Difference Between Demand Deposit & Fixed Deposit

Low-risk investments like savings are a reliable option for having a safety net for unexpected expenses, such as medical emergencies or job loss. When seeking low-risk investment options, both demand deposits (DDs) and fixed deposits (FDs) emerge as potential options.

Demand deposits and fixed deposits serve distinct purposes for investors managing idle funds. Demand deposits offer immediate access to funds, making them ideal for daily transactions and emergencies. In contrast, fixed deposits lock in funds for a specified term, yielding higher interest rates. Ultimately, it is hard to choose between the two, as demand deposits favour liquidity and fixed deposits favouring higher returns over time.

Let’s understand the difference between demand deposit and fixed deposit to be able to optimise returns and achieve our financial goals.

What is a Demand Deposit?

Demand deposits are funds that can be accessed at any time without prior notice. While these accounts typically earn lower interest rates, ranging from 4% to 6%, they provide the flexibility required for everyday transactions.

The bank may offer limited interest, but the primary benefit lies in the immediate availability of funds, which can be accessed through various means such as ATMs, debit cards, or online banking.

Besides, Demand deposits are governed by the Reserve Bank of India (RBI), ensuring the safety and security of deposited funds.

What is a Fixed Deposit?

Fixed deposits (FDs) involve depositing a specific amount of money for a predetermined period, usually offering higher interest rates between 7% and 9%.

Unlike demand deposits, FDs have restricted access to funds until maturity, making them suitable for individuals looking to grow their savings over time without needing immediate access.

FD account is ideal for conservative investors who prioritise capital preservation and are willing to lock in their funds for a fixed term in exchange for better returns.

Differences between Demand Deposit and Fixed Deposit

Let's check out a quick demand deposit vs fixed deposit overview. Here are the major distinguishing factors between fixed deposits and demand deposits:

Particulars	Fixed Deposits	Demand Deposits
Withdrawal	Funds can only be withdrawn on maturity post a predetermined tenure at a fixed interest rate	Funds can be withdrawn at any time without prior notice
Objective	Suitable for long-term savings goals	Ideal for short-term cash management needs
Interest Rates	Offers comparatively higher interest rates	Offers lower interest rates in exchange for liquidity
Tenure	Can range from 7 day to 10 years	No such requirements as deposits are available for regular use
Types	Regular FD, senior citizens FD, Tax saving FD, Corporate FD and more	Savings accounts, checking accounts, and money market accounts
Taxation	Tax saving FDs can help save taxes up to ₹1.5 Lakhs u/s 80C of the Income Tax Act, 1961 While you can save taxes under Section 80C, interest earned from both FDs and demand deposits is taxable. Interest from savings accounts is taxable after ₹10,000 under Section 80TTA	No direct tax benefits on interest income, it is taxable as per individual slab
Liquidity	Low liquidity Premature withdrawal available Subject to penalties	Highly liquid No penalties or charges incurred for withdrawal
Flexibility	Low flexibility Certain FDs come with a lock-in period	Highly flexible Funds can be added or withdrawn anytime

Advantages and Disadvantages of Demand and Fixed Deposits

Demand Deposits		Fixed Deposits
Advantages	Disadvantages	Advantages	Disadvantages
Funds can be withdrawn at any time without prior notice	Earn lower interest compared to fixed deposits	Higher interest rates than demand deposits	Funds are locked for a specific term
Unlimited withdrawals and deposit	Limited growth opportunity	Guaranteed returns	If inflation outpaces the fixed interest rate, the real value of savings may decline
Insured by the rbi, ensuring the safety of funds	Some banks may charge fees for exceeding withdrawal limits	Encourages disciplined saving habits	Withdrawing funds before maturity often incurs penalties

Which is Better: Demand Deposit or Fixed Deposit

Both demand deposits and fixed deposits come with their own merits and demerits. Therefore, depending on your specific needs, you can choose any of these investment options as suitable.

Let’s understand the probable scenarios in which you might choose either of them:

When to Choose Demand Deposits

As we have learnt that demand deposits are ideal for scenarios requiring immediate access to funds. They are suitable for:

Daily expenses such as groceries, utility bills, and other routine purchases
Quick access to cash during unforeseen circumstances like medical emergencies or urgent repairs

When to Choose Fixed Deposits

Fixed deposits are better suited for individuals aiming to save for specific goals or those who prefer a conservative investment approach.

They are ideal for:

Planning for future expenses like a down payment on a house or funding education
Individuals who prioritise stable returns and can commit their funds for a set period without needing immediate access

Conclusion

Selecting between a fixed deposit and demand deposit hinges on your financial goals and liquidity preferences. DDs offer easy access to funds but lower interest rates, while fixed deposits provide higher rates with limited access. Consider your objectives, risk tolerance, and liquidity requirements to make the best decision for your financial well-being.