FD Vs RD: Which is the Better Investment Scheme?

If you do not want to take a risk with your money and are satisfied with a fixed return from your investment, then Fixed Deposit (FD) and Recurring Deposit (RD) are the best investment options for you.

Mostly all the major banks and financial institutions offer FD and RD account opening options. In both these schemes, you can invest a specific amount on which you will get a predefined interest for a fixed tenure. After completion of this fixed tenure, you will get both the amount invested and the interest earned. However, if you are the one who is confused between FD and RD and do not understand whether to invest in FD or RD, then you are not alone. Many like you do not understand which investment option to select.

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Here we are going to compare these two investment plans and we hope that by the end of this article, you will be able to select one:

The Basic Difference Between FD and RD

One basic difference between these two investment options is the investment amount. While both these investment plans are for a fixed tenure and offer a fixed rate of interest, the investment amount in fixed deposit is invested for once whereas, with RD, you get an option of investing a certain fixed amount at specific intervals.

  • What is a Fixed Deposit? Those who want to invest in FD or Fixed Deposit have to select a tenure for which they want to keep their money invested. The tenure of FD ranges from 7 days to 10 years and one has to make deposits only once. The interest on the invested amount is credited wither quarterly or monthly basis.
  • What is Recurring Deposit? Those who wish to invest in RD or Recurring Deposit have to select a tenure, which generally ranges from one year to 10 years as per your financial institution or bank. However, in these investment options, one has to invest a fixed amount at regular intervals. The interest on RD is earned every month and is given at the time of maturity with the total invested amount. The interest provided in an RD account remains the same throughout the tenure of the investment.
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RD and FD Features

Both RD and FD are investment schemes of fixed tenure and both are available in all the major financial institutions and banks. The banks will pay you a fixed interest rate on the amount invested for a specific period. When the tenure of these schemes gets over, you get a maturity amount, which is the sum of invested amount and accumulated interest.

The income that you earn from FD or RD is taxable as per the IT Act, 1961. Moreover, the interest you get from these two schemes is added to the total annual income and then taxed according to your rate of income tax. This implies that if you fall under tax slab of 30%, then the interest that you have earned from recurring and fixed deposits will be taxed at the same rate., i.e. 30% for both Recurring Deposit and Fixed Deposit. In both Recurring Deposit and Fixed Deposit, the banks deduct TDS when the income earned from interest is more than Rs.40, 000. There will not be a deduction of tax if the total interest earned is less than Rs.40, 000 on both RD and FD.

As per section 80D of IT Act, 196, the investment amount of Rs.1.5 lakh can easily be claimed as a tax deduction and this amount includes almost all types of investments including the fixed deposits.

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Recurring Deposit Vs Fixed Deposit - Which Investment Option Can Earn More Interest?

While comparing Recurring Deposit and Fixed Deposit, you will get to know that Fixed Deposit or FD earns you more interest than Recurring Deposit. To make you understand this more clearly, we are taking three different examples. The columns of this table contain tenure of the investment, amount of fixed deposit, the interest earned, maturity amount, the amount you invest for Recurring Deposit, interest earned, maturity amount on RD, and the final column is difference between FD maturity amount and RD maturity amount.

In the first example if this table, you are investing Rs.24, 000 for one year in FD and the same amount as Rs.2, 000 per month for one year in RD. In the second example let us increase this amount to Rs.48, 000 and invest it for two years. In the same way Rs.2, 000 will be invested per month for two years in RD. So, with every year we are increasing the investment amount by Rs.24, 000 so that Rs.2, 000 are invested every month for the same tenure.

In the below comparison table, we are assuming that the bank or your financial institution is offering you interest at the rate of 7.2% per year for both FD and RD, which is compounded every month.

Tenure

FD Amount

Interest that is earned on FD at 7.2%

Maturity Amount of FD

RD Amount

Interest that is earned on RD at 7.2%

Maturity Amount of RD

Difference between both the Maturity Amounts

One Year

Rs.24, 000

Rs.1786

Rs.25, 786

Rs.2, 000

Rs.957

Rs.24, 957

Rs.829

Two Years

Rs.48, 000

Rs.7410

Rs.55, 410

Rs.2, 000

Rs.3, 771

Rs.51, 771

Rs.3639

Three Years

Rs.72, 000

Rs.17, 301

Rs.89, 301

Rs.2, 000

Rs.8581

Rs.80, 581

Rs.8720

The above table is just an illustration wherein it is assumed that the rate of interest offered by your bank is 7.2%, which is compounded every month.

As you can see in the above example that in Fixed Deposit you will get Rs.25, 786 and in Recurring Deposit you will get Rs. 24, 957 as maturity amount. The difference between the interest earned from both these deposits is Rs.829 and with the increase in invested amount, this difference increases.

The main reason for this difference in both these investment options is that in FD you invest a lump sum amount whereas in RD you invest a fixed amount for a fixed period. In this way, your entire money in FD gets interested for a specific period, whereas, in RD, the installments get interested every month for a fixed period. Due to this difference or variation, FD can earn more interest than RD, and the final maturity amount increases due to the same reason.

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What Should You Select RD or FD?

If you do not have a considerable amount to invest in FD as a lump sum, but you can afford to invest a small amount every month for a long period, then a recurring deposit should be your choice. However, if you have a lump sum amount to invest, then you should go for a fixed deposit because it earns you more interest than RD. However, both RD and FD are risk-free investment options. A fixed deposit for sure earns you more money when comparing it with a recurring deposit, but in case of unavailability of lump-sum amount, RD can be your choice of risk-free investment.

Written By: PolicyBazaar - Updated: 28 August 2020
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