Home / Money / Personal Finance /  SBI cuts savings rate to just 3.25% - Should you switch banks?

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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