What Is The Difference Between FD, RD & iWish?

May 23, 2019

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Many a times investors get confused whether to invest in a Fixed Deposit (FD) or a Recurring Deposit (RD) for their investment objectives. The attraction for both these instruments is the fixed returns with safety of money invested. But when you compare the two, an FD scores higher than an RD. Let’s see how these two products differ in the earnings and when you should opt for them.

Features

Both FD and RD are fixed income products available from banks. On the invested amount, banks pay you a fixed interest which can be at a specific frequency till the term or on maturity. At the end of the term, the maturity amount which is your invested capital, along with remaining or accumulated interest is paid. Although the interest of banking products changes with interest rates scenario, in both these products once you have invested, the interest rate remains the same throughout the term. In recent times, the high rising rates have prompted banks to offer high interest rates on these two instruments and so the attraction of investors has increased manifold.

Taxability

Both these products have the same taxability. The interest received from these two is added to your total income and taxed at your personal income tax rate. So if you are in 30% tax slab, the interest from FD and RD will be taxed at the same rate. However, there is a difference in the nature of tax deduction. In an FD, banks deduct Tax Deducted at Source (TDS) if the interest income in a year exceeds Rs 10,000 but there is no TDS deduction in RD. This one feature sways investors’ interest towards RD when there is a comparison.

Where you earn more?

When you compare both these products, an FD fetches you more income than an RD. Let’s assume you have invested Rs 24,000 in an FD at start of the year and Rs 2,000 per month in an RD for a year. Both these products offer you a 9% rate of interest compounded quarterly. This is what you will earn from these two instruments:

 Fixed DepositRecurring Deposit
Invested amount (Rs) 24,000 2,000 per month
Interest rate (per annum) 9% compounded quarterly 9% compounded quarterly
Total interest earned in a year (Rs) 2,234 1,195
Total amount after one year (Rs) 26,324 25,195
Difference (Rs) 1,039  

As you can see, after a year you will receive Rs 26,324 in an FD while in RD you will receive Rs 25,195. So the recurring deposit earns you Rs 1,039 less than an FD. The primary reason for this difference is that in FD you invest a lump sum amount and so the entire money earns interest for one year. But in an RD, the first instalment earns interest for 12 months’ period, the second for 11 months, third for 10 months and so on. Due to this variation, FD is able to fetch a higher maturity.

When to Invest in FD and RD?

Although FD earns higher than RD, it’s not feasible for a single product to meet all your needs. When you do not have a lump sum to invest, but can save a defined amount from your income every month, an RD is a more viable product. With it you can achieve an objective of regular savings for your medium term needs. But when you have a lump sum to invest then FD is a wiser choice. Although both these banking products appeal to all class of investors, it is more lucrative for small investors who are mostly in lower tax slab. The less or non-taxability of interest along with high interest payout in today’s scenario ensure good fixed earnings for their goals. Avail of them as they will help in meeting certain objectives but do take all associated factors into consideration.

Added flexibility in RD - Flexible RD

The investors who start RDs are concerned about sustaining the instalments. To address this, we offer RDs with flexibility called iWish, which facilitates deposits as per the customer’s convenience. This has the advantage of regular savings in an RD, along with the option to add a lump sum, when available. 

 

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