All of us have, and indeed need “Savings account” and with UPI and mobile app it is used every day. Savings account serves multiple purposes and comes loaded with features – net banking, mobile app, cheques, debit card, UPI payments, ATM withdrawal, automated bill payments, and more.
Savings Accounts offer high liquidity, meaning that we can access our money whenever we need it without penalties or without waiting. This “ease of use” could be a disadvantage as studies have proven that while using physical cash, we tend to be conscious of our spending and stick to budgets, whereas digital payments lead to impulsive shopping and overspending.
Don’t keep large amount of money in the savings account. Maintain around 2-3 months expenses – including the ECS/standing instructions you have set up. ECS or Standing Instructions is a scheduled payment order/ instruction you can setup online to make regular funds transfer on a specific date. Using it to make monthly bill payments can ensure that you pay on time and do not incur penalties.
Move the balance from savings account to instruments like fixed deposits which offer better returns, especially if the amount is large and you do not foresee any immediate need. One thumb rule is to maintain 6-month expenses – as emergency fund – in the most liquid asset. For that, you can consider Liquid funds as an alternative to savings account.
Minimum account balance (MAB)
While deciding on the amount to be maintained in your savings account, do not forget the “minimum account balance” (MAB) required. If the MAB is not maintained, your bank will charge a penalty.
When opening a savings account, choose the bank and account type after taking into consideration the interest rate, MAB, features that are free-of-charge and the perceived quality of the digital banking.
Ask for MAB requirement – as it varies from ₹ 2000/- to ₹ 1,00,000/- or even more and depends on location (metro cities having the highest MAB). Typically, savings account interest rate is about half of the ones you can get from Fixed deposits in the same bank. Assuming that you are paid 4% less in savings account, an MAB of ₹ 1,00,000/-, you are losing around ₹ 4,000/- interest annually.
Unlike fixed deposits, TDS (Tax deducted at source) is not applicable for Savings Account. But that does not mean that the interest is completely non-taxable. Under section 80tta of Income Tax Act, interest from savings account (can be sum of multiple accounts) up to the limit of ₹ 10,000 can be deducted while doing tax calculations. In other words, interest from savings account up to ₹ 10,000 is non-taxable.
My experience has been that public sector banks have lower MAB requirement – but charge for debit card annual maintenance, one-time ECS mandate setup, cheque book delivery etc. And private banks with larger MAB, provides these features up to a limit free-of-charge. Digital convenience used to be one factor that was in favour of private bank, but in the recent years the public banks do offer a good online and mobile banking. Some banks do offer a zero-balance account with only the basic features.
To attract customers, some banks offer zero-balance Salary account with wide range of features. If your savings account is where your salary gets credited regularly, talk to your bank and see if you can convert it to zero-balance account.
Savings account is not an investment
What are savings? Savings is the amount of money left over from income after expenditures. You use safe, liquid, low-interest, negligible risk instruments like savings account to do that. Savings is meant for meeting any short term or urgent needs.
What is an investment? Investment is about making your money grow. You can use your money to invest in various financial (mutual funds, shares, fixed deposits etc.) or non-financial products (real estate, gold, silver etc.) with the expectation of earning higher returns over a period of time. Investments generally have low liquidity, a bit of risk depending on the type of asset. As SEBI points out, “While investing one should always remember that return on investments may rise or fall over time and it is quite normal for that to happen.“
It is true that compared to keeping the amount as cash at home, savings account offers some interest. In addition to being the lowest interest rate, the banks also keep changing it and do not even have to inform the customers.
If bank is paying interest and if your money is growing (however slowly), why is it not an investment? The answer is “inflation”!
Inflation is the decreasing purchasing power of money due to general increase in price of goods and services. For example, take the price of a cup of coffee/tea. What you pay today is higher than what you did couple of years ago. If you are the one managing grocery shopping at home, you can see the effect of inflation within a month – especially for packaged items.
Current inflation rate in India is around 5% whereas savings account interest rate is around 3%! So your money kept in savings account is losing its value. Let me demonstrate it using a graph.
And remember there were times – 1990, 1991, 1996, 1998 – where inflation rate was double-digit in India and it crossed 25% in 1974. The point is while it seems a thing for government and economists to worry about, inflation has a major effect in our lives and ability to maintain/improve our lifestyles.
My recommendations regarding Savings account are:
- Check out the minimum balance, charges and penalties associated with your savings account – it could be an eye-opener.
- If you are going to open a new Savings account, consider all factors before choosing.
- Do not have too many savings accounts – as the minimum balance required increases and you end up paying for debit card maintenances (even if you don’t use it) and other charges.
- If your savings account is salary account, ask your bank and convert it to zero-balance account.
- Use savings account ECS/scheduled transaction feature to automate regular bill payments.
- Maintain around 2-3 months expenses (plus MAB) in the savings account. But remember to ensure that the value does not go down below MAB or insufficient to meet your recurring payments. A bit of discipline needed!
- Do not think of amount in savings account as investment. Realize that the value of money kept in savings account is reducing due to inflation.
- While filing IT returns, make sure you use 80tta to get the deduction for interest from savings account.
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