Investing your earnings in a risk-free, steady income-generating tool helps achieve financial goals. Every person should have a plan to achieve their financial goals. There is more than one investment option available to choose from in the market today. The two most common instruments are fixed deposits and savings accounts. As monetary transactions take place through banks and financial institutions, a savings account is mandatory. A Fixed Deposit (FD) account is also one of the simple and easy tools to invest. Irrespective of the volatile market conditions, fixed deposit accounts and savings account generate steady returns. Below are some of the differences between savings and fixed deposit accounts you will have to consider.
Parameters to compare Fixed Deposit and Savings Account
A few factors that differentiate savings and FD accounts are:
- Interest Rate
The interest rate on savings bank accounts depends on bank policy. Rates are usually low, and interest is calculated using a simple interest method. In the case of fixed deposits, the interest is compounded. The tax-saving fixed deposit account will provide high returns and savings with a single investment. The return on FD is comparatively high because of the method of interest calculation. Impressive interest rates of fixed deposits are available which makes FD more preferable to savings accounts.
- Tax Benefits
A resident Indian can avail tax benefits on both FD and savings accounts, subject to certain terms and conditions. A regular FD does not have any tax benefit but there are tax-saving fixed deposit accounts that investors opt for specifically to save taxes on investments. Savings bank accounts provide tax deductions only on the interest earned. According to section 80TTA, the interest earned on a savings account is free of tax up to the limit of ₹10,000.
- Flexibility of Tenor
A savings bank account does not have a fixed tenure. While a fixed deposit account can have a tenure of up to 20 years. An investor is allowed to open multiple fixed deposit and savings bank accounts. A savings bank account is open for a lifetime till the customer chooses to close it. When there is a huge amount of money available to invest which won’t be required soon, it can be converted into a fixed deposit.
A customer may want to make a partial or premature withdrawal of an account balance during an emergency. In this case, both fixed deposit and savings accounts can be withdrawn. However, banks and financial institutions charge penalties for premature withdrawal of investments. The rate of penalty can range from 1% to 2% depending on the amount. A savings account, however, does not have any such limitations. You can withdraw money from a savings bank account whenever you want, without any restrictions.
- Savings Instrument
When the main goal of an investment is to save, a fixed deposit serves the purpose. There is a habit of savings created as you cannot withdraw the investments unnecessarily. Also, the interest calculated on compound rates creates more and more wealth over time. A savings account does not generate such returns and excessive spending becomes easy.
Which is better: a Savings Bank Account or Fixed Deposits?
To save money, there are many options available. Savings and FD accounts are also one of those. If you want to grow your savings over time and get guaranteed results, a tax-saving fixed deposit should be your preferred option. High return generating options like mutual funds are also an investment instrument but it comes with high risk. For investors who have a low-risk tolerance and want to safeguard their money without constant monitoring, fixed deposits are the best option. While savings accounts have high liquidity and help meet any emergency requirements, there are no good returns. Reasons why fixed deposits are better investment tools:
- Impressive interest rates
- A loan against a fixed deposit account can be availed
- Easy and hassle-free investment
- Higher returns with very low risk
The points mentioned above specify the pros and cons of both FD and savings bank accounts. The choice of saving instrument depends on the purpose of the investment. A savings account is something everyone needs to make day-to-day transactions. However, for large deposits which can be invested for more than a year, a fixed deposit account is ideal.