Types of Bank Accounts
A bank account is considered the most effective option for protecting our hard-earned money from theft and other uncertainties. A bank account can help protect individuals and enterprises from sudden or unexpected losses or risky situations. Bank accounts are necessary for everyone in this technological era and not having a bank account is almost unthinkable. But before we choose a bank account, it is very important to know about the bank account and its types.
Here, we are explaining different types of bank accounts with their characteristics. Before discussing the types of bank accounts, we must first understand the definition of a bank account:
What is a Bank Account?
A 'bank account' refers to a contract made between a bank and an individual or institution under which the bank agrees to keep money and/or assets on behalf of the client. Once the party or customer agrees to all the terms and conditions, the bank holds the money and provides a unique bank account number for that particular account. Depending on the type of bank accounts, banks get the right to do whatever they want with the money or assets. In particular, banks hold money and pay some specific money to the customer as interest. This applies only to a savings account or checking accounts.
Besides, banks have the right to lend some or all of their money to other customers or to invest in the scope of law and banking regulations. However, it is all digitally managed. Therefore, customers can withdraw their deposited money anytime on demand. The laws of different countries specify the rules as to how bank accounts can be opened and operated. For example, they can specify who can open bank accounts, limit deposits or withdrawals, etc.
Note: The minimum age for holding a bank account is usually 18 years. However, it can vary from 10 to 16 years, depending on particular countries. Besides, most banks also offer accounts to be opened in the name of a person of restricted age; however, such accounts will be jointly opened and operated by their legally appointed parents.
Types of Bank Accounts
Previously, there were mainly four types of bank accounts that could be opened in India. Such accounts included savings account, current account, recurring deposit account, and fixed deposit account. However, due to the banking sector's advancement and various requirements, they were forced to add more bank accounts types.
The most common types of bank accounts are listed below:
Now let us understand each:
What is a Savings Account?
A savings bank account is the most popular and widely used type of bank account. This type of bank account not only safeguards our hard-earned money but also pays some rate of interest. In particular, it is the first type of bank account that most people will open first. Customers mainly use the savings account to keep their money for future use. Since this type of bank account is meant to save money, there is a restriction on the number of transactions customers can make in a month. Additionally, there is also a limit for the total amount of money transacted in a day.
Banks usually offer various savings accounts depending on the type of depositor, age of the holder, features of what the holder wants, the purpose of holding the account, etc. Typically, the common types of savings accounts include regular savings accounts, family savings accounts, joint savings accounts, senior citizens or women, savings accounts for children, institutional savings accounts, etc. Almost every bank provides a zero-balance savings account where customers don't require to maintain a minimum balance.
The following are some of the main benefits of a Savings account:
Note: A salary account is a type of savings account; however, it cannot be opened by only one person. To open a salary account, a business (employer) needs to have a tie-up with the bank, and only then the employer can assist in opening an account there. Also, there are different terms and conditions for salary account and savings account.
What is a Current Account?
The second most common and widely used type of bank account is the current account. These bank accounts are not meant for savings. They are mainly opened by business persons, firms, companies, and public enterprises. Current accounts are also known as deposit accounts, which help those who need to make and receive payments more often than others, i.e., business owners make payments multiple times a day. Unlike savings accounts, current accounts do not provide any interest benefits. Also, the account holder is required to maintain a minimum balance to operate these accounts with ease.
The current bank accounts don't have any fixed maturity because they are maintained continuously. These accounts hold more liquid deposits. This means that the deposits made in such accounts always remain in operational flow, making deposits more like a liability than an asset to the bank. Besides, banks also charge certain amounts of money as service charges.
The following are some of the main benefits of the Current bank account:
What is Recurring Deposit Account?
A recurring deposit (RD) account is a type of bank account that has fixed tenure. This means that the account holder should invest a fixed amount for a fixed period. Depending on the bank, the money is usually invested every month or once per quarter until it reaches the fixed maturity date. The term 'recurring' itself refers to something that is occurring repeatedly or periodically. Once the account has been opened by agreeing to the specific tenure and the amount to be invested, the account holder cannot change RD's tenure or the amount to be invested from time to time.
An RD account also provides interest at a fixed rate for the invested money with the same interest rate as Fixed Deposits (FDs). Unlike FDs, where a holder has to invest lump-sum amounts, the sum that needs to be invested in RDs is comparatively smaller and more frequent. In the case of premature closure, some penalty is charged in the form of a reduced interest rate. The interest rate may vary from bank to bank, depending on the bank policies and investment tenure. However, it most commonly varies between 3.5% to 8.5%.
The maturity period (Tenure) for a recurring bank account is commonly classified into the following three types:
Short-term Tenure: The maturity period ranges from 6 months to 1 year.
Medium-term Tenure: The maturity period ranges from 1 year to 5 years.
Long-term Tenure: The maturity period ranges from 5 years to 10 years.
The following are some other features of the Recurring bank account:
What is a Fixed Deposit Account?
A fixed deposit bank account is more commonly known as an FD account. It is a type of bank account that offers customers to earn a fixed rate of interest on their invested money. A fixed deposit allows us to earn a decent interest rate if a certain amount of money is locked into an account for a specific period. Unlike RDs, where the money is invested periodically, the money invested in FDs is a one-time deposit.
Besides, users cannot withdraw the deposited money before the end of the tenure period. However, the customers can close the fixed deposit permanently and retrieve the deposited money. In this case, the penalty amount is charged, which varies from one bank to another. Likewise, these accounts' interest rate also varies depending on the bank policies and the FD's tenure. However, it most commonly lies in between 4% to 7.25%. The maturity period of an FD can range between 7 days to 10 years.
The following are some other benefits of the Fixed deposit account:
What is a DEMAT Account?
A DEMAT account is a short form of 'Dematerialized Account'. It is a type of bank account that allows customers to keep their shares and other electronic format securities. This mainly helps in facilitating easy trade and conducting stress-free transactions for shares and bonds. There are two different depository organizations in India, which manage and maintain DEMAT accounts. They are Central Depository Service Limited and National Securities Depository Limited.
The following are some other features of the DEMAT account:
What is NRI Account?
NRI (Non-Resident Indian) accounts are available only for those Indian people or Indian-origin people living overseas. These types of bank accounts are also termed as 'overseas accounts'.
The NRI accounts are further sub-divided into two types of savings accounts and a fixed deposit account. They are:
Importance of Bank Accounts
Although it is not mandatory to have a bank account, several good reasons make a bank account necessary for human needs. Some such reasons are listed below:
Which type of bank account is best for everyday transactions?
A major aspect of industries or businesses is everyday transactions. To meet this requirement, current accounts are considered the best option. These accounts are best suited for everyday transactions, as there is no fixed number that money can be deposited or withdrawn from such accounts in a day. However, these accounts are not beneficial for saving purposes and are mainly opened by businesspeople only.