Savings Account 101: Definition, Types, How to Open a Savings Account and More

There are various types of investment avenues in India, each with its set of features and benefits. Among various investment vehicles one such avenue is savings account. With a savings account, you can invest your surplus cash and also earn annual interest on it, that too tax free.

But what exactly is a savings account? In this blog, we will delve deeper into understanding the concept of savings account, its types, advantages and disadvantages of having a savings account and much more.

What is a savings bank account?

A savings account is a type of liquid deposit account offered by banks and post offices in India. You can invest your idle funds into the account and get the benefit of liquidity and returns. The benefit of having a savings account is that you can make withdrawals and deposits at your discretion. Moreover, you can also earn interest on the balance that you maintain in your account. 

• Savings accounts are liquid investment avenues where you can invest your idle funds
• You can withdraw and deposit at your discretion and earn returns on the balance
• You earn a tax deduction on the interest earned from the savings account

Types of savings accounts

There are different types of savings accounts in India. Some of the most commonly available ones include the following –

• Regular savings account

Regular savings accounts are basic accounts with a specified interest rate. These accounts require a minimum balance at all times. If the balance is not maintained, a small fine will be levied. The minimum balance for each bank varies, therefore check the minimum balance limit with the bank before opening a savings account.

• Senior citizen savings account

These accounts are specifically available for senior citizens, i.e., individuals aged 60 years and above. These accounts pay a higher interest rate, and the minimum balance criterion is also relaxed.

• Salary savings account

A salary savings account is offered to salaried individuals. Many salary accounts are zero-balance accounts that do not require any minimum balance. However, if no salary is credited for three or more months, the account gets converted to a regular account with a minimum balance requirement. 

• Women savings account

As the name suggests, these accounts are offered specifically to women. Some perks include higher interest rates, lower minimum balance requirements, discounted charges, etc. 

• Children’s savings account

These accounts are opened in the name of minors, i.e., children aged below 18 years. However, the account is supervised and managed by an adult. 

How do savings accounts work?

You can open a savings bank account individually or jointly. A deposit is required to start the account, which varies from bank to bank. Once the account is opened, you must maintain the minimum balance (if required). You can deposit funds into the account and make withdrawals freely. You also earn interest on the balance that you maintain during each month. 

Savings accounts also offer you the facility of a cheque, passbook, debit card, lockers, etc. You can use them to manage your account. 

Advantages of savings account

The advantages of a savings account are as follows –

• Highly liquid as you can withdraw the money any time
• Opportunity to earn interest on idle funds
• Easy opening and maintenance
• Facilitates payments and fund transfers
• Beneficial for online transactions
• Tax benefit (The interest income earned is allowed tax deductions) 

Disadvantages of savings account

Some of the demerits of a savings account are as follows –

• Penalty on non-maintenance of balance
• Low-interest rates compared to other avenues
• Fees on debit cards and other services
• Requirement of a minimum balance

What is the interest on a savings account?

The interest on a savings account depends on the bank or post office. It usually starts from 3% and can go up to 7% per annum.

How to choose the best savings bank account?

To choose the best savings account, consider the following parameters –

• The type of account that is suitable for you. For instance, if you are female, a women’s savings account would be better.
• The interest rate – the higher, the better. It is not always ideal to go for the highest interest rate as the banks providing such high rates are usually second-tier banks trying to attract deposits. Consequently, they have their own risks involved. Example: HDFC Bank will provide only a 3% rate while Yes Bank may provide a higher rate, maybe close to 5-6%, and we know how massively these banks differ.
• The charges – the lower, the better
• The balance requirement – the lower, the better
• Added facilities like debit cards, lockers, chequebooks, etc. – the more, the merrier

How to maximise earnings from a savings account?

Some tips to maximise savings from a savings account are as follows –

• Opt for an account that pays the highest interest rate
• Maintain a steady balance in your account to avoid non-maintenance penalties 
• Use the rewards offered by your debit card
• Have multiple savings account
• Cut down on unnecessary expenses to reduce withdrawals 

Is the interest from the savings account taxed?

The interest income is tax-free up to Rs. 10,000 under Section 80TTA of the Income Tax Act, 1961. For senior citizens, the tax-free limit is Rs. 50,000 under Section 80TTB. Excess interest income, however, would be taxed in your hands at your slab rates. 

How to open a savings account online?

You can visit the bank’s official website to open a savings account online.

You would have to fill up an online account opening form, upload your documents and make the initial deposit. Financial institutions have also launched mobile applications that allow you to open a savings account online through your smartphone. 

Documents required to open a savings account

The following documents would be required to open a savings account –

• Identity proof
• Age proof
• Address proof
• Aadhaar card
• Recent photographs

How much balance should you maintain in your savings account?

The savings account balance requirement depends on the financial institution with which you have opened the account and the type of account. For instance, a salary-saving bank account does not require any minimum balance. However, for other accounts, the balance might start from Rs. 500 or Rs. 1000 and go up. 

What is the frequency of interest credited to the savings account?

Usually, the savings account interest rate is credited at the end of every quarter.

How is the average monthly balance calculated for a savings account?

The Average Monthly Balance (AMB) is calculated by adding together the closing balance of the account every day. This aggregate amount is then divided by the number of days in the month.

AMB = Sum of the closing balance of each day/number of days in a month

Does non-maintenance of the average monthly balance of a savings account attract charges?

Yes, if you don’t maintain the average monthly balance, you would attract a charge which would be debited from your savings account balance.

Conclusion

Saving accounts are liquid bank accounts that allow you to invest funds and earn interest. These accounts are easy to open and offer a decent interest income. You can open a savings account online or visit a bank to do the same. Remember that your interest income may attract taxes. Consult with your advisor to choose the most suitable savings account. 

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