Fixed Deposits vs. Debt Mutual Funds

Interest Income from Fixed Deposits (including from Tax Saver Deposits) is considered to be part of Income from Other Sources and is taxed on accrual basis as per your Income Tax bracket. Tax Deduction at Source (TDS) is applicable above the threshold defined by Income Tax rules.
Profits from Debt Mutual Funds are taxable only on redemption (not on accrual basis) and are considered to be Short Term Capital Gains (STCG) irrespective of holding period. STCG is taxed as per your Income Tax bracket.
Debt Mutual Funds offer flexibiliy from a taxation perspective since there is no TDS, capital losses can be carried forward and set-off against future gains and redemptions can be timed for better tax planning.
Tax Saver Deposits allow tax deduction up to Rupees 1.5 Lakh annually on the invested principal amount under Section 80C of the Old Income Tax Regime. But there is a mandatory five-year lock-in period.

Principal amount of Fixed Deposits is protected and interest income is guaranteed. Since the money is parked with banks, there is low or negligible credit risk. Small Finance Banks and Cooperative Banks offer higher interest rates but carry higher risk.
Returns on Debt Mutual Funds are from interest earned and also from market price movements. Market price movements may lead to better returns but can also lead to loss of principal in longer tenor funds. Debt Mutual Funds may be exposed to higher credit risk depending on the composition of the underlying portfolio of debt instruments.

Fixed Deposits have fixed tenors with pre-mature withdrawal being allowed with a penalty. Money can be transferred from the Fixed Deposit to the Savings Bank Account almost instantly using digital channels.
Debt Mutual Funds generally have no lock-in, allow T+0 or T+1 redemption with no exit load after a certain period, making them more liquid and cost-effective