Why are Fixed Deposits Better Than Savings Accounts?

Are you perplexed about which investment avenue to choose – a Bank fixed deposit or a savings account? The fact is that both have their own significance. While the bank fixed deposit (FD) is one of the safest investment avenues that promise assured returns and higher interest, a savings account is a basic account where you can park your money and earn interest. A savings is not an investment account and can be used to deposit and withdraw cash anytime anywhere. A fixed deposit, however, is an investment tool that comes with a lock-in period. Premature closure of the fixed deposit account may also attract penalty.

Over the years, FDs have gathered more significance over savings account as they promise assured returns with zero risk probability. Plus bank FDs inculcate a habit of savings in individuals. It requires you to deposit a certain amount of money and sit back and earn interest on it. The rate of interest offered in a fixed deposit account is higher than the savings account. So opening an FD is a better way to invest your money instead of simply keeping it in a savings account.

Top reasons why fixed deposits are better than a savings account

  1. Helps earn interest periodically: Simply accumulating a huge amount of money in your savings account would be of no use. A fixed deposit account will put it to better use. Since it’s the safest investment avenue, it can help you earn good amount of interest from time to time, either monthly, annually or at the maturity period (whichever option you choose). The interest you earn from your FD account can be used as an additional income which you can either use for something important or reinvest it for increased savings.
  2. FDs offer higher interest than Savings account: True that! As compared to savings account, an FD would offer higher interest rate. So with the fixed deposit, you can help your money grow with time. Currently, the interest rates offered by top banks on fixed deposits ranges from 6.40% to 6.75% for an investment made for less than a year. Another good thing to note here is that senior citizens are offered 0.5% higher interest rates in FD as compared to the general category of investors. So for example, if a bank offers an interest rate of 6.00% on FD for XYZ term, the same bank will offer 6.05% interest rate on senior citizen FD accounts.
  3. FD as collateral: If you have a poor credit score, and you want to get a loan, you can easily apply for the same by keeping your FD as collateral. In addition to this, you can also use your FD to get a credit card. Some banks charge a comparatively lower interest rate if their credit card application is backed by an FD as collateral.
  4. Tax benefits: According to the present I-T laws, you can claim a deduction of Rs 1.5 Lakh in tax-saving fixed deposits under section 80c of the income tax act 1961. Plus if you have invested in a normal fixed deposit, then some amount of interest earned from it will be liable for tax-deduction. As per the current scenario, if the interest earned from FD is more than Rs 10k, the 10% of it will be deducted by banks as TDS per year. For this, you need to provide your Permanent Account Number (PAN) to the bank.
  5. FDs are regulated by the RBI: Since bank fixed deposit schemes are regulated by the rules laid down by the Reserve Bank of India, credibility is also not a problem here. Also, the FD account is only managed by the investors whom it belongs to, the chances of loss of money is negligible.

Types of Fixed deposit schemes

A fixed deposit scheme is offered in different types which include:-

  1. Standard Fixed Deposits: Obtainable for the tenure of 7 days to 10 years, the standard fixed deposit scheme works on a rule that “The longer you stay invested the higher returns you will get”. The rate of interest in this scheme remains unaffected by the market fluctuations because it is set at the time of opening an FD.
  2. Special Fixed Deposits: Here funds are invested for a specific period of time. If you keep investing funds under this scheme, you are likely to earn higher returns as compared to standard fixed deposit schemes.
  3. Regular Income FDs: Ideal for investors with a limited source of income, a regular income FD schemes can help you earn interest on a monthly basis.
  4. Tax Saver FDs: It is a long-term FD scheme that comes with a 5-year lock-in period. The principal amount you invest in tax saver FDs qualify for tax exemption, with a higher limit of Rs.1.5lac for each FD.
  5. Cumulative FDs: In this FD, the interest is not disbursed to the investor. Rather it is added to the FD every time, thus saving you more on your investment.
  6. Flexi fixed deposits: These FD schemes are linked to your savings account and allow you to set a limit on your savings account so that any excess amount can directly be transferred to the FD.
  7. Corporate and other Fixed Deposits: Offered by some banks and post offices in India, these schemes typically come with a 3-year lock-in period. The interest rate in these FDs is slightly higher than other fixed deposit schemes. By investing in an FD offered by the reputed non-banking financial institution; you are likely to earn high interest as compared to the bank fixed deposits.

So now that you know why FDs are better than a savings account, you can start investing your surplus money in the bank FDs. The interest rates on FDs can be calculated both manually and online by using FD calculator available at various bank’s website and also on several third-party websites.

Contributed by https://www.paisabazaar.com/

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