Fixed Deposit (FD) and Recurring Deposit (RD) both are the financial instruments for saving. The difference between RD and FD is often a lesser known point. Both the instrument gives pre-assured, fixed return. The degree of safety (or degree of risk) in both kinds of the instrument is also similar in nature. The interest rates offered for both types of deposits are also comparable with a minute difference. However, there is a key difference between FD and RD when it comes to the time of investment, amount of investment and amount of interest. Following paragraphs will throw more light on theseaspects so that you can get the best FD rates and best RD rates available in the market.
Interest Earnings: Perspective of Interest rate and Interest Amount
Although interest rate could be the same for fixed deposit and recurring deposit, it does not mean you will earn the same amount of interest for a particular investment. For example, if you have opened a one-year recurring deposit with Rs. 10,000 per month, only first month’s deposit will earn full interest for one year. The second month’s deposit will earn interest for the next eleven months. In the same way, the third month’s deposit will earn interest for the next ten months only. Hence, your entire investment does not earn the full one year’s interest. On the other hand, had you invested a lump sum amount of Rs. 1.20 lacs in fixed deposit, your entire amount will be eligible for full interest amount. In a nutshell, you will get much lesser amount as interest payment in case of RD even if you are offered the same rate of interest as FD.
Step by Step Savings
Although the interest amount is not as good as a lump sum amount, you can create huge corpus by saving a small amount every month. At the end of the maturity period, you can get a lump sum amount of your original investment plus interest earned. Many people cannot save a large amount in one go but can save a small amount every month. For them, RD is the ideal investment option.
Ease of Investment
In most of the cases, you can give bank mandate, popularly known as ECS. By this facility, your savings bank account is debited on a particular date with an amount equal to RD installment. Hence, you don’t have to repeat the formality of the investment in every transaction. On the other hand, in case of Fixed deposit, you have to perform KYC formality and other paperwork every time you open a new fixed deposit.
Many investors assume that there is no tax applicable in the case of RD. However, it is not a fact. The interest income is clubbed with your regular income and taxed at your applicable tax rate. There is no difference in tax in the case of FD and RD. However, when yearly interest income is more than Rs.10000, TDS is deducted from the FD. While there is no deduction of TDS in case of RD. Nevertheless, the tax is payable in both cases. In case your taxable income is below the limit of applicable tax, you can apply for TDS waiver by submitting form No. 15 G or form no. 15 H.
If you come across to the situation when you need money in an emergency, the rules for RD are a little bit complex. First, many banks insist that there should be a minimum of 12 instalments paid by you before you are eligible for withdrawal. Moreover, you will be paid much lesser interest than the contracted period if you withdraw the amount in between. The rate of interest come back to normal once you repay the withdrawal. In the process, you lose the original purpose of earning a higher interest rate and creating a large corpus step by step. On the other hand, fixed deposit gives more flexibility in case of an emergency. For example, NBFCs like Bajaj Finance provide you a loan against a fixed deposit with minimum paperwork and nominal interest. Your FD will continue to earn a contracted interest rate.
As far as you have a lumpsum amount in hand, it is advisable to go for fixed deposit. It will give you the power of compounding to your investment to the maximum possible extent. However, you don’t have a lumpsum amount, but can save a small amount regularly, you can open RD account for one year or so to accumulate large corpus in the long run. After one year, you can open FD with the maturity amount from your RD proceeds to earn a higher interest rate.