Savings Vs Fixed Deposit Account: An Overview
When it comes to saving money, many options are available on the market. But which is best for you? Many different accounts are available for your money, including a fixed deposit or a savings account. Which one should you open? Both fixed deposit and savings accounts can be great tools for growing your money — but they have different purposes and work differently.
Let’s look at the difference between a savings and fixed deposit account to see which one might be better for you. Keep reading to find out more!
What is a Fixed Deposit Account?
A fixed deposit account is a type of savings account where your money is kept in a financial institution for a fixed amount of time. This is usually a one-time deal, where you deposit a set amount into the account and earn interest on that amount as long as you hold the account. However, you can’t withdraw your money until the period is over. You may incur a penalty if you need that money before the end of the term. Fixed deposit accounts are helpful for people looking for a guaranteed return on investment or who want a large amount of money saved.
Pros of Fixed Deposit Account
- Guaranteed return - Unlike stocks and other investment types, a fixed deposit account comes with a guaranteed return. This is something to keep in mind if you are saving money over a long period and need the money in the future.
- Flexible tenure - A fixed deposit's tenure is variable and determined by the depositor. Each bank has its minimum tenure restrictions, but the depositor has the last say. It is also feasible to choose whether to redeem or prolong the fixed deposit simultaneously.
- Tax advantages - Interest earned on a fixed deposit account is usually tax-free, making it an excellent option for people who don’t want to pay taxes on their savings.
Cons of Fixed Deposit Account
- Limited access to funds - One of the most significant drawbacks to a fixed deposit account is that you don’t have access to the money until the end of the specified period.
- Low rate of return - An FD's returns are assured, but the rates are modest compared to other market-linked investments.
- Penalty on premature withdrawal - If you need the money before then, you may have to pay a fee, and the amount you receive may be less than what you initially deposited
What is a Savings Account?
If you need a small amount of money to save or if you want to preserve your funds, a savings account is a great option. A savings account is a low-risk investment tool that allows you to deposit a certain amount of money for a set amount of time. Different banks provide interest rates ranging from 2% to 4%. A savings account is the most liquid investment. As a result, it is equivalent to having cash on hand but held in a secure location. Furthermore, a savings account is a risk-free investment with guaranteed returns. Some banks offer additional features that can help you organise your finances. These features include online access to your account information or a mobile app that helps you stay organised.
Pros of Savings Account
- Widely available - You can open a savings account at many banks and financial institutions. This is a good option to spread your money across several different accounts.
- Easy to set up - Most banks require a minimum deposit to open a savings account. This is an excellent option if you only have a small amount of cash you want to save.
- Easy access to funds - Unlike a fixed deposit account, you can withdraw money from your savings account whenever needed. This is an excellent option if you need to access the funds before the end of the specified time.
Cons of Savings Account
- Lower interest rate - What you earn on savings is typically lower than in a fixed deposit account. This is a good option if you need a small amount of cash saved and don’t want to lose it.
- Inflation: If any savings account does not provide a reasonable interest rate, inflation may eat away at the value of the earned interest.
- Minimum Balance Requirements: Most savings accounts demand a minimum balance. If your savings account is below the standard threshold, the bank will charge penalties from your account, erasing the interest you received.
Differences Between Savings Account and Fixed Deposit Account
Features | Savings Account | Fixed Deposit |
| Objective | Customers open savings bank accounts primarily to keep their funds secure and to transfer purposes. | People create a fixed deposit account to earn interest on their long-time investments. |
| Tenure | Savings accounts have no connection to tenure. | FDs have a defined tenure duration determined by the bank with whom the FD account is held. In general, the duration of FD ranges from 7 days to 10 years. |
| Rate of Interest | This rate of interest is not fixed but is subject to vary. Savings account interest rates typically range between 2-4%, which is substantial. | Fixed deposits provide higher interest rates varying from 5-8%. |
| Withdrawal Limit | Withdrawals from savings accounts are permitted, and there is no withdrawal restriction. The account holder can withdraw as much money as they like while maintaining the minimum balance. | Withdrawal funds from FDs are only possible when the tenure period is over. |
| Loan Facility | Regarding Indian banks, generally, savings accounts do not offer loan facilities; nevertheless, exceptions do exist. | The bank fixed deposit is accessible for use as collateral. Anyone can take an emergency loan on his current FD. |
| Tax Benefits | Savings accounts do not provide any tax benefits. | Tax benefits are possible under Section 80C of the Income Tax Act for a tax saver FD with a 5-year lock-in term. |
| Liquidity Options | Savings bank accounts provide high liquidity since consumers may withdraw funds spontaneously. | FDs have limited liquidity since funds cannot be accessed during the tenure. Customers must apply to the bank to terminate the FD for an emergency. |
| Senior Citizen Benefits | Savings accounts are an excellent alternative for persons on fixed incomes, but many banks offer senior citizen rebates on savings accounts. | Fixed Deposit accounts usually provide greater interest rates to older individuals, allowing them to expand their money significantly. |
Proof Of Deposit | Banks issue passbooks as proof of deposit in savings accounts. This also confirms the quantity of money in the clients' savings bank accounts. | As proof of deposit for FDs, banks provide their clients with a confirmation in the form of a fixed deposit receipt. |
Which One is Right for You?
If you wish to deposit a significant sum of money and get a guaranteed return on investment. This is a fantastic choice, but it doesn't have access until the time is over. A savings account is a good option if you have a modest amount of money to save or wish to access the funds at any time. You can open both sorts of accounts if you want to maximise the value of your money. This is a fantastic choice if you just have a little money to save and want it to increase over time.
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Summing up
A savings account and an FD is financial instruments that protect your money while providing a reasonable return rate. They both contribute to the creation of wealth and steady income. As a result, it is critical to grasp the difference between a savings account and a fixed deposit account. They are, nonetheless, distinct and serve distinct functions. For a consistent income, you can create a savings account; on the other hand, invest in a fixed deposit account to earn long-term income.
What advantages do fixed deposit accounts offer?
Returns on a fixed deposit are guaranteed. When you start an FD, your interest rate stays the same for the duration of your employment. Your FD won't be impacted if interest rates decrease across the board. As a result, you don't need to be concerned about the market's fluctuations.
Why is the interest rate on FDs greater than on a savings account?
FDs pay significantly more interest than regular savings due to the fixed deposit's restrictions on withdrawals, and the interest rate has risen.
What is a fixed deposit known by another name?
With a fixed deposit, you deposit a lump sum into your bank for a predetermined time at a predetermined interest rate. You get your original investment back plus compound interest at the end of the term. So it is also known as a term deposit.