Saturday, 9 June 2018

Fixed Deposits (FDs) Vs Recurring Deposits (RDs): Which Should Be Your Pick And Why

Both fixed deposits (FDs) and recurring deposits (RDs) are popular investment avenues for risk-averse investors. While bank FDs allow investors to make a lump sum investments and earn higher interest rates in comparison to a savings bank accounts, RDs require small, regular and fixed amounts of investment. Investing in a recurring and fixed deposits are risk-free and both guaranteed returns. But how should an investor decide which of the two is good for them? What are the advantages and disadvantages of fixed deposits and recurring deposits? (Also read: Interest Rates On Post Office Fixed Deposits (FD) Vs Monthly Income Scheme Vs Savings Accounts)

Advantages of fixed deposits (FDs)

FDs provide you with the flexibility of fixing your money over a period of time. Fixed deposits come up with varying tenure duration, which ranges from 7 days to 10 years. Sometimes liabilities arise due to uncertainty and you may have an urgency of having cash at that point in time. In those conditions, you can take a loan against your fixed deposits. There is no such rule of percentage offering by banks. However, banks mostly give loans ranging from 60 per cent to 90 per cent of the deposits. At present, the interest rates on one-year bank FDs - range from 7.75 per cent to 8.75 per cent per annum. The interest earned on FDs is taxed as per one's income tax slab on accrual basis. If the interest amount exceeds Rs.
10,000, the bank would deduct tax at source (TDS) at the rate of 10 per cent per annum. (Also read: Interest Rates On Post Office Fixed Deposit Vs Public Provident Fund Vs Kisan Vikas Patra)

Advantages of recurring deposits (RDs)

In most cases, recurring deposit interest rates are very similar to that of fixed deposits. Interest rates on RDs vary from 7.25 per cent to 9 per cent depending on the bank and the plan chosen by the customer. For salaried customers, it will be easier to set aside a particular amount every month as savings and for this recurring deposit is the best option. Also, RD schemes come with guaranteed returns and the rate of interest for RD is locked which will protect the investor from interest rate swings.

TenureUsually, for FD schemes, the tenure ranges between 7 days to 10 years. The investor can choose a tenure that he is most comfortable with.Tenure for Recurring deposits usually varies from 1 year to 10 years. The customer has to deposit a fixed amount at regular intervals over the tenure.
Investment LimitThere is no limit on the amount that can be invested in a fixed deposit scheme. But, this limit generally depends on the bank and the minimum investment is Rs. 100 and multiples while the maximum limit is Rs. 1.5 lakh.While there is no prescribed minimum or maximum limit, this usually depends on the bank. Many banks have the minimum investment limit as Rs. 1000 and the maximum limit as Rs. 15 lakhs per month.
Rate of ReturnFor a period of a year, the interest rate varies between 6.96% to 8.00%. The interest rate depends on the capital and tenure opted for. The interest rate for FD is slightly higher than that of RD.The interest rate varies between 5.25% to 7.90% for a tenure of one year. The rate of interest usually depends on tenure and monthly investment amount.
Tax benefitsFor fixed deposit, a tax exemption under the section 80C of Income Tax Act 1961 is applicable.Income tax will be not deducted if the interest you earn on your rd is up to Rs.10,000.
Documents RequiredIdentity Proof and address proof. Customers will have to submit documents like PAN card, passport and income documents, if required.Address proof and Identity Proof. Investors will have to submit documents like PAN card, passport and income documents, if required.
Income InterestInterest earned on your FD is taxable and most of the banks deduct TDS.Interest earned on your RD is taxable and most banks do not have the facility of TDS.
Additional BenefitsLoan Facility
Eligibility· Resident Individuals
· Hindu Undivided Families
· Public and Private Limited Companies
· Trusts and Societies
· Resident Individuals
· Trusts and Societies
· Hindu Undivided Families
· Public and Private Limited Companies
WithdrawalAt the end of tenure. Premature withdrawal is allowed with penalty.At the end of opted tenure. Premature withdrawal is allowed with penalty.

As told by Rakesh Singh, Retail Head, SVC Bank

So what should be your pick - fixed deposits or recurring deposits?

"Both FDs and RDs are fixed instruments and offer more or less same features. So, a salaried person can invest in RDs since he/she receives regular income while a person having lump sum amount can invest in FDs," said Abhimanyu Sofat, Head of Research, IIFL. (Also read: Latest Recurring Deposit (RD) Interest Rates: SBI Vs Post Office)

However, the actual interest earned on FDs is higher than that on RDs, explained Puneet Kapoor, Sr. EVP, Kotak Mahindra Bank. For example, if one invests Rs.
1,20,000 in a FD for one year as against Rs.
10,000 every month in an RD for one year (12 months), the investment in the FD will earn higher interest being a lump sum investment. On RD, only the first month deposit completes 12 months and hence earns interest for 12 months. The second deposit earns interest for 11 months and so on, Mr Kapoor said. (Also read: Post Office Saving Schemes Recurring Deposit (RD) Vs Fixed Deposit (FD))

When it comes to investing in both these fixed income instruments, one can also consider small finance banks, besides the usual banks like State Bank of India, ICICI Bank and others.

Source - NDTV