How a Recurring Deposit is Different from a Fixed Deposit

Posted on Monday, November 9th, 2020 | By IndusInd Bank

Earning money issimply one half of the equation, which only becomes complete and meaningfulwhen one practices saving, or better yet, investing. However, “an investorwithout investment objectives is like a traveller without a destination.” Incase you’re unsure about your options, but wish to play it safe and risk-free,there are two beneficial savings options for you – Fixed Deposit and RecurringDeposit.

Let’s understand all about them so that you can make an informed choice.

Understanding Each

Fixed Deposit

A Fixed Deposit or FD is a fixed-term investment option offered by banks wherein an individual can deposit a lump sum amount for a pre-determined period. During the lock-in period, the amount deposited with the bank will earn interest as per the rate at the time of locking in the deposit.

Recurring Deposit

Recurring Deposit or RD is another popular low-risk investment option offered by banks, especially useful for those who do not have a lump sum amount to invest. Under RD, an individual needs to deposit a pre-decided share of their income each month for short or long-term corpus creation.

Are There Any Common Features?

Despite theirmany differences, a Fixed Deposit and RecurringDeposit are similar to some extent. Firstly, each of the two is a fixedinvestment option; meaning, they are safe and secure, offering guaranteedreturns at the time of maturity. Moreover, the interest rate in each of thecase is known beforehand, and the same remains unaffected by other marketconditions. This means that the interest rate does not change throughout theduration of the lock-in period.

Since the amount at the time of maturity can be known upfront in each of the two investments, both Fixed and Recurring Deposits are useful tools for fulfilling major financial goals such as children’s education, marriage, paying for an overseas trip, down-payment of a new home, etc. Finally, the money in each investment is locked-in until the time of maturity. In case you wish to make a premature withdrawal, you can do so by paying a penalty, which generally differs from bank to bank.

Major Differences between FD and RD

Now that we’ve looked at the overlapping features of FD and RD, let’s take a look at the many factors that make each a unique investment.

Manner of Investment

As mentioned earlier, a Fixed Deposit involves investing a lump sum amount for a fixed period. A Recurring Deposit, on the other side, is an investment option wherein you need to invest a fixed amount every month for a pre-decided tenure.

Tenure

The minimum tenure for which one can make Fixed Deposits is 6 months whereas the same for Recurring Deposits is just 7 days. However, the maximum tenure for each of the two investments is 10 years.

Interest

In case of aFixed Deposit, three options are available regarding the interest amount.Interest may be credited on a monthly or quarterly basis or at the time ofmaturity. However, in case of a Recurring Deposit, interest is paid directly atthe time of maturity along with the capital amount.

Also, the interest received on a Fixed Deposit is generally higher than that received on a Recurring Deposit. The reason being that in case of RD, the account holder deposits money on a monthly basis and hence, interest is earned accordingly as opposed to an FD, which is a lump sum amount.

Minimum Investment Amount

To open a Fixed Deposit account, you need to make a minimum deposit of Rs. 10,000 whereas to open a Recurring Deposit account, the minimum amount of investment is Rs. 500.

Taxation

Each of the twoinvestments is taxable; meaning, interest earned in each scheme is taxable, ifthe interest earned exceeds Rs10,000 in a financial year, the same will qualifyfor TDS payment at the rate of 10% ( The TDS willbe 20 percent, if you fail to provide the PAN information to the bank.

The bank also provides tax saver deposits Scheme with tenure of five years and deposit amount up to Rs. 1,50,000.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.