FD vs RD

Fixed Deposits (FDs) and Recurring Deposits (RDs) are both practical savings tools that offer fixed returns. Each caters to different financial goals. This similarity could confuse investors when choosing the right tool.

Comparing them helps you determine which suits your needs better. If you aim to grow a lump sum or build savings gradually, it's important to understand these types of deposits.

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.

Fixed deposits and recurring deposits offer different ways to save. They also provide varying methods to earn interest. The table below highlights the key difference between FDs and RDs. This will help you choose the option that suits your financial goals.

To understand the returns you would get on investing in an FD vs that in an RD, let’s take an example.

Let’s assume you invest ₹24,000 in an FD for 1 year. At the same time, you invest an equal amount, but on a monthly basis (₹1,000 per month) for 1 year in an RD. The rate of interest for both plans is 7.2%, which is compounded monthly. This way, the FD investment amount will continue to increase by ₹24,000 annually. In case of the RD, it would increase by ₹1,000 monthly. 

The table given below shows the returns you can earn in each. Review the results to help determine which investment option may be ideal for you.

The difference between the returns earned from the two options is approximately ₹27,000 at the end of the 5th year.

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