A fixed deposit account (FD) is one in which the investor makes a one-time lump sum investment that is fixed for a pre-decided tenure. It is not possible to make additional deposits or withdraw money from the FD account during the tenure. In a recurring deposit account (RD), money is deposited in installments in the specific account. For both the deposits, the interest earned falls between the range of 7.5-8.5%, depending on the bank and is taxable as per the income tax slab for that individual.
The investor can claim tax deduction for FD with a tenure of 5 years or above as per Section 80C of the Income Tax Act. However, if the interest earned on FD is more than INR 10,000 annually, the bank deducts 10% TDS on the invested amount as per Section 194A of the Income Tax Act. FD can be created for any period between 7 days-10 years.
A RD can be made for minimum 6 months and maximum 10 years. There is no TDS deduction for a deposit made in RD. As opposed to an FD account, the interest for a RD account is not earned for every 12 months. In RD, the initial amount generates interest on a 12-month period whereas for every deposit thereafter, the interest is earned for 11 months, 10 months and so on. When the overall compound interest is considered for FD and RD, the interest earned is higher for FD as compared to RD.
If you do not have a lot of money to save every month, a recurring deposit is a more convenient option for you, since that allows you to save in installments and the initial saving amount is also nominal. On the other hand, if you have a large sum that you do not intend to use for a long time, you can save it in a fixed deposit account and avail the interest at the end of the tenure. You can also invest in a short tenure FD to gain access to your money sooner while earning higher interest rates compared to a regular savings account . RD is beneficial if you are uncertain about your expenses in the near future and wish to have the freedom of using your savings in case of any emergencies.
Investment in instruments associated with the stock market like mutual funds and derivatives yield higher returns when compared to both the above mentioned bank deposit instruments, however, they are also high risk investments and do not necessarily guarantee higher returns every time. If you are looking at long term savings, FD and RD are better options for a risk-free investment
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