Decoding Savings Account vs Fixed Deposit: Making Smart Investment Choices
July 29, 2024
In India, the two most common savings instruments are Savings Accounts and Fixed Deposits (FDs). You can park your money in either and earn interest at a prevailing rate. However, both these accounts serve different purposes. For your ease of understanding, we have outlined the difference between FDs and Savings Accounts so you can make an informed investment decision.
Savings Account vs Fixed Deposit: Key Differences
1. Purpose
Fixed Deposit: FDs allow you to park your money for a specific tenure (as chosen by you at the time of opening an account) ranging from 7 days to 10 years and earn interest on it. The accrued interest can be paid monthly, quarterly or annually (for non-cumulative FDs) or at the time of maturity (cumulative FDs).
Savings Account: Most of us start our financial journey with a Savings Account. The primary purpose of a Savings Account is to keep your surplus funds safe and secure while you earn interest on the account balance. Such accounts offer easy access to funds whenever you need.
2. Interest Rates
Fixed Deposits: FDs typically offer higher interest rates compared to Savings Accounts. The interest rate depends on the tenure and varies across banks. The primary benefit of FDs is that the interest earned on your deposit gets reinvested every year. This allows you to enjoy interest not only on the principal amount but also on the accumulated interest, resulting in higher overall returns at the time of maturity (for cumulative FDs).
Savings Accounts: The interest rates on Savings Accounts are generally lower than FDs. However, as mentioned earlier, the primary purpose of a Savings Account is to keep your money safe and secure while offering easy access to funds whenever required. However, to make Savings Accounts more attractive, banks have introduced premium Savings Accounts that come with additional benefits like insurance coverage, higher transaction limits, flexible balance maintenance options, feature-rich Debit Cards, and more.
3. Tenure
Fixed Deposits: FD tenures usually range from 7 days to 10 years. This may change if you have booked a Tax-Saver FD or a short-term FD (more on this later). However, for regular FDs, the tenure shouldn’t be misconstrued as lock-in period. Let's say you have booked an FD for 3 years. Does that mean you're not allowed to withdraw funds before this period? You can, however, with a penalty fee. Most banks impose penalty charges for early or premature withdrawals. That said, Ujjivan SFB does not charge any penalty for withdrawals (applicable for non-callable FDs) made after 6 months from the time of deposit.
Savings Accounts: Such accounts do not have a fixed tenure; funds can be deposited and withdrawn without restrictions. However, you may need to check the minimum balance requirement to avoid penalty charges. For zero balance accounts, you don't have to maintain any minimum balance.
4. Withdrawal Flexibility
Fixed Deposits: FDs have limited liquidity, and premature withdrawals may attract penalties. Full withdrawal is typically allowed only at the time of maturity. As mentioned earlier, certain banks like Ujjivan Small Finance Bank does not levy any penalty for withdrawals (for non-callable FDs) made after 6 months from the time of deposit.
Savings Accounts: Savings Accounts offer high liquidity, allowing funds to be withdrawn anytime without penalties, as long as a minimum balance is maintained (not in the case of zero balance or salary account). This flexibility makes them suitable for managing day-to-day expenses and unexpected financial needs.
5. Tax Benefits and Overdraft/Loan Facilities
Fixed Deposits: Tax-saving FDs offer tax deduction benefits under Section 80C of the Income Tax Act, helping you in reducing your tax outgo. Please note that such FDs come with a lock-in period of 5 years, meaning you are not allowed to withdraw funds before the maturity period. Another benefit of FDs is that during financial emergencies, you can opt for loan against FD or overdraft facility.
Savings Accounts: Savings accounts generally do not offer tax benefits or loan facilities. However, some banks may provide overdraft facilities or other financial products like Debit Card based on your account balance.
6. Senior Citizen Benefits
Fixed Deposits: Banks often provide higher interest rates on FDs for senior citizens, supporting their financial growth and retirement planning. The additional rate offered varies across banks, usually 0.50%* p.a. above regular rates.
Savings Accounts: Most banks don't offer additional interest rates on Savings Account for senior citizens. That said, senior citizens can enjoy priority services at bank branches, free Debit Card, no minimum balance maintenance criteria, doorstep banking, and more with their senior citizen Savings Account.
Savings Account vs Fixed Deposit: Which is Better for You?
Both Savings Accounts and Fixed Deposits serve different purposes and can be beneficial in managing your finances. It is advisable to have both as part of your financial portfolio.
If you have short-term financial goals or need easy access to your funds, a Savings Account could be a suitable option.
Let’s understand this with two different scenarios:
Scenario 1: Rajesh has opened both FD and a Savings Account on the same day with each account having ₹3 lakh. His FD is for a 3-year tenure. He plans to use his Savings Account as an emergency fund. Five months into his financial journey Rajesh receives a phone call. His mother is admitted to a hospital for an urgent surgery. However, to carry out the procedure, Rajesh needs to deposit ₹1 lakh as security. Should he choose breaking his FD or withdrawing funds from his Savings Account? Ideally, Rajesh should lean towards his Savings Account, primarily because of two reasons – premature FD withdrawal may attract penalty. Additionally, he may lose out on potential returns in the future. Instead, he can withdraw his funds from his Savings Account, which he considers as an emergency fund.
Scenario 2: Meena has long-term financial goals, such as saving for her child's education. For this purpose, she chooses to invest in a fixed deposit (FD) to maximise her savings. Meena invests ₹5 lakhs in an FD with an attractive interest rate of 8% p.a. for a duration of 5 years. She decides to receive the interest payout on maturity, allowing her savings to grow significantly over time. In this scenario, opening an FD is more apt. FDs are known for driving long-term financial growth.
Please Note: Both the examples are for illustration purposes only. Please consult a financial adviser before taking an investment decision.
Savings Account vs Fixed Deposit: Quick Recap
| Factors | Savings vs FD | |
|---|---|---|
| Savings Accounts | Fixed Deposits | |
| Interest Rate | Lower | Higher |
| Tenure | No fixed tenure | Fixed tenure (7 days to 10 years)* |
| Withdrawal Limit | No restrictions | Restricted based on tenure (can be withdrawn before maturity upon payment of a penalty fee) |
| Loan/Overdraft Facility | Not available in most cases | Available |
| Tax Benefits | No tax benefits | Tax-saving FDs offer tax deductions under 80C |
| Liquidity | High liquidity; easy withdrawals | Limited liquidity during tenure |
*Short-term and Tax-Saver FDs have a lower tenure.
Final Thoughts
Both Savings Accounts and Fixed Deposits could help you build a stress-free financial life. However, before investing or depositing amount, assess your financial goals first.
Looking to open a Savings Account or Fixed Deposit? Ujjivan SFB offers Digital Savings Account and Fixed Deposits that come with higher interest rates, maximum convenience and more. Alternatively, you can browse through Ujjivan SFB product suite - our wide range of financial products are designed to make your financial life better.
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