What is the Difference Between Recurring Deposits and Fixed Deposits?

People can avail themselves of any financial product easily accessible in the market. This range of financial products includes both risk-free and high-risk associated products. To be safer, people often opt for regular investment products, which will accumulate a fair amount of corpus. Some regular risk-free investment products include savings accounts, post office saving schemes, fixed deposits, public provident funds, and recurring deposits. However, people often need to realize the difference between fixed and recurring deposits, making them commit investment blunders. 

What are Fixed and Recurring Deposits?

Fixed deposits and recurring deposits offer fixed returns, yet they have exclusive features that attract their own customer base. Fixed deposits have a fixed tenure ranging from 7 days to 10 years, and the depositor has to deposit the amount at once. Under a fixed deposit, the interest rate is credited to the depositor's account either monthly or quarterly.

The recurring deposit has a lock-in period ranging from 1 to 10 years, and the tenure varies from bank to bank. However, under this deposit, the depositor has to deposit a fixed amount every month, earning interest every month. Besides these features, these two investment products offer different facilities. Dive in to acknowledge the parameters under which the difference between FD and RD can be figured out. 

Points of Contrast: Recurring deposit Vs fixed deposit

Some of the pertinent factors which display the ground of difference between the two are discussed below:

The role served by the deposit

The purpose of fixed deposits is to enable the depositors to accumulate a lump-sum amount for future usage. It has been acknowledged to be one of the best options to invest idle money, which will help earn a higher interest rate than a regular savings account. In contrast, these deposits initiate regular saving habits among the general public.

Tenure

The lock-in period of fixed deposits ranges from a minimum of 7 days to a maximum of 10 years. The recurring deposit account has a minimum lock-in period of 6 months, while the tenure can be extended up to 10 years.

Eligibility condition

All Indian citizens and those belonging to Hindu Undivided Families (HUFs) are eligible to open a fixed deposit account. In comparison, the banks offer the facility to open recurring deposits for all citizens and minors. Recurring deposit accounts for minors can be opened, which will help the parents cover their child’s vchild'sexpenses. The RD account can be opened by the minor’s pminor'sr the legal guardian and would be maintained by them.

Interest Rate Offered

The FD and RD interest rates differ greatly. The interest rate earned under FD ranges from 3.5% to 7.8% for the general public, while it may scale up to 8.8% for senior citizens. The recurring deposits offer an interest rate between 6.3% and 6.5% for the general public.

Impact of compounding frequency

The interest earned on the fixed deposit follows the compounding method. Under this method, the interest earned on the fixed deposit gets reinvested for the consecutive year. So, for the next year, the principal would be the previous year’s pryear'sl plus the interest earned on the amount. Most of the banks offer two modes when it comes to earning interest. One is cumulative, where the interest gets compounded quarterly, which will be paid on maturity of the FD. The other mode is the non-cumulative interest rate, which helps the depositor earn the interest monthly or quarterly. On the other hand, the recurring deposit also earns interest through compounding. However, most banks offer recurring deposit schemes that receive compound interest every quarter. 

Withdrawal and renewal of account

The fixed deposits can be encashed at the end of the tenure. Premature withdrawals of the deposit are often charged. Any amount withdrawn above Rs. 20,000 will be transferred to the depositordepositor'saccount. While cash withdrawal of any amount less than Rs. 20,000 will be given in cash. Withdrawals are allowed only after a minimum of 5 years in the case of tax-saving fixed deposits. The deposits with sweep-in facility and Flexi-deposits have a withdrawal option that is allowed on the interest accrued on the principal amount. The rest of the balance will be treated as a new deposit. 

In comparison to the withdrawal facility provided under the FD by the banks, recurring deposits allow customers to take a premature withdrawal, but the interest rate is lower than the base rate. The partial withdrawal facility is not allowed under recurring deposits. 

Provision of loan against the account

Under FD, the loans can be availed by keeping FD documents as collaterals. The banks offer this facility to depositors who need funds but wouldn’t wouldn'tbreak their deposit account prematurely. The depositors can avail 70 to 90 percent of their deposit value of FD. On the other hand, the recurring deposit account offers 90 percent of the deposit value as a loan to the depositors during the financial crisis. 

Income tax 

The income or the interest rate earned on the FDs is taxable as per the income tax slab of the Indian Tax Act. Even if the interest earned gets reckoned on an annual or cumulative basis, it is taxed on an accrual basis. The banks deduct TDS at 10% if the interest earned in a year is more than Rs.10,000. On the other hand, under RD, the interest earned is also taxable, but no TDS will be deducted if the interest earned is less than Rs.10,000. However, the TDS may scale up to 20 percent if the bank does not furnish the PAN card information. 

The parameters above showcase the typical difference between the two types of investment products. Both accounts have their own set of benefits and drawbacks, which make them exclusive in features. Understand the pros and cons of both financial products and then make an investment choice prudently.