Fixed Deposit (FD) and Recurring Deposit (RD) have been popular for decades. This is because the returns from FDs and RDs are significantly higher than what one can receive from savings accounts. Both the fixed deposit and recurring deposit enable people to earn a higher interest on their savings.
An FD is a financial instrument through which people can invest a predetermined amount of money for a period of time to earn interest on their investment. There are two types of Fixed Deposit plans:
- Non-cumulative FD Plan: In a traditional (FD), the principal is invested in the tenure selected by the investor. The interest is paid back on a monthly, quarterly, or yearly basis. This is the traditional FD plan that people take if they want to generate a regular source of additional income since their principal stays invested during the tenure but they get interest on a periodic basis.
- Cumulative FD Plan: In a cumulative (FD), the principal is invested for the tenure at the time of making the FD. The interest is compounded quarterly and reinvested along with the principal. The accumulated amount, i.e. the principal and accrued interest are paid out at the time of the maturity of the FD.
FD versus RD:
|Basis||Fixed Deposit||Recurring Deposit|
|Rate of Return||The interest rate depends on the capital and tenure opted for. The interest rate for FD is slightly higher than that of RD.||The rate of interest usually depends on tenure and monthly investment amount.|
|Investment Limit||There is no limit on the amount that can be invested in a fixed deposit scheme. But, this limit generally depends on the bank and the minimum investment is Rs. 100 and multiples while the maximum limit is Rs. 1.5 lakh.||While there is no prescribed minimum or maximum limit, this usually depends on the bank. Many banks have the minimum investment limit as Rs. 1000 and the maximum limit as Rs. 15 lakhs per month.|
|Duration||People can invest in an FD for at least 7 days to a maximum of 10 years.||An RD account can be opened for a minimum and maximum duration of 6 months and 10 years.|
|Tax benefits||If the yearly interest in a financial year on an FD exceeds Rs. 10,000, the bank deducts 10% as Tax Deducted at Source (TDS) for investors who have submitted their PAN and 20% for those who have not submitted their PAN with the bank.||TDS is not deducted from the interest earned from a Recurring Deposit but the person has to file it in the IT return|
|Withdrawal||At the end of tenure. Premature withdrawal is allowed with a penalty.||At the end of opted tenure. Premature withdrawal is allowed with a penalty.|
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