Fixed Deposit (FD) vs Savings Account: Key Differences

When choosing a savings tool, understanding the difference between fixed deposits and savings accounts is crucial. Both options serve different financial goals and knowing how they function can help you make an informed decision. Understand the features, benefits, and key differences between a fixed deposit and a savings account.

What is a Fixed Deposit

A fixed deposit is a savings tool that lets individuals invest a lump sum for a specific tenure at a fixed interest rate. Offered by banks and Non-banking Financial Companies (NBFCs), FDs are known for their stability and guaranteed returns, making them a popular low-risk option. Tenures can range from 7 days to 10 years, with interest rates remaining fixed throughout. 

While FDs provide predictable growth, they come with restrictions: premature withdrawals incur penalties, and additional deposits aren’t allowed after opening. This makes FDs preferable for those seeking stable returns without exposure to market risks, but with reduced financial flexibility.

Features of a Fixed Deposit

Here are some of the features associated with fixed deposits offered by banks and NBFCs:

• Interest rate is fixed and does not change throughout the tenure

• Tenures are flexible and range from 7 days to 10 years

• Returns are guaranteed and unaffected by market fluctuations

• Additional deposits are not allowed once the FD is opened

• Premature withdrawals are possible but may incur penalties

• Interest can be paid monthly, quarterly, annually, or at maturity, depending on the bank or NBFC

• Tax-saving FDs offer deductions under Section 80C of the Income Tax Act, 1961

• Senior citizens may receive higher interest rates on FDs

• FDs provide an option to reinvest interest for compounding benefits

For example, investing ₹1 Lakh in an FD with a 6.5% p.a. interest rate for one year would earn ₹6,500 as interest, resulting in a total maturity amount of ₹1,06,500. This simplicity and reliability make FDs a widely preferred choice among conservative investors.

What is a Savings Account

A savings account is a fundamental banking service designed to help individuals securely store and manage their money while earning variable interest on the balance. It provides easy access to funds, making it ideal for daily financial transactions such as deposits, withdrawals, and transfers. 

The account ensures liquidity and convenience, often coming with additional features like debit cards, cheque books, and online banking services. While the interest rates are typically lower than fixed deposits, the flexibility and accessibility make it a practical choice for everyday financial needs.

Features of a Savings Account

Here are some of the features commonly associated with savings accounts offered by banks and NBFCs:

• Funds can be deposited or withdrawn anytime without restrictions

• Interest is earned on the account balance, though rates are typically lower than FDs

• Savings accounts offer cheque books, net banking, and debit card facilities

• Some accounts may provide rewards or cashback on transactions

• Accounts often have a minimum balance requirement set by the bank

• Salaried individuals can opt for zero-balance savings accounts

• Savings accounts provide access to ATMs for cash withdrawals

• Interest income of up to ₹10,000 per year qualifies for tax exemption under Section 80TTA of the Income Tax Act, 1961.

For example, the interest rates for savings accounts in India range from 2.5% to 4% p.a., depending on the bank.

Important Differences Between Savings Accounts and FDs

Savings accounts offer daily transaction flexibility, while fixed deposits focus on long-term savings with higher returns. The table below outlines their key differences: