Yes. Premature withdrawal and closure are allowed in fixed deposits. However, you will have penalty charges for the same.
Difference between Fixed Deposit (FD) and Recurring Deposit (RD)
When we talk about secure investments, term deposits hold their place as being the most preferred choice of investment for investors. Now, what are term deposits?
Term deposits are fixed-term investment accounts that bear returns at a fixed interest rate and mature at a certain predefined date. Banks and financial institutions offer two kinds of term deposits: Fixed Deposits and Recurring Deposits.
Fixed Deposits (FD) and Recurring Deposits (RD) are the flagbearers of an unshakable dependability in the world of guaranteed investments. While Fixed deposits involve a lump sum investment, recurring deposits follow a gradual savings approach.
Let's unravel the details of these popular investments, shedding light on their features, benefits, and differences.
What is Fixed Deposit (FD)?
A fixed deposit is a financial investment product where an individual invests a lump sum amount for a predetermined period at a fixed interest rate. This secure investment ensures capital preservation while building the fund value at a guaranteed interest rate.
The stable returns and assurance of capital protection, makes these financial instruments an attractive investment option for risk averse investors who seek low risk avenues to appreciate their savings.
What is Recurring Deposit (RD)?
A recurring deposit, commonly known as RD, is a systematic savings instrument that helps individuals invest and build a corpus through regular monthly contributions.
In this scheme, investors contribute a fixed amount to a bank or financial institution at scheduled intervals. Over a predetermined tenure, these deposits accrue interest at a fixed rate, thus giving a steady growth to your capital.
The flexibility of choosing investment amount and time, a disciplined approach to savings and a guaranteed return on investment make recurring deposits a favourite choice of risk-averse investors.
Difference Between Fixed Deposit and Recurring Deposit
Point of Difference
Requires a Lump Sum Investment
Needs regular fixed investments at periodic intervals that can be small amounts
Minimum and Maximum Tenure
7 Days to 10 Years
6 Months to 10 Years
FD provides option of monthly, quarterly, and yearly interest payouts, making them an excellent choice for income generation.
Returns from RD are paid only on maturity as a lumpsum. There is no option of periodic withdrawal.
There is no scope for default here since the complete payment is done at the start of the investment.
If the RD payment is defaulted for a consecutive 6 months, the bank or financial institution has a right to close the account.
Income Tax Benefit
The tax safer FDs that have a lock in period of 5 years offer a tax saving option under section 80C of income tax
No tax benefit option available.
Lumpsum at the start
Periodic - mostly monthly
Features and Benefits of Fixed Deposits
Fixed deposits have a predetermined maturity period as chosen by the investor at the start of the investment.
Fixed Interest Rate
The interest rate is fixed at the time of investment and remains constant throughout the tenure, thus providing stable and guaranteed returns and preserving your capital against market fluctuations.
Fixed deposits require a one-time lumpsum to be paid, thus making it an easy and straightforward investment instrument.
Low Risk Investment
FDs offer capital protection and returns at a fixed interest rate, thus ensuring the return of the principal amount, along with capital appreciation. Thus, they are a low-risk investment, especially suited for risk averse individuals.
Flexible Interest Payout Options
Investor has a choice to receive interest payouts monthly, quarterly, annually, or on maturity, thus providing you the flexibility to align the income from investment as per your life goals and requirements.
Loan Against FD
Many banks and financial institutions provide the option of loan or credit card against fixed deposit, thus providing an option of liquidity without breaking the FD.
Senior Citizen Benefits
Senior citizens usually enjoy a higher interest rate on their FDs, thus providing an additional income for the retirees.
Tax Saver FDs offer tax benefits under Section 80C of the Income Tax Act, allowing investors to claim deduction on the amount that they invest in these FDs.
Features and Benefits of Recurring Deposits
Regular Periodic Investment
In a recurring deposit, you can invest a fixed amount at regular intervals, usually monthly for a predetermined period, thus following a systematic approach to investment.
Similar to the fixed deposits, RDs have a predetermined maturity period that the investor chooses at the time of starting the investment.
In RDs, the interest is calculated on the total amount in deposit each month, thus growing the corpus gradually.
RDs pay the total accumulated amount on maturity. Periodic interest withdrawal as in case of FDs is not allowed.
Auto Debit Option
Usually, all banks and financial institutions provide auto debit option in order to maintain a more disciplined approach to RD and to minimise the instance of payment bounce towards RD instalment.
Fixed Deposit Vs Recurring Deposit - Which is Better?
So, we read details about the fixed deposits and the recurring deposits, their features, benefits and how they are different from each other. While both have their own relevance, deciding on which one to buy depends on our finance in hand and investment goals.
If you have a lumpsum available to invest, you can select fixed deposits as they provide a higher interest as compared to recurring deposits.
However, if you want to follow a more modest, disciplined, and regular approach to savings, you can go for recurring deposits.
Frequently Asked Questions
Yes, the interest earned on your FDs and RDs is taxable as per your income slab.
Yes. You can change the nomination by submitting the required form.
No, recurring deposits do not have the option of monthly/quarterly interest payout.
No. The tenure and instalment debit date once set, cannot be changed during the term of the deposit.
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.