Decoding Savings Account vs Fixed Deposit: Making Smart Investment Choices

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Savings Accounts: Such accounts do not have a fixed tenure; funds can be deposited and withdrawn without restrictions.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.

*Short-term and Tax-Saver FDs have a lower tenure.