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Fixed Deposit Vs Recurring Deposit: What should you choose?

4 minsSeptember 03, 2019

If you are looking to build a corpus to meet your financial goals or if you want to set aside a fixed amount for an emergency, a bank deposit is an easy and convenient way to do it. It is one of the safest investment options that are easy to open, operate and withdraw.

Banks offer Fixed Deposits (FD) and Recurring Deposits . But how do you choose between the two? Let us understand the features, benefits and differences between FD and RD in detail.

Difference between FD and RDs

While the interest rate and benefits are the same for FDs and RDs, there are some differences in terms of the manner of investment, minimum investment amount, tenure, etc.

ParametersFixed DepositRecurring Deposit
Manner of investmentInvest a lump sum amount for a fixed periodInvest a fixed amount every month for a fixed period
TenureMinimum 7 days and maximum 10 yearsMinimum 6 months and maximum 10 years
Minimum investment amountRs 5,000Rs 500
Interest pay-outMonthly or quarterly pay-out is availableMonthly or quarterly pay-out is not available
Auto-renewal optionIs available. You can renew either only principal or both principal plus interestNot available
Penalty for delayed instalmentNot applicableIf there is a delay in the instalment beyond the calendar month, you are liable to pay a penalty of 4% over the Benchmark Prime Lending Rate. For RDs opened after August 9, 2016, the penalty is Rs 10 per Rs 1000 per month for the period of delay. Hence, make sure you pay the instalment ton time.

Common features of FD and RD

Both FD and RD are fixed income investments. They offer a guaranteed return on maturity. The interest rate is known upfront and it does not change during the tenure of the deposit.

The interest rates offered on FDs and RDs are the same. Check out the latest FD rates.

FDs and RDs can be opened at the branch, through internet or mobile banking. It is advisable to have a nominee for your deposit. You can also open a joint FD or RD along with a loved one. This will ensure that in your absence the joint holder can operate the account, that is, claim the proceeds from the account.

You can open FDs and RDs in the names of your spouse, children, parents or other close family members. Hence, these make for good gifts on occasions such as birthday, wedding, etc.

Since the maturity amount is known upfront, FDs and RDs are useful tools for planning your future expenses. For instance, you can link your FD and RD to your financial goals, such as your children’s education, marriage, repairs for your home, down payment for a new house, foreign trip, etc.

Pre-mature withdrawal is allowed with a penalty. In the case of Axis Bank, up to 25% of the principal amount can be withdrawn before maturity without penalty. But subsequent withdrawals or if the amount is more than 25% of the principal premature penalty will apply

Another benefit is the Loan against FD, which is useful in case of an emergency. The interest rate charged is 2% above the FD Interest Rate and you can borrow up to 85% of the value of the Fixed Deposit.

Taxation rules are the same for FD and RD. You have to pay income tax if the interest earned is more than Rs. 10,000 in a financial year. The interest gets added to your income and is taxed as per your income tax slab.

Banks deduct TDS if the interest exceeds Rs. 40,000 in a financial year. For senior citizens, the TDS limit is Rs. 50,000.

[Also Read: New Income Tax Slabs of India]

Remember, even if the bank deducts TDS you should declare the interest while filing income tax returns. If your total income is below the taxable limit of Rs 2.5 lakh, you can avoid TDS by submitting Form 15G and Form 15H for senior citizens. A Tax Saver Fixed Deposits helps here.

How to choose between FD and RD?

You can choose between FD and RD depending on your needs.

Fixed Deposits:

FD is a good option for those who have a lump sum amount to invest. You can also link it with your savings account. It is also a good option for someone looking for regular cash inflow, as you can choose monthly or quarterly pay-out.

For instance, retired persons can invest benefits received at the time of retirement in a long-term FD. This will ensure the protection of their capital as well as regular interest for their monthly expenses.
Salaried employees can invest their annual bonus in an FD and use it to meet expenses such as buying a car or refurbishing their house, etc.

Recurring Deposit
If you don’t have a lump sum to invest, but can set aside small amounts every month, you can opt for RDs. For instance, you can save regularly in an RD and time it to match your child’s school fees at the beginning of the academic year. A couple that likes to travel can save money in an RD for the dream foreign holiday they are planning.

Make sure you include FDs and RDs in your investment portfolio for safe and secure returns.

[Also Read : FD vs PPF ]

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.