Managing your money effectively starts with choosing the right place for your funds. While a savings account offers easy access to money for daily needs and emergencies, a fixed deposit helps you earn potentially higher returns by investing a lump sum for a fixed tenure. Understanding their differences can help you make informed financial decisions and align your savings with your goals.
Savings account vs Fixed deposit: Know the difference?
A savings account is the most commonly used instrument when it comes to saving excess money. This is mainly due to its ease of liquidating funds and even providing a modest interest. Unlike a fixed deposit (FD), only banks are liable to provide savings accounts, and no NBFC can provide a savings account. Nowadays, FD has become more popular when it comes to parking your surplus funds. It is due to its higher interest rates and easy withdrawal of your funds during emergencies.
1. FD vs Savings Account
A savings account is a secure financial tool which allows you to deposit money, earn moderate interest, and easily withdraw funds when needed. Managed by banks under government supervision, it provides a safe option for account holders who might need liquidity of funds.
While FD generally offers higher interest rates than saving accounts. You can create multiple FDs at different intervals to create a stream of constantly maturing FDs. This method, known as laddering, helps you earn a regular income without affecting your principal amount. FD involves investing a lumpsum amount over a chosen tenure, with interest paid upon maturity. Institutions like Bajaj Finance offer flexible tenures ranging from 12 to 60 months, with interest depending on the selected tenure.
2. Returns on each
Many private sectors and nationalised banks offering savings account provide interest earnings of up to 3-5% p.a.*. Apart from these, savings account offers hassle-free withdrawal of funds during emergencies. The interest earnings here can help achieve your short-term financial goals. For instance, Mr. Abhishek maintains a fund of Rs. 1 lakh in his savings account. Consider interest payable on the savings account to be up to 4% p.a.*. You can calculate monthly interest as:
Monthly interest = (Daily balance*No. of days*(Interest Rate/100))/Day in year
Monthly interest = (1,00,000*30*(4/100))/365 = Rs. 328.77
This implies that Mr. Abhishek will get Rs. 328.77 in his savings account every month, if he maintains a balance of Rs. 1 lakh throughout the year.
Institutions like Bajaj Finance offer you to invest in an FD with a minimum of Rs. 15,000, and a maximum return of up to 7.75% p.a. You can also choose to withdraw money before maturity after a 3-month lock-in period. In this case, you need to bear an interest loss. For instance, Ms. Kavita wants to invest Rs. 1,00,000 in FD for one year. Consider interest payable at up to 6.95% p.a. Total interest payable to Ms. Kavita post maturity will be Rs. 6,800, which is nearly about Rs. 550 per month.
3. Benefits of FD over savings account.
The fixed deposit has several benefits over a savings account that are:
High-interest rates
While banks offer an average up to 3-5% p.a. interest on savings account, they offer comparatively higher interest rates up to 5-6% p.a. on FD. However, NBFCs offer even higher interest rates on FD than banks. Institutions like Bajaj Finance offer a maximum interest rate of up to 7.75% p.a. on FDs.
Check the interest rates on Bajaj Finance Fixed Deposit.
Flexible payout
Bajaj Finance also offers flexibility in terms of payouts on FD. It provides two types of payout options: cumulative and non-cumulative.
A cumulative FD allows you to make a one-time lump sum investment for a set period and earn interest upon maturity. This is the best choice if you have a sizeable money to invest for growth and desire higher returns.
If you select the non-cumulative option, you will be paid interest on a regular basis. You can choose a payout frequency of monthly, quarterly, half-yearly, or yearly. It is an excellent option for people whose financial goals depend on a steady stream of income.
You can calculate the returns on FD using an FD calculator
c. Tax Benefits
When it comes to tax benefits, it's important to note that savings accounts do not offer any tax advantages. In contrast, bank fixed deposits offer potential deductions under Section 80C of the Income Tax Act. However, it's crucial to consider that these deductions are applicable exclusively to tax saver fixed deposits, which come with a mandatory 5-year lock-in period. This means that if you choose to invest in a tax saver FD, you may enjoy tax benefits while also committing to a longer-term investment horizon.
d. Senior citizen benefits
Savings accounts can be a valuable choice for individuals with fixed incomes, and it's worth noting that several banks extend special benefits to senior citizens who maintain savings accounts. On the other hand, bank fixed deposit accounts often provide senior citizens with the advantage of earning higher interest rates, offering them an opportunity to significantly boost their savings. These tailored benefits aim to cater to the financial needs of senior citizens, whether they seek accessibility and liquidity or are looking to maximise their returns through fixed-term investments.
