Fixed deposits or Recurring deposits : Which is better?

Who doesn’t like risk-free investments? We don’t simply like to save, but we also want to grow those savings by investing them properly. The desire to not take any risks on our investments is primarily why risk-free investment options like fixed deposits or FDs and recurring deposits or RDs have become investor’s number one preference. 

Lets understand the difference between FD and RD, and which option is right for you. 

A fixed deposit is an investment option where the investment tenure and interest rate are fixed and predetermined. For starting an FD, you have to deposit a lump sum amount. FDs can have a tenure ranging from 7 days to 10 years.

In a recurring deposit or RD, you are not required to deposit money in a single go, like an FD. In an RD, you can deposit money every month or even every quarter. RDs typically have tenures ranging from 6 months to 10 years. Like an FD, the interest rate on RDs remains fixed throughout the tenure.

The special feature of RDs offered by various banks, NBFCs and post offices is that it inculcates the habit of saving money every month, be it for short or long-term goals.

When it comes to investments, we usually focus is on two things-returns and risk. We want to ensure that our money compounds over time, and is not get eroded in any form. 

So, who is better off between FD and RD in terms of returns?

HDFC Bank is offering interest rates between 4.50% to 7.10% on RDs ranging from 6 months to 10 years. The highest interest of 7.10% is offered on a 15-month RD, while for RDs of 2 years to 10 years, the interest is 7% per annum.

For a 5-year RD from India Post, the interest offered is 6.7%, which is lower as compared to bank RDs. For fixed deposits ranging from 7 days to 10 years, the interest ranges from 3% to 7.25% per annum. The highest interest rate of 7.25% is available for tenures greater than 18 months but less than 21 months.

Generally, the interest rate on recurring deposits is slightly lower as compared to fixed deposits. However, the interest rate entirely depends on the FDs/RDs tenure. In both FDs and RDs, the interest rates remain fixed. Whatever interest rate is determined at the time of opening the FD or RD, the same interest will be paid throughout the tenure. Also, market fluctuations do not impact the interest rate.

In case of FDs and RDs, your money is insured to some extent. Your deposit amount in the bank is insured by the Deposit Insurance and Credit Guarantee Corporation or DICGC. Each depositor in the bank is insured up to Rs 5 lakh, including principal and interest amount. This covers all deposit accounts like savings accounts, fixed deposits, recurring deposits and current deposits

Fixed deposits do have a slight advantage on the taxation front. By investing in a 5-year tax saving FD, you can claim a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. The deduction amount is reduced from your income, thereby lowering your overall tax liability.  

On the other hand, investment in recurring deposits does not get the benefit of 80C deduction. The interest income earned on FDs and RDs is taxed similarly. The interest gets added to your income and is taxed as per your income tax slab.

For premature withdrawals, i.e. withdrawing money before maturity, you have to pay penalties on both FDs and RDs in the form of reduced interest rate. Those who want to invest a lump sum amount for longer tenures in exchange for higher interest can opt for FDs. Those who can only manage to invest small amounts every month should go for RDs. Remember, both FDs and RDs are low-risk investment options.