Saving money is very important for future goals and emergencies. Rather than keeping cash at home or office, consider parking your money where it can grow. In India, two popular options are savings accounts and fixed deposit accounts. Both allow you to earn interest at predetermined rates.
This article compares the features and benefits of a savings account vs a deposit account, providing clarity for those deciding between these two financial instruments. If you're uncertain about the best option for your savings, this article will do a detailed comparison to help you make an informed decision.
What is a Savings Account?
A savings account is a basic financial product offered by banks and financial institutions for depositing and withdrawing money. Its primary function is to provide a safe place to deposit funds while earning interest on the deposited amount. Savings accounts come in various types, including regular savings accounts, salary accounts, senior citizen accounts, and zero balance savings account offered by Kotak811 catering to different customer needs.
In India, savings accounts typically offer interest rates determined by the bank (which can be 2.5% to 7%), calculated on the average monthly balance maintained in the account. While the interest rates may vary among banks, savings accounts generally provide lower interest than other investment options like fixed deposits. In short, these are a convenient and accessible tool to save money securely while earning modest returns on deposits.
What is a Fixed Deposit Account?
A Fixed Deposit (FD) account is a financial tool where an individual deposits a lump sum with a bank or financial institution for a predetermined period at a fixed interest rate. The primary function of an FD account is to provide a secure option for individuals to grow their savings over a specified period, ranging from a few months to several years.
There are various types of FD accounts, including regular FDs, tax-saving FDs, and senior citizen FDs each catering to specific needs. In India, the interest on FD accounts is determined by the prevailing market rates and varies across banks. Investors appreciate FDs for their stability, guaranteed returns, and flexibility in choosing tenure according to their financial goals.
Must Read: What are Fixed Deposit Accounts & How Do They Work?
Difference Between Savings Account and Fixed Deposit Account
Here is the difference between fixed accounts and savings accounts evaluated on different parameters.
Rate of Interest
One significant difference lies in the interest rate offered by savings and fixed deposit accounts. Savings accounts usually provide lower interest rates, often varying between 2.5% to 7%, depending on the bank. For example – Kotak811 savings accounts offer up to 7% interest on deposits with the ActivMoney feature. This rate is generally calculated on the average balance maintained in the account.
In contrast, fixed deposit accounts offer higher interest rates, up to 8%, and sometimes even higher for longer tenures. The interest for fixed deposits is predetermined and guaranteed, making it a preferred choice for those seeking higher returns on their savings.
Liquidity
Savings accounts offer high liquidity, letting account holders withdraw funds whenever needed without penalties or restrictions. This flexibility makes savings accounts suitable for short-term financial needs and emergency funds.
On the other hand, fixed deposit accounts impose restrictions on liquidity, typically requiring a predetermined maturity period before withdrawal without penalty. While fixed deposits offer higher interest rates than savings accounts, the trade-off is reduced liquidity. Investors opting for fixed deposits must carefully consider their financial goals and liquidity needs before committing funds.
Taxation
Taxation differs between savings accounts and fixed deposit accounts. Interest earned on savings accounts is subject to income tax as per the individual's tax slab rate. However, banks provide a deduction under Section 80TTA of the Income Tax Act, allowing individuals to claim up to Rs 10,000 in interest income from savings accounts as exempt from tax.
On the other hand, interest earned on fixed deposit accounts is fully taxable as per the individual's tax slab rate. Banks deduct TDS (Tax Deducted at Source) on interest earned from fixed deposits if it exceeds Rs 40,000 annually for non-senior citizens and Rs 50,000 annually for senior citizens.
Must Read: What Is A Tax-Saving FD?
Senior citizen benefits
Senior citizens enjoy distinct benefits in both savings accounts and fixed deposit accounts. In a savings account, they typically receive higher interest rates than regular account holders, providing them with enhanced returns on their deposits. This helps senior citizens preserve the value of their savings against inflation.
On the other hand, fixed deposit accounts may offer even more favourable interest rates for seniors, presenting an attractive option for those seeking a fixed income stream. The choice between the two depends on individual preferences and the need for liquidity.
Lock in period
One significant distinction between a savings account and a fixed deposit lies in the lock-in period. A savings account offers liquidity, allowing you to deposit and withdraw funds freely without any predetermined time commitment. This flexibility makes it ideal for short-term financial needs and emergency funds.
On the other hand, a fixed deposit involves a predetermined lock-in period during which the funds remain invested. While this lock-in period restricts immediate access to the funds, it comes with the advantage of higher interest rates. It makes fixed deposits suitable for those looking to earn more on their savings over a specific timeframe.
Conclusion
When deciding between a savings account and a fixed deposit, it's essential to consider your financial goals and needs. Fixed deposits are ideal for individuals looking to save for the long term without immediate access to funds. They offer higher interest rates, greater security, and flexibility in terms of tenure.
While savings accounts provide easy access to funds, they often offer lower interest rates. However, with the right interest rates and features, savings accounts can still be preferable for short-term savings or emergency funds.
At Kotak 811, anyone can earn up to 7% interest on a savings account with the ActivMoney feature. What’s more, those with no or low credit scores can get a Kotak 811 Dream Different credit card against a fixed deposit of as low as Rs 5,000.
Frequently asked questions
1. Which is better, a savings account or a fixed deposit?
It depends on your financial goals and liquidity needs. Fixed deposits offer higher interest rates but lock in funds, while savings accounts provide easy access to funds with lower interest rates.
2. Are fixed deposits safer than savings accounts?
Both fixed deposits and savings accounts are safer modes of savings and deposits. Fixed deposits offer higher fixed interest rates on longer terms, while savings accounts offer lower interest but greater liquidity.
3. Is it possible to withdraw money from a fixed deposit before maturity?
Yes, but it often comes with penalties and reduced interest rates. It's best to check the terms and conditions of your fixed deposit before making early withdrawals.
4. What are the benefits of a savings account over a fixed deposit?
Savings accounts offer greater flexibility and easier access to funds, making them suitable for regular savings or emergency funds.
5. How to decide between a savings account and a fixed deposit?
Consider your financial goals, liquidity needs, and risk tolerance. Fixed deposits are ideal for long-term savings, while savings accounts provide flexibility for short-term needs.
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