Fixed deposit v/s Recurring deposit – Which is better?

Fixed deposit v/s Recurring deposit – Which is better?

Deposit schemes are one of the safest investment options when an investor is looking to earn extra income generated from the interest on the principal amount. On the other side, these investments options show higher returns compared to the interest gained from the bank savings accounts. Therefore, most of the smart investors keep relatively less money in their bank account and invest the remaining sum in deposit schemes like Fixed Deposit (FD) and Recurring Deposit (RD).

Every financial companies provide FD and RD with an attractive rate of interest for different tenure. Amongst the two schemes, fixed deposit rates are more profitable compared to the recurring deposit. Before we conclude which one of the two schemes are better, we need to understand the basic difference between RD and FD.

In Fixed Deposit (FD), we invest a lump sum amount for a period. The compounding of the interest occurs monthly or quarterly and added to the principal amount at the end of the tenure. Whereas in Recurring Deposit (RD), instead of investing a lump sum amount, an investor gets an option to invest a variant amount monthly. Since interest generated on a bulk amount in FD is more, it shows higher returns than RD. However, if an investor can afford to invest a large sum of money monthly, then even RD can sometimes yield more interest than FD.

A smart investor should not only see the profit but also know the intrinsic difference between RD and FD as cited below:

  • A person investing in FD scheme is someone who has enough savings in the saving account. While for someone who is doing a job might not have enough resources, and for such people, RD is the best option. It allows them to invest a portion of their salary monthly.
  • Minimum investment amount in FD is Rs. 1000. Whereas in the RD scheme, you can even deposit Rs. 100 every month.
  • Tenure for a Fixed deposit ranges from a minimum of 7 days to a maximum of 10 years or beyond. In Recurring Deposit, the tenure of 6 months is a minimum and 10 years in maximum. In most of the cases, fixed deposit rates give higher returns than the recurring deposit.
  • You can open FD account only if you have your name in the savings account. However, there is a facility to open RD account under the name of minors by their parents or guardians.
  • RD does not allow partial withdrawals. However, some financial institute offer a loan against the same. If a person has applied for a tax-saving FD scheme, then the financial institute doesn’t allow partial withdrawal for a minimum of 5 years.
  • If a person forgets to encash during maturity, then there is a provision for auto-renewal in FD. Under this, your FD policy auto-renews for the same tenure, but the bank considers the interest rate prevailing at the time of auto-renewal in your account. You can take the withdrawal amount as cash if it is less than Rs. 20,000. If the amount exceeds this barrier, then you get this amount transferred directly to the savings account.
  • Nomination criteria are the same for both FD and RD. Only one nomination is possible, and a nominee needs to show the proof of death before claiming the FD or RD amount.
  • The financial institute offers a loan against FD and RD. They loan against you avail up to 75% of your FD value.
  • The interest earned from both the deposit schemes is taxable. If you earn up to 5 thousand in a year, then you are in under tax deduction.
  • The financial institute do not cut TDS from the RD scheme, but an investor needs to show the interest in the IT return. For those who don’t come under the criteria of TDS deduction should submit the Form 15G to the lender. Senior citizens can avoid TDS deduction by filling the Form 15H to respective lender handling their FD and RD account.
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