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Saving Bank Account:Do you know how interest is calculated and more

Savings Bank Accountis the most common account for individuals. We all have at-least one. Savings accounts offer safe place to keep your money. Savings accounts offer easy access to your cash you can make withdrawal easily and quickly i.e your money is liquid .Savings account helps people to put through day-to-day banking transactions besides interest .

Do you know?  Bank  is derived from the Italian word  banco or desk , used during the Renaissance by Florentines bankers, who used to make their transactions above desk covered by green tablecloth.
  • Savings accounts now constitute about 23% of the total deposits in the banking system.
  • As of 31 March 2011, the State Bank of Indi(SBI) had 132 million savings account customers with total savings account deposit of Rs. 3,23,394 crore, which translates into an average balance per account of Rs. 24,499.
  • During 2000-09, savings bank deposits comprised around 13% of total household savings.

Ref:Businessline

Advantages of Saving Account

Safety:Suppose that you have 1000 rupees and you’re not going to use the money for sometime say another one or two months. You could do several things with the money. You could carry it around with you, you could put it under your mattress, or you could put it into bank savings account. If you carry the money around with you, you might lose it. If the money is under your mattress, your house could burn down or be robbed. However, if the money is in bank savings account, your banking institution is responsible for the safekeeping of that money. If the bank burns down, your money won’t go with it, and any reputable bank will not just lose your savings.

Liquidity : Your salary goes straight into the savings bank account. Your housing EMI devours large part of it. Then the cheques you have issued for your credit card payments, utility bills, SIP and so on. Money in the saving bank account is easily withdrawn anddeposited. Interest: When you have money in bank savings account, your money earns interest. That means that you get “paid” for keeping your money in the account. If you were not going to use the money anyway, then getting paid little is better than nothing. If Savings bank account offers 4% interest per annum to the savers(Saving rates got deregulated on 25th Oct 2011 after that few banks revised their rates. More on this later). The interest is calculated on the daily balance in your account. Lets show it by an example

Say on 1st Aug Rs 70,000 is credited into your account. On 5th August after some withdrawls balance in your account is Rs 55000. You had Rs 70,000 for 4 days at 4% per annum. So how much interest did you earn? The formulis:
Interest = Principal or amount in the account * Number of days * Daily Interest Rate

Daily Interest Rate = Interest rate per annum /365 days
At 4% Daily Interest Rate is: 4%/365 = 0.010958%
So after plugging in the values the calculations are as follows:

Calculation of interest

Banks offer many different channels to access their banking and other services such as ATM, Phone Banking, Internet Banking, Mobile Banking.

At present, each bank follows its own schedule including monthly, quarterly and and half yearly for paying interest rates on savings accounts. The Reserve Bank of India(RBI) wants banks to pay the interest to depositors at uniform period of three months.

Changes in Interest Rate and Calculations

Savings deposits interest rate was regulated till Oct 2011. Let’s see how saving rates have changed over the years.
Saving rates over the years
From 2003 to Jul 2011Interest rate was constant at 3.5 %.Before Apr 2010 the interest was calculated on the lowest amount in the bank account between the 10th of every month and the last business day of the month.In Apr 2010 RBI moved to calculation on daily basis(as shown in above example). In 2011 RBI moved the interest rate to 4%. This increase in interest rate meant more money for you but will cost banks close to Rs 6,000 crore. Deregulation: On 25th Oct 2011 Reserve Bank of India(RBI) deregulated the saving bank interest rates. The banks will have to offer uniform interest rate on deposits in saving account up to Rs 1 lakh. For savings deposits above this amount, the banks will be free to offer differential interest rate. After the deregulationYES Bank was the first to hike the interest rate offered on savings bank accounts by 2 percentage points to 6%. Kotak Bank also followed. Remember theadvertisement Vinay Pathak saying it’s not

2% more it is 50% zyada.To find the saving accounts with high rates one can checkout Savings Accounts Interest Rates in Indiat ratekhoj.comQuoting from it:

YES Bank 7.00 % Rate applicable for balances of atleast Rs. 1 lakhs
Kotak MahindrBank 6.00 % Rate applicable for balances of atleast Rs. 1 lakhs
YES Bank 6.00 % Rate applicable for balances of atmost Rs. 1 lakhs
IndusInd Bank 6.00 % Rate applicable for balances of atleast Rs. 1 lakhs
Kotak MahindrBank 5.50 % Rate applicable for balances of atmost Rs. 1 lakhs
IndusInd Bank 5.50 % Rate applicable for balances of atmost Rs. 1 lakhs
Ratnakar Bank 5.50 % Rate applicable for all amounts

But should you change your bank?

As perEconomicTimes:Should you change your bank? Here’s what you need to consider before making the switchchanging bank simply because of deposit rate translates into minute gains only as shown in the picture below:

Ref:Economic Times
It suggests the reasons as to why and when should one change one’s bank.
Why change bank? (Ref:EconomicTimes.com)

Interest earned on Saving Account is considered as Income from other Sources. This needs to be declared in your income tax returns. It is taxed based on your income slabs.People usually ignore this income it is one of common mistakes people make while filing tax returns (Others being: Since tax has already been deducted from their salary, there is no need to file their income tax returns, Omission of income received by minor child. minor child is not required to file separate return of income. However, this income has to be included in the hands of either of the parents, although it might be small amount of bank interest. Reference:Rediff article)

Income Tax Rates/Slabs for Assessment Year 2012-13 (FY 2011-12)

For individuals, HUF, Association of Persons (AOP) and Body of individuals (BOI):

Income Tax Rates/Slabs Rate (%)
Upto 1,80,000 Upto 1,90,000 (for women)

Upto 2,50,000 (senior citizens)

NIL
1,80,001 � 5,00,000 10
5,00,001 � 8,00,000 20
8,00,000 and above 30
Tax amendments for the FY 2011-12 are mentioned below :
  • Increase in base income tax slab of men and senior citizens.
  • Tax exemption limit remains the same i.e Rs. 20,000 on investment in tax saving Infrastructure bonds.
  • set of New Direct Tax Codes have been proposed, which will be active from Financial Year 2011.
  • Senior citizen age reduced from 64 years to 60 years.
  • People above 80 years of age to be included in the newly introduced ‘Very Senior citizen’ category.

From FY 2012-13 under the proposed new section 80 TTA of the Income-tax Act, deduction up to an extent of Rs 10,00 in interest from all the bank accounts shall be allowed to an individual or Hindu undivided family, Interest over Rs 10,000 will be taxed at marginal tax rate of an individual. To earn an interest income of Rs 10,000, one will have to invest

  • Rs 1.66 lakh at 6%
  • Rs 1.42 lakh at 7%
  • Rs 2.5 lakh at 4%

This will be applicable from the assessment year 2013-14 and subsequent assessment years.

Will now(after the tax free return upto Rs 10,000) would one be better off investing in fixed deposits, short-term debt funds or liquid funds? If interest rate is 6% p.a and you put 1.5 lakh an year as shown in the figure(Ref:EconomicTimes-Is a bank account better than FDs, liquid funds?)

Comparing Saving bank account with Liquid Fund and Short Term FDs

How much in Saving Bank account?

Money kept in your savings account should ideally be for two purposes:
  • First, to meet your monthly fixed obligations, including EMI payments on your home, auto and personal loans, utility bill and credit card payments.
  • Second, as buffer to meet contingencies.

Puneet Kapoor, executive Vice President of Kotak Mahindra Bank ,says:The salaried people have monthly source of income, which provides them one window for money inflow. It is advisable to keep twice the total of your monthly obligations in your account. You might want to keep some buffer for unforeseen expenses too . Adds Harsh Roongta,CEO apnapaisa.com:As financial planner, you would want person to typically have at least 3-4 months expenditure, all EMIs, as contingency reserve in liquid form. You can keep months amount in the savings account and the balance in liquid or an ultrshort-term fund .

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Banks at bemoneyaware.com tells more about banksWhy should we save?,What makes money grow?Interest,Compound Interest,What is Loan and Debt?,How to bank,What is Saving account?,What is Current account?,What is ATM and how to use it,History of Banking,Calculator for Simple & Compound Interest

Download chapter on banks and other related topics at download at bemoneyaware.com So how well do you know your saving bank account? Did this post help?


Category: Savings account

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