Should you shift to new banks for higher interest?

Savings bank accounts for long have fetched 4% interest. However, with the advent of new niche lenders, savings bank accounts are fetching 6%-7% interest or even more. With bank fixed deposit rates on a downward slide, many top banks are paying much lower interest even as loans have also become cheaper. In this scenario, 6-7% savings bank interest opportunities seem very attractive. Experts say that if depositors only want higher return, shifting should be an easy decision. But if channels of transaction, service, and access points are also important, then depositors should consider staying back.

With the launch of differentiated banks, the interest rates on savings account deposits in some of the banks have been priced attractively. Small finance banks, payments banks and newly started private sector banks are offering higher saving account rates. Bandhan Bank gives 6% per annum (p.a.) savings bank account interest rate on incremental daily balance above Rs 1 lakh. Interest of 4.25% p.a. is applied for amount upto Rs 1 lakh. With effect from December 2016, IDFC Bank pays 5% interest rate for Rs 1 crore to Rs 10 crore balance, and 6% interest rate beyond that.

Payments bank allows customers to open only a savings account, that too with a deposit of up to Rs 1 lakh. Airtel Payments Bank is offering an interest rate of 7.25% on savings account deposits. Small finance banks like Utkarsh and Suryoday also pay attractive interest. Suryoday pays 6.25% p.a. on balance up to Rs 1 lakh and 7.25% p.a. on balance over Rs 1 lakh up to Rs 10 lakh. Lastly, there is digibank by DBS. digibank is India's first paperless, signatureless and branchless bank, where balance up to Rs 1 lakh will get 7% interest rates.

Since the interest earned from savings bank accounts is an income, it will be taxed. The interest that you earn from the money from your savings bank account is subject to tax as per the tax slab applicable to you. If the interest earned from a savings bank account is less than Rs 10,000, then you don't have to pay taxes on it. If the interest earned goes above Rs 10,000 threshold, then the additional amount would be added to the income and taxed.

Experts say that depositors thinking of shifting should consider a few things.

Safety first: Trust is the main factor. To be able to trust a new bank will require positive experience. "Safety should be your main concern when you are venturing into a new bank. Although these are RBI regulated institutions, depositors should not put too much of their money at one go. Returns should not be the only yardstick," says Anil Rego, CEO, Right Horizons, a financial consulting company. He further advises that depositors should not put a huge amount, and start with incremental money. If interest is paid on time, exposure may be increased.

Diversify money: Not putting all your eggs in one basket is an old saying. If you have decided to shift some money from your old bank to new banks, it would be wise to experiment with some. "Different banks have different minimum balance requirements. Also, calculation of interest rate is important. Some will pay 6% interest on balance above Rs 1 lakh. If the balance crosses a level, interest rate is reduced. Some new banks charge a penalty fee a minimum balance is not maintained. To take advantage of the sitaution, one can try different banks to see who is giving the best deal," feels Manoj Sharma, a money advisor.

Network and fees: Remember that interest rates form only a small part of your savings account. There are many crucial points like point of withdrawal and ATM network compatibility. New banks will have some teething troubles. "Channels of transaction, service coverage, and access point network are extremely important. Some new banks have started operations in a few cities and will gradually ramp up expansion. Your service experience will vary. At least, dont expect them to be at par with the State Bank of Indias, HDFC Banks or the ICICI Banks of the world. Also bear in mind that though the interest rates offered by new banks are among the highest in the industry, some have cash withdrawal charges that can lower the overall interest you get on the deposit," says Sudipa Datta, a financial consultant.