What Is the Difference Between Fixed Deposit and Savings Account?

One of the biggest dilemmas Indians face while investing their money is whether to invest in savings accounts or fixed deposits. Savings accounts and fixed deposits are the most common and traditional investment instruments in India. Both of them have their advantages and disadvantages.

This article will discuss the main differences between fixed deposits and savings accounts to determine which is a better investment option.

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What Is a Savings Account?

The savings account is the simplest financial instrument. It provides account holders with liquidity options and a moderate interest yield. These types of deposit accounts do not require a lot of funds. There are even some banks that offer zero-balance savings accounts.

Savings accounts manage people's finances for short-term and long-term goals. It helps to store funds separate from daily spending money due to its reliability and safety factors. These accounts are ideal for saving money for emergencies and short-term goals.

What Is a Fixed Deposit?

A fixed deposit is a financial instrument in which you can deposit a fixed amount of money for a fixed duration and earn a fixed interest throughout that period. Banks, Post Offices, and NBFCs all offer fixed deposits. Fixed deposits generally provide higher interest rates than savings accounts.

The interest rates of fixed deposits vary from institution to institution, the interest rates of fixed deposits are significantly higher than savings accounts. People use this investment option to save for a long-term goal or retirement because of the higher interest yield.

What Is the Difference Between Savings Account and Fixed Deposit?

Savings accounts and fixed deposits have their distinct advantages and disadvantages. Here is a list of all the major comparison between savings accounts vs fixed deposits:

Basis	Savings Account	Fixed Deposit
Interest Rate	The interest rate of savings accounts depends on the bank and the regulations of RBI. Nowadays, the interest rate ranges between 2.5% to 7%.	The interest yield of fixed deposits also depends on the bank and the regulations of RBI. The fixed deposit interest rate generally varies between 2.5% to 6.65% for general citizens and 3% to 7.15% for senior citizens.
Purpose	To earn interest while obtaining liquidity benefits.	To earn risk-free fixed interest on a long-term investment.
Tenure	Savings accounts do not have any tenure.	The bank determines the tenure of fixed deposits. The tenure duration can start from seven days to ten years.
Emergency Loan	Savings accounts generally do not offer any loan facilities	You can take an emergency loan against your fixed deposit.
Liquidity	Savings accounts offer high liquidity. You do not have to pay penalties or charges for any withdrawals.	Funds of fixed deposits cannot be withdrawn during the tenure. If you want to withdraw the funds prematurely, you have to pay a penalty.
Tax Benefits	There are no tax benefits for savings accounts.	Fixed deposits offer tax exemption for FDs with 5-year lock-in periods under Section 80C of the Income Tax Act.
Senior Citizen Advantages	Many banks offer higher interest rates and discounts for senior citizen savings accounts. It is a great way to store funds for fixed income and pension.	Senior citizens can receive higher interest rates on their fixed deposit accounts. It helps them to increase their financial resources after retirement.
Withdrawal	There are no withdrawal limits for savings accounts. You can make any amount of withdrawal within your account balance.	Fixed deposits allow withdrawals only after the completion of the maturity period.
Deposit Proof	Banks offer passbooks to their account holders. They need to update their passbooks to know about their account details.	Banks provide a fixed deposit receipt to their fixed deposit account holders.

Which One Is Better - Savings Account or Fixed Deposit?

Fixed deposits are a better option to keep aside money for emergencies or future purchases. If you invest in a fixed deposit and savings account simultaneously, your fixed deposit will earn more money even if you withdraw the fund prematurely.

However, withdrawing fixed deposit funds before the maturity period is not advised, as you will have to pay a penalty for it.

In case your aim is saving with enough flexibility to withdraw money in the hour of need, then a savings account is a better choice for you.

So, gather an idea about the difference between fixed deposit and savings account from above and choose the account you want to invest in wisely. The decision may vary according to your needs.

FAQs About Fixed Deposits and Savings Accounts

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Is it required to have savings accounts to apply for a fixed deposit?

There are some banks that offer fixed deposits even if you do not have a savings account in the bank. In such cases, you need to submit documents like photos, identity proof, and address proof and complete your KYC process.

What is the penalty for withdrawing a fixed deposit before maturity?

Different banks charge differently for withdrawing funds prematurely from a fixed deposit. These penalties vary according to bank policies. Such penalties range between 0.5% to 2% of the fixed deposit fund amount.

Is it possible to convert savings accounts to fixed deposits?

The process of converting a savings account to a fixed deposit is called auto-sweep. If you opt for an auto sweep facility in your savings account, you will earn interest rates of an FD. It is an automatic facility where the account balance of a savings account is converted to a fixed deposit. These accounts attract similar returns as fixed deposits.