SBI cuts savings rate to just 3.25% - Should you switch banks? | Mint
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Business News/ Money / Personal Finance/  SBI cuts savings rate to just 3.25% - Should you switch banks?
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SBI cuts savings rate to just 3.25% - Should you switch banks?

Savings account interest up to ₹10,000 is tax free under Section 80 TTA of the Income Tax Act, 1961
  • You can safely earn higher interest by shifting to another bank without necessarily paying higher tax
  • SBI has reduced the interest rate on its savings account for balances below ₹1 lakh. (Mint)Premium
    SBI has reduced the interest rate on its savings account for balances below 1 lakh. (Mint)

    The State Bank of India (SBI) has reduced the interest rate on its savings account for balances below 1 lakh to a historic low of just 3.25%. As a banking customer, you can earn a higher interest rate by switching to another bank. Unlike fixed deposits, there is no lock-in for savings accounts.

    Also, remember that savings account interest up to 10,000 is tax free under Section 80 TTA of the Income Tax Act, 1961. For senior citizens, this tax-free allowance goes to 50,000 under Section 80 TTB. In other words, you can safely earn higher interest by shifting to another bank without necessarily paying higher tax.

    Which bank to shift to

    You have several options including public sector banks and private sector banks. In addition, the RBI has created newer categories of banks such as payments banks and small finance banks. “I would suggest a shift towards banks giving a higher interest rate. This will also increase the returns for clients who are doing Systematic Investment Plans (SIPs) in mutual funds," said Vineet Iyer, a Pune-based financial planner. An SIP transfers a fixed amount into a mutual fund every month from a bank account. However the money earns the savings account interest between SIP dates.

    “However I would avoid co-operative banks and small finance banks," he said. The recent crisis in Punjab and Maharashtra Co-operative Bank (PMC Bank) which had a close to 73% exposure to a single borrower has brought home the risk in certain categories of banks. Your money in banks is only guaranteed up to a sum of 1 lakh under the Deposit Insurance and Guarantee Corporation of India. That said, among mid to large private sector banks, IDFC First Bank offers a 6% rate on savings accounts with balance less than 1 lakh. RBL Bank offers a 5% rate of interest.

    Things to watch out for

    Apart from the risk of default highlighted above, savers should also consider if they are losing out on ancillary benefits if they are shifting out their savings account, such as reward points on debit cards, a low minimum balance requirement or free ATM withdrawals. For many individuals, the strength of the branch network also matters. A branch close to one’s house greatly eases banking convenience. Finally, they should note the fact that there is no lock-in of a savings bank rate and the new bank may lower its savings account rate at any time. “However these banks will have to maintain some gap over SBI to attract savers. Also cuts in savings account interest tend to be gradual," said Iyer.

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    ABOUT THE AUTHOR
    Neil Borate
    Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
    Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Check all the latest action on Budget 2024 here. Download The Mint News App to get Daily Market Updates.
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    Published: 09 Oct 2019, 04:44 PM IST
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