FD vs Savings

FD vs Savings account? Which one is better?

FDs and savings accounts are the two most common investment options for common masses. These are bank accounts that help individuals to deposit their surplus funds. 

Both FDs and savings accounts are financial instruments that offer safe and stable returns. To understand which is the better option among FD vs savings accounts you have to first know about them individually.

What is FD?

FDs are financial tools offered by banks, NBFCs, and post offices where a lump sum amount is deposited as a one-time investment for a fixed tenure.

The banks are offering an interest rate of 5% to 7.5% based on the age of the depositor and the tenure of the deposit account. 

Depositors can opt for a normal FD which is taxable or a tax-saving fixed deposit which saves taxes up to 1.5 lakhs under Section 80C of the Income Tax Act 1961

FD vs Savings Which one is better

What is a savings account?

Savings accounts are deposit accounts in a bank where the account holder deposits his income or surplus funds. Different banks offer varied interest rates ranging from 2% to 4% on the savings account. 

The savings account is considered a safe and risk-free instrument with assured interest.

Any interest earned up to INR 10,000 on the savings account is tax-free under Section 80TTA of the Income Tax Act 1961.

FD vs savings account based on various parameters

1. Meaning 

A fixed deposit account is a one-time investment where the account holder deposits a fixed amount for a fixed tenure.

The account holder can withdraw the money when the term is complete whereas the savings account allows the account holder to deposit and withdraw money at any time.

2. Rate of interest

In terms of rate of interest, FDs are much better than savings account because the interest rates offered on FDs ranges between 5% to 7.5% or sometimes more, whereas the interest on savings account varies between 2% to 4%

3. Considerations for senior citizens

FDs are better than savings account for senior citizens as the interest on fixed deposit account is 0.50% – 1% more than common citizens in banks.

This is not the case in a savings account where the interest rates remain the same for every citizen. 

4. Tenure

The tenure of a bank FD ranges from 7 days to 10 years where individuals can invest in multiple FD accounts with different tenures over the years.

The savings account does not have a fixed tenure and remains open for a lifetime

Additional read: Debt mutual fund vs FD

5. Interest payout

Account holders have the option of opening cumulative FDs where the total interest earnings are offered at the end of the maturity period and non-cumulative FDs where the interest amount is offered as monthly, half-yearly, quarterly, or yearly payouts.

There is no such option on the savings account. 

6. Saving instrument

The money in the FDs is locked for a specific tenure and the account holder cannot withdraw or use it until the date of maturity.

The FDs act as safe investment options that helps the investor to save more as the compound interest is added to the principal amount to create more wealth over time. 

The savings account on, the other hand, allows withdrawal of funds anytime and anywhere which can lead to excessive spending and thus is not considered an apt savings instrument. 

7. Partial or premature withdrawal

Bank FDs provide the investors with an option of withdrawing the invested amount partially or prematurely before the maturity date after paying a penalty between 1% to 2%.

Account holders can withdraw from their savings account anywhere and anytime without any penalty. They are just required to maintain a minimum balance in their account.

8. Financial goals

FDs are used for investing and reinvesting to achieve long-term financial goals as it offers better interest rates. A savings account does not have any such option. 

9. Loan and overdraft

Bank FDs act as collateral and investors can apply for a loan or overdraft against the FDs to meet financial emergencies. There is no need to withdraw from the FD prematurely and suffer financial loss

The loan and overdraft both have a lower rate of interest and can be repaid in installments or as a lump sum amount.

There is no such option with a savings account, hence in the FDs vs savings account debate, FDs are better than savings accounts based on this parameter.  

10. Tax rebate

Investors who invest in regular FDs are not eligible for any tax benefits but investment in 5-year or more tax-saving FDs is eligible for tax deductions up to 1.5 lakhs.

Interest earned on the savings account is tax-free till INR 10,000 and beyond the limit is taxable. 

11. Building a credit history

Individuals can take out a loan for short-term against the FD and repay it within time to build a credit history. Savings account holders do not have this option. 

Conclusion

In the debate, ‘FD vs savings account: which is better?’ let us say that both accounts have their pros and cons. A savings account is a necessity to meet daily essentials, whereas an FD is a safe investing instrument for conservative investors.

It ultimately depends upon the individual and his purpose in opening that account.

Consult an expert advisor to get the right plan

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