Savings Products from Banks
Welcome to the Chapter on Savings Products from Banks.
Banks offer three saving products: Savings Accounts, Fixed Deposits and Recurring Deposits.
We will take a look at each one of them one by one.
Savings Accounts
Savings accounts are the most basic way to save your money.
Nearly everyone in India has a savings account. The Jan Dhan scheme of the government a few years back gave a strong boost to the spread of savings accounts among the economically weaker sections – the only segment of our society where savings accounts were not widespread.
Most banks now allow you to open a savings account online and complete the KYC formalities online also. This allows you to easily open a savings account these days without having to visit the bank.
Savings accounts are of different types. The most common is the standard savings account that anyone can open including minors who can open them with adults as joint account holders.
Also, there are accounts meant for specific sections of people such as:
- Savings accounts for minors
- Savings accounts for young adults such as the college-going population
- Savings accounts for women
- Savings accounts for senior citizens
- Savings accounts for salaried individuals
- Savings accounts for public sector employees and so on.
Each of these specific accounts comes with its own positives and negatives. The primary reason these accounts can be preferred over the standard savings account is that they provide specific benefits to the target audience. For instance, savings accounts for senior citizens or women usually have higher rates of interest, savings accounts for minors and young adults usually do not have any minimum balance requirements and so on.
Of these, the primary benefit is the higher interest rate, which is usually an additional 0.5% over the interest rates for the standard accounts.
This 0.5% additional interest may seem very negligible and most people do not think it is necessary to use it for one’s benefit.
Though we agree that the benefits seem quite less, but to assume that they do not count at all is a mistake.
Let us look at an example to understand why we are saying it is a mistake. Suppose you find ₹200 or ₹500 lying on the ground without anybody nearby. Would you let the money lie there or would you take the money and use it for something?
We are willing to bet you will take it, right?
The same logic should be applied to interest on these accounts.
Yes, the money on the additional interest you receive may seem low but it is still extra money.
You also benefit from specific deals that might be present for these accounts. For example, certain banks offer educational loans at low interest rates for college-going kids who have an account with them. Similarly, women with Women’s Savings Accounts may get deals and offers on specific days such as Women’s Day or Mother’s Day.
The salary accounts opened by a bank for employees of its business clients usually have no fees at all. Plus, you get access to the best deals that they have such as lower interest rate credit cards and loans at favourable terms.
Now here is a caveat that you need to keep in mind: sometimes the banks charge a certain fee for these specific accounts for the additional benefits they offer. If the fees are a bit more than the interest you are likely to earn or the monetary equivalent of the benefits you will get, then it is better to stick to a standard account.
There is another type of savings account that is a mix of a savings account and a fixed deposit or recurring deposit. Here a certain amount of money after a specific minimum balance is put into a fixed deposit. In case your balance falls below the minimum balance requirement, then the amount of money needed to maintain the minimum balance is transferred back from the fixed deposit into the savings account. These savings accounts allow you to benefit from the higher interest rate on a fixed deposit even though you still have the liquidity of a savings account.
Interest Rates of Savings Accounts
Most people take these accounts as a standard way to save their money but this has to be avoided.
Once upon a time, the interest on savings accounts used to be high enough to justify such an investment strategy but not now.
For instance, when savings accounts gave you an interest rate of 12% or thereabouts then it was a very good way to grow your money. But now the interest rates are around 4%. This is a negative return due to inflation. The average 10-year or 20-year inflation rate in India hovers around 6-7%. If you consider this factor, you will realise that you are actually losing money by keeping money in your savings accounts.
Nonetheless, it is important that you keep some money in your savings account because it is the most liquid way to keep your money around you. You can easily transfer money between accounts, pay bills, make withdrawals, etc.
It is suggested that you keep around 2 & ½ months’ worth of your money requirements in a savings account and put the rest in other investment options. If you want to play it really safe, keep a year’s worth of your monetary needs in a savings account to tide over emergencies.
A few things to keep in mind:
- Banks charge you for making too many withdrawals, especially from ATMs of other banks. So make sure that you use the bank’s ATM as much as possible.
- Secondly, don’t make withdrawals of very small amounts. If you need around ₹15,000 in cash every month for expenses, take it out in 2-3 transactions and not 10-12.
- Make as many digital payments as you can. Small vendors may still prefer cash but you are being inconvenienced and you need to realise that. Sometimes, if you are out of cash, you may end up paying more money if you have exceeded the free transaction limits
- Pay all bills online. It saves you time and if done from the comfort of your home, it is much easier and safer
Fixed Deposits
Fixed deposit should rank second in the list of simple ways to grow your money right after savings accounts. Fixed deposits can now be opened online without you having to go to the bank and fill a form.
In a fixed deposit, you can choose to invest a certain sum of money for a specific period of time with the bank.
You cannot take out the money within this time unless you pay a penalty.
Fixed deposits are available for different periods from a few days to 10 years. At the end of the investment period, you can choose to renew the fixed deposit or take out your money.
These saving products are a good investment option in a recession. This is because in a recession the stock markets are not able to offer the investors good returns while the returns from investments like fixed deposits and debt end up giving better returns.
Fixed deposits are also a good way to keep your money without losing its value. If you are very risk-averse then it makes sense to put your money in a fixed deposit first and then look out at other risk-free or less risky options.
An important thing to know about fixed deposits is that you cannot make a partial withdrawal of the deposit amount. You can make a full withdrawal by breaking the fixed deposit but you will have to pay a penalty for the same.
The fixed deposits offered by the India Post allow premature encashment after expiry of 6 months.
Interest Rates of Fixed Deposits
Interest rates on fixed deposits vary according to the period of the deposit. In certain cases, it also varies depending on the amount you are putting up as a fixed deposit.
The best interest rates on fixed deposits in India right now vary from around 6.5% to around 8% on an average. Senior citizens get 0.25-0.5% more.
Considering the inflation rate which is around 6-7%, this means that you usually do not grow your money by a large percentage. But if you choose a bank that offers more than 6-7%, then you do not lose money also.
Finding the right fixed deposit is a bit difficult as different banks offer different rates of interest.
Usually, the private sector banks and smaller banks offer a higher rate of interest as a way to attract more depositors since the additional funds will allow them to grow their business.
Plus due to the competition, the bigger banks offer more or less similar rates of interest.
If you are planning to put your money in a fixed deposit it is obvious that you go to the banks that offer a better rate of interest.
The same analogy of finding money on the road applies here also. Every extra percentage will earn you more money. As such, it is important that you put the money in a bank that gives the best rates of interest.
Another thing to note. Whether you should invest for the longer tenure or shorter tenure?
Interest rates on fixed deposits do not change. They are fixed.
A good way to understand whether it is better to invest for the longer tenure or the shorter one is to look at the historical returns from the bank. If returns have been on a decline for some years it is better to go for the longer tenure as your interest will be fixed and you will be getting a higher rate of interest compared to what someone who is investing five years down the line would get. Similarly returns have been increasing then it is better to go with shorter tenure.
It is important to note here that interest rates have been falling for some time now.
For instance, the interest rate on the 5-10 year Fixed Deposit offered by State Bank of India was 8.25% in April 2015 while it was around 5.4% in April 2020.
A caveat here. Just like savings accounts, you need to ensure that you are actually not losing any money by choosing a bank that gives a high rate of interest but charges higher fees. Also, sometimes a weak balance sheet makes it more sensible to put the money in a larger bank.
Recurring Deposits
Recurring deposits are somewhere between savings accounts and fixed deposits. Here a certain sum of money is regularly moved from your savings account and put in a term deposit. The deposit earns more money than the savings accounts and so your overall interest earnings go up.
A recurring deposit is a good way to save your money especially if you have problems making regular investments.
Because it is happening on a monthly basis you are able to see your money being invested and giving you returns. This motivates you to start looking at other investment options also.
Recurring deposits can range from six months to around 10 years. The interest rate is usually fixed and does not vary just like a fixed deposit.
Most banks allow you to vary the amount you transfer each month, though there is a specific minimum amount that you have to transfer.
In terms of tenure of the recurring deposit, the logic for your choice of tenure in the fixed deposit applies here also. If interest rates are falling then it is better to go for the longest tenure but if the interest rates are rising then it is better to go with the ones with shorter tenures.
Just like a fixed deposit, you cannot make a partial withdrawal of a recurring deposit but you can make a full withdrawal by paying a penalty.
The Indian Post Office also offers recurring deposit. And here you can make a partial withdrawal of the funds if you have maintained the recurring deposit for a year. You can also close the recurring deposit after three years from the date of opening of the account.
Interest Rates of Recurring Deposits
Just like the interest rates on fixed deposits, the ones for recurring deposits also vary according to the tenure of the deposit. And in certain cases, it also varies depending on the amount you are putting up.
The interest rates on recurring deposits right now vary from around 6.5% to around 8% on an average. Senior citizens get 0.25-0.5% more.
Just like fixed deposits, with an inflation rate of around 6-7%, you usually do not grow your money by a large percentage, but you also do not lose money.
Bank Savings Products & Taxation
The interest from bank savings products is not tax-free.
But there is a deduction under the Income Tax Act for interest earned from savings accounts.
You do not have to pay any tax on the interest you receive from savings accounts if it is less than ₹10,000. This deduction is not available for Fixed Deposits and Recurring Deposits.
Banks do not deduct any TDS on Fixed Deposits if the interest amount is not more than ₹40,000. If it is above that then they charge TDS at 10%.
For Recurring Deposits, banks do not deduct any TDS if the interest amount is not more than ₹10,000. If it is more than that, then the TDS is charged at 10% just like Fixed Deposits.