Recurring Deposits (RDs) and Fixed Deposits (FDs) are among the most popular investment instruments available today. They offer assured returns which are typically higher than a savings account. Since market fluctuations do not impact these investments, they are considered as stable income-generating options.
While RDs and FDs may be similar in several aspects, such as interest rate, premature withdrawal facility, tax treatment, etc., they also have certain differences. Let’s look at what these are.
Read More: National Pension System: New rules for Jeevan Pramaan, Immediate Annuity form submission. Details
Investment frequency
Fixed deposits let you make a one-time, lump-sum investment which is locked in for a chosen tenure. During this time, no additions can be made to the invested amount, which accumulates interest at a pre-set rate for the entirety of the lock-in period. If you wish to increase your investment, you can do so by opening a new FD account. There is no upper limit on how much you can invest in an FD.
On the other hand, recurring deposits allow you to invest a fixed amount on a monthly, quarterly or semi-annual basis. The investment can be made manually (online or offline) or via auto-debit from your preferred bank account. You can start an RD with a monthly investment as low as Rs.100.
Tenure
Fixed deposit tenures usually range from 7 days to 10 years. However, FDs with longer tenures earn higher interest. The minimum tenure of an RD is 6 months, while the maximum may extend up to 10 years.
Read More: PM Suraksha Bima Yojana: Get Rs 2 lakh insurance by paying just Rs 20 per year, check details
Interest payment
Fixed deposits offer two interest-payment options – cumulative and non-cumulative. Under the cumulative option, the principal amount and accumulated interest are paid together as a lump sum when the FD matures. The non-cumulative payment option offers the flexibility of receiving the interest payouts on a monthly, quarterly, or half-yearly basis.
However, recurring deposits don’t usually offer a short-term interest payment option. The entire pre-specified maturity amount is paid to the investor as a lump sum payment once the RD tenure is complete.
Tax savings
Recurring deposits and fixed deposits, in general, are not considered to be tax-saving instruments. However, certain tax-saving FDs with a 5-year lock-in period can help you save tax under Section 80C of the Income Tax Act. On the other hand, recurring deposits do not offer any tax-saving benefits whatsoever.
RDs and FDs have been popular among investors for the variety of benefits they offer. However, they may not be the right choice if you want to stay ahead of inflation. This is because the tax charged on the interest amount – 10% TDS on annual interest amounts over Rs.40,000 (Rs.50,000 for senior citizens), further reduces your returns. That being said, both these instruments are a good choice if you want to start building your emergency fund in a disciplined manner.
