Finance

The Difference Between Post Office RD & FD

Are you one of those people who sit and wonder where the money you are making is going? Are you almost broke by the end of the month? If you have answered yes to both of the questions, it is probably the right time to start making investments. However, when it comes to choosing between different investment options, most of us may tend to get confused. Unless of course, you are a financial expert, in which case, you would not be reading this. In this article, we help you understand the features and differences between a Post Office Recurring Deposit (RD) and a Fixed Deposit (FD).

The Difference Between Post Office RD & FD

Both RDs and FDs are great options for first-time or conservative investors who do not want to take too much of a risk. That way, both the options are safe bets. India Post, which is part of the Ministry of Communication & Technology, Government of India, offer quite a few interesting options. They offer customers a number of financial services in the form of the various Post Office Savings Schemes. 

Let Us Now Take A Detailed Look At The Rd And Fd Options:

  1. Post Office Time Deposit Account or FD account: This is nothing but a type of fixed deposit account through which a prospective investor can put in a chosen amount for any duration that ranges from a minimum of 1 year to a maximum of 5 years.

Given below is a table of the interest rates that are offered on the FD with effect from January 1, 2018:

Tenure Interest Rate (per annum)
1 year 6.60%
2 years 6.70%
3 years 6.90%
5 years 7.40%
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Now let us look at some of the features:

  • The interest rate offered ranges from 6.60% p.a. to 7.40% p.a.
  • The highest rate of interest paid is 7.40% p.a. for a tenure of 5 years
  • Those investing for a period of 5 years will be able to get tax benefits under Section 80C of the Income Tax Act
  • The interest is computed on a quarterly basis for this type of term deposit
  • Interest will be payable to the deposit holder only at the time of maturity
  • The minimum investment that one needs to be made is Rs.200
  • There is no upper limit on how much a person can invest in a Post Office time deposit
  • After maturity of the respective deposit, it will be automatically renewed for the tenure it was opened
  • Individuals will be able to open a single account or a joint account based on discretion
  • Multiple FDs can be held by the same person
  • Nomination facility is available
  1. 5-year Post Office Recurring Deposit Account: An RD is a type of deposit account in which an investor puts in a fixed sum of money, each month, for 5 years.

Now let us look at some of the features:

  • The rate of interest that is offered on the 5-year RD is 6.90% p.a.
  • The interest is compounded every quarter but the maturity amount will only be paid after completing a 5-year tenure
  • An RD can be opened even for a minimum amount of Rs.10
  • There is no upper limit on the maximum amount as far as Post Office RDs are concerned
  • It is possible to open the account by cash or by issuing a cheque
  • Nomination facility is available
  • Multiple accounts can be opened and the account can be transferred from one post office to another
  • It is possible to withdraw 50% of the deposit amount after completing 1 year in case of any type of financial emergency or need
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A comparison

As far as the interest rates are concerned, FD pays a much higher rate of interest for the same tenure of 5 years. If you invest in a fixed deposit account, the interest rate paid will be 7.40% p.a. But in an RD, for the same investment duration, the rate much is comparatively much lesser at 6.90% p.a.

So, if you are mainly looking at how much you will gain out of certain investment, it is best to go for a 5-year FD. Not just this. The 5-year FD will also give the investor tax benefits, which is not the case when it comes to the recurring deposit option.

The main difference between an RD and an FD is that in case of a fixed deposit you have to invest a certain lumpsum amount. This is not the case with an RD, which allows the investor to put is as less as Rs.1,000 each month. To have a good financial portfolio, financial experts recommend investments in both RDs, FDs and a  mixture of other types of financial instruments like mutual funds or stocks, etc.

An RD will be a good option for those who have not saved up a lump sum but still want to begin their journey as far as investing is concerned.

The common element

The main feature that is the same between both the types of investment options is the fact that both are very flexible, you can choose how much you want to invest and the return is guaranteed. There is almost no element of risk involved, making it quite a lucrative investment option when compared to other types of risk-prone investments. 

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The verdict

When you actually compare the two, an FD is definitely more rewarding in all aspects. A 5-year Post Office FD pays a very lucrative rate of return, which is much better than what most banks in the country offer today for term deposits. As far as tax benefits are concerned, a tax deduction of up to Rs.1.5 lakh can be claimed under Section 80C of the Income Tax Act in India. The thing is, in the long-term, an FD is definitely more financially rewarding when you compare the returns that you get out of a recurring deposit. RD also does not give the investor any type of tax benefit, which is another drawback.

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