Bank FD vs. Savings Accounts: Which One Is A Better Option?

6 MinsFebruary 23, 2018

We all work hard to make a living and provide the best for our family. However, it’s equally important to work on saving money wisely for the future, so that you can achieve your financial goals.

Besides, not all days are same; there are ups and downs in life, and therefore you ought to assign some money for contingency purpose.

However, merely saving is not enough. Investing wisely in productive avenues is important.

Wise investing facilitates money saved to grow, effectively making money work for you or generate wealth in the long run, and be financially secured.

Thus, if you are holding too much money in a savings bank account, it may not be a prudent approach.

Here are reasons why you should open a bank FD:

1. Inflation erodes the purchasing power of your hard-earned money. Countering inflation by earning a positive real rate of return (also known as inflation-adjusted return) is essential. For that reason, keeping money idle or just in a saving bank account may not yield you much.

2. A bank FD enables you to earn a higher rate of interest that can help you clock better inflation-adjusted returns.

3. The returns on a bank FD are fixed –– there is no risk as in the case of market-linked instruments.

4. If you are conservative or averse to risk, and wish to drive fixed returns to accomplish the envisioned goals, a bank FD is one of the worthy avenues.

5. Likewise, a bank FD can even take care of your liquidity needs and address short-term goals, if the tenure is selected thoughtfully.

6. If you are a senior citizens, who would like to draw in a regular source of income vide interest, a 50 bps (0.50%) higher rate works in your favour.

7. Bank FD encourages saving and facilitates wealth creation.

8. A bank FD can be used as a collateral when you don’t have a credit history and want to take a loan.

9. You can even use a bank FD to get a credit card.

10. For tax planning, you can consider a Tax Saver bank FD as well and get a tax benefit under Section 80C of the Income Tax Act, 1961.

Key points of distinction between a savings account and bank FD

FeaturesSavings accountBank FD
Deposit amountNo limitWhile many banks do not have upper limit, it depends on the rules of the bank.
TenureNo fixed tenureFixed tenure ranging from 7 days to 10 years
Rate of interestNot fixed: it varies with the marketFixed: based on the tenure and age of the depositor (Senior Citizens can enjoy a slightly higher rate)
Interest calculationOn a daily basisOn a quarterly basis
Withdrawal limitSubject to the minimum balance requirementPermissible at maturity or prematurely subject to penalty
Loan facilityNot availableAvailable, bank FD can used as collateral
Tax benefitNot availableDeduction under Section 80C of the Income Tax Act available only for a Tax Saver bank FD which has a 5 year lock-in period.

To enjoy the best of both, i.e. saving and investing, you potentially need a savings bank account which smartly converts money into a bank fixed deposit (FD), when the balance in the savings account exceeds a certain value.

Axis ASAP, a zero balance savings account, is one such account that:

  • Takes care of your liquidity needs
  • Encourages you to save
  • Pay utility bills
  • Book flight tickets and hotels
  • Earn eDGE reward points

The Axis ASAP account is linked to Encash 24 Deposit Account, where automatic transfers to fixed deposits (also known as term deposits) are done.

About Encash 24 Deposit Account:

Encash 24 Flexi Deposits can be linked to your Axis Bank savings account facilitating automatic transfers in multiples of Rs 5,000 to a fixed deposit when the balance in the savings account crosses Rs 25,000.

And the money in fixed deposit can be accessed easily via a cheque or ATM withdrawals. This amount is automatically reverse swept from the most recently formed FD (in units of Rs 5,000) to your savings account whenever the balance in the latter (i.e. savings account) falls below Rs 25,000.

Thus, it offers dual benefits:

  • Takes care of liquidity needs; and
  • Earns a high rate of interest via bank FD

You even have the facility to auto-renew the FD booked under Encash 24 upto a maximum of 5 years from a minimum of 6 months.

A bank FD can be opened by:

  • Resident Individuals
  • Hindu Undivided Families (HUFs)
  • Proprietorship Firms
  • Partnership Firms
  • Limited companies
  • Trust

Even NRIs can open a bank FD.

And make it a point to have a nomination. A nominee is a person who will have legal right after your demise. A nominee can be your legal heir (a family member) or anyone who is not a part of the family. By filling in the nomination form and submitting it to the bank, you can assign a nominee. For bank FDs held in joint name, the nomination process needs to be carried out jointly by all the holders. Further, a nomination can be made only in individual capacity and not official capacity, using designations. In most cases, one can nominate only individuals and not organisations, barring for certain Trusts.

To conclude:

Opening a savings bank account is the first step that is principal to your investment activity. A bank FD can prove supportive in the journey of wealth creation and add to your long-term financial wellbeing. Make it a conscious effort to save more and invest wisely.

Happy Saving & Investing!

Happy Banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.