How Do Fixed Deposits Compare to Other Savings Options?

Remember piggy banks? The childhood toys that we used to treasure, quite literally. That was our initiation into the world of saving money! Whether you are planning to take up modern savings methods or just want to see your surplus funds do more than gather dust, the 21st century brings numerous saving options. Saving accounts, fixed deposits, recurring deposits, the list goes on.  

Are the multiple saving tools and their differences giving you a headache? Dive deeper into the nuances of various kinds of saving schemes. Understand what each one does and how its financial potential compares with your long-term monetary goals. Read on for a simplistic breakdown of several such plans and make an informed choice of where to park your money.  

Fixed Deposits 

A fixed deposit (FD) is a financial instrument you can avail from both traditional banks and non-banking financial companies (NBFCs). In such deposits, you can invest a certain amount of money for a stipulated period at a fixed rate of interest. While this rate varies between several financial, you can usually get higher interest rates than savings accounts.  

This makes fixed deposits one of the most preferred savings instruments with guaranteed returns. When you open an FD account with a bank, the bank holds your money for a designated period or tenor and provides you interest at a fixed rate throughout this time. What’s more, you can also choose to put your money in a tax-saving FD scheme. These plans help you save tax up to ₹1.5 Lakhs, under Section 80C of the Income Tax Act of 1961.  

Savings Account

A savings account is another investment-cum-savings tool where you can deposit a certain sum of money for a fixed duration of time. Different banks provide varying interest rates ranging between 2% and 4%. A savings account is the most liquid savings facility you can opt for; essentially, it is the same as keeping your cash in a secure account than in hand. Moreover, savings accounts are completely risk-free and provide you with guaranteed returns.  

Savings accounts have certain key differences from fixed deposit accounts:  

Rate of Interest:  

FDs allow you to earn a higher interest rate than savings accounts, hence providing better returns. The annual interest rate for fixed deposits starts from 3% and can go up to even beyond 8% for senior citizen schemes. On the other hand, you can earn only around 2%-4% interest on your savings account deposits.  

Tenors:  

Fixed deposits with banks and NBFCs have periods starting from 7 days and going up to 10 years. As a result, you can split your savings across more than one FD account and utilise the different tenors available. However, savings accounts do not have any fixed deposit tenors.  

Lock-in Facility:  

FDs keep your money locked in for a specific tenor, which means that you cannot withdraw even a part of the deposit amount until the scheme matures. On the other hand, you are free to withdraw money from your savings account anytime. While this is a benefit, it also nulls the point of saving money.  

Recurring Deposit 

Recurring deposit accounts with banks or NBFCs allow you to put a fixed amount in them every month. These schemes have fixed interest rates throughout their tenors, usually ranging between 6 months and 10 years. When the plan matures, you receive the principal amount along with the accumulated interest. Moreover, you can also opt to receive the interest at regular intervals  

RD accounts differ from FDs in the following ways:  

Duration: 

Fixed deposit accounts have a lock-in period starting 7 days, while the same for recurring deposits is 6 months. Both schemes come with a maximum duration of 10 years.  

Taxation: 

Although you don’t have to pay TDS mandatorily in the case of RDs, you still have to include the interest earned when filing for ITR. Alternatively, if you earn an interest of more than ₹10,000 from an FD on maturity, you will have to pay TDS.  

Returns: 

Usually, you only deposit the lumpsum amount in your FD account only once and neither withdraw nor deposit any further. Consequently, you can earn a higher interest rate from these accounts. You deposit a fixed sum of money in your RD account every month; hence, the interest earned is also comparatively moderate.  

Public Provident Fund

Commonly called PPF accounts, these investment-cum-tax-saving instruments are commonly chosen because they were introduced around half a century ago by the Ministry of Finance under the Government of India. Hence, PPFs are considered a safe and secure savings instrument by Indians even today. You can opt for these long-term savings schemes from designated banks or even the Indian post office.  

PPF accounts differ from FDs in the following ways:  

Tenors:  

The minimum deposit term for a PPF account is 15 years. Beyond this, it can be extended in increments of 5 years. However, FDs have both long-term and short-term deposit options, ranging from 7 days to 10 years. Decide your investment end goals and choose your FD plan’s tenor accordingly.  

Returns:  

The interest rates for FDs remain fixed over time and do not fluctuate with market changes, recession, etc. Thus, you get guaranteed returns when your deposit matures. The Indian Government revises the rate of PPF returns every quarter, corresponding with the returns rate for government bonds. After the latest revision, PPFs provide 7.1% interest annually.  

Liquidity:  

FD accounts have moderate liquidity since specific types of FDs allow you to withdraw your deposit early. Conversely, PPF schemes allow you premature yearly withdrawals only from the seventh financial year of the plan (out of the 15-year lock-in period) if you need emergency finances.  

End-use:  

Fixed deposits are your go-to risk-free savings option, doubling as a safe investment with predetermined returns. From market volatility to macroeconomic changes, FDs continue to provide stable returns. PPFs are a good alternate savings tool with a 15-year lock-in period. So, it is ideal for investors seeking long-term fixed returns.  

Decisions, Decisions...  

As far as sound financial advice goes, you will not find it out there on the internet. One will tell you to choose a certain savings scheme, while another will favour a different one. Instead, you need to go over your own finances, calculate your earnings and expenses, and make an informed decision yourself.  

Ask yourself, do you want to see your savings reaping more long-term benefits, or do you want to earn quicker returns? Accordingly, you can choose from several financial instruments like fixed deposits, recurring deposits, public provident funds, and more. Take a wise financial call by first understanding which tool best aligns with your saving goals and how. If you finally decide that FDs are the most lucrative savings option for you, the next step would be to choose your preferred plan tenor, interest rate, etc. Earn sizable returns of up to 8.10% on your fixed deposit only on Bajaj Markets!