Just as every business operates to earn profits, every individual works to earn money. Money today is minimally maintained in physical form of actual cash but is actually maintained digitally in bank accounts. Banks provide a digital account to its customers in which they can keep their money for safekeeping as well as earn compensation in form of interest on the deposited money. Certain type of bank accounts utility extends beyond safekeeping of money and can also be used as investment tools by customers. Depending on the customer’s specific needs, the appropriate type of bank account is chosen.

This article looks at meaning of and differences between two types of bank accounts – savings account and fixed deposit account.

Definitions and meanings

Savings account:

A savings account is a bank account maintained by a customer to deposit his personal savings as well as to undertake personal monetary transactions. Safekeeping of money with high liquidity is the primary purpose of maintaining a savings account. Earning interest on the deposited money is the secondary purpose.

Customers deposit their personal earnings in a savings account and also make their personal payments through their savings account. A savings account thus cannot be opened by a business entity but only by an individual or association of individuals.

Banks require customers to maintain a minimum balance in their savings account, failing which they may charge some penalty. Banks also pay nominal interest to customers on the balance maintained in their savings account. This interest is generally calculated on the average balance on a quarterly basis and credited to the savings account of the customer itself.

Fixed deposit account:

A fixed deposit account is an account of customer maintained with the bank in which money is deposited with him for a specific, defined period of time during which the money cannot be withdrawn.

A fixed deposit account is a type of investment made by the customer with the specific bank with the primary purpose of earning interest. Every fixed deposit has an interest rate that is associated with it depending on the tenure of the fixed deposit. The longer the tenure, the higher the interest rate. Tenures can range from as little as 30 days to as much as 10 years.

When a customer opens a fixed deposit account, he chooses the tenure and deposits the determined sum of money for which he is given an acknowledgement termed as ‘fixed deposit receipt’ as a proof of his investment. Customers are generally not allowed to withdraw money from the fixed deposit account, before completion of the predetermined tenure. In case a customer wishes to withdraw his money, he will be required to break his fixed deposit which generally involves charge of a monetary penalty by the bank.

The interest rate attached to the fixed deposit may be paid to the customer at specified intervals (non-cumulative fixed deposit) or it may accrue to the fixed deposit account and paid to the customer only on redemption of the fixed deposit (cumulative fixed deposit). On completion of the tenure of the fixed deposit account, the amount deposited along with any accrued interest becomes payable to the customer.

Difference between savings and fixed deposit account:

The differences between savings and fixed deposit account have been detailed below:

1. Meaning

  • Savings account is a personal bank account maintained by individual customers to deposit their personal savings and undertake their personal monetary transactions.
  • Fixed deposit account is an account in which a customer deposits money for a specified fixed tenure and at a specified interest rate.

2. Opened by

  • Savings bank account are primarily opened by individuals for undertaking their personal monetary transactions and depositing their personal savings.
  • Fixed deposit account can be opened by individuals for their personal investment or by business entities for their business investments.

3. Purpose for maintaining

  • Savings bank account are primarily maintained by customers for the safe-keeping of their savings and to make payments and collect receipts. Earning interest is a secondary purpose.
  • The primary purpose of maintaining a fixed deposit account is to earn interest on the deposited money. Fixed deposit is thus a mode of investment for customers.

4. Liquidity

  • Savings bank account offer high liquidity as the money deposited can be withdrawn almost instantly by its customers.
  • Fixed deposit accounts have minimal liquidity as money cannot be withdrawn in the normal course. In case funds need to be withdrawn customers need to apply to the bank to break the fixed deposit.

5. Penalty on withdrawal

  • There is no penalty on withdrawals from savings bank account. This is provided the required minimum balance is maintained.
  • Banks levy penalty in case fixed deposit account is broken and the money is withdrawn prematurely.

6. Transactions

  • A savings bank account may see frequent, often daily transactions of deposits (receipts) and withdrawals (payments).
  • Fixed deposit account generally has only one deposit transaction at the start of the fixed deposit and one withdrawal transaction at the time of redemption.Fixed deposit account cannot be used for making any payments.

7. Proof of deposit

  • Banks provide passbooks as a summary of transactions to the holders of savings account. This also serves as a proof of the amount held by the customers in their savings bank accounts.
  • In the case of fixed deposit account, banks issue an acknowledgement in the form of a fixed deposit receipt as a proof of deposit to its customers.

8. Quantum of interest

  • Savings account earn a low amount of interest as they offer high liquidity.
  • Fixed deposit accounts offer higher rate of interest than savings account as the money is practically locked in. Higher the tenure higher the rate of interest.

9. Variability of interest rate

  • Savings account interest rate can be varied by the bank when there is a change in the federal interest rate.
  • Fixed deposit interest rate cannot be changed by the bank once the customer has deposited the money in the account.

10. Tenure

  • Savings account have no fixed tenure and can remain operational or an indefinite period.
  • Fixed deposit account is opened for a fixed and specific time period.

Conclusion – savings account vs fixed deposit account:

Most individuals have savings bank account as digitized payments today mandate the need for a bank account to undertake monetary transactions. On the other hand, not every individual or every business has a fixed deposit account. A fixed deposit account is an investment mode more than a simple bank account and is thus preferred when the individual/business has spare funds to invest on which they wish to earn interest rate higher than that applicable to savings account.