Nature and Types of Accounts

Nature and Types of Accounts

In most legal systems, a deposit of funds in a bank is not a bailment – that is, the actual funds deposited by a person in a bank cease to be the property of the depositor and become the property of the bank. The depositor acquires a claim against the bank for the sum deposited but not to the actual cash handed over to the bank. In accounting terms, the bank creates (“opens”) an account in the name of the depositor or a name directed by the depositor in which the amount received by it is recorded as a transaction. The deposit account is a liability of the bank and an asset of the depositor (the account holder).

On the other hand, a bank can lend some or all of the money it has on deposit to a third party/s. Such accounts, generally called loan or credit accounts, are subject to similar but reverse principles of a deposit account. In accounting terms, a loan account is an asset of the bank and a liability of the borrower. Loan accounts may be unsecured or secured by the borrower, and they may be guaranteed by a third person, with or without security.

Deposits of banks are classified into three categories: 

(1) Demand deposits are repayable on customers’ demand. These comprise of: – Current account deposits – Savings bank deposits – Call deposits 

(2) Term deposits are repayable on maturity dates as agreed between the customers and the banker. These comprise of: – Fixed deposits – Recurring deposits

 (3) Hybrid deposits or flexi deposits combine the features of demand and term deposits. These deposits have been lately introduced by some banks to better meet customers’ financial needs and convenience and are known by different names in different banks. 

The demand and time deposits of a bank constitute its demand and time liabilities that the bank reports every week (on every Friday) to the RBI

1. Savings Account

These are deposit accounts meant to help consumers save their money. A savings account can be opened by any individual in India who holds an Aadhaar card and a PAN card, both of which are mandatory to open a bank account in India. 

Key Features of a Savings Account

Limit:There is no limit to the amount of money that can be saved in a savings account. The number of transactions may be capped in some cases, depending on your bank. 

Balance:A consumer is expected to maintain a mandatory minimum balance in most cases to maintain a savings account. 

Exception to minimum balance requirements is for select accounts, such as savings accounts that have been opened under the Indian federal government’s financial inclusion plan called the Pradhan Mantri Jan Dhan Yojana (PMJDY). 

2. Current Account

Current accounts are mostly business accounts where money is frequently transferred between financial accounts. These accounts are best suited for transactions by corporations and business owners for daily business activities. 

Key Features of a Current Account

Limit:There is no limit to how much money can be put in a current account. Current accounts also do not have a transaction limit. 

Balance:A current account has a higher minimum balance requirement than savings accounts. 

Interest:Consumers do not earn any interest on current accounts. 

Benefit: These accounts allow an overdraft facility, which permits consumers to withdraw more money from the account that there is actually in the account. 

3. Salary Account

These accounts are opened by banks upon the request of big corporations and businesses that pay their employees through banks. Each employee is eligible to maintain a salary account in which the company they are employed with credits a monthly salary. 

Key Features of a Salary Account

Limit:There is no limit to how much money can be put in a salary account. Each employee receives salaries based on disbursal from their employees. Independent transactions can be made by employees to transact between this kind of bank account with another. 

Balance:A salary account is a zero balance account and employees can withdraw all the money credited in the account at any point. 

Interest:Employees do not earn any interest on salary accounts. 

Benefit:These accounts can be converted into savings accounts at any point in time. Upon inactivity for more than three months, banks hold the rights to convert these accounts into savings accounts, the regulation for which is different. 

4. NRI Account

These accounts are opened by non-resident Indians who wish to maintain a financial bank account in India. There are three kinds of NRI accounts that can be opened:

Non-Residential Ordinary Account (NRO): These accounts hold deposits in Indian rupee denomination. The money deposited is from proceeds earned in India. 

Key Features of an NRO

Limit:There is no limit to how much money can be put in an NRO account. 

Balance: Any amount of balance can be maintained. 

Interest: The principal and the interest earned on that principal fall under the taxable category. 

Benefit: These accounts are unaffected by the rate of conversion. An NRI can open a current account, a savings account or a fixed deposit account via the NRO account. 

Non-Residential External Account (NRE)

These accounts hold deposits in Indian rupee denomination. The money deposited, however, is not from proceeds earned in India; in other words, the money deposited is earnings or savings from the country where the non-resident Indian lives.

Key Features of an NRE

Limit: There is no limit to how much money can be put in an NRE account. 

Balance: Any amount of balance can be maintained. 

Interest: The principal and the interest earned on that principal do not fall under the taxable category. 

Benefit: These accounts bear the impact of a prospective change in the rate of conversion. An NRI can open a current account, a savings account or a fixed deposit account via the NRE account. 

Foreign Currency Non-Residential Account (FCNR)

These accounts hold deposits in the currency approved by the central bank of India, the Reserve Bank of India. Any NRI or a person of Indian origin can hold deposits in an approved currency in which they earn their income. If the income is earned in a currency other than the approved list of currencies, then an approved currency is chosen for the conversion of the earnings or the proceeds to be deposited. FCNR accounts are often called FCNR (B) accounts where the (B) stands for banks. 

Key Features of an FCNR

Limit: There is no limit to how much money can be put in an FCNR account. 

Balance:Any amount of balance can be maintained.  

Interest:The principal and the interest earned on that principal do not fall under the taxable category. 

Benefit: These accounts bear the impact of a prospective change in the rate of conversion. An NRI can open only a fixed deposit account with a minimum maturity of one year via the FCNR account. 

5. Recurring Deposit (RD) Accounts

These accounts are opened as deposit accounts by consumers who are interested in earning interest on their money. Commonly known as RDs, these accounts are the easiest ways to earn an income higher than that offered by savings accounts. 

Key Features of a Recurring Deposit

Limit. The minimum limit to open an RD differs from one bank to another. Consumers can opt for a minimum limit as low as INR 1,000 per month and open an RD account with any bank of their choice. 

Balance: RDs are deposit accounts that allow consumers to collect a monthly amount set at the beginning of the tenure of the account.

Interest: A fixed amount is deducted every month and collected in the RD account, where it earns interest month-on-month. This interest is often higher than savings accounts. 

Benefit: The flexible tenure of the RD makes it a consumer-friendly financial decision. Consumers can opt for anywhere from six months to up to 10 years to deposit their money in an RD and earn interest on the deposited amount. RD accounts can be discontinued before the end of the tenure without losing the interest earned. 

6. Fixed Deposit (FD) Accounts

These accounts are opened to earn interest on  deposits for a fixed period of time until maturity. Fixed deposits are among the safest financial instruments to save and earn interest on idle money. 

Key Features of a Fixed Deposit

Limit: There is no limit to how much money can be put in a fixed deposit account. The higher the money allocation, the more interest is paid at the end of the account’s tenure.

Balance: An FD account holds a lump sum amount as investment. 

Interest: The bank pays an interest on this deposit. This interest is paid once the tenure of the FD is complete. Upon breaking the FD in the middle of its tenure, consumers risk losing out on the interest and often receive only the principal amount. 

Benefit: FDs are risk-free investments with high returns. Most banks in India offer an FD interest rate higher than savings accounts’ interest rates and RDs’ interest rates, owing to the fixed tenure benefit a bank enjoys in the case of FDs. Banks can hold big sums for a fixed period and consumers can make higher volatility-free returns, turning the financial instrument into a win-win for banks and consumers.