5 tips on banking

Time deposits for Individual or Joint Account Holders

Time deposits with banks are a safe and secure way of earning interest on any surplus funds or funds available for investment. In deciding the type/s of account/s suitable you must know the period for which the funds can be deposited and if necessary whether the total sum could be broken up into a number of deposits  for different periods. However, in the case of large amounts the amount of each deposit is also important since you may be able to negotiate for higher rates of interest for large value deposits.

In terms of instructions issued by the Department of Inland Revenue unless the account is an exempted account defined by them a withholding tax of 2.5% has to be deducted from the interest paid at the time of payment of interest. Persons over 60 years of age are exempted from this requirement.

The options available for time deposits are discussed below.  

 

1.7 day Call Deposit

This type of account requires a minimum of seven days notice to be given for a withdrawal. Failure to do so will result in non-payment of interest on the last seven days of the deposit. The rate of interest payable is usually slightly higher than that paid on Savings Accounts and the bank will usually specify a minimum value for such deposits. The rate of interest quoted is valid for the first seven days only and the bank is free to apply a new rate for each renewal depending on the market rates. Since, today banks offer a variety of Savings Accounts some may be paying interest at even a higher rate than on seven day call deposits, you need to verify the applicable rates before making such deposits. 

2.Fixed deposits

This type of deposit requires the deposit to be kept for a specified period such as one month, three months, six months, 12 months, 24 months, 36 months, 48 months or 60 months. The rate interest payable is fixed on the date of the deposit and is usually higher than that for Savings Accounts or seven day call deposit accounts and usually higher rates of interest are applied for high value deposits. Banks specify a minimum value for such deposits.

You have the option of receiving interest on the deposit monthly or at maturity. The rate of interest for the former is less than that payable at maturity. You will have to specify which option you choose at the time of making deposit and you may also give instruction to the bank for the automatic renewal of the deposit for a similar period at the rate prevailing on the date of maturity. You will have to specify whether the renewal is inclusive of interest and if not to which account the interest is to be credited.

In the event of a premature withdrawal of a Fixed Deposit some banks do not pay any interest on the deposit whilst others pay a lower rate of interest than the rate for the Fixed Deposit, for the period the deposit was kept with the bank.

3.Certificates of Deposits

In this type, a Deposit Certificates which is negotiable is issued by the bank which is payable to the Bearer at maturity. Certificates of Deposit are issued for different periods such as one month, three months, six months, one year, two years, three years, four years, etc. Certificates of Deposit can be purchased for any face value by paying the discounted value for the period of the deposit. The face value of the certificate can be drawn on the maturity date by surrendering the Certificate of Deposit to the bank which issued it. 

It is important that Certificates of Deposits are kept in a secure place since any person holding the original certificate can obtain payment from the bank at maturity and banks will not entertain any stop payments on Certificates of Deposit due to the nature of the instrument.

Although no names appear on Certificates of Deposit, the details including the name, address and NIC number of the person who purchased it and also of the person who obtained payment of it at maturity must be provided to the bank in terms of the regulations issued by the Central Bank of Sri Lanka.

4.Treasury Bill Repurchase

In this type of deposit which is actually a loan or an investment, the bank will sell and repurchase from the customer a part of their Treasury Bills holding for an agreed period at affixed rate of interest. Banks will insist on a minimum amount for such deposits and the period of the deposit and the rate of interest will be based on the maturity date of the Treasury Bill being repurchased. An advantage in this type of deposit is that no withholding tax is deducted from the interest paid, since withholding tax has been paid at source when it was originally purchased.

5.Senior Citizens accounts

A special scheme has been introduced by the Government of Sri Lanka for senior citizens (minimum of 60 years of age) are entitled to receive interest at 15% per annum on one year Fixed Deposits up to one million rupees placed with banks. The limit of one million does not apply to a single bank but all banks with which you have deposits. For this purpose you will have to provide the bank with a declaration to ensure that you receive this special rate only on deposits totalling to one million or less with all banks.

Most banks offer Senior Citizens an additional 1% per annum on the advertised rates of interest. However, the minimum age to be categorised as a Senior citizen varies from ban to bank and can be 50 years, 55 years or 60 years.

With effect from 1 April 2015 as per instructions received from the Inland Revenue Department, banks will not deduct any withholding tax on interest paid on deposits made by Senior Citizens. For this purpose Senior Citizens are defined as those over 60 years of age. 

(Please note that this is based on current practices and may vary from bank to bank)