Difference Between Fd Accounts And Savings Accounts

By Author: Ravi
Total Articles: 66
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Last Diwali, during our family gathering, my uncle proudly announced he had kept 15 lakhs in his savings account for the past three years. The banker in me nearly choked on my gulab jamun. When I gently explained how much interest income he'd missed out on by not shifting some of that money to an fd account, his expression changed from pride to genuine concern. That conversation inspired me to share these insights with you.
The Fundamental Nature: Storage vs Growth
A savings account and an fd account serve different purposes in your financial journey, much like different players in a cricket team have different roles.
Savings accounts function primarily as transaction accounts. They're designed for regular money movement, bill payments and daily expenses. I use mine as a financial crossroads where my salary arrives and various expenses depart.
An fd account, on the other hand, is built for growth. It's where money goes to work ...
... harder for you, similar to how bonds investment operates but with more simplicity and usually more safety.
Interest Rates: The Dramatic Difference
The most compelling difference comes down to returns. Current savings account interest rates hover around 2.5% to 3.5% in most Indian banks, barely keeping pace with a child growing out of their clothes.
In contrast, fd account rates typically range from 5.5% to 7.5% depending on tenure and bank. Some small finance banks even offer rates approaching 9% for certain tenures.
When my daughter was born in 2018, I moved her education fund from a savings account paying 3% to a series of fixed deposits averaging 7%. The difference over just 5 years added nearly ₹1.2 lakhs to her education corpus without any additional deposits from my end.
Liquidity: Freedom vs Commitment
Savings accounts shine when it comes to liquidity. Your money remains available 24/7 through ATMs, debit cards, UPI, checks or branch withdrawals.
An fd account trades some of this freedom for higher returns. Your money gets locked for a predetermined period, ranging from as short as 7 days to as long as 10 years.
I learned about this trade off the hard way during a family emergency in 2016. While I could access my savings immediately, breaking my fd account early cost me some interest. Still, having the option to break it (albeit with a penalty) was better than the challenges I'd have faced liquidating my bonds investment during that stressful period.
Risk Profile: Safe vs Safer
Both accounts are among the safest financial instruments available in India, especially with deposit insurance covering up to ₹5 lakhs per bank. However, there's a subtle difference.
Savings account interest rates can change overnight based on RBI policy or bank decisions. In 2020, several banks cut savings rates dramatically, affecting millions of depositors.
An fd account locks in your interest rate at the time of opening. When I saw signs of rates declining in early 2019, I quickly locked in a 3 year fd account at 7.25%. By mid 2020, new fd rates had fallen to 5.5%, but my deposit continued earning the higher rate.
Purpose in Your Financial Portfolio
I think of savings accounts as working capital for life, holding enough money for 1 to 3 months of expenses plus funds for upcoming planned expenditures.
Fixed deposits serve as the middle layer in my financial planning, positioned between highly liquid savings and higher risk growth assets like bonds investment or equity mutual funds.
Making Them Work Together
The smartest approach isn't choosing between them but using them strategically together. I follow a simple framework:
Keep 1 to 2 months of expenses plus any planned short term needs in savings.
Move excess funds beyond this buffer to fd accounts of varying tenures.
Use an auto sweep feature if available at your bank, which automatically transfers excess savings to fixed deposits while keeping them accessible.
For my emergency fund, I use a ladder of fds maturing every three months, ensuring both better returns and strategic access.
Tax Implications Worth Noting
Interest earned on both accounts is taxable at your income slab rate. However, there's a practical difference.
With savings accounts, you enjoy tax exemption on interest up to ₹10,000 annually under Section 80TTA.
Fixed deposit interest enjoys no such exemption (except tax saver fds with 5 year lock in), making them less tax efficient.
My retired father, who falls in a lower tax bracket, holds more money in fixed deposits. Meanwhile I keep more in debt mutual funds for their tax advantages over fd accounts while still getting exposure to the bonds investment market.
The Verdict
Neither account type is inherently superior. They're financial tools designed for different jobs. Understanding these differences has helped me optimize my own finances and hopefully will help you too.
When my uncle finally moved 12 lakhs from his idle savings to a mix of fd accounts last year, his interest income jumped nearly fourfold. Sometimes the simplest financial moves make the biggest difference.