Fixed Deposit vs Recurring Deposit – Which Financial Instrument Should You Opt for?

With the introduction of Recurring Deposits scheme by Indian banks, there is an ongoing debate about which one among Fixed Deposit and Recurring Deposit is the best. Both the term deposit schemes offer fixed returns and guarantee the safety of the money invested. However, while comparing both in detail, Fixed Deposit plan holds an upper hand among the two.

Irrespective of their different portfolio, there are many similarities between Fixed Deposit and Recurring Deposit. Both offer almost same interest rate when applied through the same bank. Both are term deposit schemes where the money will be invested for a specific amount of time and the maximum benefit from the investment can be achieved only after the tenure or maturity. Having said that, there are so many reasons why an individual would think twice before choosing either of the two term deposit schemes.

Let’s check out the differences between the earnings from Fixed Deposit and Recurring Deposit schemes:

Features Offered:

There are no major differences in the features offered for both FD and RD available from banks. The only difference is the way you invest in both these financial instruments. Under Fixed Deposit scheme, you invest a set amount of capital for a specific term and by the end of the term, you are liable to withdraw the invested amount in addition to the accumulated interest offered by the bank. Whereas, with Recurring Deposit, you have to fix a certain amount as per bank guidelines that has to deposited regularly every month of a specific tenure selected by you. At the end of the term or maturity, you are liable to withdraw the lump sum amount paid every month for the specific term along with accumulated interest offered by the bank.

In both scenarios, the interest rate remains constant throughout the term once you have opened any of the term deposit account even if the interest rates at the respective bank is revised during your term period. With passing time, the popularity of both FD & RD is rising among the people as both these financial instruments are considered to be the safest and the most reliable mode of investment today.

Taxability on Returns:

TDS is applicable on Fixed Deposit returns if the interest income exceeds Rs. 10000 in a year whereas there is no TDS applied on Recurring Deposit returns. However, you are liable to pay the income tax at your personal income tax rate if your total income in addition to the RD returns fall under the specified tax bracket as per Income Tax guidelines. The same will apply for Fixed Deposit returns where the interest rate is below Rs. 10000 in a year.

Profit Margin:

The profit margin is better with Fixed Deposit as compared to Recurring Deposit for the same amount of investment for the given term at the same rate of interest. To analyze the returns from FD & RD, please refer to the following scenario where equal amount of Rs. 24000 (lumpsum for FD and Rs. 2000 per month for RD) is deposited for a year both as Fixed Deposit and Recurring Deposit. As the accounts are opened in the same bank, both these products offer the same 9% rate of interest compounded quarterly.

Here’s what you will earn at the end of the tenure (i.e. 1 year):

With Fixed Deposit

• Invested Amount (Rs) 24000
• Interest Rate (p.a.) 9% compounded quarterly
• Total Interest earned in a year (Rs) 2234
• Total Amount after One Year (Rs) 26324

With Recurring Deposit

• Invested Amount (Rs) 2000 p.m.
• Interest Rate (p.a.) 9% compounded quarterly
• Total Interest earned in a year (Rs) 1195
• Total Amount after One Year (Rs) 25195

[Difference between FD vs RD: (Rs) 1039]

As per the above scenario, the recurring deposit scheme offers you Rs. 1039 lesser than a Fixed Deposit scheme of the same amount for the same period at the same rate of interest. Hence, it is better to opt for a Fixed Deposit scheme if you have lump-sum amount to be invested rather than Recurring Deposit scheme as with FD, you earn the interest for the principal amount for one year while with RD, you earn interest for the 1^st installment for 12 months, 2^nd installment for 11 months, 3^rd installment for 10 months and son on. As a result, FD offers a higher maturity value than RD.

Making the Final Choice:

Given the fact that FD offers better returns as compared to RD, it is not feasible for everyone to deposit a lump-sum amount at one go. Recurring Deposit is the best option for people who want the benefits of Fixed Deposit scheme but couldn’t afford to invest a lump-sum amount to begin with. Instead they prefer to save a fixed regular amount every month from their income and deposit into their RD account to earn better returns.

However, FD is a wiser choice for people who have a lump-sum amount to invest. In short, whichever financial instruments you choose from FD & RD, you are liable to receive higher returns on your investment without any sorts of risks involved.