RD or FD: Which is the Better Investment Option?

As you step into the world of investing, the primary recommendation you must have gotten from friends, mentors, and acquaintances is to invest your savings in a fixed deposit (FD) or recurring deposit (RD). These two investment schemes offer guaranteed returns with fixed or variable interest rates. Moreover, you get these recommendations because they fall under the safe investment category.

You can also invest in these schemes to diversify your investment portfolio by investing in safe investments while other investments are in stocks and mutual funds. But how do you choose between the schemes? RD or FD? Which is the better option to invest in as per your situation and financial goals? Let us have a look at each scheme and help you arrive at a decision.

Each scheme has its benefits, and you should choose one by considering the features such as interest rate, investment amount, tenure, and others. However, before you determine which is better, RD or FD, let us go through each scheme and compare them.

What is FD?

A fixed deposit is an investment scheme in which you invest a lump sum amount for a fixed tenure and avail interest on your investment based on the predetermined interest rate. 

Banks, post offices, and non-banking financial institutions (NBFCs) provide FD facilities. In contrast to stocks and mutual funds, these plans do not further invest the money in market-linked securities, which makes them reasonably secure. 

Your investment is at risk only if the bank or NBFC with which you opened an FD account goes bankrupt or collapses entirely. If you have a lump sum amount,  you should invest in an FD.

You need to note that the interest rate provided by FD schemes varies from bank to bank and NBFC to NBFC. However, the interest rates offered by post offices are similar throughout India. 

The interest rates remain the same throughout the investment tenure so that you can gain a predictable interest amount upon maturity. The interest rates are higher for senior citizens than for adults and minors. 

The minimum investment amount depends on banks, NBFCs, and post offices. Generally, the minimum investment amount in an FD scheme varies from ₹1,000 to ₹5,000. However, there is no limit on the maximum investment amount. The investment tenure varies from seven days to 10 years. You have the freedom to choose your tenure within the range mentioned above. 

Premature withdrawal, which implies the facility to close an account and avail the entire deposit in an FD account, is allowed. So, if you need funds urgently, you can close your FD account and use the deposit. However, some penalties are levied at the time of premature withdrawal.

If you want to know which is better for saving taxes, here is your answer. A few RD schemes offer tax exemptions on investments up to ₹1,50,000 under Section 80C of the Income Tax Act, 1961. 

You can open multiple FD accounts with the same or different financial institutions. You can use the investment in an FD account as collateral for availing  a loan. Loans of up to 90-95% of the total balance in an FD account are available. 

However, the loan amount varies from bank to bank. Therefore, if you have a lump sum amount in your hand, want to invest in a safe investment option, and gain a higher interest rate than a savings account, you should consider investing in an FD scheme.

What is RD?

A recurring deposit is an investment scheme in which you invest a certain amount on a monthly basis for a specific duration and avail interest on an accumulated amount at the end of the tenure. 

Banks, post offices, and NBFCs offer an RD scheme. This scheme helps inculcate the habit of saving regularly.

Why not save the same small amount in a savings account regularly?  The answer is the higher interest rate provided by an RD scheme compared to a savings account.

The minimum investment amount varies from financial institution to financial institution. Generally, it is ₹500 per month for the post office. However, some banks keep it at ₹1,000. 

There is no limit on the maximum investment amount per month. There are two types of RD schemes, fixed and flexible. In a fixed RD account, you must deposit a fixed amount of money on a predetermined date every month. 

On the other hand, in a Flexi RD account, you gain flexibility in the amount to be deposited every month. You can deposit a variable amount every month as per availability.

The investment tenure varies from 6 months to 10 years. Therefore, the interest rate depends upon the monthly investment amount, investment tenure, and the financial institution with which you open an RD account. 

The interest rates are higher for senior citizens than for adults and minors. You can use the accumulated balance as collateral against loans. Moreover, if you need funds urgently, you can withdraw the total balance in an RD account and close the account. Partial withdrawals are not allowed. All the investments in the RD scheme and the interest amount are taxable.

Key Differences Between FD and RD

Following are the differences between FD and RD at a glance:

ParameterFixed DepositRecurring Deposit
A minimum amount of investmentGenerally, ₹1,000. However, it depends on banks, NBFCs, and post offices.Generally, ₹100. However, it depends on banks, NBFCs, and post offices.
Tenure of investment7 days to 10 years.6 months to 10 years.
Interest rateEach bank and NBFC sets its interest rate structure depending on investment amount and tenure. It remains fixed throughout the tenure.Each bank and NBFC sets their interest rate structure depending on investment amount and tenure. It remains fixed throughout the tenure.
Deposit FrequencyOnce.Monthly.
Collateral against loansYou can use FD receipts as collateral against loans.You can use the total RD balance as collateral against loans.
The higher interest rate for senior citizensProvided.Provided.
Auto-renewal facilityAvailable.Not available.
Tax benefitsOnly tax-saving FD schemes offer tax deductions under section 80C of the Income Tax Act.There are no tax benefits whatsoever.
A penalty for skipping an instalmentThere is no skipping of instalments because there is just one deposit.The skipping of an instalment carries a charge. Some banks, however, do not impose penalties for Flexi RD plans.

Which One Should You Choose—FD or RD?

If you want to know between RD or FD, which is better for you, then you should consider the investment amount first.  You should invest in an FD scheme if you have a lump sum amount. 

Even if you want to invest for less than six months and avail higher returns than the returns offered by a savings bank account, you can invest in an FD scheme.

On the other hand, if you want to save a small amount every month, then an RD scheme is for you. For example, you are wondering, between RD and FD, which one is better to put an end to unnecessary spending or save money to pay education fees for your children for the following year? In that case, you can open an RD account to keep aside a small amount every month for a year. So, your financial goal also matters when it comes to choosing between FD and RD.

Final Thoughts

If you are exploring options to invest in one of the safe investment schemes and still need help figuring out which RD or FD is better, then you should consider your financial goal and the investment amount at hand.

Many of the features and benefits of these schemes are similar. The key difference is in the deposit frequency. So, if you have a lump sum amount, you should invest in an FD scheme. However, if you want to save your corpus over time, you can start saving every month and build up a decent sum.

Frequently Asked Questions (FAQs)

Why should I choose FD or RD over a savings bank account?

You can avail a higher interest rate by investing in FD and RD schemes than you can gain by keeping your money in a savings bank account.

Which is better, RD or FD, if I want to avail tax benefits?

Tax saving FD schemes offer tax deductions under Section 80C of the Income Tax Act, 1961. However, RD schemes do not offer any tax benefits.

Do RD schemes offer an auto-renewal facility like FD schemes?

RD schemes only provide auto-renewal facilities upon maturity, as FD schemes do. 

Which scheme offers a higher interest rate than the FD and RD schemes?

Interest rates depend upon the investment amount, the investment tenure, and the financial institution with which you open an account. So, you should check out the interest rates of different institutions before investing.

What is the maximum investment amount for FD and RD schemes?

There is no limit on the maximum investment amount. You can choose the investment amount based on the availability of funds and financial goals.

Is a premature withdrawal facility available for FD and RD schemes?

You can withdraw your investment before the maturity date in FD and RD schemes. However, you cannot withdraw your investment partially.   

Investments Principal at Wint Wealth

Anuj is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.Com (Hons) in St. Xavier’s College, Kolkata and holds PGDM (Finance) degree from GIM. He is currently working as Investments Principal at Wint Wealth. He has been working in the debt capital market space for the past 4+ years and is also an NISM certified mutual fund expert.

Was this article helpful?
YesNo

Disclaimer: This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The article may also contain information which are the personal views/opinions of the authors. The information contained in this article is for general, educational and awareness purposes only and is not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision, whether related to investment or otherwise, taken on the basis of this article.

Leave a Comment