Fixed Deposit vs. Recurring Deposit: Which One Gives Better Returns?
When it comes to safe and secure investment options, Fixed Deposits (FDs) and Recurring Deposits (RDs) are two of the most popular choices among investors. Both investment instruments offer guaranteed returns, but they differ in terms of investment method, interest calculation, liquidity, and overall returns.
In this blog, we will compare FDs and RDs based on different factors to help you decide which one suits your financial goals better.
1. Understanding Fixed Deposits (FDs)
A Fixed Deposit is a lump-sum investment where you deposit a fixed amount of money for a predetermined tenure at a fixed interest rate. At the end of the tenure, you receive the principal amount along with the accumulated interest.
Key Features of FDs:
- One-time lump sum deposit.
- Fixed interest rates.
- Tenure ranges from 7 days to 10 years.
- Higher interest rates compared to savings accounts.
- Premature withdrawal allowed with penalties.
- Senior citizens often get higher interest rates.
2. Understanding Recurring Deposits (RDs)
A Recurring Deposit is an investment option where you deposit a fixed amount every month for a fixed tenure. The bank or financial institution pays interest on these deposits, and at the end of the tenure, you receive the total invested amount along with accrued interest.
Key Features of RDs:
- Regular monthly deposits.
- Fixed tenure ranging from 6 months to 10 years.
- Interest rates similar to FDs but slightly lower.
- Penalties for missed payments.
- Lump sum payout at the end of the term.
3. Interest Rates Comparison
Both FD and RD offer fixed interest rates, but FD generally provides higher returns since the entire amount is invested at once.
| Investment Type | Interest Rate (Approx.) |
|---|---|
| Fixed Deposit | 5% – 7.5% per annum |
| Recurring Deposit | 4.5% – 7% per annum |
Note: Interest rates may vary depending on the bank, tenure, and market conditions.
4. Returns Comparison: Which One Offers Higher Returns?
To understand the difference in returns, let’s assume an individual invests ₹10,000 per month in an RD and the same ₹1,20,000 (lump sum) in an FD for one year at an interest rate of 6.5%.
- FD Returns Calculation:
- Principal: ₹1,20,000
- Interest: ₹7,800 (approx. at 6.5%)
- Maturity Amount: ₹1,27,800
- RD Returns Calculation:
- Monthly deposit: ₹10,000
- Interest: ₹4,250 (approx. at 6.5%)
- Maturity Amount: ₹1,24,250
Conclusion: FD provides better returns since the full amount earns interest for the entire period, whereas in RD, only the first deposit earns interest for the full tenure, and subsequent deposits earn interest for shorter durations.
5. Liquidity & Premature Withdrawal
- FD: Allows premature withdrawal, but it may attract penalties or reduced interest rates.
- RD: Allows premature closure, but penalties apply, and the total returns may be lower.
If liquidity is a priority, FDs with flexible withdrawal options may be a better choice.
6. Tax Implications
- Tax Deduction at Source (TDS): Interest earned from FDs above ₹40,000 per annum (₹50,000 for senior citizens) is subject to TDS.
- RD Interest Taxation: RD interest is taxable as per the individual’s income tax slab.
- Tax-Saving FDs: Offer tax benefits under Section 80C (5-year lock-in required).
7. Suitability: Who Should Choose What?
- FD is ideal for:
- Investors with a lump sum amount.
- Individuals looking for higher guaranteed returns.
- Senior citizens seeking stable interest income.
- RD is ideal for:
- Salaried individuals who can invest small amounts regularly.
- Investors with financial discipline who prefer systematic savings.
- Young professionals aiming for a disciplined approach to savings.
8. Final Verdict: Which One is Better?
Both FD and RD are excellent investment options, but the choice depends on individual financial goals:
- If you have a lump sum amount, FD is the better option due to higher returns.
- If you prefer monthly savings, RD is a disciplined way to build wealth over time.
Summary Table:
| Factor | Fixed Deposit (FD) | Recurring Deposit (RD) |
| Deposit Type | Lump sum | Monthly contributions |
| Interest Rate | Higher | Slightly lower |
| Returns | Higher due to full investment at once | Lower due to monthly contributions |
| Liquidity | Can withdraw early with penalty | Premature closure allowed with penalty |
| Tax Implications | TDS applies on interest earned | Taxable as per income slab |
| Best For | Lump sum investors, higher returns | Salaried individuals, disciplined savings |
Final Thoughts
Both FD and RD offer guaranteed returns, making them safe investment options. Choosing between the two depends on your financial situation, savings pattern, and investment goals. If your priority is maximizing returns and you have a lump sum amount, go for an FD. If you prefer a systematic savings approach, RD is a better option.
