Types of investment - Banking

Banking

A bank account is an account maintained by a banking institution, in which it records financial transactions between the bank and the customer.

In India, bank accounts are primarily of four types- Savings Bank Account, Current Account, Recurring Deposit Account and Fixed Deposit Account. 

Current Accounts don’t earn any interest hence they haven’t been discussed here.

SAVINGS BANK ACCOUNT

A Savings Account is an interest-bearing bank account. The main idea of this account is to promote the habit of savings within people.

Benefits of a savings account include -moderate interest on deposits, low risk, convenience, ease of use etc.

 At the time of opening the account, the account holder gets a cheque book, a passbook and a Debit cum ATM Card.

 This account has become popular because of its liquidity and low risk.There is a cap on the number of withdrawals and deposits in this account. 

A Savings Account channels idle household cash into savings.

Types of Savings Bank Account

1. Basic Savings Bank Deposit Accounts (BSBDA) or No-Frills Account:

It is a zero-balance account with no restrictions on minimum and average balance and zero or no levies. 

This account does away with unnecessary services or frills. It is mainly for the low-income groups. 

However, If the balance in a no-frills account exceeds ₹50,000 or if the cumulative value of credit transactions exceeds ₹1 lakh inany financial year, the account will no longer be treated as ‘no frills’.

 The Pradhan Mantri Jan Dhan Account falls under this category.

2. Salary Account:

A Salary Account is one where the organization credits an employer’s monthly salary. This is somewhat like a zero-balance account as there is no minimum balance maintenance requirement.

However, if salary is not credited for 3 consecutive months, then it is treated as a Savings Account.

How to Open an Account

The following documents are required to open a Savings Bank account:

• Proof of identity - Passport, Driving license, Voter’s ID card, etc.

• Proof of address - Passport, Driving license, Voter’s ID card, etc.

• PAN card

• Form 16 (only if PAN card is not available)

• 2 latest passport size photographs

Guarantees

The interest rate in a savings bank is guaranteed up to the first ₹1 lakh balance in the account.

 This rate varies across banks since the Reserve Bank of India deregulated the savings bank deposit interest rate on October 25, 2011.

Banks are now free to determine the interest on the balance in a savings bank account, which has to be uniform for all types of accounts up to ₹1 lakh in an account but varies for accounts with a higher balance.

New Age Banking (e-banking & Mobile Banking)

These days, banks offer various facilities through net banking and mobile banking. Fund transfer facilities like National Electronic Fund Transfer (NEFT), Real Time Gross Settlement (RTGS), Unified Payment Interface (UPI) and Immediate Payment Service (IMPS) are offered through net banking and mobile banking. IMPS can be done 24X7 

whereas NEFT and RTGS operate with certain time restrictions and can be used only on 

bank working days. NEFT can be done for any amount till ₹10 lakh, IMPS for ₹2 lakh. 

The minimum amount for a RTGS transactions is ₹2 lakh and it does not have any upper limit. These facilities attract nominal charges which differ from bank to bank.

 Funds can be transferred from one account to another in a matter of seconds through these facilities available on the Bank’s mobile app or through net banking. 

People can also check their account balances by these ways without having to go the bank.

Tax Implications

Interest up to ₹10000 earned from savings bank account is exempted from tax under 

Section 80TTA of the Income Tax law.

 This exemption can be claimed by both individuals and HUF’s. However, any amount exceeding ₹10000 will be subject to taxation. 

Risk associated with Savings Bank Account

The Deposit Insurance and Credit Guarantee Corporation Scheme of India (DICGC) 

insures the balance in an account including bank interest up to ₹1 lakh.

 In case of a bank winding up, or becoming insolvent, the bank is liable to pay a maximum of ₹1 lakh per account. For example, suppose Sumit has ₹4 lakh in a savings account in XYZ Bank.

One day XYZ Bank becomes insolvent. The maximum amount that the bank is liable to 

give Sumit is ₹1 lakh. 

Sumit would only receive ₹1 lakh out of his deposit of ₹4 lakh. Savings bank account is not inflation protected.

 If inflation turns out to be higher than the nominal interest rate of the Savings Account, there would be no real returns available.