A Fixed Deposit (FD) is a financial instrument provided by banks and non-banking financial companies (NBFCs) where you can invest a lump sum amount of money for a fixed period at a predetermined interest rate. Once you make the deposit, it earns interest throughout the tenure and is returned at the end of the maturity period along with the interest earned.
A Recurring Deposit (RD) is a savings plan where you deposit a fixed amount of money every month for a specified tenure, and it earns interest. This is ideal for people who want to save regularly. At the end of the RD tenure, you receive the sum of all your monthly deposits along with the interest earned.
We have to pay Tax on interest earned in both FD and RD
| Feature | Fixed Deposit (FD) | Recurring Deposit (RD) |
|---|---|---|
| Type of Deposit | Lump sum deposit | Regular monthly deposits |
| Minimum Investment | ₹1,000 (varies by bank) | ₹100 per month (varies by bank) |
| Interest Rate | Ranges from 5% to 7.5% per annum | Ranges from 5% to 7.25% per annum |
| Investment Tenure | 7 days to 10 years | 6 months to 10 years |
| Early Withdrawal Penalty | 1% reduction in interest rate for premature withdrawal | Penalty applicable depending on the bank's policy |
| Maturity | Lump sum principal and interest paid at maturity | Sum of monthly deposits plus interest paid at maturity |
If you invest ₹1,00,000 in a Fixed Deposit at 6% interest for 1 year, the maturity amount would be:
Maturity Amount = ₹1,00,000 + (₹1,00,000 * 6%) = ₹1,06,000
Note: Interest will be compounding at every 3 months. Just to be simple, we have not considered compounding
If you deposit ₹5,000 every month in a Recurring Deposit at 6% interest for 1 year, the maturity amount would be:
Maturity Amount = ₹60,000 (total deposits) + Interest Earned = ₹61,856
Both FD and RD come with penalties if withdrawn before the maturity period:
At the time of maturity:
Both Fixed Deposits (FD) and Recurring Deposits (RD) are reliable and safe savings options, especially for risk-averse investors. FDs are better for those who have a lump sum amount to invest, while RDs suit individuals who prefer to save systematically on a monthly basis. It's essential to consider the interest rates, penalties, and tenure before making a decision.