Know Your Investment Tools: Difference Between FD and RD

According to a survey, 81% of millennial workers with monthly incomes ranging from Rs. 50,000 to Rs 1,00,000 said they invested in fixed deposits (FDs), recurring deposits (RDs), or public provident funds (PPFs). To put that into perspective, if you’re sitting in a room with 9 of your friends, 8 of them have FD, RD, or PPF investments. 

Settle in; we’re about to tell you everything you need to know about the difference between FDs and RDs.

Key Takeaways

• What is the difference between FD and RD? The main difference is when or how often you are investing money. 
• FD and RD are great ways of generating consistent and assured returns based on steady and low-risk interest rates. They are a safe and convenient investment option if you’re looking for alternatives to your savings account.
• An FD is perfect for when you’ve come into a large sum of money or wish to make a one-time investment. 
• An RD is perfect for when you want to get into the habit of saving consistently.
• While both have their merits and disadvantages, the question of which is better will ultimately be answered by your financial situation and goals and particular needs at the time of investment. 

Defining FD & RD

Fixed deposit: Let’s say it’s salary day, and you’ve just received Rs. 60,000. You live with your parents, though, and don’t have any spending plans for the month. You can deposit the full amount in an FD in your bank for 6 months at a specific interest rate. Once the 6 months are up, you get your Rs. 60,000 back and the interest it earned. Vacation plans sorted!

Recurring deposit: it’s salary day again! You’ve moved out and have monthly expenses; you can spare Rs. 10,000 a month. When you open an RD with your bank for 6 months, you will deposit Rs. 10,000 every month for 6 months. At maturity, you get the total principal amount invested – Rs. 60,000 – back along with the interest it has earned. Vacation plans still sorted!

Major Differences Between FD & RD

When you’re trying to decide which is better, FD or RD, understanding the fundamental ways they differ helps. Here is a neat table clearly outlining the difference between RD and FD.

Factor	Fixed Deposit	Recurring Deposit
How is the investment made?	A one-time lump sum deposit is made for a specific period	A fixed sum of money is deposited every month
How long do you have to invest?	Tenure ranges from a minimum of 7 days to a maximum of 10 years	Tenure ranges from a minimum of 6 months to a maximum of 10 years
What is the minimum amount you have to invest?	Rs. 5,000	Rs. 500
When are returns based on interest paid out?	Either at maturity or the following intervals: monthly, quarterly, or yearly.	At maturity only.
Are there any tax benefits?	Yes, on tax-saving deposits with 5-year lock-in periods.	No, taxes apply based on the investor’s tax bracket.
What is its purpose?	Great for earning interest on savings and disposable income not being utilised elsewhere.	Great for creating a sustainable and consistent habit of saving money in the long run.
Are there any penalties applicable?	Not applicable unless the deposit has a lock-in period.	Delays in the deposit beyond the due month incur Rs. 10 for every Rs. 1000 for every month of delay.
Can I withdraw money from the deposit?	Yes, unless it is a tax saving deposit, which has a lock-in period of 5 years.	No, many banks allow you to take loans using the deposit as collateral at low interest rates.

Common Features Between FD & RD

While there is a world of difference between FD and RD, they share many similarities too.

1. Withdrawal before the end of the investment term.

We’ve all heard someone say it: “let’s break the deposit!” If you’re in trouble and need to get into your savings, both FD and RD allow you to prematurely withdraw your deposit and break its terms, albeit with a penalty. Some deposits also allow for partial withdrawals with no liability. 

2. Assured and risk-free returns. 

Despite the many differences between FD and RD, both offer assured, stable, and risk-free returns on your investment. You can calculate exactly what your returns are at the investment itself. 

3. Fixed interest rates.

Closely related to assured returns, RD and FD interest rates are common across the two investment options and ensure that any market fluctuations or economic shifts do not influence your money. 

4. Collateral for loans.

You can also take overdraft against FD or RD. Loans using FD and RD as collateral are often offered at competitive interest rates. However, interest rates and withdrawal limits vary from bank to bank.

FD vs RD: Which is Better? 

You can’t make sense of the difference between FD and RD without thoroughly considering their pros and cons. Here is a thorough list explaining the advantages and disadvantages of the FD vs RD debate.

Fixed Deposit: Pros and Cons

Investing in FDs comes with many remarkable advantages. 

• Low risk: Because FDs are not connected to market fluctuations, they make for stable investments and offer guaranteed returns to investors with low appetites
• Specific tenure: Knowing when your investment will mature means you don’t need to figure out when you should sell it; the investment takes care of itself as it earns returns for you/
• Loans using FD as collateral: Most banks allow you to use your fixed deposit as collateral to take out a loan. 
• Diverse payout options: FDs are well known for their flexibility and can be used to create a steady income from your money that might otherwise be sitting idle. FD lets you choose when to receive your interest payouts and whether you wish to compound your returns. 
• Fixed deposit credit cards: Most banks allow you to apply for credit cards and increase spending limits against fixed deposits. This is particularly useful if you haven’t applied for a credit card before and don’t have a credit score. Applying for a credit card on FD is a great way to build your credit score. 

However, it’s not all perfect! There are disadvantages to investing in FDs too.

• Low returns: The consequence of taking fewer risks in investments is that your returns are also lower. Although returns are guaranteed with FDs, they are also lower than other investments, especially marked linked ones. 
• Penalty on breaking the deposit: Prematurely withdrawing money before maturity may incur penalty fees in many cases. Some FDs also have a stringent lock-in period. 
• Taxes: Unless your FD is specifically a tax saving scheme, the interest you earn is part of your income for tax purposes and will be taxed according to your bracket. 

Recurring Deposit: Pros and Cons

There are many advantages to investing in an RD, especially if you’re trying to save money consistently. 

• Planning for short term goals: Recurring deposits are great for when you have a steady income but are trying to save for something in the distant future: a nice vacation, fees for a course in a foreign university, etc.
• Consistent savings: RDs make getting into the habit of saving easier than eating pie. Most banks will allow you to automate the process entirely by depositing it on your behalf on a specified date every month. This takes away the stress of budgeting around saving money; you’ve already set aside something to save!
• Interest rates: Both FD and RD interest rates remain steady from the time of investment and do not fluctuate, allowing you to anticipate your returns without worrying about losing money.
• Investment on a salary: While FDs are great when you have a lump sum to invest, being on a salary naturally limits how much you can invest at a given time. RDs allow you to build wealth on a salary by enabling you to invest a particular amount over a set period leading to great savings and returns in the long term. 
• Loans against RD: Like FD, most banks allow you to use your RD to apply for a loan.

Although the advantages are substantial, there are some drawbacks to investing in RD.

• Taxes: Unlike FD, where tax saving schemes are available in specific plans, RDs offer no tax benefits and the interest earned will be taxed according to your bracket. 

• No liquidity: RDs do not allow you to withdraw money until maturity. While this is great for your savings in the long run, it does make things difficult in case there’s an emergency.
• No flexibility: The most significant disadvantage of an RD is its lack of flexibility. Once an RD has been opened, its terms – the deposit amount, date, etc. – cannot be changed to suit changing circumstances or contingencies. 

Despite these similarities, there is a clear winner in terms of returns. If you invest the same amount of money for the same period in FD and RD, you’ll have better returns with an FD.

Taxability Aspect: FD vs RD

Special tax-saving FDs notwithstanding, there is little difference between FD and RD in taxation. You will be taxed on the interest you earn from your FD or RD based on the tax bracket you fall in. However, taxes on both FD and RD kick in only when the interest you have earned is more than Rs. 40,000 in a year.

There is a critical difference between FD and RD taxation. FDs are subject to TDS or tax deducted at source, while this does not apply to RD.

Word to Remember

Assured returns: despite the many differences between FD and RD, they guarantee you the returns they promise. This is a precious thing to have in times of such economic chaos.

Conclusion

Given all this information, you might be wondering which is better, FD or RD. As with most investment plans, the answer will be specific to your financial situation and goals and your needs at the time of investment. If you have a large sum of money lying around (wouldn’t that be lovely), fixed deposits are a great choice. On the other hand, if you’re trying to save consistently from your salary, an RD is the perfect fit for you: you can start one with monthly deposits as low as Rs. 500.

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