FD vs RD: Which is a Better investment Option for You?

Fixed deposit is a risk-free and secure investment offered by banks, post offices and other financial institutions where you can deposit a lump sum for a fixed time period. Once the money is invested, it earns a pre-defined rate of interest until maturity. The fixed deposit has flexible tenure.

The investor has the flexibility to choose the tenure of the FD. Fixed Deposits can be used to park money for the short-term and can also be used to fulfil long-term investment goals. One of the main criteria of fixed deposits is that it cannot be withdrawn before maturity. A premature withdrawal of FD entails a penalty which is 1-2% on the interest.

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FD vs RD: Which is a Better Investment Option for you?

What is a Recurring Deposit?

A recurring deposit is also a risk-free and secure investment offered by banks and the post office where you don’t need to deposit a lump sum. You simply deposit a fixed amount each month for a pre-defined time period. Recurring deposits also come with flexible tenure that ranges from 6 months to 10 years. The interest on recurring deposit is compounded quarterly.

See Also: Difference Between Recurring And Fixed Deposit

Features of Fixed Deposit:

• Comes with a flexible tenure that ranges from 7 days to 10 years.
• You can earn an interest of 6.6% to 7.4% a year on your fixed deposits.
• You can avail a maximum of 70% to 90% of your fixed deposit amount as a loan.
• Interest received on FD is taxable and TDS is deducted in case the interest income exceeds Rs 40,000 annually. Its 50,000 a year for senior citizens.
• Premature withdrawal can be made by paying a penalty of 1-2% on the interest earned.

Features of Recurring Deposit:

• Comes with a flexible maturity period that ranges from 6 months to 10 years.
• The current interest rate offered by the banks on RD ranges from 4.5% to 7.9% a year.
• Loan facility is offered by the banks on RDs. An investor can avail a maximum of 75% of the deposit amount as a loan.
• Interest received on recurring deposit is fully taxed. The interest is added to your taxable income and taxed as per tax bracket. TDS is deducted at 10% if interest earned exceeds Rs 40,000 a year. It’s Rs 50,000 a year for senior citizens.

See Also: Is It Better To Invest In a Fixed Deposit?

Fixed Deposit vs Recurring Deposit – Which Deposit Earns More?

If you compare both the investment options, you will realize that a fixed deposit offers better income. This is because in fixed deposits, a lump sum amount is deposited which earns interest across the tenure of the deposit. In this way the principal amount grows and enjoys the compounding benefit or return on return.

In a recurring deposit, the first instalment earns interest for a period of 12 months. The second instalment earns interest for 11 months; the third receives interest for 10 months and so on. The money accumulates across the tenure.

As a result, the recurring deposit earns lower interest income than a fixed deposit. You can use the online FD calculator and online RD calculator, to easily calculate the maturity amount on both investments.

What should you choose- FD or RD?

Both the fixed deposit and recurring deposit are good investment options for the risk-averse. Individuals who want to invest a lump sum lying idle in their savings bank account can opt for fixed deposits as it offers higher returns along with capital protection.

A recurring deposit is an ideal investment for investors who want to save a portion of their monthly income and accumulate a corpus over a time period. In this way an investor can gain wealth by regularly depositing money and earning interest on it. Now, the choice depends on the investor’s financial goals and investment capacity.

See Also: Fixed Deposits Vs Mutual Funds

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