A leading Indian bank recently slashed interest rate on Savings Account from 4% to 3.5% for deposits up to Rs. 1 crore. The interest rate on savings deposit has always been relatively lower than other financial instruments available in the market such as liquid funds. The recent rate cut has caused a trigger for people to look for other alternatives to a Savings Account.
Why do people park their money in a Savings Account?
Savings Accounts are popular because of easy accessibility of cash and being low risk in nature compared to other investment instruments. Interest in Savings Account is calculated on an everyday basis and credited every quarter, unlike FDs, wherein the interest is compounded on a quarterly basis. Interest earned from savings account up to Rs. 10,000 is exempted from income tax. There is no penalty for withdrawal of funds from Savings Account.
What are the alternatives to low-interest Savings Account?
Some of the new banks that are awaiting penetration of more customers are still offering a high-interest rate on savings deposit. You could move your money to these new banks to earn a more lucrative return on savings deposit. Payment banks could be a good option to park your money with good returns. You can deposit up to Rs. 1 lakh with interest rate ranging from 4% to 7.5%. These banks can issue debit cards and cheque books, but cannot offer any credit product. You could also make use of sweep-in Fixed Deposit products. The sweep-in facility transfers your fund deposited in savings deposit to FD on crossing the set limit. You earn a higher interest on the fund in Fixed Deposit. Say, you set a threshold at Rs. 20,000 in the sweep-in account. On depositing more than Rs. 20,000, the surplus amount would get automatically shifted to the FD account in multiples of Rs. 5,000. However, the interest earned on this fund would be taxable as per your tax slab. Liquid funds offer an attractive alternative to Savings Account. The return you get from liquid funds is at around 7% to 8% per annum. The interest income is taxable as per the applicable tax slab. While long-term capital gain on liquid funds is taxed at 20% with indexation, the short-term capital gain is taxed as per the applicable tax slab. And, as the name suggests, you can withdraw from the fund in a day's notice. The fund can be redeemed by requesting the Mutual Fund company to do so. The amount is credited to the bank account in a day’s time.
Which one to pick?
Banks offering a high-interest rate on savings deposit could eventually follow the lead of the other banks cutting rate. So, you could keep a small portion of your fund in a high-interest Savings Account, but keep the rest in a sweep-in Fixed Deposit or a liquid fund. Make sure the fund you keep in the savings deposit is meant for use sooner than later. Among all options, liquid funds provide you with better tax efficiency along with good returns. Explore these options for high-potential returns with low-risk investments. (The writer is CEO, BankBazaar.com)
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