Changing my savings account is it obvious?

Why do savings account rates vary?

Some banks, especially new ones, which are keen to expand their customer base quickly, offer higher interest rates on savings accounts as a strategy. Small banks follow this rule even though they can raise cheaper funds in the bond market, as customers who enter this route may then be sold other products such as mutual funds, credit cards or insurance policies. This strategy has been deployed in the past, especially after demonetization, when interest rates fell throughout the banking system. However, older and larger banks don’t need to expand their customer base as much.

What are the advantages of changing accounts?

Higher interest rates can help you get higher returns on your savings, without locking up your money for a long time or buying risky market-linked products. This helps you deal with inflation, which erodes the value of your savings over time. The interest rate on the savings account is also tax deductible up to ??10,000 per year under Section 80 TTA of the Income Tax Act, 1961. For the elderly, the interest deduction is higher than ??50,000. Some banks also offer other advantages with a savings account such as insurance or a debit card with loyalty points or access to airport lounges.

What are the pitfalls of switching accounts?

Banks can reduce interest rates on savings accounts at any time. Unlike a fixed deposit, you cannot lock in a specific interest rate for a savings account. Direct debits or tax refunds will also need to be transferred to the new account. Any advantage in terms of easier credit that arises from your current relationship with your bank may be lost.

How safe is your money with a bank?

In 2019, the Punjab and Maharashtra Co-operative Bank collapsed, while 2020 saw a crisis at Yes Bank; although those who had accounts in the latter suffered no losses due to a bailout by the SBI. In addition, accounts up to ??500,000 balances are guaranteed under the government’s deposit insurance scheme. However, you should do your own research on the financial health of the bank in question. Focus on metrics like the non-performing asset ratio or consider limiting yourself to scheduled commercial banks only.

Are there substitutes for the savings account?

Debt funds are a way to get a higher return on your fixed income investments, albeit with a much higher level of risk. The capital gains of these funds, held for more than three years, are treated as long-term capital gains. LTCG on debt funds is 20% with the benefit of indexation. Alternatively, there are small savings products guaranteed by the Center such as national savings certificates (NSC) and the senior savings plan (SCSS) for seniors. However, NSCs and SCSSs have five-year blocking periods.