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:

• Savings Account
• Current Account
• Recurring Deposit Account
• Fixed Deposit Account
• DEMAT Account
• NRI Account

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:

• Savings account holders are eligible to receive debit cards, online banking and cheque-books on demand.
• The rate of interest that benefits customers typically ranges from 4% to 6%. Some online savings accounts may also offer more than 6%.
• A savings bank account is best suited for students, pensioners and housewife women.
• There is no fixed limit to the number of times users can deposit money into 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:

• Internet banking is available with a Current account.
• Current accounts provide an overdraft feature. This means that the account holder can withdraw more than that available amount in the account.
• There is no fixed limit to the number of times money can be deposited or withdrawn. However, there can be a capped limit applicable to the amount of money transacted in a day.
• The current bank account is best suited for business traders, owners and entrepreneurs.

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:

• Recurring can be opened by individuals and institutions, either separately or jointly.
• The periodic investment amount can be as low as 50 Rupees. It can also vary from bank to bank.
• The passbook is given for recurring bank accounts.
• RD accounts also have a nomination facility.

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:

• Users cannot withdraw the amount deposited in a fixed deposit in installments.
• Users can open a Fixed deposit account in any Public or Private sector bank.
• A high rate of interest is credited in fixed deposit accounts.
• Full repayment of the deposited amount is possible before FD's maturity date.

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:

• DEMAT accounts allow trading from anywhere, allowing traders to work from any location.
• Transaction cost charged by the bank on the purchase of shares and bonds is comparatively low.
• Reduced paperwork is required to transfer securities.
• Users can easily open a DEMAT account with KYC (a type of government-issued ID card verification).

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:

• NRO (Non-Resident Ordinary Rupees) Account: NRO accounts allow people to easily transfer their foreign earnings to India. These are rupee accounts. This means that the money deposited in these accounts is converted to Indian Rupees from foreign currency. However, some of the exchange rates are charged. NRIs can keep their earned money (applicable for both Indian and overseas earning) in these types of accounts. There is an option to open NRO accounts individually or jointly in different forms, such as Savings, Current, RD, and FD. The income (Interest) earned in NRO accounts is taxed in India.
• NRE (Non-Resident External Rupees) Account: When an Indian individual move abroad to live or work there, his/her account is converted and maintained as an NRE account. Likewise, NRO account, NRE accounts also convert the foreign earnings into Indian Rupees (INR) at certain prevailing exchange rates. However, these bank accounts only provide parking for earnings from abroad, not to transfer to India like NRO accounts. Besides, the account holder can transfer funds (Principal and Interest both) to any other account. There is also an option to open NRO accounts jointly with an Indian resident. The interest earned in these accounts is not taxed in India.
• FCNR (Foreign Currency Non-Resident) Account: Unlike the NRO and NRE accounts, FCNR accounts are maintained in foreign currency. These types of accounts are beneficial for managing international currency. Furthermore, FCNR accounts are maintained as Term deposits and can be withdrawn after completing the maturity period. Besides, the principal and interest earned in these accounts can be transferred to other accounts. The interest in these accounts is not taxed in India.

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:

• Back accounts offer safety for our hard-earned money. We can withdraw our money anytime, even if the banks are closed. Many ATMs are installed throughout the city, which are operational 24 hours a day.
• Bank accounts reduce the burden of carrying large amounts of money. They provide many options for payments in various mediums, such as online and offline. Most common options include credit card, debit card, cheque, online net-banking, UPI, etc.
• Banks keep a record of all transactions of every account. This ultimately helps to track expenses or income for individuals and enterprises in an efficient way.
• Having a bank account can also be an easy way to grow money. Almost every bank pays interest when we keep money in our savings account. It helps our money grow over time.
• Banks provide easy access to credit for trusted account holders. This means that we can benefit from many savings schemes and loans, such as personal loans, home loans, education loans, etc.

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.