Seeking stable investment returns to meet your financial goals? You’ve got two useful investment options to choose from - recurring deposit vs fixed deposit. No matter whether the market goes up or down, your returns will be safe with either of these investments. So, if you book either of these products at say 8% for 3 years, you will get the maturity amount at the said rate. However, the difference between fixed deposit and recurring deposit lies in the eventual earnings. Besides, the style of investment also differs. In this blog, we will discuss all these and more so that you can make an informed call.

What is a Fixed Deposit?

A fixed deposit is a financial product where you invest a specific amount for a specific time at a specified interest rate. It’s a one-time lump sum investment that yields good returns. The minimum investment amount required in a fixed deposit differs from one bank to another. While some allow fixed deposits with a minimum of INR 1,000, some can raise the limit. It is purely bank-specific. You can book a fixed deposit for a minimum and maximum period of 7 days and 10 years, respectively. Interest rates are based on the investment amount & time. 

Banks usually set interest rates for resident Indians (regular and senior citizens) in two investment amount brackets (amounts of upto INR 3 crores and amounts above INR 3 crores). In case you want to liquidate FD funds to meet your emergency needs, consider using the premature withdrawal facility. However, that will incur a penalty charge of 0.5-1% of your proceeds accumulated at the time of withdrawal. It will suit people who want to earn safe returns on their surplus funds.

What is a Recurring Deposit?

A recurring deposit is a financial product where individuals need to invest every month. As an individual, you will need to earmark a specific amount every month out of your income to run a recurring deposit account without any hassle. The recurring deposit runs for a minimum and maximum of 6 months and 10 years, respectively. You need to deposit a minimum of INR 500 every month. This will most likely suit salaried individuals with a regular flow of income every month. Even those with a steady flow of income can opt for this investment to enhance their earnings. 

Key Differences Between FD and RD

Let’s analyse the differences between fixed deposits and recurring deposits based on various factors.

An Infographic Representation of Fixed Deposits vs Recurring Deposits

Calculation Showing the Difference in Earnings Between Fixed Deposits and Recurring Deposits

Knowing the exact difference in earnings is critical to making an informed decision. It will be clear with an illustration.

For instance, you open a fixed deposit account of INR 1,20,000 for 5 years at 8.50% per annum and your friend opens a recurring deposit account of INR 2,000 per month for 5 years at 8.50% per annum. The total investment amount in both cases remains the same i.e. INR 1,20,000. However, the maturity amount in the case of a fixed deposit will be INR 1,83,276.07. Whereas the maturity amount will be at INR 1,49,698.95 in the case of a recurring deposit. So, your friend will earn INR 33,577.12 (1,83,276.07-1,49,698.95) less than you. 

Note - The calculation is made on an assumption that the interest is compounded on a monthly basis.

Factors to Consider Before Choosing Between Recurring Deposit vs Fixed Deposit

Still, the question remains - which to choose between recurring deposit vs fixed deposit? Let’s examine some more factors in greater detail below. 

Financial Goals

Choosing between the two depends largely on the financial goals you would like to achieve. Both are ideal for short-term goals such as arranging funds for a domestic trip or a bike purchase. They can also help individuals obtain a loan against the same to meet contingency requirements such as medical emergencies. 

Income Stability

The flow of income also helps decide the better option between recurring deposit vs fixed deposit. If you are salaried and have been receiving a steady flow of income but don’t have a lump sum amount, consider investing in a recurring deposit with high interest rates. However, if you have a lump sum amount to invest in, consider opening a fixed deposit account at higher interest rates to maximise your earnings. 

Investment Duration

Your investment horizon also helps decide on the right alternative for you. If you want to stay invested for a long time, prefer a fixed deposit over a recurring deposit as the former will allow you to earn more than the latter even at the same interest rates. Because the interest accrual on a lump sum fixed deposit amount will be way more than that from small monthly recurring deposits over a longer period. An illustration above demonstrates this point.

Tax Savings

Usually, investors can’t receive tax deductions on either a recurring deposit or a fixed deposit. However, banks do offer a tax-saver fixed deposit, which is different from a conventional fixed deposit. In a tax-saver FD, you cannot withdraw investments before a 5-year lock-in period. Also, the maximum investment allowed is INR 1.5 lakh. As an investor, you can receive tax deductions on the invested amount for upto INR 1.5 lakh in a financial year. The interest earned is taxable once it crosses INR 40,000 (Regular Customers) and INR 50,000 (Senior Citizens) in a financial year. 

Conclusion

Choosing a fixed deposit or recurring deposit depends on your goals, cash in hand, income stability, and for the time you wish to stay invested. While fixed deposits earn you way more over the long term, recurring deposits suit you if you don’t have a lump sum amount. Evaluate all these factors carefully before choosing the option that puts you on the right financial path.

FAQs

What is the main difference between a Fixed Deposit (FD) and a Recurring Deposit (RD)?

The main difference lies in the way a fixed deposit and a recurring deposit operate. While investors can invest a lump sum to book an FD, they will need to invest every month to run a recurring deposit account. 

Which option offers better returns, FD or RD?

The return rates remain the same for both FD and RD for the same investment amount and time. However, the absolute earnings remain typically higher in FDs compared to that of RDs.

Can I withdraw funds before maturity in an FD or RD?

Yes, you can withdraw funds before maturity in either of these fixed-income products.

What is the minimum tenure for an FD and an RD?

The minimum tenure for an FD and an RD is 7 days and 6 months, respectively.

Is the interest earned on FD and RD taxable?

Yes, the interest earned on FD and RD is taxable once it crosses the threshold limit of INR 40,000 (Regular Customers) and INR 50,000 (Senior Citizens) in a financial year.

Can I get a loan against an FD or RD?

Yes, you can get a loan against an FD or RD. Banks can offer you a loan of upto 80-90% of FD or RD value. 

Are there tax-saving benefits available with FD or RD?

Technically speaking, neither of them offers tax benefits. However, banks do offer a tax-saver fixed deposit, which is different from a normal fixed deposit account. With a tax-saver FD, you can get tax deductions on your invested capital for upto INR 1.5 lakh in a financial year under Section 80C of the Income Tax Act.

Can FD and RD be renewed after maturity?

Yes, both FD and RD can be renewed after maturity.

Which is better for short-term goals, FD or RD?

Both are good options for short-term goals. However, since FDs offer you higher earnings, you can accomplish your goals quickly with them.

What happens to the interest if I withdraw my FD or RD prematurely?

Banks will deduct an interest penalty, which typically ranges from 0.5-1% of the proceeds accumulated at the time of premature withdrawal.

Is it possible to convert an RD into an FD upon maturity?

Some banks allow investors to convert their recurring deposits into fixed deposits upon maturity. However, if you don’t find such an option at your bank, you can open a fixed deposit account with the accumulated RD proceeds on maturity.

Which is more liquid, FD or RD?

Both are highly liquid as you can withdraw them anytime. However, since FDs help investors accumulate more, they are considered more liquid than RDs, in terms of monetary value.