Personal Finance

RDs or SIPs? Take your pick

Naveen Kukreja | Updated on August 18, 2019 Published on August 18, 2019

Recurring deposits offer income certainty; SIPs come with higher risk

Recurring deposit (RD) is one of the most popular options for low-risk investors.

By enabling investments in smaller amounts at regular intervals, RDs have instilled financial discipline among those who save small amounts. However, the growing awareness about mutual funds has led many retail investors to turn towards SIPs, especially debt mutual funds, due to their potential of fetching higher returns. Here is a comparison between RD and SIP:

Recurring deposit is covered under the deposit insurance scheme from the Deposit Insurance and Credit Guarantee Corporation (DICGC). This cover insures your RDs along with your current, savings and fixed deposits of up to ₹1 lakh in case of a bank failure. The capital protection on investing through SIPs depends on the type of the fund. RDs guarantee principal repayment and interest income at booked interest rates. Returns from mutual funds depend on the performance of the underlying instruments in the market. However, investing through SIPs helps average your purchase cost during market dips and corrections.

Liquidity

Generally, banks charge a penalty of up to 1 per cent on pre-mature withdrawal of RDs.

In case of debt mutual funds, only fixed maturity plans restrict redemption, whereas in equities, equity-linked savings scheme (ELSS) does not allow redemption before three years of investment.

While other fund categories have no restrictions on withdrawal, many charge an exit load if redeemed before the pre-specified period. The equity funds do not charge exit load after one year of investment.

Taxation

The interest earned from your RDs is added to your total income and taxed in accordance to your tax slab.

In SIPs, the taxation depends on the mutual fund type and the holding period.

In equity funds, gains booked on investments held for less than one year attracts short-term capital gains (STCG) tax of 15 per cent.

Gains in excess of ₹1 lakh booked after one year of investment attract long-term capital gains (LTCG) tax of 10 per cent. LTCG of up to ₹1 lakh per year is tax-free.

Additionally, SIPs in ELSS funds of up to ₹1.5 lakh per year qualify for tax deduction under Section 80C.

In debt funds, the gains made on redeeming the investments within three years are treated as STCG and taxed as per your tax slab.

The gains realised after three years are treated as LTCG and taxed at 20 per cent with indexation benefits.

Making a choice

RDs are a popular option for low-risk investors preferring income certainty and high degree of capital protection.

Those with an appetite for higher risk can consider SIPs in mutual funds.

For long-term financial goals, investors can consider SIPs in equity funds.

The writer is the CEO and Co-founder of Paisabazaar.com

Published on August 18, 2019
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