Fixed Deposit versus Recurring Deposit

Important Differences between Fixed & Recurring Deposits

Fixed deposits and recurring deposits are the more popular types of bank deposits. While these differ in their structure and returns, there is no doubt that these two instruments have quite a bit to help Indians invest their idle money and do habitual saving. In this article, we examine the similarities and differences between fixed deposits and recurring deposits

What is a Fixed Deposit?

A Fixed Deposit is a financial instrument that allows consumers to invest a fixed amount of money on which they receive a fixed interest at a pre-determined rate of interest.

Fixed deposits are a very popular source of investment for the masses. A recent Reserve Bank of India report said that over ₹1,30,00,000 crores of fixed deposits are kept in scheduled commercial banks across India. 

What is a Recurring Deposit?

A Recurring Deposit is a popular savings option under which an investor regularly deposits a fixed amount at regular durations at a pre-determined rate of interest

Recurring deposits are used by a number of conservative investors to inculcate a savings habit. The idea is to keep on growing the corpus by these small but regular additions of money into the account. The tenure of the recurring deposit is fixed and so is the interest rate.

Common features between a fixed deposit and a recurring deposit

Let’s start with the common parts

  • Both, fixed deposit and recurring deposit, are popular savings instruments used by millions on Indians to save & grow their money
  • Both offer a fixed rate of interest along with safety of money
  • And both have a pre-determined tenure for the invested amount. The maturity value in both instruments is known while handing over the principal

Differences between a fixed deposit and a recurring deposit

The difference between a fixed deposit and a recurring deposit can be classified into these major points of difference which are:

  1. Structure
  2. Taxation
  3. Returns

Structure

A fixed deposit is meant to be looked at as a one-time investment whereas a recurring deposit is structured as regular and periodic investments. 

In other words, you can look at a recurring deposit as a series of fixed deposits. The only key difference then is that the interest rate in a recurring deposit is fixed through the period that you are making the periodic investments. However in case of a fixed deposit, every time to do a fixed deposit, you might have a new interest rate (which can be higher or lower than the previous time you invested)

Taxation

There are no differences in the taxation treatment of a recurring deposit and a fixed deposit. The interest earned on a recurring and a fixed deposit gets added to the income of the depositor and is taxed as per the income tax slab. 

Besides, the interest earned on both these instruments attracts a TDS (tax deducted at source) of 10% if the interest earned is greater than ₹10,000 in a financial year.

It is important to note here that the deduction of TDS does not reduce the tax liability of the depositor. So if you are at a 30% tax slab, you need to pay the remaining tax (20%) at the time of filing your income tax returns. On the other hand, if you are liable to pay any tax, you can get your TDS refunded during the income tax filing phase. And in case, you want to avoid paying the TDS (always a better option as you don’t want the hassle of waiting for a tax refund although the process is rather smooth now) you can do so by submitting a Form 15G (for age below 60) or Form 15H (for age above 60) to the bank branch which has booked your fixed deposit or recurring deposit.

Return

A fixed deposit gives more returns than a recurring deposit. The reason for this is simply that the money in a fixed deposit is invested for a longer period of time.

Let’s understand this.

On 1-April-2020, you started a fixed deposit of ₹12,000 with Bank A and a recurring deposit of ₹1,000 per month with Bank B. The recurring deposit was for a period of 12 months. 

We shall assume that both instruments pay an interest rate of 8% and the interest is compounded annually.

MonthFixed DepositRecurring Deposit
InvestmentInterestInvestmentInterest
0 (Start)₹12,000₹960.00₹1,000₹80.33
1₹1,000₹73.33
2₹1,000₹66.67
3₹1,000₹60.00
4₹1,000₹53.33
5₹1,000₹46.67
6₹1,000₹40.00
7₹1,000₹33.33
8₹1,000₹26.67
9₹1,000₹20.00
10₹1,000₹13.33
11₹1,000₹6.67
12 (End)₹960.00₹520.00

Per the above table, the fixed deposit earned an 8% interest on the ₹12,000 deposited which yielded an interest of ₹960.

The recurring deposit of ₹1,000 earned 8% interest for different time periods. The first deposit which was made in the beginning of month 1 (or month 0), yielded 8% interest. This came to ₹80. However, the 2nd deposit of ₹1,000 accumulated interest for only 11 months as the investment was made in the beginning of month 2. Hence, it earned an interest of ₹73.33.

The math of both products is the same.

Here’s a list of bank fixed deposit interest rates of 41 Indian banks. It is a good idea to see which bank is paying the higher interest rate. However do exercise care to see if the bank is a worthy one and does not have the risk of any default.

Additional Resources

Here are some articles you can read to get better details on financial and stock metrics

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