The problem of having multiple bank accounts

Of course, not all companies apply these conditions. It is illegal for employers to withhold pay from employees on these grounds, a lawyer, who did not wish to be identified, told Mint. Two of the salary accounts the Delhi resident had opened earlier are no longer zero balance accounts as they have been converted into regular savings accounts by the banks concerned. “Now I have to maintain an average monthly balance (AMB) of 10,000 on each of those accounts,” he said.

This is not an isolated case and highlights that maintaining an AMB is the single largest expense associated with a savings account.

Sagar Saha, based in Bangalore, had to lock herself up near 1.3 lakh across four accounts to meet MAB requirements. In the current fiscal year, the total interest earned on all of his savings accounts will exceed 10,000 and he will have to pay 30% tax on it (according to his tax plate). However, Saha opened these accounts of her own volition for various reasons.

“One was opened to secure a high interest rate of 8.3% on a recurring deposit (RD), one for superior digital banking services and the other two were opened as salary accounts,” said the 29 year old player.

Although it is easy to open several bank accounts, maintaining them all can be quite difficult.

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Strings tied

You need to set aside a minimum sum to maintain AMB, and the more accounts you have, the more money you will need to keep in those accounts. This sum will lose value over time because the interest rate on savings accounts is 2.5-4%, which is well below the rate of inflation.

Additionally, failure to maintain a minimum balance results in a hefty monthly penalty of 1.5-6% BMA (see chart), which can eat away at net interest yield. Bank accounts with an RD or a fixed deposit of more than 1 lakh does not require AMB. BMA is calculated by adding each day’s closing balance and dividing it by the number of days in that month. This means that you will need to closely monitor the statements of these accounts regularly to ensure that you do not fall below the AMB limit. But imagine doing this with 5-6 accounts.

“Just depositing the minimum required amount all at once may not be enough, as banks automatically levy certain service charges which may reduce your balance. This happened to me once when I failed to notice that my bank had deducted the annual debit card fee which caused my balance to drop below the minimum threshold and I was penalized for not maintaining the account” , said Vinit Iyer, co-founder, Wealth Creators Financial Advisors, a Sebi registered investment adviser.

Note that banks do not notify customers of a default on AMB or before a penalty is imposed.

Many customers are also unaware that banks convert a zero-balance salary account into a regular savings account (which mandates AMB) if salary is not credited there for three to six consecutive months. Again, banks do not intimidate customers before converting the account.

Multiple bank accounts also add to the tedious task of filing the tax return (ITR), as you will still need to report them on returns even if the total interest income is below the tax exemption limit. “Now that taxpayers have access to the AIS (Annual Information Statement), they can’t afford to miss it,” said Rohit Shah, senior director of Sebi-registered investment advisory firm GYR Financial Planners.

Additionally, keep a record of all account-specific online banking login information, track debit card expiration and renewal dates, and ensure payments are made on time to avoid one of the accounts becomes inactive.

One of the few benefits of having multiple accounts is that you can get perks on different debit card purchases. However, banks usually offer such benefits to preferred customers (those with a high monthly income). Note that the higher the rewards offered on a card, the higher its annual fee.

Saha did not give up her Citibank account for this reason. “I get cash back, rewards on almost every purchase I make with my debit card. Also, it offers flat rate cash back on purchases from certain merchants, such as Apple. For me, the rewards on my Citibank account outweigh any service fees I have to pay to maintain it,” he said.

how much is too much

Financial advisors are of the opinion that maintaining three bank accounts is more than enough. Shah said a simple financial life is one of the basic prerequisites for financial freedom. “Closing those extra bank accounts is the easiest way to shore up your financial life,” he said.

Iyer agreed and added, “You can have one permanent account for all income, one account for household expenses, which can be a joint account with your spouse, and a third for personal expenses.”

Most private banks allow you to close accounts online on their netbanking website after paying all dues, but the State Bank of India and some other banks will require you to do this only at a physical branch.

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