People can avail of any financial product that is easily accessible in the market. This range of financial products includes both risk-free and high-risk associated products. To be on the safer side, people often opt for the regular investment products which will accumulate a fair amount of corpus for them. Some of the regular risk-free investment products include savings account, post office saving schemes, fixed deposits, public provident fund, and recurring deposits. However, people often fail to realize the difference between fixed deposits and recurring deposits which makes them commit investment blunder in life.
What are Fixed and Recurring Deposits?
The fixed deposit and recurring deposit offer fixed returns yet, they have their own exclusive features which attract their own customer base. Fixed deposits have a fixed tenure ranges from 7 days to 10 years, where the depositor has to deposit the amount at once. Under the fixed deposit, the interest rate is credited to the account of the depositors either on a monthly or quarterly basis.
The recurring deposit has a lock-in period which ranges from 1 to 10 years. The tenure varies from bank to bank. But, under this deposit, the depositor has to deposit a fixed amount every month which will make them earn interest on a monthly basis. Besides these features, these two investment products offer different facilities. Dive in to acknowledge the parameters under which the major 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 served by 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 the idle money, which will help to earn a higher rate of interest than a regular savings account. In contrast to it, the recurring 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 the Indian citizens and the ones belonging to Hindu Undivided Families (HUFs) are eligible to open the fixed deposit account. While in comparison to it, the banks offer the facility to open the recurring deposit for all the citizens as well as for the minors. Recurring deposit accounts for the minors can be opened, which will help the parents to cover their child’s various expenses in the future. The RD account can be opened by the minor’s parent or the legal guardian and would be maintained by them.
Interest Rate Offered
The FD and RD interest rate differ by a great margin. 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 which ranges between 6.3% to 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 principal 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 and the other mode is the non-cumulative interest rate which helps the depositor to earn the interest in the form of a monthly, or quarterly basis. On the other hand, the recurring deposit also earns interest through the method of compounding. However, most of the banks offer the recurring deposit scheme which receives the compound interest on a quarterly basis.
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 savings account of the depositor. 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 case of tax-saving fixed deposits. The deposits with sweep-in facility and Flexi-deposits have a withdrawal option 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, the recurring deposits facilitate its customer to take a premature withdrawal but the interest rate will be 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 the depositors who are in need of funds but wouldn’t like to break 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, yet, it is taxed on the accrual basis. The banks deduct TDS at the rate of 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 PAN card information is not furnished to the bank.
The above-mentioned parameters showcase the common ground of difference between the two types of investment products. Both the accounts have their own set benefits and drawbacks which make them exclusive in features in comparison to one another. Understand the pros and cons associated with both the financial products and then, make an investment choice prudently.
