Both fixed deposits and recurring deposits, more commonly known as FDs and RDs, are low-risk investment instruments with guaranteed returns as per a bank or post offices’ pre-determined rate of interest for a particular tenor.
Fixed deposits allow you to allocate a lumpsum amount to a financial institution for a fixed period of time and for a fixed rate of . FDs also tend to have higher interest rate than simply parking your money in a savings account.
Meanwhile, recurring deposits allow you to start a deposit for a fixed amount monthly, which runs for tenure and rate of interest. Also, higher returns that a simple , RDs have lower returns compared to FDs due to the power of compounding.
The annual rate of interest this year is between 5.5% to 7.75% for FDs and RDs across most banks.
Fixed deposits: Benefits, what is it, when to use…
The tenor for FDs ranges from seven days minimum up to 10 years across public and private sector . It is a great financial tool when saving for specific goals and can be automated for renewal at end of term. The choice is to either have the principal and interest deposited into your account, only the interest deposited into your account and principal renewed, or renew both principal and interest into another FD, depending on your requirement.
Notably, you can use FDs to save for your emergency fund, school fees, big planned or unplanned expenses, children’s , loan collateral, school fees, as well as travel and wedding expenditures.
- FDs give you assured returns at a fixed rate throughout the tenure.
- The tenure is flexible and can be chosen as per convenience and rate of interest.
- It is low-risk and safe option.
- You can choose to receive monthly or quarterly payouts, besides the liquidity at maturity.
- You can take loans against your FDs without breaking them.
- For senior citizens and other taxpayers, the five-year tenure offers tax saving.
- They are liquid assets and can be broken with minimal charges depending on the lender terms, at short notice.
- Lenders in India typically levy a ranging from 0.5% to 1% below the contracted interest rate, applied to the duration the funds were held.
- Interest income generated by FDs is taxable as per your tax slab, while TDS may be deducted if interest exceeds ₹40,000 in a financial year ( ₹50,000 for senior citizens).
- It has KYC and nominee requirement
Recurring deposits: Benefits, what is it, when to use…
Recurring deposits are similar to or EMIs, as it calls for a fixed amount put aside each month for the instrument. This can be automated to be directly debited from your account on the same date for the length of the deposit — six months to 10 years.
At the end of tenure, you can choose to have the principal and interest deposited into your account or converted into a FD (only principal or principal and interest), as per your needs.
- Requires set sum to be deposited every month.
- Rate of interest set at start of tenure.
- It is low-risk and safe investment option.
- These are also and can be broken with minimal charges depending on the lender terms, at short notice.
- Lenders in India typically levy a penalty ranging from 0.5% to 1% below the contracted interest rate, applied to the duration the funds were held.
- You can take loans against your RDs without breaking them.
- Interest income generated by FDs is as per your tax slab, while TDS may be deducted if interest exceeds ₹40,000 in a financial year ( ₹50,000 for senior citizens).
- It has KYC and nominee requirement.
FD vs RD: Key difference between fixed and recurring deposits
| Factor | Fixed Deposit (FD) | Recurring Deposit (RD) |
|---|---|---|
| Initial Lump Sum | Requires a lump sum deposit at the start | Requires periodic contributions |
| Deposit Frequency | One-time lump sum deposit | Regular deposits |
| Interest Calculated | Interest is calculated on the entire principal amount over a fixed tenure | Interest is calculated on the reducing balance method: each monthly deposit is treated as a new deposit and the interest earned increases as the principal amount grows |
| Tenure | Fixed duration ranging from 7 days to 10 years | Fixed duration, generally from 6 months to 10 years |
| Monthly Contributions | NA | Requires fixed monthly payments unless it’s a flexible deposit like iWish Goal Based Savings |
| Flexibility | Offers less flexibility for deposits and withdrawals | Offers flexibility with monthly deposits |
| Returns | Higher overall returns due to lumpsum investment | Lower overall returns due to regular, smaller investments |
| Suitable For | Suitable for individuals with a lump sum amount to invest | Suitable for individuals with regular income looking to save |
| Risk Tolerance | Lower risk due to fixed investment amount | Lower risk due to disciplined savings |
| Penalty for Missed Payment | There is no penalty for missed payments as the amount is deposited in one go | Generally imposes a penalty for missed payments. But RDs like iWish from ICICI Bank have no such penalty |
| Interest Calculation | Interest calculated on the initial deposit amount | Interest calculated on the monthly contributions |
| Source: ICICI Bank | ||
How to use FDs and RDs for maximum returns?
FDs are ideal for conservative investors looking for safe investment and steady, assured returns. You can use the strategy — dividing a lump sum investment across multiple fixed or recurring deposits with different maturity periods, rather than investing the entire amount in a single long-term deposit.
This approach enhances flexibility for withdrawals and allows for reinvestment at potentially higher rates if interest rates change.
Further, you can use your RDs to build corpus for other investments:
- ₹12,000 per month for a period of 12 months at 6.5% will give you final payout of ₹1,53,360.
- This can be re-invested as lumpsum for your public provident fund () or national pension scheme (NPS). Up to ₹1.5 lakh is tax free under Section 80C.
- Or the lumpsum ₹1,53,360 invested into an FD for a period of 12 months at 6.5% will give to payout of ₹1,63.328, which can be reinvested into mutual funds, Sukanya Samriddhi or the stock , depending on your investment goals.
- The point is that timing your FD or RD as per the financial year will allow you to collect funds for re-investment over time without pressure for sudden lump sum.
Your decision to choose between RD and FD should be based on your investment objectives, tenure preference, liquidity needs, and . It is best to consult an expert for strategies when using the tool for retirement planning or other serious financial goals.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
- Fixed deposits (FDs) offer higher interest rates and are suitable for lump sum investments, while recurring deposits (RDs) allow for monthly contributions.
- FDs provide flexibility in terms of withdrawal and reinvestment strategies, making them ideal for conservative investors.
- Choosing between FDs and RDs depends on individual financial goals, liquidity requirements, and risk tolerance.