Should You Choose a Fixed Deposit or Savings Account?

In today's world, saving money has become more crucial than ever before. Whether it's for emergencies when between jobs, future plans for opening a business, or just to have some extra cash at hand, choosing the instrument of the right savings is critical. While savings accounts have been the go-to option for many, fixed deposits have also gained popularity in recent years. 

Both these instruments have their own set of advantages and disadvantages, and choosing between them can be confusing. In this blog post, we will discuss the pros and cons of both savings accounts and fixed deposits and help you determine which option is best for your financial goals. So, let's dive in and explore the world of savings!

Savings Account vs Fixed Deposit

A savings account is a type of bank account where you can deposit your money and earn interest on it. You can withdraw the money at any time without any penalty. On the other hand, a fixed deposit is a type of investment where you deposit a fixed amount of money for a fixed period, and in return, you earn a fixed rate of interest. You cannot withdraw the money before the maturity date without paying a penalty.

Now, let's evaluate the differences between these two financial instruments based on various parameters:

1. Interest Rate 

Fixed deposits (FDs) tend to provide higher interest rates than savings accounts and can help you earn better returns on your investments. The interest rates for fixed deposits can range from 5% to 8% per annum, depending on the deposit's tenure (6 months to 10 years) and the deposited amount. Senior citizens can also avail themselves of additional interest rates of 0.25% to 0.75% on top of the regular interest rate. On the other hand, savings accounts offer lower interest rates, usually ranging between 3% to 6%, which are less than the interest rates offered by fixed deposits.

2. Liquidity

Investors also consider the liquidity aspect when selecting an investment avenue. In terms of liquidity, savings accounts have an edge over fixed deposits as they offer the highest level of liquidity. As a savings account holder, you have the flexibility to deposit or withdraw money from your account at any time. Additionally, you can use your debit card, net banking, or UPI facility to make payments directly from your savings account to merchants.

3. Taxation 

Wondering how the Taxation on FD works? Well, when it comes to tax benefits, regular bank fixed deposits do not offer any tax deductions. However, if you invest in a 5-year tax-saving fixed deposit, you can avail of tax deductions under Section 80C for up to Rs.1.5 lakhs. On the other hand, savings accounts offer tax benefits only on the interest earned. The interest earned on a savings account is tax-free up to Rs.10,000 under Section 80TTA, but anything beyond that is taxable. So, while fixed deposits offer tax-saving benefits, savings accounts offer limited tax benefits on the interest earned.

4. Withdrawal Limit

Withdrawal limits are an essential factor to consider when choosing between savings accounts and fixed deposits. In a savings account, you can withdraw funds as per the daily or monthly withdrawal limit set by your bank. Most banks allow up to four to five free withdrawals per month. After that, they may charge a fee for additional withdrawals.

In contrast, fixed deposits have a lock-in period where you cannot withdraw your funds before maturity. If you need to withdraw your money before the maturity period, you may have to pay a penalty fee, and the interest rate may be lower than the promised rate. Therefore, if you require easy access to your money, savings accounts are a better option, while fixed deposits are ideal for those who do not require immediate access to their funds.

5. Loan Facility

One of the primary benefits of choosing a fixed deposit over a savings account is the loan facility offered by banks against FDs. Banks provide loans to customers against their fixed deposit as collateral, which is an easier and quicker process than a regular loan application. The interest rates on loans against fixed deposits are also lower than other types of loans, making it a better option for customers in need of funds. 

In contrast, savings accounts do not offer such loan facilities, and customers will have to opt for personal loans, which come with higher interest rates and stringent eligibility criteria. Therefore, if you require funds and want to avoid the hassle of applying for a personal loan, investing in a fixed deposit and availing of a loan facility against it can be a wise choice.

6. Proof of Deposit 

Another important aspect to consider when choosing between a savings account and a fixed deposit is the Proof of Deposit (POD) document. A POD document is required when you need to provide evidence of your deposit to a third party. In the case of a savings account, the passbook serves as the POD document. However, in the case of a fixed deposit, the deposit receipt or certificate acts as the POD document.

The deposit receipt or certificate contains essential details such as the depositor's name, deposit amount, maturity date, and interest rate. It is a crucial document that needs to be preserved carefully as it serves as evidence of the deposit made. In case the deposit receipt or certificate is lost or misplaced, the bank will issue a duplicate copy only after due verification and scrutiny.

Therefore, it is crucial to ensure that you preserve the deposit receipt or certificate carefully in the case of a fixed deposit. In contrast, a savings account holder needs to maintain their passbook to serve as proof of their deposit.

Final Thoughts

It is important to choose the right savings method that best fits your financial goals. Consider whether you need flexibility or a higher return rate, and what your timeline and risk tolerance are. There are benefits to both fixed deposits and savings accounts, so weigh all the options before making your decision. It's also important to remember that no matter which option you choose, having an effective savings plan can help you reach your financial goals.