May 11

Difference between Fixed Deposit and Recurring Deposit

Team Antworks

Let’s take a look at the points with the table below which explains FD vs RD:

Fixed Deposits

Recurring Deposits

Purpose: To enable investors to mobilize idle savings and earn with a higher rate of interest than regular savings bank accounts.

Purpose: To inculcate a regular habit of savings among the public.

Duration: Fixed deposit accounts can be opened for a minimum of 7 days, to a maximum of 10 years.

Duration: Recurring Deposit accounts can be opened for a minimum of 6 months, and a maximum of 10 years.

Eligibility: All resident Indians and Hindu Undivided Families (HUFs) are eligible to open a fixed deposit account.

Eligibility: All resident Indians and Hindu Undivided Families (HUFs) are eligible to open this account. RD accounts can also be opened for minors by their parents or legal guardians.

Compound Interest and Impact of Compounding Frequency: Interest on investments made in a FD compounds, and earns interest on the new balance after each compounding. The following formula explains this further:

Where:
A = Final Amount that will be received

P = Principal Amount.

r = Annual nominal interest rate.

n = number of times the interest is compounded per year.

t = number of years

Compound Interest and Impact of Compounding Frequency: Most banks that offer Recurring Deposit usually compound interest on a quarterly basis. Compound interest is interest that is added to the principal amount so that from then on, the interest that has been added also earns interest. This addition of interest to the principal is called compounding.

The following formula gives you the total amount one will get if compounding is done:

Where:

M = Maturity value.

R = Monthly instalment.

n = Number of quarters.

i = Rate of interest/400.

Renewals and withdrawals of Fixed Deposit Accounts:

Rolling over of deposits for another term where term, in which the tenure can differ.
Auto-renewal: The tenure of deposit doesn’t change, but the interest rate depends on the prevailing interest rate at the time of renewal.
Deposits can be encashed at maturity.
Premature withdrawals are subject to penalties.
Amounts being withdrawn above Rs.20,000 must be transferred to the depositors savings bank account.
Amounts being withdrawn below Rs.20,000 can be taken in cash.
For sweep-in facility and flexi-deposits, withdrawals are allowed on the interest accrued by the FD, the balance will then be held as a new deposit.
No withdrawals are allowed for a minimum of 5 years in the case of tax-saving deposits.

Renewals and withdrawals of Recurring Deposit Accounts:

During the premature closure of the RD for reinvestment in a term deposit, interest will be paid to the account holder without reducing interest rate by 1% (as penalty).
If the account holder does not stay with the bank after prematurely closing the account, the interest rate will be (whatever the interest rate was, minus 1% as penalty).
Partial withdrawals are not allowed for RDs, but some banks offer a loan facility against the RD, where the RD must be pledged as collateral.
Premature withdrawals are possible, but the rate of interest will be less than the base rate (which is around 8.40%).

Nominations under Fixed Deposit Schemes:

A nominee is the person named to receive the funds accrued in a particular FD upon the depositor’s death.
Nominee details required: Name, age, address, relationship with depositor, details of legal guardians.
Only one nominee per deposit account.
Proof of depositor’s death required to claim funds.

Nominations under Recurring Deposit Schemes:

A nominee is the person named to receive the funds accrued in a particular RD upon the depositor’s death.
Nominee details required: Name, age, address, relationship with depositor, details of legal guardians.
Only one nominee per deposit account.
Proof of depositor’s death required to claim funds.

Loan against Fixed Deposit

Loans can be availed by keeping your FD as collateral.
Loans are given as an alternative to those who need funds, but do not wish to break the deposit account prematurely.
Most banks allow for loans in the range of 70% – 90% of the deposit value.

Loan against Recurring Deposit

Loans can be availed by keeping your RD as collateral.
Loans are given as an alternative to those who need funds, but do not wish to break the deposit account prematurely.
Banks offer loans for up to 90% of the deposit value.

Income Tax on FD

Income on FDs is taxed as per the depositors tax slab.
Interest on FDs is calculated on an annual or cumulative basis, but it’s taxed on an accrual basis – revenue is recognised when earned and expenses are recognised when incurred.

Income Tax on RD

Income on RDs is taxed as per the depositors tax slab.
No TDS, but the investor needs to include the interest accrued during the year in the IT return.

So which one should you invest in? A fixed deposit or a recurring deposit?

It all depends on your needs. A fixed deposit account earns interest in a compounding manner on the initial lump sum deposited. The entire amount earns money for 1 year, but in the case of recurring deposits, the first instalment earns interest for 12 months, the second for 11 months, the third for 10 months, and so on until the end of the deposit term.

In real time, you make more money with a fixed deposit (As illustrated by the below example), but it does not have the flexibility of a recurring deposit account in terms of being able to deposit smaller amounts as and when they become available to you.

Example:

Particulars	Fixed Deposit Account	Recurring Deposit Account
Amount invested	Rs.24,000 (lumpsum)	Rs.2,000 (per month for 12 months)
Interest rate per annum	9% (compounded quarterly)	9% (compounded quarterly)
Total annual interest earned	Rs.2,234.	Rs.1,195.
Total account balance after one year	Rs.26,234.	Rs.25,195.