FAQs on different bank deposits and what should you choose

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Have you ever wondered what to choose while opening an account in the bank? Having a bank account inculcates the habit of saving and you also end up getting returns. It is wise to keep your money in a bank account than keeping it in our houses.

To make it simple for you, Money9’s Hemanshi Tewari speaks to Raj Khosla, Founder and MD, MyMoneyMantra.com, who will answer some commonly asked questions on different bank deposits.

Can you grow your money by just making a deposit in your savings account?

The deposits in a savings account yield a nominal interest rate compounded daily, monthly or quarterly as per the financial institution. However, to grow your money, the rate of interest should be more than inflation. Currently, retail inflation in India is around 4.6% and the Saving Accounts of top commercial banks yield 3.50% to 3.75% p.a. on the minimum average balance maintained. Thus your money does not really grow if you park entire income/savings in a deposit account of the bank.

Savings Accounts should ideally hold just enough funds required for regular monthly cash flows and a part of an emergency fund as there is little or no restriction on withdrawals. To grow your money in real terms you should invest in a mix of equity and debt options as per your financial goals and risk appetite.

For what purposes, using a savings a/c can be beneficial?

A Savings Account is a basic bank account that allows ease of banking for day-to-day financial needs such as setting up standing instructions, online transactions etc. At the same time, you also enjoy multiple benefits like internet/ mobile banking, Debit Card, and pre-approval / offers on other bank products like bank locker, personal loans, credit cards etc.

Can FD be a good savings option?

A Fixed Deposit (FD) offers better returns than savings account and consolidates funds for a predefined tenor at a fixed rate of return, i.e. from 10 days to 10 years. This is why FD is still considered as one of the popular investment options in rural as well as the urban market.

Particularly for senior citizens and those who need safe and regular monthly income from their bank deposits, FDs are an efficient tool to create a short term reserve for three to five years and for an emergency fund. Broadly an FD can be a good saving option for an investor who is risk-averse and is in need of guaranteed returns for some definitive requirements.

However, in the current falling rate regime, FDs are not very lucrative. The best approach is to use FDs as a part of your portfolio along with a mix of debt and equity funds and earn a higher return. Adding market-linked options in the portfolio helps to score over the inflation rate & to achieve consistent capital growth.

 Why and for whom recurring deposit a/c can be beneficial?

To create a guaranteed long term corpus for fixed goals with small monthly deposits, RDs or recurring deposits are best advised. However, one can also start MF SIPs in debt and equity funds in a similar fashion and earn better yields. Investments in RDs, FDs & PO schemes offer assured returns with no risk at all, whereas MF investment can generate higher returns over a larger period of time with market risk.

How are four types of accounts — current, savings, recurring and FD accounts — taxed?

Under section 80TT(A) of Income Tax Act,  Individuals/HUFs are eligible for standard deduction on interest income up to Rs 10,000 on deposits in savings bank accounts. Whereas, under section 80TT(B) senior citizens are eligible for standard deduction on interest income up to Rs 50000 on deposits in saving account or fixed deposit. The interest income is recorded as ‘income from other sources’ in the Income Tax Return (ITR) and beyond these thresholds will attract income tax at applicable rates.