Both Fixed Deposit (FD) and Recurring Deposit (RD) are safe investment avenues which are ideal for individuals who look for risk-free returns. Though all the banks offer the same rate of interest on both the investment schemes, many people find themselves in a confused state to make the best choice between the two. 

Both the schemes have their own objective and investment purposes. By closely looking at their features in detail, you can choose the investment option that is suitable for your needs. Following comparison between RD and FD will help you understand better about both the schemes. 

Additional Reading: What is a Fixed Deposit and a Recurring Deposit?

 

 Features  Recurring Deposit  Fixed Deposit
 Definition  It is a financial instrument which helps people invest a regular amount every month until a specific term and earn returns at a fixed rate of interest.  It is a financial instrument that helps people invest a pre-determined amount until a specific period and earn returns at a fixed rate of interest.
 Purpose  The purpose of this plan is to encourage individuals to invest a smaller amount each month and thus earn an income with interest after a specific period.  The purpose of this plan is to encourage individuals to invest a huge corpus with banks and earn a decent income after a specific period.
 Eligibility  All resident and non-resident Indians, trusts, societies and members of Hindu Undivided Family can open a recurring deposit account.  All resident and non-resident Indians, trusts, societies and members of Hindu Undivided Family can open a fixed deposit account.
 Minimum deposit amount  Initially, the minimum investment amount could range between Rs. 500 to Rs. 1000 and thereafter, in multiples of Rs. 100.  Minimum investment starts from Rs. 10,000.
 Tenure  The minimum tenure starts from 6 months and one can invest up to 10 years maximum. NRI customers may have minimum tenure of 12 months. However, this may vary from bank to bank.  The minimum tenure starts from 7 days and the maximum tenure is up to 10 months.
 Interest Rates  Higher than a savings account. The minimum interest rate starts from 4.5% onwards and it can go up to 7%, depending on the amount invested. Senior citizens get slightly higher interest rate which would be 0.50% more than normal rates.  The minimum interest rate starts from 5.5% onwards and it can go up to 7% based on the amount invested. Senior citizens get slightly higher interest rate which would be 0.50% more than normal rates.
 Loan/Credit Card Facility  A few banks offer loan against RD. One can get up to 95% of the invested amount.  Loan amount is fixed up to a certain percentage of the fixed deposit amount.
 Tax benefits  No tax exemption is available for RD. The interest earned is tax-free.  One can get tax exemption for up to Rs. 1. 5 lakhs under section 80C of the Income Tax Act 1961. TDS is applicable on the interest earned more than Rs. 10,000.
 Premature withdrawal  One can make a premature or partial withdrawal from the recurring deposit account. Banks will levy a penalty of up to 2% on the applicable interest rate.  Some banks do not charge any penalty for premature withdrawal. The penalty could range between 0.50% to 1%.
 Renewal  One can renew the RD after the date of maturity or choose for an auto-renewal facility.  The fixed deposit account holder can renew the tenure after reaching the maturity date. You can also opt for an auto-renewal feature.
 Interest pay-out  Interest income is paid only at the end of the tenure.  Interest income is paid quarterly, bi-annually or annually.
 Documents Required  Address Proof & Identity proof. No documents may be required if you open an RD account with the bank where you have a savings account.  Address Proof, identity proof, passport size photo, etc. You may have to produce the original documents for verification purpose.

 

Both the products almost have the same features and the major difference is only with the amount invested. An FD lets you just invest the amount at once and sit back and relax until the maturity. Moreover, the interest is paid out half-yearly, bi-annually or yearly. On the other hand, RD account is a financial responsibility that requires a specific sum for each month.

Additional Reading: Top 5 Fixed Deposit Schemes

Let’s consider a situation wherein you plan to invest an amount Rs. 5 Lakhs for a tenure of 10 years. The following will be results of each investment.

   Recurring Deposit   Fixed Deposit 
Amount Invested  Rs. 5 Lakhs  Rs. 5 Lakhs
Rate of Interest  7%  7%
Returns with Principal   Rs. 8,70,472  Rs. 10,04,830
Interest income earned   Rs. 3,70,472  Rs. 5,04,830

 

There is a huge difference in terms of returns in both the schemes. In this regard, fixed deposit score higher over recurring deposit. However, recurring deposit offers you the flexibility to invest the amount in smaller portion at your own convenient. 

Flexible Recurring Deposit

Apart from regular recurring deposit, the banks have launched innovating schemes such as flexible recurring deposits. With a flexible recurring deposit, you can choose a target amount and start investing on your own online. Unlike a regular deposit, flexible recurring deposit does not have a specific amount of deposit each month. You can choose to add amount to your account starting from in multiple of Rs. 50 and reach the targeted amount on or before the maturity date. 

This type of recurring deposit enables you to invest more when you have a good income or have more money in your savings account. You can withdraw the amount in between the tenure, but the bank will levy a certain percentage as penalty on applicable rate of interest. 

Additional Reading: Top 5 Recurring Deposit Scheme in India

Bottomline

Both RD and FD are suitable for risk-averse investors. As the degree of risk is nil, the rate of returns is lower than other investment instruments such as mutual funds, stocks, bonds, etc. Individuals who have a lump sum and look for risk-free avenues can opt for fixed deposit, and investors who can only afford a smaller amount can opt for recurring deposit.