FD vs RD – Understand The Difference Between FD and RD

When it comes to saving and investing, recurring deposits (RDs) and fixed deposits (FDs) are two popular types of deposit accounts that individuals consider. RDs and FDs provide a secure and reliable way to grow your savings while earning interest. As a result, ‘FD vs RD’ is a debate investors are all too familiar with.

However, understanding the key difference between RD and FD is crucial in making an informed decision that aligns with your financial goals. In this blog, we will explore the features, advantages, and considerations of both RDs and FDs, helping you determine which option suits your needs and preferences best.

What is a Fixed Deposit Account?

A fixed deposit allows you to lock in your funds for a chosen period, ranging from days to years. In return, it offers a fixed interest rate. At maturity, you receive your principal along with the interest. An FD account is a favored investment option in India, especially for risk-averse middle-class investors. The features of fixed deposits are different in each bank. Now that we know more about FDs, let’s learn about RDs. 

What is a Recurring Deposit Account?

Recurring Deposits (RD) in India offer low-risk, assured returns. They allow flexibility in investment amount and tenure, with tenures ranging from 6 months to 10 years. RDs, offered by banks and NBFCs, help you save monthly for short or long-term goals. Invest a minimum monthly amount for assured wealth creation, even if you lack a lump sum. There are 5 significant types of recurring deposit accounts: Regular RDs, Senior Citizen RDs, Minor RDs, Tax Saving RDs, and NRE RDs. They offer varying features, flexibility in deposits, and tenures. Now that we know what is FD and RD, let’s explore their differences.

FD vs RD – What’s the Difference Between the Two?

A Fixed Deposit (FD) is a financial instrument where a lump sum amount is deposited with a bank or financial institution for a fixed period, earning a predetermined interest rate.

Recurring Deposit (RD), one the other hand, is a financial product where a fixed amount is deposited regularly on a monthly basis for a predetermined period, earning interest on the accumulated deposits.

Here’s the table of difference between recurring deposit and fixed deposits:

Main Differences Between FD and RD

Feature	Fixed Deposit (FD)	Recurring Deposit (RD)
Deposit Amount	In FD, a lump sum amount is deposited at once.	In an RD, a fixed amount is deposited regularly every month.
Tenure	FDs have a fixed tenure chosen at the time of deposit.	RDs have a predetermined duration, usually ranging from 6 months to 10 years.
Interest Calculation	FDs earn interest on the entire deposited amount from the beginning.	RDs interest is calculated on the increasing balance as each monthly deposit is made.
Interest Rates	Usually higher than an RD	Usually lower than an FD
Maturity Amount	In FDs, the maturity amount is the principal amount along with the accumulated interest.	In RDs, the maturity amount includes the total deposits made plus the interest earned.
Premature Withdrawal	Cannot withdraw money until the end of the tenure, unless you pay a penalty	Can withdraw money at any time, but may have to pay a penalty
Deposit Flexibility	FDs require a lump sum amount to be deposited.	RDs offer flexibility in the monthly deposit amount.
Insurance	FDs have insurance coverage.	RDs have insurance coverage.
Best for	People who want to earn a higher return on their investment and do not need access to their money in the short term	People who want to save money gradually and have the flexibility to withdraw their money if needed

FD vs RD – Advantages and Disadvantages

Let’s explore the RD and FD difference in terms of their benefits and challenges:

Advantages of Fixed Deposit (FD)

The advantages of Fixed Deposit or FD are as follows

• Higher interest rates: FDs generally offer higher interest rates compared to other fixed-income investments.

• Fixed returns: The interest rate is fixed at the time of investment, ensuring predictable returns.

• Flexibility in tenure: FDs come with various tenure options, allowing investors to choose a suitable investment period.

Disadvantages of Fixed Deposits or FD

The disadvantages of FDs are as follows:

• Lack of liquidity: FDs have a fixed tenure, and premature withdrawals may attract penalties or reduced interest rates.

• Inflation risk: Fixed interest rates may not keep pace with inflation, potentially impacting the purchasing power of returns.

• Inflexible deposit amount: FDs usually require a lump sum deposit, which may not be feasible for everyone.

Advantages of Recurring Deposits (RD)

The advantages of investing in an RD are as follows: 

• Regular savings: RDs encourage disciplined savings as they require monthly deposits, promoting a regular savings habit.

• Lower minimum deposit: RDs have a lower minimum deposit requirement compared to FDs, making it accessible to a wider range of investors.

• Flexibility in deposit amount: RDs allow investors to choose a monthly deposit amount that suits their budget.

Disadvantages of Recurring Deposits or RD

Some of the disadvantages of a Recurring Depsoit are as follows:

• Lower interest rates: RDs generally offer lower interest rates compared to FDs, resulting in potentially lower returns.

• Longer investment period: RDs require a fixed investment period, which may not be suitable for those seeking shorter-term investments.

• Limited premature withdrawal options: RDs usually have restrictions on premature withdrawals, limiting liquidity options.

FD vs RD – Advantages and Disadvantages

Fixed Deposit (FD) Advantages:

The advantages of Fixed Deposit or FD are as follows

• Higher interest rates: FDs generally offer higher interest rates compared to other fixed-income investments.

• Fixed returns: The interest rate is fixed at the time of investment. Hence you can predict your returns.

• Flexibility in tenure: FDs come with various tenure options. Therefore, allowing investors to choose a suitable investment period.

FD Disadvantages

The disadvantages of FDs are as follows:

• Lack of liquidity: FDs have a fixed tenure, and premature withdrawals may attract penalties or reduced interest rates.

• Inflation risk: Fixed interest rates may not keep pace with inflation, potentially impacting the purchasing power of returns.

• Inflexible deposit amount: FDs usually require a lump sum deposit, which may not be feasible for everyone.

RD Advantages

The advantages of investing in an RD are as follows: 

• Regular savings: RDs encourage disciplined savings as they require monthly deposits, promoting a regular savings habit. You can easily calculate your RD returns by using smallcase RD calculator.

• Lower minimum deposit: RDs have a lower minimum deposit requirement compared to FDs, making it accessible to a wider range of investors.

• Flexibility in deposit amount: RDs allow investors to choose a monthly deposit amount that suits their budget.

Recurring Deposit or RD Disadvantages

Some of the disadvantages of a Recurring Deposit are as follows:

• Lower interest rates: RDs generally offer lower interest rates compared to FDs, resulting in potentially lower returns.

• Longer investment period: RDs require a fixed investment period, which may not be suitable for those seeking shorter-term investments.

• Limited premature withdrawal options: RDs usually have restrictions on premature withdrawals, limiting liquidity options.

Key Differences between FD and RD

Both recurring deposits (RD) and fixed deposits (FD) are investment options that offer guaranteed returns. However, there are some key differences between the two that can affect your earnings.

Investment Amount 

The first and most important thing that you should consider is your investment amount. If you have a large chunk of money to invest in lumpsum, you can consider investing in an FD. On the other hand, RDs don’t demand lump-sum investments. So, if you have a little money to invest you can go for an RD. 

Interest rates

FD and RD interest rates do differ from bank to bank. However, generally, FDs offer higher interest rates than RDs. This is because FDs require a lump sum investment, while RDs allow you to invest a fixed amount each month. Banks are willing to offer higher interest rates on FDs as they are considered to be a lower-risk investment.

Tenure

FDs have a fixed tenure, while RDs have a flexible tenure. This means that you can withdraw your money from an RD at any time, while you will have to pay a penalty if you withdraw your money from an FD before the end of the tenure.

Liquidity and premature withdrawal options

FDs have a fixed tenure, and premature withdrawal may result in penalties or reduced interest rates. RDs provide more flexibility, allowing partial withdrawals and premature closures with certain conditions.

Tax implications and exemptions

The interest earned from FDs is taxable as per the individual’s income tax slab. In contrast, the interest earned from RDs is fully taxable. However, both fixed deposit and recurring deposit are schemes that offer tax-saving options like the 5-year tax-saving FD or the 5-year RD eligible for tax deductions under Section 80C of the Income Tax Act.

Similarities of FD and RD

The following are some of the similarities of Fixed Deposits and Recurring Deposits:

• Fixed Income Investments: Both FDs and RDs offer fixed interest rates, remaining unaffected by market fluctuations. Banks and financial institutions guarantee returns.
• Predictable Returns: You can calculate expected maturity amounts based on tenure, deposit amount, and interest rate, aiding financial planning.
• Premature Withdrawal: Some FDs and RDs allow penalty-free partial withdrawals, e.g., Axis Bank permits up to 25% withdrawal without penalties.
• Loan Facility: Both FDs and RDs enable loans against deposits, providing flexibility for various financial needs.

FD vs RD : Choosing the Right Option

Fixed Deposits (FD) and Recurring Deposits (RD) are popular investment options that offer a fixed rate of return over a specific period. Understanding the differences between FD and RD is crucial for making an informed investment decision. Let’s delve into the details:

Assessing personal financial goals and requirements

• FD: FDs are suitable for individuals with a lump sum of money that they don’t require immediate access to. It is ideal for long-term financial goals, such as retirement planning or purchasing a property.

• RD: RDs are beneficial for individuals who want to accumulate a specific amount over time through regular contributions. It is suitable for short-term goals like saving for a vacation or a down payment on a home.

Hence, if you think that you can invest in lumpsum, you can go for an FD. Otherwise, you can choose an RD. 

Considering risk tolerance and investment horizon

• FD: FDs are considered low-risk investments as they offer a fixed rate of return. They are suitable for risk-averse investors who prioritize capital preservation. The investment horizon can range from a few months to several years.

• RD: RDs also have low risk, but they provide a steady accumulation of funds over time. They are suitable for individuals with a longer investment horizon and a lower risk tolerance.

Both options are suitable for risk-averse investors. However, the main difference is between the investment horizon. Therefore, if you want to make a long-time investment, you should choose an FD. On the contrary, if you want to invest for a short period pf time, go for an RD.

Evaluating interest rates and investment terms

• FD: FDs offer a fixed interest rate throughout the investment tenure, providing clarity on the returns. The interest rates vary based on the bank, tenure, and investment amount. Regular FDs typically have a lock-in period, and withdrawing before maturity may incur penalties.

• RD: RDs also have a fixed interest rate, but it is calculated on a monthly basis. The interest rates are determined by the bank and can vary. RDs usually don’t have a lock-in period, allowing flexibility in withdrawing funds when needed.

Both investments have fixed interest rates. However, a fixed deposit can and typically does come with a lock-in period whereas an RD doesn’t. Hence, if lock-in periods are not an issue for you then choose FD. Otherwise, you can invest in a RD.

FD vs RD – Which is Better?

Tenure`	Fixed Deposit Amount	Interest Earned on FD(6%)	FD Maturity Amount	Recurring Deposit Amount	Interest Earned on RD (6%)	RD Maturity Amount	Difference
1	₹12,000	₹736	₹12,736	₹4,000	₹1,580	₹5580	₹7,156
2	₹24,000	₹3,036	₹27,036	₹4,000	₹6,204	₹10,204	₹16,832
3	₹36,000	₹7,042	₹43,042	₹4,000	₹14,055	₹18,055	₹24,987
4	₹48,000	₹12,911	₹60,911	₹4,000	₹25,335	₹29,335	₹31,576
5	₹60,000	₹20,811	₹80,811	₹4,000	₹40,252	₹44,252	₹36,559

*The difference is calculated by subtracting RD Maturity Amount from the FD Maturity Amount.*

You might have heard a proverb that ‘one shoe doesn’t fit all’. This statement holds true for your investments as well.

See, when it comes to choosing between an FD or RD, no option is good or bad. It completely depends on your risk tolerance, investment horizon, and financial goals. 

So, if you have a lump sum of money to invest and you are looking for the highest possible returns, then an FD is the better option. This is because FDs offer higher interest rates than RDs. However, if you are unable to invest a lump sum of money and you need the flexibility to withdraw your money at any time, then an RD is the better option.

Taxability of FD vs RD

Both FD and RD are taxed similarly, but with one key difference. Interest earned on both is added to your total income, taxed according to your slab rate. For instance, a 30% tax bracket incurs 30% tax on FD/RD interest.

However, the deduction method varies. FDs have TDS for interest over ₹10,000 annually, while RDs do not. This makes RD a favored choice for many investors.

To Wrap It Up…

Both fixed deposits (FDs) and recurring deposits (RDs) have their own unique advantages and considerations. FDs offer a fixed lump sum investment with higher interest rates and flexibility in terms of tenure. They are suitable for individuals with a sizable amount of savings and a longer investment horizon. 

On the other hand, RDs provide the convenience of regular monthly contributions, making them ideal for individuals with a steady income and a desire for disciplined savings. RDs offer flexibility in terms of deposit amount and tenure, making them accessible to a wider range of investors.

When deciding between FDs and RDs, it’s essential to consider your financial goals, risk tolerance, liquidity needs, and investment horizon. Assessing these factors will help you determine which option aligns better with your requirements.

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