Compared to the exciting world of stocks and mutual funds, savings accounts can seem awfully boring. However investors are ignoring a tidy little source of extra income when they ignore savings account rates. This is amplified by the favourable taxation that savings accounts enjoy. Read on.
Competitive Rates on Savings Accounts
In the past, the savings account interest rate was fixed by the RBI. It stood at 3.5% for an extended period before the RBI deregulated the rate in 2011. However in today’s world, savings account rates go up all the way to 7%, almost on par with FD rates and in fact better than FD rates for several tenures. A key number to note is Rs 1 lakh. Due to RBI regulations, banks can set more competitive rates for savings account balances of Rs 1 lakh and more. Here are some relatively juicy savings account rates, offered by different banks:
|Bank||Savings Balances below Rs 1 lakh||Savings Balances of Rs 1 lakh – 1 crore|
|Digibank by DBS||6%||7%*|
For Balances from Rs 1 lakh to 2 lakh. The rate is 5% for Rs 2-5 lakh and 4% for 5 lakh to 1 crore. Source: bank websites as on 16/10/2018
How is savings account interest calculated?
It is calculated on the daily balance in the savings account. In other words, your account balances earns interest each day. For instance, if you have kept Rs 300,000 in a savings account with interest rate of 5% for 20 days, it will earn interest of Rs 1,027. This amount is paid out to you on a quarterly basis. In other words, if you have maintained this balance in your account from 1st August to 20th August, you will have to wait till 30th September (end of the quarter) to receive Rs 1,027 in this example.
Why should you care about savings accounts?
Under Section 80 TTA of the Income Tax Act, 1961 you get a tax deduction for interest earned on savings account balances up to Rs 10,000 per annum. Senior Citizens get the same exemption for both savings account interest and FD interest under Section 80 TTB. However, everyone else gets this only on savings account interest. To generate an interest income of Rs 10,000 at 5% you would need to maintain a minimum balance of Rs 2.5 lakh for the entire year. In other words, the exemption does not get easily used up. There is no corresponding exemption on FD interest and FD interest is fully taxable. This reduces the post tax yield of FDs and can make it lower than savings account interest. Here is an example:
You make a Rs 1 lakh FD for 1 year at 7%. Hence you get Rs 7,000 in interest. Assuming you fall in the 30% tax bracket, Rs 2,100 will be paid in tax and you will only get Rs 4,900. Now instead, assume you keep Rs 1 lakh in a savings account at 5%. Hence you get Rs 5,000 in interest. No tax is payable on this amount because it is below Rs 10,000. As a result you have got more interest (Rs 5,000 post tax) by keeping the money in your savings account compared to an FD (Rs 4,900 post tax).
Second, no TDS is deducted on savings account interest. This allows you more time before you pay a tax due on savings account interest and also spares you the hassle of claiming refunds. This is different from FD interest where TDS is deducted on accrued FD interest even if the same has not been paid to you. Last but not least, savings accounts are highly liquid. They have no premature termination penalties. You can use them in emergencies or for paying monthly bills or even your mutual fund SIPs.