How to earn higher returns on savings accounts

Wealth can only be accumulated by the earnings of industry and the savings of frugality.

John Tyler

What happens in a country, when interest rate on savings accounts falls below the inflation rate (4.1%)? Add to it the fact that interest on savings account is taxable as per income tax slabs applicable to the investor.

This is being widely discussed since State Bank of India dropped interest rates on savings accounts to 2.5% p.a. We are not likely to see negative rates in India, but the returns on a savings account become negative in case of SBI savings accounts, if the inflation effect and tax is taken into account.

A lockdown crisis happens to be a time when one needs to maintain liquidity for exigencies. Fortunately, there are new banks which need customers, and old banks which do not want to lose their clientele. They lack the luxury of a dominant market share, and offer high rates to keep their share of the pie intact.

BANKS OFFERING SAVINGS INTEREST RATE OF 4% OR ABOVE

NAME OF BANKINTEREST RATE ON SAVINGS ACCOUNTS
RBL Bank5.00% – 6.75% p.a.
Yes Bank5.00% – 6.25% p.a.
Kotak Mahindra Bank4.00% – 6.00% p.a.
Lakshmi Vilas Bank3.50% – 6.50% p.a.
IndusInd Bank4.00% – 6.00% p.a.
Bandhan Bank4.00% – 7.00% p.a.
IDFC First Bank4% p.a.

Source: bankbazaar.com

Most other banks like ICICI, HDFC and Axis offer 3.5% p.a. on savings accounts.

SHOULD ONE OPEN MULTIPLE SAVINGS ACCOUNTS?

The savings account which is your main expenditure account, and/or receiving account for interest, dividends, maturity proceeds, sale proceeds etc. should ideally not be changed.

One can open an additional savings account which offers a higher interest rate, to park surplus funds, and keep transferring the amount needed for expenditure to the main account. Minimum balances need to be maintained.

HOW DOES ONE OPEN A NEW SAVINGS ACCOUNT IN A LOCKDOWN?

Many bank websites show an online account opening facility. It is about placing a request online, and letting a Relationship Manager visit you. It does not work well with most banks, and not likely to work well with banks presently working with 50% staff strength. Movement of people is restricted and the bank RM may not be allowed to enter the premises where you live.

Here are savings accounts which can be opened online.

DIGIBANK BY DBS

This is a savings account offering high interest rates.

  • Balances up to Rs. 1 lakh earn an interest rate of 4% p.a.
  • Balances in the range of Rs. 1 lakh to Rs.2 lakhs will earn 7% p.a. on the incremental amount.
  • Balances in the range of Rs. 2 lakhs to Rs. 5 lakhs will earn 5% p.a. on the incremental amount.
  • Interest rates on balances above Rs. 5 lakhs go back to 4% p.a.

Visit https://www.dbs.com/digibank/in/default.page

IDFC First Bank

IDFC First Bank provides facilities of opening a Basic Savings Bank Deposit Account (BSBDA) online, by uploading documents. A BSBDA is a limited account which allows a maximum balance of Rs.50,000/- p.a., and a maximum annual turnover of Rs. 1 lakh.

The interest rate offered is 4% p.a., and BSBDA account holders can open fixed deposits and recurring deposits.

Since IDFC First offers attractive rates on fixed deposits, this account can become a pathway to open fixed deposits online without visiting a branch.

Visit https://onlineaccountopen.in/open-account/zero-balance-savings-account/idfc-bank-zero-balance-account/

FLEXI-DEPOSITS

This is a facility one should consider to maintain adequate liquidity and earn higher interest on surplus funds. These accounts can be opened through net-banking, if you have a savings account, after checking bank-specific terms and conditions.

Flexi-deposits come under various brand names.

  • SBI Multi-Option Deposit Scheme
  • Axis Encash 24
  • Union Flexi-Plus savings deposit
  • AB Freedom (flexi) Deposit Scheme
  • IndusInd Sweep In/ Sweep Out Deposit

It is a combination of a savings account and fixed deposit.

The customer is expected to maintain a prescribed minimum balance in the savings account. Funds in excess of this minimum amount are automatically transferred to a fixed deposit (tenor and rate of which is determined at the time of account-opening), subject to the following terms and conditions:

SWEEP-IN

Fixed deposits are created for the minimum amount prescribed for a FD. RBI prescribes Rs.5000/- as the minimum amount, while some private sector banks maintain it at Rs.10000/-. Surplus amounts lower than this will not be transferred.

Fixed deposits are created in round figures only, rounded to the nearest ‘000 or 5000 as decided by the bank. Odd amounts will remain in the savings account

The rate of interest and tenor of all FDs created will be uniform

SWEEP-OUT

In case you need funds, the bank withdraws money from the fixed deposit, rounded to the nearest ‘000 or 5000, to honour your cheque or ATM or online withdrawal.

If the FD amount is withdrawn in a period less than 7 days, no interest is payable on it, as the minimum period prescribed for a fixed deposit is 7 days. In this case, the customer neither earns interest on the savings account nor fixed deposit.

By and large, penal interest is not charged on withdrawal from a flexi-deposit, but read terms and conditions offered by the bank. Interest is paid is at the rate applicable to the period for which funds have remained with the bank, as on date of start of deposit.

Some banks may offer only sweep-in facility, but not sweep-out.

Note:

SBI Flexi-Deposit is the name given to a flexi-recurring deposit where amount of instalments can vary from Rs.500/- to Rs. 5000/-. Maximum deposit amount is Rs.50000/- in a financial year, and minimum period of deposit is 5 years. Not recommended to block money for 5 years, since prevailing interest rates are low.

It is not to be confused with the generic flexi-deposit product.

FIXED DEPOSITS

Presently, new banks are offering high interest rates on fixed deposits. This includes small finance banks which do not have a nationwide branch network.

The table below gives highest FD rates offered by some banks compounded quarterly (referred to as yield on some platforms), as updated by Economic Times on 9th April, 2020

Source: https://economictimes.indiatimes.com/wealth/invest/top-5-bank-fd-rates/articleshow/66863542.cms

Tenor of I year
Bank Rate of interest compounded quarterly
Ujjivan Small Finance Bank 8
IDFC First Bank 7.25
RBL Bank 7.2
IndusInd Bank 7
AU Small Finance Bank 7
Tenor of 2 years
Bank Rate of interest compounded quarterly
Ujjivan Small Finance Bank 8
AU Small Finance Bank 7.50
DCB BANK 7.3
IDFC First Bank 7.25
RBL Bank 7.25
Tenor of 3 years
Bank Rate of interest compounded quarterly
AU Small Finance Bank 7.77
DCB BANK 7.6
Ujjivan Small Finance Bank 7.5
IDFC First Bank 7.25
RBL Bank 7
Tenor of 5 years
Bank Rate of interest compounded quarterly
DCB BANK 7.5
AU Small Finance Bank 7.5
IDFC First Bank 7.25
RBL Bank 7.15
Ujjivan Small Finance Bank 7

Some people may not be familiar with the names of new banks, and do not place trust easily.

  • The bank can be considered reasonably safe, ifthe capital adequacy ratio is15% and above (figures are available on the bank website in Published Results for the last quarter) can be considered to be safe.
  • It is covered under the Deposits Insurance and Credit Guarantee Corporation (DICGC) scheme.
  • Non-performing assets are below 5%
  • Market reputation of top management

Some may argue that balance sheets can be manipulated and I concur with the view. In case of doubt, place deposits of less than Rs. 5 lakhs in a single account-holding pattern. DICGC insures deposit amounts up to Rs.5 lakhs in case of bank failure. It makes sense to spread fixed deposits in several banks.

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