If you have a low-risk appetite then FDs and RDs could be the best investment plans for you. They have a negligible risk-factor and offer guaranteed returns. Though they can’t provide high returns like mutual funds and other market-linked investment plans, they are fixed-income sources and provide regular interest rates. If you are wondering whether to go for FD or a RD do consider the following things before making a choice.
CHARACTERISTICS OF FDs:
- SAFETY: They are insured under the Deposit Insurance and Credit Guarantee Corporation(DICGC). Under the DICGC rules, a depositor in the bank is insured upto a maximum of Rs 1 lakh for both principal and interest amount held in the same capacity.
- INTEREST RATE: The rate of interest varies from bank to bank and according to the tenure of deposit. However, all the banks provide an additional interest to the senior citizens in spite of the tenure.
- TENURE: The tenure available for deposits 7 days to 10 years. Keeping in mind the taxability and interest rate choose the appropriate tenure.
- TAXABILITY: Interest rate earned on a FD is taxable. So always keep in mind the post-tax returns.
- FREQUENCY OF INTEREST PAYMENT: If you want a fixed-income source then you may choose monthly, quarterly, half-yearly or yearly interest payments according to your needs. Else, you can opt for the reinvestment mode; where the interests get reinvested with the principal amount and are paid at once during the maturity.
- PREMATURE WITHDRAWAL: If you withdraw your FD before its maturity, then the bank charges a penalty. Most of the banks charge a penalty of 1% on the applicable rate.
- CORPORATE FDs: These FDs are also known as company FDs and are held by companies. They yield higher returns.
- STANDARD FDs: These are the basic investment plans where you invest a fixed amount. On the maturity you are eligible to get the principal amount along with the interests.
- SENIOR CITIZEN FDs: Individuals above 60 years of age are eligible to invest in this plan. They get a little higher interest rate and flexible tenure than standard FDs.
- TAX-SAVING FDs: The maximum deposit limit for these plans is 1.5lakhs per year and the tenure for this is 5 years.
- CUMULATIVE FDs: In these plans, the interest is compounded quarterly, half yearly or yearly. But the interests are paid at the time of maturity.
- NON-CUMULATIVE FDs: In these plans interests are paid monthly, quarterly, half yearly or early. So this option is best for investors looking for a fixed-income source.
- FLEXIBLE FDs: In this plan, investors have to link their bank savings account to their FD account. This provides a higher interest rate.
FD holders can also avail loan against their FDs investment. The interest rates on such loans is lower and the repayment tenure is up to the maturity period of the FD. To avail TDS exemption non-senior citizens need to submit a 15-G form and senior citizens need to submit a 15-H form.
It is a popular investment alternative for the FDs. In a RD one has to invest a certain amount every month for a fixed tenure. At the end of the tenure the principal amount and the interest earned is paid back to the individual. If you don’t have a lump sum amount to invest in a FD, then you can opt for a RD instead. You can open a RD account either with a bank or post office.
The tenure usually ranges from six months to ten years. And in some banks the minimum tenure is 1 year.
FD OR RD: WHERE TO INVEST?
Both FDs and RDs have the same taxability. However, if the interest earned in a FD exceeds 10,000 in a year then the bank deducts TDS. But in case of RD there is no TDS deduction. But when we compare the both on the basis of a fixed income source FDs earns more than RDs. This is because, in FD you invest a lump sum amount and the entire amount earns interest for a year or so. But in a RD only the first deposit earns interest for a year and the second instalment earns for 11 months, third for 10 months and so on. That ‘s why FDs earn a higher amount of maturity than a RD. Also, you can choose for monthly or quarterly interest payment in a FD that can act as a fixed income source but RDs don’t act as a regular income source.
Even Though FD earns higher than RD it can’t always meet your needs. If you are unable to invest a lump sum amount at a time then you should definitely go for a RD, but if you can invest a lump sum amount then a FD will be a wiser choice.