are exceptions, wherein some financial institutions may allow withdrawals without deductions or penalties) |
| Auto-Renewal Facility | Available | Not available |
| Default Penalty | Not applicable | If one doesn’t make RD payments for six consecutive months, the RD will stand cancelled. |
| Taxation | Interest income above ₹40,000 shall be taxed at 10%. For senior citizens, this amount increases to ₹50,000. The tax increases to 20% if the PAN number is not submitted. | Interest income above ₹40,000 shall be taxed at 10%. For senior citizens, this amount increases to ₹50,000. The tax increases to 20% if the PAN number is not submitted. |
| Investment Type | One-time investment | Monthly investment |
| Insurance Coverage (DICGC insures all types of deposits (e.g., Savings, Fixed, Recurring, etc.) with an insured bank but does not include deposits received from a foreign Government, the Central Government, a State Government, or another bank, or any deposit received outside India.) | Yes | Yes |
Recurring Deposit vs Fixed Deposit: What to Choose?
There is no formula or algorithm about which term deposit is better. It depends on the investors’ goals, financial situation, monthly income, and investment purpose. Here are some conditions:
- Choose FDs if you want to build wealth over time. Invest in RDs if you save some of your monthly income to meet financial goals.
- Consider FDs over RDs if you want to earn higher interest amounts, as FDs have a higher ROI than RDs.
However, FDs and FDs are the best investment options for people who prefer safe investments.
Conclusion
FDs and RDs are simple ways to diversify one’s investment portfolio, grow wealth, and fulfil their financial goals. Individuals can use FD or RD calculators to assess the returns. These tools also allow forecasting returns, assessing tenures, and making informed decisions.
FDs are for people who are looking for guaranteed returns, flexible payout options, and an initial lump-sum investment. RDs work well for those who want to earn high returns by saving smaller amounts regularly.
Both encourage a disciplined saving habit and help diversify your investment portfolio. Therefore, it is crucial to understand unique advantages and key differences before investing.
FAQs
1. Can I earn similar interest amounts through an FD or RD?
No, FD interest rates are higher than RD interest rates. FDs revolve around making a lump sum investment, which attracts higher rates. Moreover, earning interest amounts depend on tenure and the amount accumulated.
2. Who can invest in an RD?
Anyone who wants to save regularly can invest in an RD. RDs are best for those who are more comfortable making monthly deposits.
3. Who should invest in an FD?
FDs are for people who can invest a lump sum amount. These deposits are also for investors who are looking for higher returns.
3. Can I withdraw my RD amount at any point in time?
You can withdraw your RD funds anytime. However, the interest earned will be penalized. If you don’t wait until maturity, your interest will be reduced.
4. Can I apply for a loan on my FD account?
You can apply for a loan on a fixed deposit account. The loan amount can be up to 60% of the FD value, which can be 75% on a cumulative fixed deposit.
