Jitendra Solanki JS Financial Advisors
Many a time’s investors get confused whether to invest in a fixed deposit or a recurring deposit for their investment objectives. The attraction for both these instruments is the fixed returns with safety of money invested. But when you compare the two, a fixed deposit scores higher than a recurring deposit. Let’s see how these two products differ in the earnings and when you should opt for them-
FeaturesBoth FD and RD are fixed income products available from banks. On the invested amount banks pay you a fixed interest which can be at a specific frequency till the term or on maturity. At the end of the term, the maturity amount which is your invested capital, along with remaining or accumulated interest is paid. Although the interest of banking products change with interest rates scenario, in both these products once you have invested the interest rate remains same throughout the term. In recent times the high rising rates have prompted banks to offer high interest rates on these two instruments and so the attraction of investors has increased manifold.
TaxabilityBoth these products have the same taxability. The interest received from these two is is added to your total income and taxed at your personal income tax rate. So if you are in 30% tax slab, the interest from FD & RD will be taxed at the same rate. However, there is a difference in the nature of tax deduction. In a fixed deposit, banks deduct TDS if the interest income in a year exceeds Rs 10000 but there is no TDS deduction in recurring deposit. This one feature sways investors’ interest towards RD when there is a comparison.
Where you earn more?When you compare both these products, a fixed deposit fetches you more income than a recurring deposit. Lets’ assume you have invested Rs 24000 in a fixed deposit at start of the year and Rs 2000 p.m. in a recurring deposit for a year. Both these products offer you a 9% rate of interest compounded quarterly. This is what you will earn from these two instruments:
| Fixed Deposit | Recurring Deposit | |
| Invested Amount (Rs) | 24000 | 2000 p.m. |
| Interest Rate (p.a.) | 9% compounded quarterly | 9% compounded quarterly |
| Total Interest earned in a year (Rs) | 2234 | 1195 |
| Total Amount after One Year (Rs) | 26324 | 25195 |
| Difference (Rs) | 1039 |
As you can see, after a year you will receive Rs 26324 in a fixed deposit while in RD you will receive Rs 25195. So the recurring deposit earns you Rs 1039 less than a fixed deposit.. The primary reason for this difference is that in FD you invest a lumpsum amount and so the entire money earns interest for one year. But in a recurring deposit the first installment earns interest for 12 months period, the second for 11 months, third for 10 months and so on. Due to this variation FD is able to fetch a higher maturity.
When to Invest in FD & RD?Although FD earn higher than RD, it’s not feasible for a single product to meet all your needs. When you do not have a lumpsum to invest but can save a defined amount from your income every month, a recurring deposit is a more viable product. With it you can achieve an objective of regular savings for your medium term needs. But when you have a lumpsum to invest then FD is a wiser choice.
Although both these banking products appeal to all class of investors, it is more lucrative for small investors who are mostly in lower tax slab. The less or non-taxability of interest along with high interest payout in today’s scenario ensures a good fixed earnings for their goals. Avail them as they will help in meeting certain objectives but do take all associated factors into consideration.
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