More interest on savings account

Your savings bank account can earn you more interest now. The Reserve Bank of India has issued a directive in its policy document that will change the way interest is paid on the minimum amount present in a savings bank account each day.

At present, the interest (3.5 per cent per annum) is calculated on the minimum balance held in the account from the 10th of each month to the last day of that month. So, if a bank customer has Rs 10,000 in his savings account one day and then Rs 100 another day, the minimum balance taken for calculation of interest in the period would be Rs 100.

But, from April 1, 2010, the interest paid on the savings account will be on the daily minimum balance. In other words, even the Rs 10,000 balance in the savings account will earn the customer interest, even if it is withdrawn later.

As per the new directive issued by RBI, only commercial banks will need to follow this new method of interest payment on savings accounts. Commercial banks include all banks other than co-operative ones.

RBI had received requests to change the present interest payment structure from the banks themselves. In its policy document issued on Tuesday, RBI said that banks had proposed two structures: Either interest should be paid from the first to the last day of each month, or on a daily basis.

RBI referred the matter to the Indian Bank's Association, which comprises of private as well as public sector banks, along with co-operative banks and foreign banks.

As such, depositors will have more reason to park money in savings account deposits. They will earn more interest from these accounts from April 1.

Banks will have additional interest outgo because of the change in interest calculation . So far, they have been aggressively targeting low cost deposits which comprise savings and current account deposits since the interest outgo on such deposits is low.

Since returns on these deposits are not subject to tax deductions at source (TDS), high net worth individuals may choose these accounts over other short term instruments such as mutual funds and term deposits.

The absence of TDS will be a big draw for high net worth individuals, who park short-term surpluses in mutual funds. Interest income of over Rs 10,000 earned from bank fixed deposits per annum is taxed at the rate of 10 percent. But interest income over Rs 10,000 each year earned from savings accounts will not be taxed.
Banks credit the interest on saving accounts every six months .The interest payment vary from one bank to another. Some credit it in July and January, others in August and February, and some in April and October.

Banks feel that the move will benefit them as well. They are hopeful that paying more interest to depositors on savings accounts will actually bring down their cost of funds. Although they may have to pay higher returns on savings account deposits now, it is still a cheaper way of raising money.

Currently, interest rates on saving accounts are deregulated , barring up to Rs 2 lakhs. The RBI only administers interest rates on saving bank deposits up to Rs 2 lakhs, and for the deposits over this amount banks are free to offer any interest rates
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