Recurring deposit v/s tax-saving FD: Key differences
What's the story
Recurring deposits and tax-saving fixed deposits are two popular investment options in India. Both have their own unique benefits, making them suitable for different financial goals. While recurring deposits are ideal for those looking to invest small amounts regularly, tax-saving fixed deposits provide the added benefit of tax deductions under Section 80C of the Income Tax Act. Knowing the differences between these two can help investors make informed decisions based on their needs.
#1
Investment amount and flexibility
Recurring deposits allow investors to deposit a fixed amount every month for a pre-defined tenure. This is ideal for those who want to invest small sums regularly without any hassle. On the other hand, tax-saving fixed deposits require a lump sum investment at the start. This option may not be as flexible for those who cannot afford to invest a large amount at once.
#2
Tenure options available
The tenure of recurring deposits usually ranges from six months to 10 years, giving investors the freedom to choose according to their financial plans. Tax-saving fixed deposits, however, have a lock-in period of five years, during which the principal cannot be withdrawn prematurely. This longer commitment may not appeal to everyone but offers stability over the years.
#3
Interest rates comparison
Interest rates on recurring deposits are usually similar to those on savings accounts but may vary depending on the bank and tenure chosen. Tax-saving fixed deposits usually offer slightly higher interest rates than recurring deposits, as they encourage long-term investments with their five-year lock-in period.
#4
Tax benefits under Section 80C
Tax-saving fixed deposits are eligible for tax deductions under Section 80C of the Income Tax Act, up to ₹1.5 lakh per financial year. This is an attractive option for individuals looking to reduce their taxable income while earning interest on their investments. Recurring deposits, however, do not offer any such tax benefits, making them less appealing for those focused on tax planning strategies.
#5
Premature withdrawal policies
Premature withdrawal policies differ greatly between these two types of investments. With recurring deposits, premature withdrawal is permitted after a certain period but may attract penalties or reduced interest rates. Tax-saving fixed deposits come with strict rules against premature withdrawals before completion of the five-year lock-in period, barring exceptional circumstances.