Additional Content
Understanding Fixed Deposits (FDs) and Recurring Deposits (RDs)
How Fixed Deposits (FDs) Work?
A Fixed Deposit (FD) is a savings scheme where you deposit a lump sum amount for a fixed tenure at a predetermined interest rate. The bank or NBFC pays interest on the deposit either periodically (monthly, quarterly, annually) or at maturity.
Benefits of FDs:
✔ Higher Interest Rates: FD rates are usually higher than regular savings accounts.
✔ Guaranteed Returns: Unlike stocks or mutual funds, FDs provide fixed returns with no market risk.
✔ Flexible Tenure: You can choose an FD tenure ranging from 7 days to 10 years.
✔ Loan Against FD: Many banks allow you to borrow up to 90% of your FD amount.
Drawbacks of FDs:
✘ Early Withdrawal Penalties: Premature withdrawal may result in a penalty and lower interest rates.
✘ Tax on Interest Earned: Interest income from FDs is taxable under the depositor's income tax slab.
How Recurring Deposits (RDs) Work?
A Recurring Deposit (RD) allows you to invest a fixed amount every month for a predetermined period. It is ideal for individuals who want to save regularly but don’t have a large sum for an FD.
Benefits of RDs:
✔ Encourages Regular Savings: Suitable for salaried individuals who want to build a habit of saving.
✔ Guaranteed Interest Rates: Like FDs, RDs provide fixed returns with no risk.
✔ Short-Term and Long-Term Options: Tenures typically range from 6 months to 10 years.
Drawbacks of RDs:
✘ Lower Returns Compared to FDs: Since deposits are made in installments, the overall interest earned is lower than a lump sum FD.
✘ Early Withdrawal Penalties: Withdrawing before maturity may lead to penalty charges and reduced interest.
Comparative Analysis: Interest Rates on FDs and RDs in Banks & NBFCs
Interest rates vary between banks and NBFCs, depending on tenure, deposit amount, and whether the depositor is a senior citizen.
Current FD Interest Rates (2024 Estimates)
Bank/NBFC 1-Year FD Rate 3-Year FD Rate 5-Year FD Rate
SBI 6.80% 7.00% 7.10%
HDFC Bank 7.00% 7.10% 7.25%
ICICI Bank 6.90% 7.20% 7.50%
Bajaj Finance 7.50% 7.85% 8.10%
(NBFC)
PNB 7.00% 7.25% 7.50%
Current RD Interest Rates (2024 Estimates)
Bank/NBFC 1-Year RD 3-Year RD 5-Year RD
Rate Rate Rate
SBI 6.50% 6.75% 7.00%
HDFC Bank 6.75% 7.00% 7.10%
ICICI Bank 6.60% 7.10% 7.30%
Bajaj Finance 7.10% 7.50% 7.75%
(NBFC)
PNB 6.80% 7.00% 7.20%
NBFCs like Bajaj Finance tend to offer higher interest rates than traditional banks, making them an attractive option for investors looking for better returns.
Tax Implications of FDs and RDs
Interest earned from FDs and RDs is subject to tax deduction at source (TDS) and is added to the depositor’s taxable income.
Taxation on FD Interest:
If total interest earned in a financial year exceeds ₹40,000 (₹50,000 for senior citizens), TDS at 10% is deducted by the bank.
If the depositor does not provide a PAN card, TDS is deducted at 20%.
Senior citizens can claim a deduction of up to ₹50,000 on FD interest under Section 80TTB of the Income Tax Act.
Taxation on RD Interest:
Unlike FDs, no TDS is deducted from RD interest.
However, interest from RDs is fully taxable under the depositor's income tax slab.
Pro Tip: To avoid TDS deductions on FDs, individuals with an annual income below the taxable limit can submit Form 15G (for non-senior citizens) or Form 15H (for senior citizens) to their bank.
Early Withdrawal Penalties: What You Need to Know?
Premature withdrawal of an FD or RD can result in penalties.
FD Early Withdrawal Penalties:
Most banks charge a penalty of 0.5% to 1% on the interest rate applicable for the actual period the deposit remained.
Some NBFCs offer special FDs with no penalty for early withdrawal.
RD Early Withdrawal Penalties:
Banks usually charge a penalty of 1% on the interest rate applicable for the tenure completed.
If an RD is closed before 3 months, only the principal amount is refunded, without interest.
Pro Tip: Before investing, check the bank’s withdrawal policy to avoid unexpected losses.
Expert Tips to Maximize FD/RD Investments
✔ Opt for Senior Citizen FDs (if eligible) for extra 0.25% - 0.50% higher interest rates.
✔ Ladder Your FDs: Instead of one long-term FD, create multiple FDs with different maturities to access funds periodically without breaking all deposits.
✔ Reinvest Interest Earnings: Choose a cumulative FD to reinvest interest and maximize compound returns.
✔ Diversify Between Banks and NBFCs: Invest in both banks and NBFCs to balance safety and higher returns.
✔ Use Auto-Renewal: Enable auto-renewal to benefit from revised higher interest rates upon maturity.
Final Thoughts: Choosing the Best FD or RD for Your Needs
Both FDs and RDs are excellent tools for secure, risk-free savings. While FDs provide higher interest rates for lump-sum investments, RDs encourage regular saving habits.
By comparing interest rates, tax benefits, and withdrawal terms, you can make an informed decision that aligns with your financial goals. Whether you choose a bank or NBFC, careful planning will ensure maximum returns with minimal risk.
Start Investing Today and Watch Your Savings Grow!