People who wish to invest their money in the market have a variety of options available to choose from. However, they should first study the different investment options, compare them, and then select the one that would be best suited to their needs. There has never been a more popular investment option across India than Term deposits.
Many people prefer this investment tool because it is a safe and secure place to keep their money. On top of that, they can earn interest on their investments. It is essential to understand that term deposits come in two types: Recurring deposits (RD) And Fixed deposits (FD).
How does a fixed deposit work?
It is common knowledge that Fixed Deposits fall under the Term Deposits offered by banks. There is no doubt that this is the safest and most popular investment option. To achieve your investment goal, you must invest a lump sum amount in a bank at once. Fixed Deposits do not require opening a separate account; instead, they can be linked to a Savings Account that one already has.
It is important to note that the term of the FD and the interest paid by the bank will be determined when the FD account is opened. Nowadays, it is easy to calculate returns of fixed deposits upon maturity using an online fixed deposit calculator, which works on the principle of return on investment formula.
How does a recurring deposit work?
One of the most popular investment options offered by banks is recurring deposits. There is no doubt that RDs are as safe and secure as FDs. Although, it is best suited to those who earn a low income.
Individuals interested in taking advantage of this investment option must deposit a fixed amount of their monthly income for a predetermined period. Upon maturity, a portion of the principal amount and the interest earned are returned to the investor. It is also helpful to have a habit of saving money because one has to deposit money regularly.
Features of RD and FD
All the major financial institutions and banks offer RDs and FDs as investments that are both available for a fixed period. If you invest a certain amount of money in the bank for a specific period, the bank will offer you a fixed interest rate. Upon completion of the tenure of these schemes, you will receive a maturity amount, which is the sum of the invested amount and the interest accumulated over that period.
Under the IT Act, 1961, you must tax your income from FDs and RDs. Furthermore, in addition to the interest you receive from these two schemes Fixed Deposit Scheme and Recurring Deposit Scheme, this interest is added to the total of your income for the year, and then you will be taxed according to the rates at which you pay. Accordingly, if you fall beneath the 30% tax slab, the interest earned from the recurring and fixed deposits will be taxed at the same rate, i.e., 30% for both recurring and fixed deposits. When the interest earned from a Recurring Deposit or a Fixed Deposit exceeds Rs. 40 000, the bank will deduct TDS from the earning. A tax deduction will not be made on the interest earned on RDs and FDs if the total amount earned is less than Rs. 40 000.
FD or RD – Which provides better returns
If you are still confused between FD and RD as to which one is the best fit for you according to your financial capabilities and goals. You can make a decision based on these factors.
If you are planning to invest in a lump sum with a considerable amount of money, you should consider setting up fixed deposits. You will be able to earn more money in the long run if you invest in fixed deposits as they offer a reliable investment option. It is possible to get better returns by investing in a cumulative fixed deposit. The interest earned on this type of FD is added to the principal amount, and you can also earn interest on the principal amount earned on it. You can invest in recurring deposits if you do not have a large sum of money for lumpsum investments, but you do have a small amount of money to invest in lump sums. Every month, you can make a small deposit of a fixed amount. Your linked account will be credited with the amount when it reaches maturity.