Some banks offer interest rates on savings accounts that can be as high as 6-7.25%. But there’s a catch. One, you will need to keep higher amounts in the bank account. Two, the higher interest is available only on a part of your balance that you keep in the savings account—not on the entire funds.
To make customers keep higher amounts in their savings accounts, banks offer interest rates based on a tier system.
Take Utkarsh Small Finance Bank as an example. It offers 5% interest rates for balances up to ₹1 lakh, according to its website.
As you go higher, the interest rates increase. For a sum above ₹1 lakh and up to ₹25 lakh, the bank pays one percentage point higher interest or 6%. If you want to get the highest rate (7.25%), you will need to park above ₹25 lakh in the savings account.
Many banks that offer higher interest rates on savings accounts follow this tier system. Bandhan Bank is another example of this. For balances up to ₹1 lakh, the bank offers 3% interest rate, according to its website. The rate increases to 6% for balances above ₹1 lakh and up to ₹10 crore.
It has two more tiers that can fetch depositors higher rates. Above ₹10 crore and up to ₹50 crore, the interest rate on savings accounts is 6.55%. The highest rate is 7.15% for balances above ₹50 crore.
But keeping higher balances doesn’t mean you will get higher interest rates on the entire amount. Part of your balance will fetch different interest rates than another depending on the tier.
Take IDFC First Bank as an example. It has six tiers. The highest rate, 5%, is offered for those who park above ₹10 lakh and below ₹2 crore.
The bank’s website explains how the interest will work. In case a depositor’s account balance is ₹25,000, the interest payable will be 4% on the entire amount.
If the balance is, say, ₹5 lakh, the interest payable will be 4% on ₹1 lakh and 4.5% on the remaining ₹4 lakh.
It gives another example where the customer keeps an account balance of ₹1.1 crore. The interest offered is based on the tier again. For ₹1 lakh, the interest is 4%. The interest will be 4.5% for the incremental money, which is ₹9 lakh. The depositor will earn 5% interest on the remaining ₹1 crore.
Chasing higher interest rates on a savings account should be avoided.
“Many banks that were giving higher rates earlier have now reduced them drastically. The same can happen with any bank offering higher rates at present. Depositors can’t be opening new savings accounts with another bank every time their existing bank lowers rates,” said Harsh Roongta, a Sebi-registered investment adviser and head, Fee Only Investment Advisers.
He suggests that depositors should focus more on safety and keep savings accounts with banks that they absolutely trust irrespective of the interest rate.