Banking Awareness : Types of Bank Accounts

There are three types of Accounts in Bank

1. Demand Deposits
2. Time Deposits
3. Accounts for NRI/PIO

Demand Deposits

1. Current Accounts
2. Savings Accounts together are known as demand deposit, since they are payable on demand.

Current Accounts

In this type of account depositor can withdraw money whenever he requires it. Generally, no interest is paid on account deposits because bank has to keep the cash ready at all time to meet the requirements of the depositor. Mostly, current accounts are opened by businessmen or institutions who require to deposit/withdraw money several times in a day. Current account deposits are called demand deposits also as the debtor (bank) has to pay off the debt on demand either to the depositor himself or to anyone else whom he authorises by writing a cheque. It is a liability for the bank, but an asset for the depositor.

Salient Features of Current Account –

• Firms, companies and businessman are eligible to open account.
• Current bank accounts are operated to run a business.
• It is a non-interest bearing bank account.
• No limit on either the number of transactions or the maximum amount of transactions
• Overdraft facility (short term loan facility) is available
• It needs a higher minimum balance to be maintained as compared to the savings account.

Saving Accounts

Saving accounts are basically for individuals and small businesses. You may deposit Rs.1000 today. Tomorrow you may require Rs.5000, you may withdraw Rs.5000 tomorrow. Similarly a grocery shop owner may deposit Rs.10000 today and in need he may withdraw Rs.5000 tomorrow. This is not for large businesses. These accounts can be opened individually or jointly or by Hindu undivided family (HUF) .

Another important point is, this is normally intended for person above 18 years of age but person between 10 to 18 years can also open individually without guardian but with some restrictions. Minor accounts i.e below 10 years accounts has to be opened with guardian only.

Salient Features of Saving Bank Account –

• Saving Bank account is basically for individuals and small businesses.
• The objective of saving bank account is to promote savings.
• The rate of interest payable is very nominal on saving accounts. It is vary from bank to bank.
• Minimum Balance – (varies from bank to bank) – Normally Rs. 500 (without cheque book facility)
• Normally Rs. 1000 (with cheque book facility).
• Some banks like – HDFC, ICICI Bank – allow premium savings account deposits with minimum balance of Rs. 5000 or Rs. 10000.
• Bank offer zero balance accounts previously known as No-frills accounts / BSBDA and now under PMJDY.

Note:

• If you go to some bank like ICICI or HDFC they may specify 10000/- min. balance in a metropolitan area, 5000/- in small towns, 2000/- in rural areas. So the minimum balance may differ.
• If minimum balance is not maintained banks may impose penalty.

HUF-

1. Hindu Undivided Family (‘HUF’) is treated as a ‘person’ under section 2(31) of the Income-tax Act, 1961 (herein after referred to as ‘the Act’). HUF is a separate entity for the purpose of assessment under the Act.
2. Under Hindu Law, an HUF is a family which consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. An HUF cannot be created under a contract, it is created automatically in a Hindu Family.

• Jain and Sikh families even though are not governed by the Hindu Law, but they are treated as HUF under the Act.

Difference between Saving Account and Current Account

CASA RATIO – The Ratio of the deposits in the form of Current Account and Saving Account to the total deposits is known as CASA Ratio (normally expressed in %). More CASA ratio banks are in the safe zone. ICICI, AXIS, HDFC & SBI have CASA Ratio more than 40%.

TIME DEPOSITS

Fixed Deposit and Recurring Deposit – these deposits are TIME deposits (as for specified period agreed between you and the bank). In these deposits interest paid by the bank is slightly higher than SA.

Note: If you are depositing the money for 1 year you will get the money after 1 year. But if you withdraw before the agreed period i.e before 1 year, you have to pay penalty. Cheque book facility is not available for time deposits.

Fixed Deposits-

A deposit of money that pays higher interests than a savings account, but imposes conditions on the amount, frequency and/or period of withdraws. It is also called time deposit. All these accounts are secure and carry a government guarantee.

Salient Features of FD –

• FIXED DEPOSIT can be operated for a tenure ranging from 7 days to 10 years in Indian banking system.
• Not payable on demand and do not enjoy cheque facility.
• Interest rate may vary from bank to bank.
• Interest rates will be slightly higher for senior citizens (60 + years of age)
• Premature withdrawal of the deposits is possible, but it attracts penalty at the rates varying from 0.5% to 1.5% .
• If the deposits are Rs. 1 Crore or more, they come under bulk deposits and interest rates may vary further.
• Loan facility is available on principal as well as on interest.

But in FD you have to pay income tax. If your interest income exceeds Rs. 10000 banks will deduct TDS (Tax deducted at source) i.e banks itself will deduct income tax.

Recurring Deposit –

Recurring Deposit is a special kind of Term Deposit offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits.

The main objective of recurring deposit account is to develop regular savings habit among the public.

Salient Features of RD –

• In India, minimum amount that can be deposited is 10 at regular intervals.
• The period of deposit is minimum six months and maximum ten years. (Minimum tenure varies banks to banks. Some banks allow minimum tenure in RD for 3 months.)
• Minimum balance can be deposited under RD is 500 per month and thereafter in multiples of Rs 100/-
• The rate of interest is higher.

ACCOUNTS FOR NRI/PIO

1. Non Resident External Rupee Account
2. Non Resident Ordinary Account
3. Foreign Currency Non Resident Account

NRE (Non Resident (External) Rupee) Account

NRE is a term assigned to bank accounts available to NRI’s who currently reside outside India.

• An NRE account can be a saving, current or a fixed term deposit account.
• It is a Rupee denominated account which means funds in the NRE account are maintained in Indian Rupees. This means that the foreign currency is converted to Indian rupees at the prevailing foreign exchange rates when the money is deposited into the account.
• The primary source of funds deposited into NRE accounts must be from your earnings abroad. In other words, you cannot deposit money from sources in India such as house rent or pensions in this account.
• Both Principal and Interest can be repatriated (can be converted to any foreign currency) / transferred out of India. The conversion back to foreign currency is done at the prevailing forex rates.
• Principle as well as Interest income earned on the money in an NRE account is non-taxable in India. Also there is no wealth tax. This tax exemptions is available only for an NRE Account held by an individual and not for those maintained by OCBs (Overseas Company Bodies)
• Interest rates on NRE Savings deposits are the same as the rates applicable to domestic savings deposits.
• You can only have other NRIs as joint account holders on NRE accounts. Resident Indians cannot be joint account holders in NRE accounts with NRIs.
• You cannot deposit Local rupee fund i.e Indian Currency in to this account.
• Nomination is allowed for NRE accounts.

NRO (Non Resident Ordinary) Account : 

NRO is a term assigned to bank accounts available to NRI’s who currently reside outside India

• An NRO account can be a saving, current or a fixed term deposit account.
• Regular bank accounts of a person, who becomes an NRI, also get converted into NRO accounts.
• It is a Rupee denominated account which means funds in the NRO account are maintained in Indian Rupees. This means that the foreign currency is converted to Indian rupees at the prevailing foreign exchange rates when the money is deposited into the account.
• The source of funds deposited into NRO accounts can be from India or abroad. An NRO account can hold income earned in India (such as dividends, pension or rental income).
• Funds cannot be transferred from an NRO account to an NRE account.
• An NRO account can be held jointly with another NRI or with a resident Indian.
• Principle amount cannot be repatriated outside India in foreign exchange, without prior permission of the Reserve Bank of India. Only current earnings are repatriable.
• The interest earned on deposits in an NRO account is taxable.
• Interest rates on NRO Savings deposits are the same as the rates applicable to domestic savings deposits.
• Nomination is allowed for NRO accounts.

Note-If the NRI holding the NRE account or NRO account returns to India and becomes a resident of India, the NRE and NRO accounts get converted into a regular resident account.

FCNR (Foreign Currency Non Resident) Account

The term FCNR refers to fixed-term deposit accounts available to NRIs and PIOs. FCNR accounts are only in the form of term deposits of 1 to 5 years. FCNR accounts have to be opened and maintained in the foreign currency itself. FCNR accounts can be opened in five different currencies viz., US dollar, Pound Sterling, Euro, Japanese Yen, Canadian Dollar and Australian Dollar. The source of funds deposited into FCNR accounts have to be from sources abroad. They can also be from your other NRE accounts. The principal amount and the interest are fully repatriable. Interest income earned on the money in an FCNR account is non-taxable in India. FCNR is free from currency risk as it keeps the money in same currency.

What are the accounts that a tourist visiting India can open?

An NRO (current/ savings) account can be opened by a foreign national of non-Indian origin visiting India, with funds remitted from outside India through banking channel or by sale of foreign exchange brought by him to India. The balance in the NRO account may be paid to the account holder at the time of his departure from India provided the account has been maintained for a period not exceeding six months and the account has not been credited with any local funds, other than interest accrued thereon.