Page 80 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 5: Banker Customer Relationship

Notes
deposit balance (` 12,597) and the savings account interest (` 402). That is still lower than
the ` 13,117 cumulative balance in the fixed deposit.
The benefit of early start and better interest rate works in favour of the fixed deposit. The
longer the tenure of the deposit, the greater is the benefit. Fixed deposits benefit more
from the power of compounding.
Tax advantage: Long-term fixed deposits (five yea or more) with a scheduled bank are
eligible for tax deduction up to ` 1 lakh. This improves the effective return on such
deposits. No such tax break is available on recurring deposits. There is no tax deducted at
source (TDS) on the interest earned on recurring deposits. In a fixed deposit, if the interest
income exceeds ` 10,000 in a year, the bank will deduct tax at source and pay you only the
balance. But the no-TDS rule does not mean that the interest income on recurring deposits
is exempt from tax. Income on both fixed deposits and recurring deposits is taxable, and
certainly you have to pay taxes on both (less, of coue, the amount already deducted by the
bank).
When to go for Recurring deposits: If you do not have sufficient funds at the beginning and
can invest only in installments, then go for a recurring deposit. Regular savings over a
long period at a healthy fixed rate of interest can translate into a significant sum.

But note that you need to be disciplined when investing in a recurring deposit. If you do
not deposit an instalment, the bank may charge you a penalty. State Bank of India, for
instance, charges ` 1.50 for every ` 100 a month for non-deposit of monthly installments
on recurring deposits with tenure of five yea or less. Further, if you do not make deposits
for an extended period, banks may close your recurring account.
Depositing sums lower than committed is not allowed in a recurring deposit. Some banks,
though, allow deposits of amounts larger than what is committed. But here, the interest
rate on the additional amount may depend on the prevalent recurring deposit rate and not
the original rate.

Source: http://www.thehindubusinessline.com/features/investment-world/peonal-finance/
article3666386.ece

Self Assessment

Fill in the blanks:

4. Accounts opened with the purpose of holding credit balances are referred to as
.................................; whilst accounts opened with the purpose of holding debit balances are
referred to as ..................................
5. An account which may be operated any number of times on a working day without any
limitation on the number and amount of withdrawals is known as ..................................

6. Overdraft facilities are given in case of ................................. accounts.
7. The rate of interest payable by the banks on deposits maintained in savings accounts is
prescribed by ..................................

8. The two types of demand deposits account are ................................. & ..................................

5.4 Mandate and Power of Attorney

A Bank Mandate is a written order to a bank asking it to open an account, names the peon(s)
allowed to sign cheques on behalf of the account bearer, and provides specimen signatures, etc.

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