What are the Two Different Types of Term Deposits?by John Judge Writer
While there are now several promising investment options available in India, term deposits continue to be the most popular option. Also known as Fixed Deposits (FDs), they require you to deposit a fixed amount for a fixed tenure at a fixed rate of interest.
Guaranteed returns and flexibility with regards to tenure and deposit amount make FD a go-to option for conservative investors. Moreover, with the growing popularity of term deposits, banks have now started offering many different types of FD accounts.
If you are planning to invest your surplus funds in a term deposit, understanding their types is important to make the right investment decision. Let us try to understand two of the most popular term deposit types and their differences-
1. Fixed Deposit
As mentioned above, a Fixed Deposit (FD) is the basic term-based deposit type where you invest an amount for a fixed duration at a fixed interest rate. You get to choose from cumulative and non-cumulative interest payout option with FDs.
With the non-cumulative option, you receive the interest payouts on a monthly, quarterly, half-yearly or yearly basis. With the cumulative option, the interest earnings are added to the principal amount and paid directly at the end of the FD tenure.
2. Recurring Deposit
While FD requires you to invest a lump sum amount, Recurring Deposit (RD) allows you to make a fixed monthly investment in a term deposit account. Once you open an RD account, you will be required to deposit a fixed amount in the account every month.
At the end of the tenure, you will receive the accumulated principal along with interest. While FDs are generally known to offer higher returns as compared to RDs, you can go with the latter if you are aiming for regular savings.
Taxation of FDs and RDs
As both FDs and RDs are term deposits, they have the same taxability. All the interest you earn in the financial year from FD or RD is added to your taxable income and is taxed based on your income tax slab. Also, note that banks deduct TDS (Tax Deducted at Source) at 10% if your interest income from FD is more than Rs. 40,000 in a financial year.
This deduction can be 20% if you have not provided your PAN details to the bank. However, in the case of RDs, no TDS is deducted.
Major Differences Between FD and RD
Some of the most important differences between these two types of term deposits are as follows-
· FD requires a lump sum investment while RD allows you to deposit a smaller amount every month.
· The partial withdrawal facility is available in FDs but not in RDs.
· Cumulative and non-cumulative interest payout options available in FDs but not in RDs.
· TDS deducted in FDs if interest income in a financial year is above Rs. 40,000. No TDS is deducted in RDs.
· You generally get higher returns in FDs as compared to RDs
What Should You Select?
If you are looking for a safe investment option where you can earn guaranteed returns without depositing a lump sum amount, RD can be an excellent choice. If you have idle funds for investment, FD is a wiser choice.
You can contact a bank offering a term deposit facility to understand them better and select an option that best suits your requirements.
Created on Sep 26th 2019 07:37. Viewed 327 times.