Savings bank account - Interest is more interesting now
The simple savings bank account has long been considered as a foolish man's investment. An 'intelligent investor' in India would never leave their money lying around in the bank account.
The interest earned on it was negligible. It offered no tax savings. It was like putting your hard earned money in a sack and leaving it under your bed.
Everyone knew it was better to invest the money in a fixed deposit or a liquid fund.
Even when the Reserve Bank of India (RBI) decided to free the savings account interest rates, not many investors were interested.
Things did not appear brighter even when banks started announcing higher interest rates on their savings accounts. Banks like Yes Bank and Kotak Mahindra Bank started to offer very attractive rates on savings account.
Despite this, investors continued to look at fixed deposits and liquid funds as a preferred investment option.
But the Union Budget 2012 appears to have tilted the balance in the favour of savings bank accounts. The Budget has announced a tax exemption up to Rs 10,000 interest earned on a savings account.
This exemption has seriously changed the way people should look at a savings account. Particularly for those who fall in the highest income tax bracket.
Let us assume that an investor invests Rs 150,000 each in a short term fixed deposit (8% interest), a liquid fund (7% returns) and a savings account (6-7% interest).
The pre-tax income for the investor in each of these would be Rs 12,000, Rs 10,500 and Rs 9,000 respectively.
It is quite obvious that the savings account appears to be the least lucrative of the three options.
But let us focus on the post tax returns for each of the income tax categories.
As seen in the chart , as the investor moves up in the tax bracket, savings accounts offer better post tax returns.
But an equally important thing to remember here is to not put your money in any savings account. This benefit or higher returns are only available in cases where banks have increased their interest rates higher than the earlier 4%.
But does it mean that you should go through the pain of switching your bank account to that bank which offers higher interest rates?
Like any other investment, the investor would have to conduct his due diligence before switching the bank account.
There are several other factors which play a key role when it comes to selecting the right bank.
It could be the range of services offered. Proximity to the branch is another importance factor. Sometimes it is also a function of relationships developed over the years. All these things are important when it comes to banking.
But yes, after the tax relief, interest rates would also become an important criteria for selecting a bank.