Fixed Deposits Vs Recurring Deposits: When To Choose What?

Both FD and RD differ on many parameters, which make them suited for different financial goals

If you have a regular income instead of a lump sum amount to invest, explore recurring deposits.

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Choosing between a Fixed Deposit (FD) and Recurring Deposit (RD) can often leave investors puzzled. Investors looking for safe and reliable avenues to grow their wealth will find both FDs and RDs to be suitable. However, both these products differ on many parameters, which make them suited for different financial goals. Let’s delve into the details of both these instruments and help you decide the one to pick. 

Investing in Recurring Deposits (RDs)

An RD investments involves depositing a fixed amount monthly for a specific period that usually ranges from 6 months to 10 years. The bank offers interest on the accumulated amount, which is credited at maturity. Interest rates offered on RDs depend based on the deposit tenure and the bank’s policies, similar to FDs. This disciplined investment approach suits investors with a steady income wishing to build wealth gradually. Here is an example to understand. You start a recurring deposit of Rs 5,000 per month for three years at an interest rate of 6.5 per cent. On maturity, your potential earnings would approximately be Rs.1.99 lakh, including interest. 

Investing in Fixed Deposits (FDs)

A fixed deposit allows you to make a lump sum investment for a fixed tenure, usually ranging from 7 days to 10 years. Banks offer a fixed interest rate on this deposit and senior citizens often enjoy slightly higher rates. As a result, FDs are ideal for investors seeking a secure investment providing fixed returns on surplus funds. For example, if you invest Rs 2 lakh in an FD for three years at an interest rate of 7 per cent, your investment will yield an approximate return of Rs.2.46 lakh upon maturity. 

How and when to choose which option?  

If you have a regular income instead of a lump sum amount to invest, explore recurring deposits. They are ideal for building funds for short- or medium-term goals like vacations or buying gadgets. On the other hand, choose FDs if you have surplus funds that you want to invest towards stable, long-term returns. They are more suited for long-term financial goals like building an emergency fund or retirement planning.   

Key Differences Between RDs and FDs

• Feature Recurring Deposit (RD) Fixed Deposit (FD)
• Investment Type Monthly contributions One-time lump sum
• Tenure Flexibility 6 months to 10 years 7 days to 10 years
• Liquidity Limited, with penalties Limited, with penalties
• Target Audience Regular savers Investors with surplus funds

Tax liabilities

The interest earned from a recurring deposit and fixed deposit is subject to tax under the Income Tax Act, 1961. While the taxation rules are largely similar for both, it is crucial to understand the nuances of each for making an informed decision. The interest earned on RDs and FDs is fully taxable under the ‘Income from Other Sources' category. It is added to the investor’s total income and taxed according to their applicable income tax slab rate. This means individuals in higher tax brackets may pay tax more on their returns from these deposits. 

Both these investments serve different financial purposes. Before choosing either, it is important to assess your financial goals, cash flow, and risk appetite. While RDs are ideal for steady savers, FDs cater to those seeking higher returns on surplus lump sum deposits. To maximise returns, diversify by balancing your portfolio with both these investments.  

The author is the DGM, Communication at Bankbazaar.com. This article has been published as part of a special arrangement with BankBazaar.