High interest savings account or fixed deposit? Which works?

Adhil ShettyBankbazaar.comIdle money can evaporate quickly and you would rarely know where it went to. Which is why people save their money in bank accounts which allows them to earn interest. Funds managed well over a long term can appreciate considerably by the way of interest. There are multiple options for earning high interest on deposits. Let us see which ones are most profitable for you. Fixed depositBank FDs are one of the most common ways of earning high interest returns on liquid money. The minimum FD tenure is normally 7 days at most banks. Starting an FD is easy: you can place a request through a phone call, on netbanking, or through a visit to your branch. The interest on FD is liable for tax as per the respective slab rate of assessee. Therefore, if you fall in the 30% tax bracket and the interest rate on your FD is 6% for a one month tenure, then you would get only 5.82% (annualized) effective interest after imposing the tax. Also, there is a 1 % penalty for premature withdrawal of the deposit. Auto sweep FDBanks also offer you an auto-sweep FD option wherein you can auto-shift your extra funds to FDs in order to earn higher interests. You can set a liquidity limit based on your monthly requirements in your savings account, and then set instructions to automatically shift the surplus amount into FDs. Normally, banks allow funds above Rs 10,000 to shift into auto-sweep FDs in multiples of Rs 5000. You have the option to withdraw partial amounts from your FDs in the multiple of Rs 1000. Some banks even allow withdrawals in multiples of Re 1. The interest on the withdrawn amount is calculated on the basis of the slab rate for the respective tenure. The fund withdrawal is calculated on the basis of last in, first out (LIFO) method. You will continue to get interest on the FD balance that’s not withdrawn. The tax liability under auto-sweep FDs is similar to what you pay with a normal FD. High interest savings accountsThese days, some banks offer interest rates on savings accounts that are comparable to FD rates. Normally, savings account pay in the range of 4% per annum, but some banks can go up to 6% and 7%. Interest earnings up to Rs 10,000 on savings account is tax free. Such high-interest accounts are good options for customers seeking higher interest with full liquidity. Following are details of the bank providing high interest rate on savings account:*Data taken from the respective bank’s website as on June 18, 2016What Suits You BestAnalysing the above-mentioned options, the best interest-earning option would be to use sweep-in FDs along with the high interest paying savings account. Let’s understand this with the help of illustration as given below:Since savings account interest up to Rs 10,000 is exempt from tax, you should opt for a sweep-in FD option above that level at which you earn Rs 10,000 interest in the savings account. This trick will ensure full benefit of the tax exemption limit as well as ample liquidity. In the illustration above we have used simple interest for calculation for simplicity. But in a savings account, the interest is calculated on the daily balance whereas FD interest is calculated on the basis of quarterly compounding basis.