Savings Account vs Fixed Deposit

What is a Savings Bank Account?

A savings account is the basic bank account that individuals open in a bank where they park their savings that they will not have to use in the near future.

• This is done to keep their money secured in a bank to avoid any chances of theft and robbery.
• Another reason is to earn interest on your savings in the form of idle cash lying with them. Banks pay interest on your savings account balance on a quarterly, semi-annually or annual basis.
• The savings account interest rate is lower than fixed deposit rates, but there are no restrictions on your money when it is kept in a savings account. You can withdraw money whenever you want.

Savings accounts are a type of demand liabilities for a bank since they have to return the customer’s money whenever the person demands. Your salary account is a savings account and senior citizen accounts also fall under this category only. Thus, it is this money in a savings account that forms one of the biggest portions of money that the bank lends to borrowers as loans.

What are Fixed Deposits?

A fixed deposit falls under the category of ‘term deposits’ that includes both fixed deposits and recurring deposits.

• Fixed deposit or FD has a time duration before it gets matured, which means you have to keep your investment amount with the lender until maturity.
• There is however an option of pre-mature withdrawal after an initial lock-in period, but it attracts a penalty as well. Premature withdrawal allows you to withdraw money before FD’s maturity.
• FD is a type of ‘time liability’ for the bank as they are expected to pay depositors money after a certain time (duration of FD).
• The fixed deposit interest rate is higher than the savings account interest rate and is normally between 7.53%*p.a.- 8.60*p.a. depending on one lender to another. Non-banking financial institutions (NBFCs) like Shriram Finance offer higher FD interest rates than traditional banks. Thus, FD is your product if you are looking for high returns over the freedom to withdraw money at will.
• There are tax-saving FDs as well these days through which you can claim deduction under Section 80C of the Income Tax Act. FD is one of the most favoured investment classes for risk-averse people in India as it is the least risky among other asset classes. 

Difference between Saving Account and Fixed Deposit Account

Now that we know something about savings account and FDs, it’s time for saving account vs fixed deposit analysis. Here it goes:

1. Rate of Interest: The primary motive behind doing any investment is to get returns from it, the same goes for banking products investment. FD is a clear winner when we speak of interest rate since FD rates are somewhere between 7.53%*p.a.-8.60%*p.a., while savings account interest rate is between 3-6%.

However, you cannot withdraw freely from your FD account, unlike in a savings account. But, FD returns will help you beat inflation which is not the case in a savings account. You can go for a shorter tenure FD if you might need cash in 6 months or 1 year from now.

2. Save Taxes: FD gives you dual benefits of high returns and tax saving option; thus you can see your investment grow and also save tax on your earnings. This is not applicable if you have a savings account with any financial institution. Thus, if you are someone who cribs about income tax being deducted, then a tax saver FD is your go-to product and besides, it has no risk.

3. Liquidity: Liquidity simply means how quickly you can convert any asset to cash without any loss in its value. Here in the saving account vs. fixed deposit study, liquidity is a key parameter. A savings account is more liquid than an FD since you can withdraw your savings anytime without any penalty deduction. On the flipside, FD is less liquid since your money is tied till maturity, and if you choose to go for pre-mature withdrawal then it will attract a penalty.

4. Emergency Loan: There are certain emergencies that come unannounced and they require a huge amount of money. In such scenarios when you don’t have enough cash with you, taking a loan seems to be the only way out. If you have a running FD with any lender, you can apply for a loan against a fixed deposit. The loan amount will be equal to or slightly lower than the principal amount of your FD. Here, your FD is acting as collateral for the lender. However, if you have a savings account, then you cannot get a loan against it.

5. Senior Citizen Benefits: If you are someone who is now retired from work and has to rely on your savings, provident fund, or pension, then FD is a better option for you. This is because lenders offer a premium to senior citizens on existing FD rates.

For instance: If the fixed deposit interest rate is 6% for 5 years tenure, then senior citizens will get a 6.50% interest rate for the same tenure and same amount. The premium over and above normal FD rates varies from lender to lender. NBFCs like Shriram Finance offer additional 0.50%* p.a. over the standard FD rates which is higher than what traditional banks offer. Senior citizens do not get any such luxury in a savings account.

6. Lock Capital: If you want to save money then FD is a better option since by investing money in a fixed deposit you are locking your capital till its maturity. You can withdraw it prematurely but then there would be a lock-in period before which you cannot withdraw. Also, withdrawing money will diminish returns which defeats the purpose of an FD. Thus, you will not withdraw that money and spend it.

Essentially you have saved your earnings and are now multiplying it through high returns in an FD. However, if you would have opted for a savings account then you can withdraw that money anytime since you know there are no restrictions on that. Thus, FD is a better asset class for saving money by locking your capital.

7. Flexibility: A savings account offers you the flexibility of withdrawing your money anytime you want. However, when it comes to variations and customization, FD is a preferred option. This is because FD comes in several tenurers from 7 days to 10 years. There are multiple tenures in between this and you can choose any of them.

You can also choose between a cumulative (interest is paid at maturity along with principal amount) and a non-cumulative FD (interest is paid at regular intervals i.e. monthly, or quarterly or semi-annually, or annually) based on your suitability. Your relationship manager will customize the FD based on your needs and financial goals. A savings account is a plain vanilla product with not many options and variations.

This is all we have for you in this article on the difference between saving account and fixed deposit account. Both of these products carry no to minimal risk, you can choose between them based on your requirements.  

We at Shriram Finance have multiple options of fixed deposits offering the best interest rates in the industry. We have tenures ranging from 12 months to 60 months with a minimum penalty on premature withdrawal. The auto-renewal feature is also there with us through which you can re-invest the principal only or principal and interest amount at maturity. You can compute returns as well by using our FD calculator available on this link. Allow us to serve you!!