- Date : 23/01/2021
- Read: 6 mins
Having different types of bank accounts can help you achieve different financial goals. Here’s how.
Having a bank account is one of the basic necessities of life. To inculcate the saving habit in their children, most Indian parents open a bank account for them as soon as they are old enough. On the macro level, bank accounts are a critical tool for mobilising national savings and putting the money to productive use.
Thanks to initiatives like Pradhan Mantri Jan Dhan Yojana, the vast majority of Indians now have access to basic bank accounts that they can use to start saving and investing for a brighter future.
Bank accounts differ primarily in terms of liquidity, accessibility, and of course interest-earning potential. Broadly, they can be classified as demand deposits, time deposits, and non-resident accounts. Other common types include demat and escrow accounts.
Let’s take a closer look at each of these:
While these accounts have no restrictions regarding how often money can be withdrawn, the chief downside is that they offer a low rate of interest. There are two main types of demand deposits – savings accounts and current accounts.
- Savings account: This type of account is best for day-to-day expenses as money can be deposited or withdrawn at your discretion. However, there usually are restrictions on the number of free transactions that can be made each month. Depending on the bank, you may also have to maintain a minimum monthly balance. However, this requirement is waived for basic savings accounts to promote small savings. Interest rates are usually quite low, generally ranging from 3%-5%.
Related: Understanding your savings account
- Current account: This type is meant for users who have a much higher frequency of deposits and withdrawals, such as businesses or commercial establishments. Such accounts do not earn interest. The minimum monthly balance is relatively higher compared to savings accounts. However, current accounts offer overdraft facility which allows access to short-term capital for businesses that need it.
As the name suggests, term deposits cannot be withdrawn for a predetermined period of time. They offer higher interest rates depending on the term, which can vary from a week to several years. Fixed deposits and recurring deposits are types of term deposit accounts.
- Fixed deposit: A fixed deposit is a lump sum investment that usually cannot be withdrawn before maturity unless you pay a significant penalty. The term, once fixed, cannot be changed. However, some banks do offer a premature withdrawal facility if you need to access the money urgently. The rate of interest offered varies as per the term, and you could get up to 5%-7% if you invest for a longer period of time.
- Recurring deposit: A recurring deposit allows the user to invest a predetermined amount at fixed monthly or quarterly intervals. With a recurring deposit, neither the term nor the amount to be invested in each instalment can be changed. However, one advantage is that you can start investing with a smaller amount regularly. The rate of interest for recurring deposits are similar to fixed deposits, ranging from 5%-7% depending on the length of the term you invest for.
Indian citizens or persons of Indian descent living abroad can use non-resident deposit (NRD) accounts for the purpose of saving and investment. These accounts are typically used to remit income earned overseas. However, they can also be used to deposit income earned locally by way of rent, dividends etc. There are three types of NRD accounts.
- Non-Resident External (NRE) rupee account: These accounts are used to hold foreign remittances in India. However, deposits need to be converted into rupees. They can also be opened jointly with Indian residents. Funds can be freely transferred to other accounts meant for NRIs or to local Indian accounts. However, funds earned in India cannot be deposited into NRE accounts. AN NRE account is tax-free, which means that any balance or interest earned on these accounts are not taxable.
- Foreign Currency Non-Resident (FCNR) account: These are used only for term deposits of 1–5 years. NRIs can set up FCNR accounts to directly deposit funds in up to eight currencies such as USD, GBP, EUR, JPY, CAD, AUD, SGD, HKD and CHF. Like NRE accounts, such remittances are non-taxable and are fully repatriable to the country of origin. Funds in these accounts can be transferred to other NRE or FCNR accounts, but local funds are not accepted.
- Non-Resident Ordinary (NRO) rupee account: NRO accounts are used to hold income from assets in India, such as rent or dividends. Indian nationals working in (or migrating to) a foreign country can open NRO accounts. Like NRE accounts, these may be opened jointly with family/others living in India. They can be term or savings deposits, but taxes are applicable according to the relevant tax slab. One key feature of an NRO account is that you can only repatriate an amount up to USD 1 million in a financial year. However, the interest income can be moved to a foreign country after TDS is deducted. Users also have the flexibility to transfer funds between accounts.
Other common bank accounts
- Demat account: Dematerialised (demat) accounts are created to hold securities like shares and stock in electronic form. These accounts need to be opened by intermediaries like banks or stockbrokers on your behalf and allows you to execute trades instantly. In case an NRI wants to open a demat account, they need to open either a repatriable demat account (linked to an NRE account) or a non-repatriable demat account (linked to an NRO account).
- Escrow account: An escrow account is used in case of large transactions (such as real estate) to hold funds before they are finally transferred to the third party. However, an escrow account does not just hold cash- it can also hold securities and other assets.
Related: What is an escrow account?
It’s best to choose a bank account depending on your financial needs and responsibilities. For greater understanding of these accounts, contact your banker for the same.