Posted on: May 24, 2016

FD vs. RD: What Sets Them Apart

Fixed deposits

Fixed Deposit (FD) and Recurring Deposit (RD) are the most popular investment schemes, particularly preferred by risk-averse investors. To understand how FD and RD differ from each other, it is important to first know what they mean.


FD and RD are fixed income products offered by all major financial institutions / banks. In both, one invests a specific amount for a specific tenure, and onthis invested amount, a fixed interest is receivable. At the end of tenure, investors receive the principal amount together with applicable interest.


The biggest advantage of investing money in an FD scheme or RD plan is the assurance of fixed returns minus the risk.


Fixed Deposit: An FD is a deposit made with a bank or financial institution for a predefined period. The investor deposits a fixed sum, once at the time of creating the FD. The interest on the invested amount is usually credited to the investor’s account every month or everyquarter. As an alternative, the interest amount for the chosen tenure is clubbed with the principal invested amount and the total sum is paid out cumulatively.


Recurring Deposit: RD is a financial instrument mainly directed towards encouraging savings. In this, the investor has the flexibility to save a specific sum every monthin a bank’s or financial institution’s RD account for a predetermined tenure, and earn interest on this amount. On maturity, interest is paid out along with the principal.
 

Difference between FD and RD

1. Sum investedFor RD, there is no fixed maximum or minimum limit, it depends on the bank. In some banks, the monthly minimum investment limit is INR 1,000 and the maximum is INR 15 lakhs. In case of an FD, there is no limit on the amount that can be invested. The amount depends on the bank and the minimum investment is INR 100.


2. Tenure: Duration of an RD ranges from 1 yearto 10 years and the investor deposits a fixed amount at regular intervals over the tenure opted for. For FD schemes, the tenure ranges from 7 days to15 years and investors may pick any suitable and comfortable tenure.


3. Objective:The basic objective to start an RD account is to save. Since an RD can be startedwith avery smalldeposit, it is a convenient saving medium to put away small amounts every month. The sole objective of an FD is to direct money towards investment.


4. Interest: In case of RD, the first installment earnsa 12-month interest, the second acquires interest for 11 months, the third installment gets interest for 10 months, and so on, until the end of the tenure. The interest usually depends on the monthly investment amount and tenure for a 1-year tenure, the interest is usually from 8% to 8.5%.


An FD is started with aninitial lump sum, which earns interest in a compounding manner on the entire deposited amount.For a one-year period, the interest varies between 7.5% and 8%, again depending on the principal amount and tenure opted for.


Note: FD interest rates are slightly higher than RD.


5. Documentation: For RD and FD both, investors need to submit address and identity proof, PAN Card, Aadhar Card, Passport and Income documents, if needed.


6. Tax implications: RD does not offer any tax benefit, the earned interest is taxable. If the interest on FD exceeds INR 10,000, TDS is deducted.However, tax exemption is also available under Section 80C of the Income Tax Act. To avail this tax exemption, Form 15-H needs to be filled in by senior citizens, and Form 15-G by regular customers – declaring all details of their FDs.


7.Withdrawal: For FD and RD both, the amount can be withdrawn along with applicable interest at the end of the opted tenure. Premature withdrawal is allowed for both, however a penalty is charged.
 

Which is a better investment option: FD or RD?

Both FD and RD are suitable for risk-averse investors, however, the final choice depends on one’s specific needs.


Those who do not have lump sum to invest and prefer smaller investment amounts each month, investing in an RD is a good option.Online RD calculators help assess the most suitable investment amount in line with one’s income. An RD is a more preferred choice as it translates to relatively lesser financial strain.


On the other hand, although one can get more returns with an FD, it does not offer the flexibility offered by an RD in terms of being able to deposit smaller amounts per month as per one’s convenience. However, FDs offer an important additional benefit, the investor can take a loan against FD on a nominal rate of interest and pay it back as per a tenure most comfortable for them.


Table 1: Example scenario – Return on Investment in an FD vs. RD
 

For calculation, we have taken the investment period as one year and rate of interest as 7.5%.
 

 

Fixed Deposit

Recurring Deposit

Investment

Rs. 12000

Rs. 1000

Annual Interest Rate

7.5% compounded quarterly

7.5% compounded quarterly

Total Annual Interest Earned

Rs. 924

Rs. 493

Difference

Rs. 431


Table 2: Fixed Deposit vs. Recurring Deposit Wrap-up
 

 

Fixed Deposit (FD)

Recurring Deposit (RD)

 

Rate of Return

 

                      

8%–9% for a period of 1 year

 

8%–9% for a period of 1 year

 

Tenure

 

 

07 days to 15 years

 

1 Year to 10 years

 

Premature Withdrawal Penalty

 

 

Yes, varies from bank to bank

 

Yes, varies from bank to bank.

 

Tax Benefit

 

 

Tax-saver FD with a minimum 5 year lock-in period has exemption u/s 80C of IT Act, 1961.

 

NIL

 

Interest Income

 

 

Taxable; usually banks deduct tax at source if interest earned crosses Rs 10,000 annually

 

Taxable/No TDS

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