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Worried about cash lying idle in your savings bank account? Don’t. Your savings bank account may now earn you a higher interest than a term deposit.
After the de-regulation of interest rates on savings bank accounts , a few banks have been offering rates as high as 6-7 per cent on savings accounts. These deposit accounts have been made even more attractive by the Finance Minister in the budget by exempting interest up to Rs 10,000 from taxes.
The tax-saving on interest of upto Rs 10,000 means that savings accounts could now lave a larger interest cheque in your hands than fixed deposits, especially for those of us in the higher tax brackets.
Currently, most banks offer 4 per cent interest on savings bank account but banks such as Yes Bank, Kotak Mahindra Bank, IndusInd Bank and Karnataka Bank offer higher rates.
Yes Bank offers the highest rate for savings accounts - 7 per cent for deposits over Rs 1 lakh and six per cent for deposits less than Rs 1 lakh. Other banks offer rates in the range of 5-6 per cent.
Yes Bank deposit attractive
Take a depositor in 30 per cent tax bracket, for instance. Now that interest upto Rs 10,000 is tax-free, a Rs 1 lakh deposit in savings account with Yes Bank would earn him an interest of Rs 7,000 per annum (assuming rates remain constant at 7 per cent over the year).
To earn similar interest after tax, term deposits need to offer a rate of 10 per cent per annum. However, current short-term deposits of less than three months are providing a maximum of 8.6 per cent.
Deposits of six months to one year duration are offering upto 9.75 per cent interest. But the liquidity offered by savings bank account positions it ahead of the term deposits. Term deposit also reduce the interest payout on pre-mature withdrawal, in case you need the money.
Similarly, for a depositor in twenty per cent tax bracket, the interest rate on term deposit should be 8.6 per cent to provide similar return as a savings bank deposit.
Get more from savings accounts
Depositors today have multiple savings bank accounts from which they earn interest. These depositors can maintain minimum balance in these accounts and transfer funds to new savings bank accounts which earn better rates.
This allows depositors to maximize returns in their savings account. Even if the interest rates decline, the short-term deposit rates will also fall. Therefore this may not reduce the attractiveness of savings bank account.
Word of caution
Depositors, however, have to note that the tax savings on interest is only upto Rs 10,000. This means that at 6 and 7 per cent rate, the maximum deposit on which one would get tax-saving is Rs 1.66 lakh and Rs 1.42 lakh respectively.
Deposits over and above Rs 1.66 lakh will be taxed at marginal tax rate of an individual. Therefore, a sweep facility, that automatically puts excess in your savings bank account into a term deposit, can be used for excess cash above Rs 1.42 or 1.66 lakh. This will enhance the overall returns of your deposits while providing liquidity at the same time.
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