FDs Vs Real Estate: Which One is Better Investment Option

The investment objective of someone who believes in fixed deposits is to get sure returns. Regardless of low interest rates, this investor is one with a very low-risk appetite, afraid to lose hard-earned funds and rightly so. 

The cautious low-risk investor is risk hesitant and afraid of high-risk volatile investments. However, low to moderate-risk investments, like real estate, may attract some interest. Here is an interesting comparative analysis between real estate investment and a fixed deposit.

Introduction

There are multiple investment avenues to choose from based on one’s financial condition, risk appetite and financial goals. Fixed Deposits and Real Estate are two of the most popular investments. Both these investments are considered safer options in comparison to investing in stock market instruments.

Fixed Deposits are instruments issued by banks or NBFCs that allow investors to deposit a lump sum amount with the financial institution for a predetermined period in exchange for a fixed interest rate. FDs are a popular investment option since they provide protection for the principal amount invested and ensure fixed returns over the investment tenure. As a result, even though the interest rate is low in comparison to instruments like stocks and mutual funds, there is no chance of losing out on your investment, making FDs a safe and secure investment.

Real Estate is not simply a financial instrument; rather, it is an investment into a tangible asset class backed by commercial or residential real estate properties. Real estate investment offers the dual benefit of capital appreciation as well as fixed, regular income in the form of rental income. However, real estate investment traditionally requires large capital and maintenance costs and lacks liquidity. Besides, the value of real estate properties often depends on a large number of factors that are beyond the scope and control of the investor.

Even though both real estate and fixed deposits are considered safe investments, there is a fundamental difference between the two, understanding which can help you decide where you should invest. Contrary to popular belief, real estate prices fluctuate based on multiple factors, including macroeconomic forces of demand and supply and geographical location. As a result, real estate investments may even go down in value. However, these factors can also work in your favour, increasing the value of the property over time. Thus, if you’re looking to earn substantial returns while taking up some amount of risk, real estate can be a good option for you. On the contrary, fixed deposit investments are impervious to market fluctuations and are known to provide assured fixed interest income over the investment period. Thus, if earning fixed returns, associated with no risk at all is something that you’re looking for, fixed deposits can be a good and reliable option for you.

Fixed Deposits (FDs)

You can invest a sum of money in a bank or NBFC for a term growth period. The deposit grows with the interest offered by the financial institutions at a fixed rate over the term. FDs fetch better interest than savings accounts. These are directly governed by the RBI and can be from standards, tax saving, special, corporate, regular, senior citizens and Flexi types. There are predominantly two types of FD deposits in India: cumulative and non-cumulative deposits. In cumulative deposit, the interest is paid upon maturity along with the principal sum. Non-cumulative deposits are paid every quarter, or if paid monthly, they are at a discounted rate. Non-cumulative FDs allow you to avail yourself of the interest rate on a monthly, quarterly, half-yearly or yearly pay-out. The rate of interest is the same in cumulative FDs, with interest compounded after every quarter. 

While fixed deposit is a popular investment tool, you should know FD interest rates depend on factors like tenure, renewals, age, and market conditions. So, if the bank offers 7% interest and the market inflation is 8%, real returns on investment can be negative. You will be taxed on your holding if the period is over a year on gains of more than a lakh with taxable interest on your current tax slab. The higher your income, the lower the FD return will be. 

Corporate FDs 

These are also high-risk, fixed-duration investments and come with a prescribed rate of interest. This type of fixed deposit is offered by financial institutions and Non-Banking Financial companies (NBFC). The return on investment is much higher if you are investing with the right financial body. 

Real Estate Investment 

People invest in at least one property just like they invest in at least one or more fixed deposits, as being a dependable saving instrument for generations. If you had acres of land and more than one house, you were considered wealthy. Today if you own a commercial property, the rents earn passive income, giving you financial freedom. Real estate is a potentially high-value, high-risk investment and surely not for everyone. 

Property values and liquidity are based on factors like position, locality, and connectivity. Brokerage eats into the profit margin when you are selling. Maintenance costs, illegal encroachment and other factors can keep the property owners on the edge. 

Commercial Real Estate Fractional Investment

A new concept of fractional investment is a way in which the small investor can own real estate. Top real estate developers like Strata, hBits, PropertyShare, bhive, etc., are inviting investments from individuals on pre-leased Grade A commercial properties. These companies create platforms called Special Purpose Vehicles (SPV) for every commercial property. Funds equivalent to the value of the property are pooled by the SPV based on the listing. Once the funds are collected in an escrow account, the money is released to the seller. The property registration is done between the seller and the SPV, making each investor a shareholder. The investments are RERA-registered. Individuals can earn high quarterly rentals, with a rental yield of 10% on an average investment of INR 25 lakh. 

Grip has further fractionalised this investment model by partnering with an SPV platform where investors can access the same opportunities available on the CRE platform by decreasing the investment size to INR 1 lakh. Investors earn quarterly rentals up to 11% yield. The CRE platforms handle the accounting, maintenance, reporting, and other operational responsibilities. 

Taxability

Income from fixed deposit returns is considered as “income from other sources” for the purpose of taxation under the Income Tax Act 1961. Subsequently, your annual income from fixed deposit returns will be added to your annual income from other sources and will be taxed as per the applicable tax slab. 

For real estate, rental income will be considered as an income under the head of “income from house property” for the purpose of taxation under the Income Tax Act, 1961 and will be considered a part of your annual taxable income and will be taxed accordingly as per the applicable slab rate. Besides, income from selling a real estate property will be considered under the “capital gains” head and is subject to applicable taxation.

Conclusion

Traditionally, real estate property investment was considered a high-value investment with uncertainties; the fractional investment model through Grip makes it affordable for the small buyer. Real estate investment is a low to moderately risky investment, but with risk-mitigating practices from top CREs, investors can invest in fully audited properties. So, if you are debating between real estate investment or fixed deposits, FDs come at low risk and low returns, while fractional commercial real estate investments offer low risk and high returns. Visit the Grip platform and read about CRE investment in detail. Grow your funds smartly with informed investing.

Frequently Asked Questions On Fixed Deposits And Real Estate

1. What is the difference between investing in Fixed Deposits (FDs) and Real Estate?

Investing in fixed deposits involves investing a lump sum amount of money in financial instruments offered by banks and NBFCs for a predefined investment tenure in exchange for a fixed rate of interest offered over the investment tenure. Real estate investment involves investing in commercial or residential real estate properties in exchange for periodic rental income and capital appreciation over time.

2. How do the returns from FDs compare to those from Real Estate investments?

While fixed deposit interest rates are fixed and usually range between 6% and 8%, real estate offers both capital appreciation and fixed rental income. As a result, returns from FDs are fixed, assured returns, while real estate leaves room for higher returns in terms of capital appreciation, which also carries the risk of loss of the principal amount invested.

3. What are the risks associated with investing in FDs vs Real Estate?

Risk of investing in FDs is highly dependent on the reliability and credibility of the financial institution that is offering the instrument. Besides, the FD rate should not be lower than the prevailing rate of inflation, which will otherwise result in a negative return. Investing in real estate comes with a fair share of risks, including factors of demand and supply, geographical location, etc. Unlike FD, real estate does not give assured returns and can even result in a loss.

4. How does liquidity differ between FDs and Real Estate investments? 

Fixed Deposits (FDs) offer higher liquidity as they can be redeemed relatively quickly, whereas real estate is less liquid and may take months to sell or rent.

5. What role does inflation play in affecting the returns of FDs and Real Estate?

Inflation erodes the real returns on FDs, especially when interest rates are low. Real estate often appreciates during inflation, potentially offering a hedge against it, although this depends on location and market conditions.

6. How do tax implications vary between FDs and Real Estate investments?

Both FD returns and returns from real estate income are taxable under the Income Tax Act 1961, subject to applicable deductions. Returns from FDs are considered as “Income from other sources”, while rental income from real estate falls under the head of “income from house property”, both of which form part of the taxable income and are taxed as per the applicable slab rate. Profit or loss from the sale of real estate property is also subjected to taxation under the “capital gains” head.

7. What factors should be considered when choosing between FDs and Real Estate?

Consider risk tolerance, time horizon, liquidity needs, potential for capital appreciation, and tax benefits. FDs are safer with guaranteed returns, while real estate offers growth potential but comes with higher risks and costs.

8. What are the long-term growth prospects of FDs compared to Real Estate?

FDs have limited growth potential, with returns often lower than inflation over the long term. Real estate, though volatile, can offer significant appreciation and rental income, providing better growth prospects in a favourable market.

9. How can one diversify between FDs and Real Estate investments for a balanced portfolio?

Combining FDs and real estate can provide stability and growth. FDs ensure liquidity and safety, while real estate adds a tangible asset with the potential for appreciation, helping to balance risk and returns.

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