New Delhi: Banks have enjoyed people’s trust, especially when it comes to safekeeping their money. However, the crisis in the Punjab and Maharashtra Cooperative (PMC) Bank no longer ago, where many depositors with higher fixed deposit (FD) amounts were not able to withdraw their deposits, has come as a shock to many investors. It also exposed the gross inadequacy of the deposit insurance cover of Rs 1 lakh given to each depositor in case of bank failure.
This limit was introduced in 1993 and continued for almost 27 years. Budget 2020 has done damage control by raising the insurance cover to Rs 5 lakh, which came into effect on February 4. It could provide safety to a decent number of people, but may not be sufficient for those with a much higher amount of deposit in bank. We tell you how you can enjoy higher insurance cover on bank deposits.
The deposit insurance cover applies separately on each account held in different rights and capac applies separately ities. As an individual, you can open a regular savings account. Additionally, you may also have an account as a guardian of a minor, a partner of a firm or a director of a company. All these accounts held in different capacities will enjoy a separate Rs 5 lakh cover. You can have joint accounts with different people, all of which then enjoy a separate insurance cover.
One way to divide your deposits is to hold FDs in the name of different family members. “We all invest in the name of family members in any case. Now the FD cover would be about Rs 5 lakh,” says Suresh Sadagopan, founder, Ladder7 Financial Advisories. “We do not suggest more than two or three bank accounts per person. For children, we suggest just one.”
However, it may have tax implications. “Interest earned from FDs opened in the name of a depositor’s non-working spouse will get clubbed with the depositor’s income and taxed accordingly,” says Naveen Kukreja, CEO and co-founder, Paisabazaar.com. “The same rule applies to FDs opened in the name of minors, except for a tax exemption of Rs 1,500 per year, per child. However, interest income from FDs opened in the name of the depositor’s parents and major child does not get clubbed with his income.”
If you wish to get higher interest by depositing in smaller banks, it is better to stick to a Rs 5 lakh deposit which also includes the interest amount. “Insurance cover on bank deposits applies separately to the deposits held with each bank,” says Kukreja. “Hence, banking consumers can reduce their risk by diversifying their deposits across multiple banks. Increased insurance cover for deposits of up to Rs 5 lakh will also allow consumers to deposit a higher amount in small finance banks and some private sector banks, which offer much higher interest rates than bigger public and private sector banks”
