Difference Between Fixed Deposit and Recurring Deposit

Fixed Deposits (FDs) and Recurring Deposits (RDs) are seen as similar investment options because both offer stable returns with minimal risk. They are popular among investors who prefer safety and predictability over high-risk investments. While both guarantee fixed returns over a set period, the investment method is slightly different. Understanding these differences can help you select the most suitable option based on your financial objectives.

A Fixed Deposit (FD) is a savings option provided by banks and non-banking financial companies, where you deposit a lump sum amount for a fixed period and earn interest at a guaranteed rate.

Features of a Fixed Deposit 

Some of the salient features are listed below:

• You may invest money for tenures ranging from 7 days to 10 years at predefined interest rates.

• Once you open an FD, the interest rate is fixed and unaffected by market fluctuations.  

• The assured interest is guaranteed, and you receive the principal plus accrued interest at the end of the term of the tenure.

• If you choose periodic interest payouts, you will receive the interest at regular intervals based on your selected frequency.

• Premature FD withdrawals are allowed but usually attract a penalty or lower interest rate.

• Tax-saving in fixed deposits with a 5-year lock-in period is eligible for deductions under Section 80C of the Income Tax Act.

• You can avail of loans and overdrafts against FDs. The terms and interest rates vary across banks.

• Most banks insist on opening a savings bank account if you want to place an FD with them. Crediting interest, transferring proceeds on maturity, etc., become easier if you have a savings bank account with the same bank.

Example: You invest ₹ 10,000 in a fixed deposit at an interest rate of 6% per annum for 5 years. At the end of 5 years, your investment would have grown to ₹13,469.

Types of Fixed Deposit

FDs are of different types and are offered by different entities. A few of the popular ones are listed below:

• Bank Deposits: Bank Deposits are offered by the public sector and private sector commercial banks. Interest rates are generally lower than those offered by non-banking financial companies and corporate houses.
• NBFC/Company Deposits: A company FD or NBFC deposit is issued by companies that want to raise funds from the general public. These deposits are rated by agencies such as ICRA, CARE, CRISIL, etc.
• Post Office FD: A post office FD, also called a post office term deposit, is issued by the Indian Postal Services and is backed by the sovereign guarantee of the Indian Government.
• Tax Saving FD: Taxable Investments in tax-saving FDs are eligible for a deduction,  u/s 80C of the Indian Income Tax Act. It has a lock-in period of 5 years.
  
  Note: Tax benefits are subject to change in tax laws. Please consult your tax advisor.

What is a Recurring Deposit?

RD is a type of term deposit that allows you to systematically invest money over a period and earn guaranteed returns.

Some of the salient features of a recurring deposit are listed below:

• Allows you to make regular deposits and earn returns that are higher than those offered for savings accounts.

• Flexible, as you can invest periodically instead of in one lump sum.

• RD tenure ranges from 6 months to 10 years.

• The fixed interest rate depends on the tenure chosen. Interest rate is unaffected by subsequent changes due to market forces.

• You may invest as low as ₹1000 each month.

• Premature withdrawals are subject to a penalty, just like in FDs.

• Helps inculcate a sustainable habit of saving.

• You may give standing instructions to auto-debit the recurring amount. Saves you time, energy, and effort of transferring/depositing the amount at a defined frequency.

For Example, if you invest ₹833 per month in a recurring deposit at an interest rate of 6% per annum for 5 years. At the end of 5 years, your investment would have grown to ₹ 58,361.

Types of Recurring Deposit

RDs can be opened in banks, post offices, and NBFCs. The different types of RDs are listed below:

• Post Office RD: Minimum ₹100 per month or any amount in multiples of ₹10 can be invested in a post office RD. There is no maximum limit. After 12 consecutive instalments, and if an account is continued for 1 year without any breaks, you may avail loan facility up to 50% of the balance available in the account.
• Bank RD: A bank RD is a term deposit that requires periodic investment and gives you a predictable, guaranteed return on that investment.
• RD for Senior Citizens: Senior Citizens get an additional interest rate of 0.25% to 0.75% over and above the regular interest rate offered by the bank.

Difference Between FD and RD

In an FD, you deposit only once and watch the principal grow over a predefined tenure, whereas in an RD, you must deposit money periodically over the defined tenure. Let’s discuss the differences below.

Alternatives to Long-Term FDs and RDs

There are other credible, equally safe investment avenues that you can explore as an alternative to FDs and RDs. Some of them are listed below:

• Endowment Plans: An endowment plan is a safe investment strategy to build a corpus and give your family a financial cushion (through an insurance component) in case of your untimely demise.
  
  Endowment plans help you save money, protect your life, and also save on taxes both on investment and during withdrawals.
• Public Provident Fund (PPF): It is a popular investment scheme among investors courtesy of its multiple investor-friendly features and associated benefits. The current rate of interest is 7.1% and is a safe option if you want risk-free, stable returns in the medium-to-long term. You must deposit a minimum of ₹ 500 and may deposit a maximum of ₹1.5 lakhs each year in your PPF account.
• Unit Linked Insurance Plans (ULIPs): A ULIP, or Unit Linked Insurance Plan, is a financial product that combines life insurance with investment opportunities.  Features of ULIPs for the long-term are as follows.
  1. Option to invest in equity funds.
  2. Bonus additions for long-term investors.
  3. Option to invest up to the age of 99 – Meet, retirement, pension, and legacy goals with a single plan.
  4. Partial withdrawals are allowed after 5 years.
  5. Withdrawals and maturity values are tax-free.
  6. A life cover along with your investment.

Alternative Fixed Income Options for Growth

If you do not have a lump sum to invest in an FD, you may explore RDs. Both RD and FD are ideal options to earn guaranteed interest over predefined periods. Use an online FD/RD calculator by Canara HSBC Life Insurance to evaluate what suits you best. There are equally good avenues, such as ULIPs and endowment funds, that give stable returns and give additional benefits as well. Compare those too and put your money wisely by diversifying your investments.

Conclusion

Fixed Deposits and Recurring Deposits are safe ways to earn guaranteed returns. FDs suit lump sum investments, while RDs support regular savings. However, for better long-term growth, tax benefits, and life cover, explore options like Endowment Plans, PPFs, or ULIPs. Choose based on your financial goals and risk comfort. A balanced mix of investments ensures both security and higher returns over time.