There used to be a time when putting money in a Savings Account was not an activity that would be associated with earning interest. If you discussed investing a large amount of money with friends, they would tell you, “put that money in a Fixed Deposit (FD) and you can live off the interest.” It is interesting to note that such statements are never made for a Savings Bank Account and there is a reason for it.
Earlier, interest rates offered by banks on Savings Accounts used to be regulated and was fixed at 4% per annum but now they have been de-regulated. This means banks can now decide on what interest rates they wish to offer for Savings Accounts. So, what should you go in for, a Savings Account or a Fixed Deposit? Before we get into that, let’s first see what the differences between these two are.
Difference between a Fixed Deposit and Savings Account
|Savings Account||Fixed Deposit|
|The amount you can put into the account is not limited.||The amount that can be put in an FD depends on the rules of the bank. Some banks may not have upper limits while others will.|
|There is no fixed tenor for a Savings Account.||FDs have fixed tenors ranging from 7 days to 10 years.|
|Interest rates are not fixed for the duration the Savings Account is held for.||All term deposits come with fixed rates of interest that are specific to the duration of the FD.|
|Interest rates are independent of the period for which funds are held, amount deposited and age of account holder.||Interest rates depend on the amount deposited, tenor chosen and the age of the depositor (senior citizens usually get special rates)|
|There is no special interest for senior citizens.||Most banks offer senior citizens a higher rate of interest.|
|There is no TDS charged on interest earned on a Savings Account.||Interest earned on an FD is subject to TDS based on certain conditions.|
|Interest is calculated on a daily basis.||Interest is generally calculated on a quarterly basis and can be credited to a specified account. Some banks may offer monthly interest credits but at discounted rates.|
|Savings Bank Accounts don’t have types or variations.||Banks offer different schemes for Fixed Deposits, each of which may have its own features.|
|These accounts don’t offer tax savings.||Most banks offer tax-saving Fixed Deposits meant to help customers save on income tax under section 80C.|
|Savings Accounts don’t have lock-in periods.||Fixed Deposits that are made for tax savings come with lock-in periods of a min. of 5 years.|
|Savings Accounts can’t be used to secure loans.||Fixed Deposits, except tax saving FDs, can be used to secure loans. The amount that can be taken as a loan will depend on the bank’s policies.|
Additional Reading: Loans Against Fixed Deposits
Should you opt for an FD or a Savings Account?
The decision to go in for a Fixed Deposit is generally defined by the individual needs of depositors. Let’s highlight a few instances where FDs make more sense than holding money in a Savings Account.
- If you have a substantial amount of money kept in a Savings Account, then you need to put it to work. With a short-term deposit of just a few months, you might earn more than what you could than if the money were to vegetate in a Savings Account.
- Interest rates offered on FDs are higher than those offered on Savings Accounts so helping your money grow in a term deposit is the more lucrative option.
- Let’s say you have a large sum of cash which you intend to use to buy something in a month or two. If you put that money in an FD it could earn more than what you would get from a Savings Account in a couple of months.
- If you are above the age of 60 years, you may qualify for the senior citizens’ interest rate which can be as much as 0.5% above the prescribed rates.
- If you don’t have a credit history and want to create one, you can use an FD as collateral to secure the loan.
- You can even use a Fixed Deposit to get a Credit Card. Some banks will charge considerably lower interest rates for Credit Cards secured by FDs.
- If you, as a depositor, are looking for tax benefits, then FDs are the ones that will give them to you via their tax-saving schemes.
Additional Reading: Everything You Need To Know About Fixed Deposits
The simplest answer to the question of Savings Account or Fixed Deposit would be, “When in doubt, go for an FD!”