FD vs RD - Which Is the Better Option?

Deciding between a Fixed Deposit (FD) and a Recurring Deposit (RD) can be tricky. Both offer savings but cater to different needs. Making a due comparison between the both can help you determine the best option for your financial goals. Whether you prioritise growing a lump sum or building savings gradually, understanding these deposits empowers you to make an informed decision. 

Fixed Deposits (FDs) are popular investment options offered by financial institutions. Here's the essence of this investment tool:

• Deposit and Tenor: You invest a lump sum amount for a predetermined period (ranging from days to years).

• Guaranteed Returns: FDs offer attractive, fixed interest rates throughout the chosen tenor.

• Security and Liquidity: Your principal amount is guaranteed by the issuer, providing security. However, early withdrawals typically incur penalties, limiting immediate access to funds.

• Ideal for Low-risk Investors: FDs are ideal for risk-averse individuals seeking a safe haven for their savings while earning predictable returns.

Recurring Deposits (RDs) are a unique savings tool offered by banks and post offices. Here's how they work:

• Regular Deposits: You commit to depositing a fixed amount at regular intervals.

• Habit Building: RDs encourage a disciplined savings routine, perfect for building a financial nest, gradually.

• Compounding Interest: Interest is compounded typically quarterly, allowing your savings to grow steadily over time.

• Flexibility: Some RDs offer premature withdrawal options with reduced interest, providing some access to funds

If you are wondering which is better, looking at the differences between FD and Recurring Deposit in the table below can give you clarity. 

Assuming that FD and RD provide the same rate of 7.2%, this table provides the returns you can earn from both investment tools. See the results below to decide which investment option may be ideal for you.

Now that you have seen the difference between FD and RD, take a look at the common facilities offered by these investment vehicles.

• Mode of Operation

You can open fixed and recurring deposits online from the comfort of your own home by using the net banking facility. Alternatively, you can open them through offline mode by visiting the nearest bank branch.

• Nomination Facility 

Both FDs and RDs offer the facility to nominate an individual for your account. This makes it easy for your beneficiaries to claim the proceeds from your account in the event of your demise.  

• Joint Holding Facility

You can open fixed and recurring deposits either individually or jointly with other individuals. Both investment options allow you to add up to three holders, including yourself.

• Ability to Open Accounts for Family Members

FDs and RDs allow you to open accounts in the name of other individuals or family members. This enables you to save for their future. For example, if either of the accounts is under your child’s name, they can use it to cover higher education costs. 

As far as taxability is concerned, both fixed and recurring deposits are very similar. The interest you receive from an FD and an RD is fully taxable. The rate of tax depends on the income tax slab rate you fall under. 

For instance, if you fall under the 20% slab rate, the tax rate for interest earning will be 20%. That’s not all. For FD and RD, the financial institution is obliged to deduct 10% TDS if the total yearly interest earned exceeds ₹40,000. This is ₹50,000 for senior investors.

However, in terms of taxability, FD and RD differ in one aspect. In the case of a tax-saving FD or an FD with a 5-year tenor, you can claim tax benefits under the Income Tax Act. 

The invested amount can be claimed as a deduction from your gross income under Section 80C of the Income Tax Act, 1961. The maximum amount of deduction available is ₹1.5 Lakhs in a financial year. However, this is not available for a recurring deposit.