Choosing Between FD and RD: Discovering the Optimal Selection for You
Comparing Fixed Deposits (FD) and Recurring Deposits (RD) in India
Investing in financial instruments can be a crucial decision for individuals seeking to grow their wealth. Two popular options in India are Fixed Deposits (FD) and Recurring Deposits (RD). Let's take a closer look at these investment options and their key differences.
Investment Method and Tenure
When it comes to investment method, FD requires a lump sum deposit upfront, while RD involves regular fixed monthly installments over the tenure. Both offer flexible tenures, ranging from short term (7 days for FD, 6 months for RD) up to 10 years.
Interest Calculation and Rates
Interest for FD is compounded annually on the principal plus accrued interest, while RD interest is typically compounded quarterly on monthly deposits. Interest rates for both are generally similar and fixed at the start, but FD may yield slightly higher returns because you invest the entire capital at once.
Returns and Profitability
FD tends to be more profitable when you have a lump sum amount to invest because the entire principal earns interest from day one. RD suits disciplined monthly savers and helps build wealth systematically but may generate lower cumulative returns compared to FD on the same total principal invested over time.
Taxation
Interest earned on both RD and FD is taxable as per the investor's income tax slab; TDS may apply if interest exceeds threshold limits. Tax benefits under Section 80C currently apply only to long-term (5 years or more) tax-saving FDs, not RDs.
Minimum Deposit and Eligibility
RD accounts typically allow low minimum monthly deposits (as low as INR 100), making them more accessible for small investors. FD requires a lump sum, which can vary by bank.
Additional Benefits
Both allow loans against the deposit (FD loans typically up to 70%-90%; RD loans available too). Both provide nominal safety as RBI-regulated fixed income instruments.
Comparative Table
| Aspect | Fixed Deposit (FD) | Recurring Deposit (RD) | |----------------------|----------------------------------------------------|----------------------------------------------------| | Investment | Lump sum upfront | Fixed monthly installments | | Tenure | 7 days to 10 years | 6 months to 10 years | | Interest | Compounded annually; slightly higher returns | Compounded quarterly | | Returns | Higher for lump sum capital | Good for disciplined savers but lower cumulative | | Tax Benefits | Section 80C for >5 years tax-saving FDs | No tax benefits | | Minimum Deposit | Typically higher | As low as INR 100 per month | | Loan Facility | Loans up to 70%-90% of deposit value | Loans available up to 90% of deposit | | Risk | Low, guaranteed returns | Low, guaranteed returns | | Taxation | Taxable, TDS applicable | Taxable, TDS applicable |
Which is more profitable? For investors with a lump sum amount, FD is generally more profitable due to immediate full capital investment and typically higher returns. For those who prefer systematic saving with smaller amounts over time, RD encourages disciplined investment with steady, guaranteed returns but usually nets comparatively lower total interest.
Conclusion
In conclusion, the best choice depends on the investor's financial capacity and savings goals: use FD for lump sum investments aiming for higher returns, and RD for regular disciplined savings promoting steady wealth accumulation.
It's also worth noting that at the end of year 5, the difference between the FD and RD maturity proceeds is ₹27,021. If you have a considerable amount of money to invest as a lump sum, fixed deposits can be an ideal investment option for higher returns in the long run. To get better returns from a fixed deposit, invest in a cumulative FD where the interest earned is added to the principal amount and earns interest on it as well. You can estimate your investment returns using an Online FD Calculator. The taxability of FD and RD is almost similar, with the interest earned from both getting added to your total income and charged as per your income tax slab rates. The difference in maturity amounts between FD and RD increases as the investment tenure increases.
Tax saving opportunities can be explored through investing in long-term (5 years or more) tax-saving Fixed Deposits (FD), as they offer tax benefits under Section 80C. On the other hand, Recurring Deposits (RD) do not provide any tax benefits currently. In personal-finance terms, if you have a considerable amount of money to invest as a lump sum, fixed deposits can be an effectively profitable investment option due to higher returns in the long run, particularly with cumulative FDs.
