ABC of Savings Bank Account—and How to Break Its Prejudices

You have a savings bank account, yes.

You have been using it for years, likely for decades.

It has been so integrated with your life that you barely notice its importance to financial success.

But have you ever thought about the significance of having the right savings bank account? The impact it can have on your personal finance?

Many of us don’t realise that we can save money effectively by banking the right way.

So what is this right way to bank?

Is there a rule book?

No. But the things we’re about to discuss below can make you bank the right way.

Understanding various types of savings bank account and the services available will not only help you save money butgenerate more of it.

Discover the unknown features and benefits of savings bank accounts and everything around it in this article.

Savings Bank Account:

As the name suggests, the purpose of saving bank account is to encourage you to save more money.

With a savings bank account, you can make deposits to save portions of your income, earn interest on your savings and withdraw the money when you need it.

At least that was the intent years ago. There are inspiring stories where people saved money in lakhswith small deposits in their savings bank account.

Read: Oseola McCarty Proves You’ll Still Get Rich

Today, a savings bank account has become more of a tool than a savings instrument. Some are using their savings bank account only as a “wallet”.

Regardless, this change over time hasn’t taken away the powers of a savings bank account. It still has its fundamental advantages in addition to being a cornerstone to financial success.

The advantages of a savings account are: instant liquidity, safety of principal, and an interest on the account balance maintained.

But who can open a savings bank account in India?

Any resident Indian 18 years of age or above can open a savings bank account in India.

Although there is no age limit for opening a savings bank account, even a minor can open a savings bank account with their natural guardian. Minors who are above the age of 10 years can operate the savings bank account themselves.

You can make deposits with cash or check and withdrawals using the withdrawal slip directly at your respective bank branch. You can also make withdrawals at any of the bank’s Automated Teller Machines (ATM).

It is savings bank account in its simplest form, for a regular or a traditional savings bank account.

Let’s look at the types of savings bank accounts; you may find one that suits you the best.

Types of Savings Bank Account:

TO cater to the needs of their customers, banks have begun offering different types of savings bank accounts with varying specialised benefits.

And today, you can choose from creating a zero balance digital accounts to create a professional savings account with premium services.

i) Zero Balance Savings Account

Zero balance savings bank accounts are typically digital savings bank accounts offered by the banks today.

These savings accounts do not require any initial deposits to create them. And you can create a zero balance savings bank account online using a computer or the bank’s mobile app.

How to create a zero balance account?

6. Start using your digital zero balance savings account.

Note that some banks may require verification over a video call for added security. The overall account creation process only takes a few minutes.

Benefits of Zero Balance Savings Bank Account:

Zero Monthly-Average Balance
Free virtual debit card
Free/minimal charge physical debit card
Zero/minimal charges on value-added services
Free unlimited ATM withdrawals
Free unlimited internet transactions

One of the advantages of having a zero balance savings account is the cut on different charges you would pay with a traditional savings bank account.

A zero balance savings bank account is ideal for students, people early in their careers, and retirees.
n though the account ope
However, anyone can make use of this type of account to use as a spend-only account.

ii) Professional Savings Account

There have been too many queries, asking,

What is a professional savings account?

Let’s get one thing clear.

A “professional” savings account is only a colloquial term banks use to present their savings bank account with prime features and benefits. It also includes the professional savings bank accounts with a sweep-in facility.

In simple terms, a professional savings account is a savings bank account with special privileges to the account holder. And these special privileges vary with different banks that offer them.

How to create a professional savings account?

You can create a professional savings bank account in India at any bank branch offering the same.

Even though the account opening process is the same as any traditional savings bank account, it has some specified prerequisites.

These specified prerequisites may vary from bank to bank.

For example: A professional savings bank account would require a higher minimum balance than a regular savings bank account.

Features of a Professional Savings Bank Account:

The features and benefits of a professional savings account is one of the reasons people go for it. The most common are,

Special Privileges at the Bank; no waiting in the queue.
Doorstep Banking Services
Dedicated Relationship Manager
Free Cheque Books
Free Demand Drafts
Free Safety Locker
Free Debit Card,
Higher transaction limits, etc.

The features and benefits mentioned may vary with every bank.

iii) SweepSavings Account

A sweep savings bank account is a special kind of savings account. It is also often referred to as a professional savings bank account.

What is a sweep savings bank account?

A sweep savings account is a savings bank account with a deposit threshold. While depositing amounts greater than this threshold, it automatically transfers the additional money to high-interest-yielding instruments at the end of each business day.

How does a Sweep Savings Account Work?

For example: If you have a sweep savings account with a threshold of ₹50,000 and deposit ₹80,000 in the same account, the odd ₹30,000 invested in a high interest yielding instrument, like an FD.

This action is called sweep-in. Meanwhile, the reverse of this is called sweep-out.

In a sweep out, when you withdraw money, the account balance may fall below the prescribed threshold. If this happens, the money from high-interest instruments is put back into your sweep savings bank account to ensure liquidity.

By operating in this way, a sweep account offers the account holders higher interest on deposits and liquidity at the same time.

A sweep savings bank account is also called a “Flexi deposit.”

Instant Liquidity:

The main attraction in a savings bank account is its high liquidity.

The only thing that offers better liquidity than a saving bank is cash.

You can withdraw cash from your savings bank account at the bank branch during working hours. Besides, you can also make use of the ATM.

ATM stands for Automatic Teller Machine.

When you need money you can withdraw from any ATM. It can be even during the non-working hours, evenon a non-working day.

ATM withdrawals will have a maximum limit for a day. Depends on the type of account you have, you can withdraw in a single day to the maximum of ₹20000, ₹25000, or ₹50000.

These days, banks are providing doorstep service to their priority account holders with professional savings bank account.

When you need money or want to deposit money, thebanks can arrange a staff to come to your place and give money or collect money. To be a priority account holder or a preferred client, the minimum balance to be maintained will be higher. It is usually ₹1 lakh or above.

Savings Bank Account Holding:

When it comes to account holding, there is two way of looking at it.

One is account centric.

1. How many can hold a single savings bank account?

You can hold this savings bank account as a single account holder.

You can also opt to hold your savings bank account jointly with your spouse or any other person. Also, you can nominate your next kith and kin in your savings bank account.

Secondly, there is an alternate way of looking at it—that is individual-centric.

2. How many savings bank account can I hold?

Do not juggle with too many savings accounts!

As stated earlier, a savings bank account is pivotal in achieving financial success. But what typically happens is that many people have 4-5 or even more savings bank accounts. It makes a mess in their finances, even if you do not use them much.

Ideally, 2savings bank accounts is enough to keep your personal finance neat and in good shape.

Use one of these savings accounts for all your expenses and the other exclusively for savings purposes, including investment transactions. Although, you may have one more savings bank account as required. For example: a joint savings bank account with your spouse or child.

But at all times, try not to have too many savings accounts.Create a new savings bank account only if it is essential and has a specified purpose.

Savings Bank’s Safety of Principal:

The old school thinking is that, “Keep your money in your savings bank account. It is safe.”

But how much of that is true?

Is there an unexplored caveat to it?

The balance you keep in our savings account is not 100% safe. The balance in your savings account is insured only for a maximum of ₹5lakhs. This amount is the insurance cover by Deposit Insurance and Credit Guarantee Corporation (DICGC).

All the commercial banks operating in India will have DICGC insurance cover. It includes even the branches of foreign banks operating in India. But when it comes to co-operative banks, you need to make sure whether they have DICGC cover.

It is reason enough to use your savings bank account only as a tool rather than an investment instrument.

If a bank is not paying the premium of their DICGC insurance scheme for 3consecutive years, this insurance cease to exist.

If you are depositing with a co-operative bank, make sure they still have the DICGC insurance cover.

But the safety of principal isn’t limited to this kind of risk only.

Many people deposit a large sum of money in their savings bank account because of the “safety of principal” and liquidity. But what they don’t consider is the effect of inflation and the taxation on interest earned.

Before we analyse each of these, let us understand the interest rate of a savings bank account.

Interest Rate of Savings Bank Account:

The general prevailing rate for savings account ranges from 3-4.5%.

It continues to vary since 25-10-2011, when the RBI deregulated the savings account interest rates. Today, the range of interest rates for savings accounts with different banks is 3% to 5%.

However, the higher interest rates are offered only by the digital savings bank account. It is because they incur relatively low operating cost.

Aside from these, small finance banks offer even higher interest rates. Account-holders in small finance banks can get interest on their deposits in the range of 4%-7%.

But it is not advisable to choose a small finance bank since they are relatively riskier than a mainstream commercial bank. Also, the features and benefits of a savings account with a small finance bank is limited.

If you are very keen on earning a higher interest rate, along with liquidity, you can park your money in a liquid mutual fund.

Unlike a small finance bank, liquid mutual funds invest in high-quality commercial papers. The risk involved, even though very low, can be assessed, and there is complete transparency. Thanks to SEBI regulations.

To sum up, it seems beneficial to earn a little more interest from the savings bank account you use. But it is not worth it to make it your only reason to keep a large sum in your savings bank account.

There are better investment instruments; make use of them.

Inflation Vs Savings Bank Account:

“There are better investment instruments; make use of them.”

You cannot be new to the concept of inflation. It is the sustained increase in the price of goods and services over a year. As an effect, the money you hold as cash, or any money that doesn’t appreciate over time will lose its value gradually.

Here’s an excerpt from one of our articles to understand this better.
You can read the complete article here: “Get Rich or Get Busy Struggling.”

Inflation is unstoppable. It will continue to have an impact on the economy forever.

As the interest rates are in the range of 3%-4.5%, it is impossible to beat inflation. You cannot even keep up with the inflation, let alone beating it.

If you are considering your savings bank account as an investment instrument, you are going to lose.

Keeping your hard-earned money in a savings bank accountis nothing less than neglecton your part.

Do not make that mistake. Use your savings bank account only as a tool if you want to achieve financial success.

Tax Liability of Savings Account Interest:

The interest you earn from your savings account is taxable!

Although, not all of the interest earned is taxed.

The IT Act 1961 allows a meagre exemption under section 80TTA for resident citizens.

The interest earned is exempt from income tax to the tune of only ₹10,000 per annum. The interest earned over and above this prescribed limit will be taxed.

You will have to pay the income tax for the interest earned under the head “Income from other sources.”

On the other hand, resident senior citizens enjoy an exemption of up to ₹50,000 on the interest earned. It is as per the section 80TTB of the IT Act, 1961.

Even though the law allows a small exemption on the interest income, it is next to nothing to anyone who wants to achieve financial success.

Considering all the facts discussed above, it is evident that a savings bank account interest isn’t in your best interests.

Conclusion:

A smith’s hammer may forge a thousand swords, but it cannot go to war.

Though a savings account plays a vital role in your financial success, misunderstanding its role could stop you from achieving it.

With the help of your savings bank account, explore and invest your savings in wealth-generating investment instruments. It can be anything from PPF to debt funds to equity mutual funds.

But, if you want to make your personal finance journey safer and smoother, you need to create a sound financial plan.

If you have any comments or questions, write them in the comment box below.

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ABC of Savings Bank Account—and How to Break Its Prejudices

Table of Contents:

Savings Bank Account: