FD vs RD

Also known as a term deposit, an FD is a savings tool in which you invest a lump sum amount with banks or Non-Banking Financial Companies (NBFCs). This amount is deposited for a fixed period, known as the tenure or tenor. Through this, you earn returns based on a predetermined interest rate. This rate remains constant throughout the term. FDs usually offer a higher interest rate compared to savings accounts, therefore, preferred by investors seeking stable and low-risk returns.

A recurring deposit is a savings tool where you invest a fixed amount of money at regular intervals (typically every month) for a chosen tenure. In return, you earn interest at a rate similar to fixed deposits. RDs are designed to help you build a corpus over time. This could be ideal for disciplined savers who want to accumulate funds with low risk.

Before investing, it is important to understand the features of both fixed deposit and recurring deposit accounts. 

Features of a Fixed Deposit Account

• Flexible Tenure

FDs offer a range of tenures from 7 days to 10 years. This flexibility allows you to choose a time period that aligns with your financial goals.

• Interest Rates

FDs generally offer higher interest rates than savings accounts.

The rate stays fixed throughout the investment period. The specific rate depends on the issuing bank or NBFC.

• Interest Payout Frequency

FDs offer flexibility with regular interest payments at fixed intervals. You can choose to receive payouts monthly, quarterly, half-yearly, or annually. Alternatively, you can reinvest the interest earned for compounding benefits.

• Premature Withdrawal

Investors can use an FD in times of a financial crunch, by withdrawing the amount before maturity. While FDs are locked in for a specific period, some providers offer this feature against a premature withdrawal penalty. This may be a flat fee or a reduced interest rate, which can lower your overall returns.

• Loan Against FD

If you need funds urgently, you can take a loan against your FD. Typically, issuers sanction up to 90% of your FD amount. This allows you to access funds without breaking the deposit.

• Tax Benefits

The interest earned on FDs is taxable under the Income Tax Act, 1961, as it is added to your total taxable income. However, deposits of up to ₹1.5 Lakhs in a 5-year tax-saving FD are eligible for a deduction under Section 80C.

Features of a Recurring Deposit Account

• Regular Deposit

RDs require fixed monthly deposits, encouraging regular saving habits. This makes RDs ideal for those looking to build a corpus over time.

• Interest Rates

The interest rate on RDs is similar to that of FDs for the same tenure. This rate applies to the cumulative fixed deposit amounts. Both the interest and principal amount are credited back to you at maturity.

• Flexible Tenure 

RD tenures range from 6 months to 10 years. This flexibility allows you to choose a period that suits your monthly budget and financial goals.

• Premature Withdrawals

RDs allow premature withdrawals, but with a penalty, similar to FDs. This penalty reduces the overall interest earned on your deposit.

• Loan Against RD

You can take a loan against your RD balance if you need funds. However, the loan amount is typically lower compared to loans against FDs. It still allows you to access funds without breaking the RD.

• Taxation

The interest earned on RDs is taxable under the Income Tax Act, 1961. It must be declared as part of your annual income source. There are no tax-saving benefits under Section 80C, for RDs.

Now that you understand the differences between an FD and an RD, let’s look at their common facilities. Both savings tools offer some similar features including:

• Mode of Operation

You can open a Fixed Deposit (FD) or Recurring Deposit (RD) account from the comfort of your home using online banking. Alternatively, you can visit the nearest branch of the deposit provider and fill out the application form.

• Nomination Facility 

You can nominate an individual to your deposit account through the nomination facility. This ensures that your beneficiaries can easily claim the proceeds from your account in case of your unfortunate demise. Ensure this by simply filling your nominee information.

• Joint Holding Facility

You can open an FD or RD account either individually or jointly with others. Both options allow you to add up to three holders, including yourself.

• Ability to Open Accounts for Family Members

Providers let you open FD and RD accounts in the names of other individuals or family members. This is useful for saving for their future needs, such as funding a child’s education.

• Similarities in Taxation

Both are taxed similarly. The interest earned from these deposits is fully taxable, and the tax rate depends on your income tax slab. For instance, if you fall under the 20% tax slab, the interest earned will be taxed at 20%. Banks and NBFCs deduct 10% TDS if your yearly interest from FDs or RDs exceeds ₹40,000. For senior citizens, the limit is ₹50,000.

• Key Difference in Tax Benefits

The main difference in tax treatment between an FD and RD lies in tax-saving options. If you invest in a 5-year tax-saving FD, you can claim a deduction under Section 80C of the Income Tax Act, 1961. The maximum deduction limit is ₹1.5 Lakhs per financial year under this section. In contrast, RDs do not offer any tax benefits.

The process of opening an FD or RD is straightforward and easy. You can open an account online or by visiting a branch. Follow these simple steps to ensure a smooth setup experience.

• Steps to Open a Fixed Deposit (FD) Account

1. Select a bank or NBFC that offers competitive interest rates and a suitable tenure

2. Visit the branch or use online banking to start the account opening process

3. You can also compare FDs online through Bajaj Markets

4. Fill in the form with your details, and deposit amount

5. Choose a tenure that aligns with your financial goals

6. Transfer the lump sum amount using your preferred payment method

7. Once the payment is complete, you will receive a receipt as confirmation for your Fixed Deposit Account

• Steps to Open a Recurring Deposit (RD) Account

1. Choose a bank or NBFC that offers competitive interest rates and a suitable tenure

2. Visit the issuer’s branch or use their online banking services to start the process

3. Fill in the form with your details, deposit amount, and chosen tenure

4. Submit the required documents, such as ID proof, address proof, and PAN card

5. Decide whether to automate monthly payments or make deposits manually

6. Your RD account will be opened once the initial deposit is made

7. After the payment, you will receive a confirmation for your RD