Bank Accounts: The Types and What Each Is Actually For

A bank account is the bank's running record of what it owes the household, and each type of account is a different set of rules attached to that record. A savings account holds money and pays a little for holding it. A current account is built for a trade making many payments and pays nothing. A deposit trades free access for certainty. Match the account to the job.

Underneath that sits something simpler. When a depositor hands a bank Rs 500/-, the bank does not put that Rs 500/- somewhere and wait for the depositor to come back for it. The bank takes the money, uses it, and writes down that it owes the depositor Rs 500/-. The account is that written record. Everything that can be done with the money afterwards is decided by the rules attached to the writing, and those rules are the only real difference between one account and another.

A record rather than a box sounds like a technicality until the differences it explains come into view. The record explains why one account pays the holder for keeping money there and another pays nothing. The record explains why a deposit cannot simply be taken back on a Tuesday afternoon. And the record explains why the same bank will happily open one kind of account in ten minutes and ask a trade for papers before it opens another. None of that is marketing and none of it is the bank being difficult. Each rule follows from the job the record has to do.

Everything below follows from that one idea: what a balance is, how a rupee moves through a credit and a debit, what each of the six accounts a household in India commonly meets is built for, how a statement reads column by column, what a nomination settles and what it does not, and how a whole year of one household's money across three holdings reconciles to the rupee.

What is a bank account underneath the app?

Start with the figure on the screen. The app says Rs 6,760/-. Rs 6,760/- is the closing figure on the Bhosale household's salary account on 31 March. Then a question that sounds silly and is not: where are those rupees? Not in a drawer with the household's name on it. Not in a bundle in a vault. The bank took the money in, lent most of it out and put the rest to work, and what it holds for the household instead is an entry in its own books saying it owes Rs 6,760/-.

A bank accountThe bank's running record of what it owes a customer. Not a container holding that customer's notes, and not a location where the money physically sits., then, is not a container. The account is a record, and the record has two sides at once. From where the household stands it is a claim: it can ask for the money and the bank has to find it. From where the bank stands the identical entry is an obligation: it owes that money and must be able to pay it. The same Rs 6,760/- is written down once and read two ways, and every difference between account types is a difference in the rules bolted onto those two sides.

Think of a shopkeeper who lets a regular customer run a slate. The customer buys rice on Monday and pays on Friday. On Wednesday there is nothing in the shop that belongs to the customer, and yet something real exists: a line in the shopkeeper's book. A bank account is that line in the book with the direction reversed, written by an institution that is regulated, supervised and required to be able to honour it. Nothing about the entry is imaginary. The entry is simply not a box.

The difference matters practically rather than philosophically. Because the account is a record and not a box, the bank cares a great deal about the job the record will have to do. A record that sits mostly still is worth something to a bank, and the money behind it can be put to work for a while. A record that is emptied and refilled forty times a month is worth much less in that sense, and costs the bank more to run. The difference between a record that sits still and one emptied forty times a month, and nothing more mysterious, produces most of the account types a household meets.

How Bank Accounts Work: what happens the moment money moves?

Two words do all the work, and because both are written from the bank's point of view, they feel backwards the first time. A creditAn entry that increases the balance on an account. Money arriving, whoever sent it and whatever it was for. is an entry that increases the balance. A debitAn entry that reduces the balance on an account. Money leaving, whether it was spent, moved, or taken by a standing instruction. is an entry that reduces it. The balanceThe running total of what the bank owes at that moment, after every entry recorded up to then. It is a result, not an instruction. is simply the running total after each entry, so it is a result rather than a decision. Nobody sets a balance. A balance falls out of what has already happened.

Watch it happen on 1 April. The Bhosale household's salary account opens the year holding Rs 6,200/-. Meghna Bhosale's take-home pay of Rs 39,800/- arrives from Sahyadri Freight Services Private Limited. The bank writes a credit of Rs 39,800/-, and the balance becomes Rs 46,000/-. On 3 April the household pays Rs 3,725/- for groceries, fuel and eating out. The bank writes a debit of Rs 3,725/-, and the balance becomes Rs 42,275/-. On 5 April the rent of Rs 14,000/- leaves by standing instruction and the balance becomes Rs 28,275/-. Nothing else is happening. Each entry lands, the total is recalculated, and that is the whole machine.

Because the balance is a result and not a store, an account can go below zero. A box of notes cannot. On 24 April the household pays Rs 3,725/- for the week's groceries, fuel and eating out when the balance stands at Rs 555/-. The bank records the debit anyway, under an arrangement the household holds with it, and the balance becomes minus Rs 3,170/-. Read that as an ordinary sentence rather than a verdict. The minus sign says the bank no longer owes the household anything and the household now owes the bank Rs 3,170/-, and the balance stayed that way for six days until the counter money arrived on 30 April. A month like that happens in a great many households, and what it costs is a matter for the household's own contract with its bank.

One more thing about movement trips almost everybody. A debit records that money left the account. A debit does not record that the money was spent. On the 15th of every month Rs 2,000/- leaves the Bhosale household's salary account and goes into its recurring depositA deposit fed by a fixed amount every month for a fixed term, with the whole amount plus its interest becoming available at the end.. The transfer is a debit, it looks exactly like the rent debit, and yet not one rupee of it has left the household. The account cannot tell the difference and neither can the app. Only a person who knows what the other end of each entry is can tell the difference. Nothing else about reading a statement matters as much.

What is a savings account, and what is the bank paying for?

A savings account is the general purpose record. Money goes in, money comes out, and the bank pays something for the use of the balance while it sits there. The rate at which it pays, whatever balance it may require, and what it charges for what, are set by each bank within rules made by the Reserve Bank of India, they change, and they differ from bank to bank. The place to read them is the bank's own schedule of charges. Every bank publishes one.

Why the bank pays anything at all is worth understanding. Money in a savings account is money the bank can use. The money is not free to the bank. Because the household can ask for it back at any moment, the bank cannot commit it to anything long. But a large number of households, each able to withdraw at any moment, in practice leave a fairly steady total sitting there. Predictability has a value, and the payment is what the bank gives for it. The bank is not paying the holder for saving; it is paying for the use of money it can lend on while the holder is not using it.

The Bhosale household holds two savings accounts and treats them completely differently. The salary account is the one everything moves through. A working account is a corridor rather than a room, so the salary account ends the year almost exactly where it started, Rs 6,200/- to Rs 6,760/-. The second savings account is used as a buffer, opening at Rs 31,000/- and closing at Rs 30,180/-, and it took Rs 1,180/- of interest across the year. Same product, same rules, two jobs. Nobody at the bank distinguishes them. The household does, and that is the whole arrangement.

Which savings accounts does a household in India actually meet?

Three of them, and two are the same product wearing a different label. A plain savings account is the one just described. A salary account is a savings account with an arrangement behind it: the employer has an agreement with the bank, pay arrives into it every month, and the bank may attach conveniences to that arrangement. Underneath the arrangement it is a savings account and behaves like one. Meghna Bhosale's account is exactly this, and the household's whole year runs through it.

The third is the basic savings account, and it exists to remove obstacles rather than to add features. The Reserve Bank of India requires banks to offer an account designed to be held without the balance requirement an ordinary savings account may carry. Having a bank account is then not conditional on already having money. The features such an account carries are set by the regulator and by each bank. A basic savings account is not a lesser account; it is an account with the price of admission taken off.

Here is a household way to hold the three apart. A plain savings account is a room anyone can rent. A salary account is that same room with the rent paid by an arrangement with the employer. A basic savings account is that same room with the deposit at the door waived. The building is the same throughout.

What is a Current Account, and who is it built for?

A current accountAn account built for a business making many payments in and out. The bank pays nothing on the balance, because the balance is not expected to sit still. is built for a trade rather than a household, and the single fact that defines it is movement. A tailoring counter taking payments from thirty customers, paying a cloth supplier twice a week, settling a thread bill and a machine repair, is not holding money. The counter is passing money through. Such a trade needs an account that carries a great deal of traffic without complaint, not a record designed for a balance that sits still.

So the bank builds a different record. The bank expects volume, it may attach services a trade needs, it asks for papers showing the trade exists, and it pays nothing on the balance. A current account paying nothing on the balance is a consequence of the job the account does, not a penalty for using it. Money that arrives on Tuesday and leaves on Thursday cannot be lent on by the bank in any useful way, so there is nothing there for the bank to pay the holder out of. Paying for a balance that is never actually there would be paying for nothing.

The everyday version runs like this. A vegetable seller and a cold store both handle the same crate of tomatoes, and they are not in the same business. The cold store is paid to hold things still; the seller is paid to move things along. Asking why the seller does not also pay rent for the crate misunderstands the seller's trade. A savings account is the cold store. A current account is the stall.

Nothing about any of this tells a particular trade what it should hold. The requirements a bank sets before it opens such an account, the charges and the services attached are that bank's business and are published by it. The Reserve Bank of India sets the framework the banks work inside, and rbi.org.in is where the framework is read.

How is a deposit different from an account?

An account is a record that can be drawn on. A deposit is a record the holder has agreed not to draw on for a while, and the agreement is the entire product. A fixed depositA single amount left with the bank for a fixed period, at a rate agreed at the start, with the amount plus its interest available at the end. is one amount left for a stated period. A recurring deposit is the same idea fed monthly: the same amount goes in every month for a fixed term, and the whole thing plus its interest becomes available at maturityThe date a deposit ends and the money, together with the interest it has earned, becomes available to the holder..

Giving up free access buys certainty. Because the bank knows how long it has the money, it can commit it, and because it can commit it, it can fix the rate at the start. A rate fixed at the start means the worth of a deposit on a stated date can be named today. The same cannot be said of a savings balance. A savings balance will be whatever is left after a year of life happening to it. A deposit is a trade of access for certainty about the amount on a date, and neither half of that trade is free.

The Bhosale household runs a recurring deposit at Rs 2,000/- on the 15th of every month, opened eight months before this year began. Twelve payments of Rs 2,000/- were made across the year, so the deposit carried Rs 16,000/- of deposits paid in on 1 April and Rs 40,000/- on 31 March. Note carefully what that Rs 40,000/- is and is not: it is the deposits paid in, and it does not include a rupee of interest. On a recurring deposit the interest is credited at maturity. The household is holding Rs 40,000/- of its own money and a promise about what that will become. Both are real, and only one of them is in the closing figure.

How does a household decide which account fits a job?

Three questions decide it, and every one of them is a question about the money rather than about the bank. How soon will it be needed? How many payments will pass through it? Does the amount have to be certain on a particular day? Answer those three about a specific pile of money and the account almost picks itself. The decision usually gets made the other way round.

Ask the questions of the money and the answer is mechanical; ask them of the bank and the answer is whatever was advertised most recently. The Bhosale household's own holdings show it working. The money that has to meet the rent on the 5th is needed immediately and passes through many payments, so it sits in a savings account. The money going towards Ira Bhosale's admission deposit is needed on a date that can be named, so it sits somewhere that fixes an amount by that date. Nobody had to compare products to get there.

What do a joint holding and a nomination actually do?

A joint holding and a nomination get confused with each other constantly, and they do completely different jobs. A joint holdingTwo or more people holding one account together, on operating terms stated when it is opened, such as either of them acting alone or both having to act together. is about who may operate the account now while everybody is alive and well. Two or more people hold it together, and the terms stated when it is opened decide whether either of them can act alone or whether both have to act together. The operating terms are not a detail. The terms decide whether one holder can empty the account on a Tuesday without asking anyone.

A nominationAn instruction on an account naming the person the bank may pay if the holder dies. It settles who the bank pays, not who the money finally belongs to. is about something else entirely: it tells the bank who it may pay if the holder dies. A common misunderstanding follows, and it is worth correcting directly. A nomination tells the bank who to pay out to; it does not decide who the money finally belongs to. The person named receives the money from the bank and holds it. Who is ultimately entitled to it is settled by law and by whatever the holder left behind saying so, and that is a separate matter decided elsewhere.

Why does the gap matter to an ordinary household? Because a nomination is doing a job worth having on its own terms. A nomination means the bank has somebody it can pay without a long wait, at the exact moment when a household is least able to wait for anything. The speed is a real service. A nomination just is not a will, and treating it as one is how a household ends up with two people holding different sheets of paper and both convinced they are right. The Reserve Bank of India carries the material on nomination and on settling claims on deposit accounts, and rbi.org.in is where it is read, along with whatever the individual bank requires.

The practical shape of it for the Bhosale household is unremarkable and worth stating anyway. Meghna Bhosale's salary account, the buffer savings account and the recurring deposit each carry their own arrangement, and each of those arrangements is a separate instruction to the bank rather than one household-wide setting. Nothing is inherited from one account to another. Whether any of them is set the way the household would want is a question the household can only answer by looking. Looking costs nothing.

How is a bank statement read, line by line?

A statement has five columns and each one answers a different question. Date, description, debit, credit, balance. Most people read the last one and skim the rest. The rest is where the information is. The description column is the one almost nobody reads and the only one that says how the money moved and who was at the other end.

Take one month of the Bhosale household's salary account, April, exactly as it fell. The salary lands on the 1st and the balance rises to Rs 46,000/-. Groceries, fuel and eating out go out on the 3rd. Rent leaves on the 5th by standing instruction, the loan instalment on the 7th. Six more entries follow between the 9th and the 14th, Rs 19,605/- in all, being cooking gas, the first school term, society maintenance, another week of groceries, the mobile and broadband bill and clothes for the school year, and the balance is down to Rs 5,520/-. The recurring deposit takes Rs 2,000/- on the 15th. On the 17th the household moves Rs 4,000/- in from its buffer savings account, and pays for another week. Electricity on the 18th, medicines on the 22nd, and on the 24th another Rs 3,725/- of groceries, fuel and eating out puts the balance at minus Rs 3,170/-, where it stays until the counter takings arrive on the 30th.

The columns matter more than the story. The date column records when the bank recorded the entry, and the day of recording is not always the day the household paid. The debit column records that money left, and refuses to say whether it was spent or merely moved. The credit column records that money arrived, and refuses to say whether it was earned or merely moved back. The balance column is the only one that can go below zero, and the only one that is a result rather than a fact. And the description column carries the code for how the money travelled. Payment routes are covered separately.

What do the household's four holdings actually add up to?

The Bhosale household holds four things at a bank, and only three of them move this year. The salary account, a savings account, opened at Rs 6,200/- and closed at Rs 6,760/-. The buffer savings account, opened at Rs 31,000/- and closed at Rs 30,180/-, took the Rs 1,180/- of interest and fell to Rs 10,400/- on 8 February. The recurring deposit, opened at Rs 16,000/- of deposits paid in and closed at Rs 40,000/-, with the interest credited only at maturity and therefore not in that figure. And a public provident fund in Meghna Bhosale's name holds Rs 84,000/-. Nothing was paid into it this year and it sits outside this arithmetic entirely.

Add the three that moved. Rs 6,200/- plus Rs 31,000/- plus Rs 16,000/- is Rs 53,200/- on 1 April. Rs 6,760/- plus Rs 30,180/- plus Rs 40,000/- is Rs 76,940/- on 31 March. The household is Rs 23,740/- better off across the year. The Rs 23,740/- has exactly two causes and nothing else: a surplus of Rs 22,560/- and interest of Rs 1,180/-, and the two add to Rs 23,740/- to the rupee. Nothing is approximate, nothing is unexplained, and if the two sides had not met, that would mean an item was missing rather than that the accounts were unknowable.

The four readings run like this. Start with the opening Rs 53,200/- alone and the gap is Rs 23,740/-, the whole year unaccounted for. Add the money that came in, Rs 5,73,600/-, and the running figure leaps to Rs 6,26,800/- while the gap becomes minus Rs 5,49,860/- and runs clean off the scale. Counting what arrived without counting what left is not half an answer but a wildly wrong one. Take out the money that went out, Rs 5,51,040/-, and the running figure drops to Rs 75,760/- with a gap of just Rs 1,180/-. Add the interest of Rs 1,180/- and the gap is nothing. Apply the recurring deposit as a movement and the gap stays at nothing. The transfer never was a change in the total. The second control allows that Rs 24,000/- to be miscounted as spending, and doing so opens a reconciliation that had closed to the rupee back up to a gap of Rs 24,000/-.

Who else reads a household's accounts this way?

Leave the household for a moment. Several other people open the same statement in the same week, and none of them is looking at the balance.

A lender reads a statement for regularity rather than for size, an insurer's claim desk reads it for a single dated payment, and the household itself reads it for the only question a statement can actually answer: where the money went. Watch the lender work. A balance on one day is easy to arrange, so somebody assessing an application is not impressed by a large balance on the day of the application. The shape across months is read instead: whether the credits arrive on the same dates, whether the account goes below zero and how often, whether the outgoings look like a household running steadily or one being kept afloat. The Bhosale household's account would show a salary landing on the 1st of every month and a balance that touched minus Rs 3,170/- once in April. Both of those are ordinary facts and both would be read.

The insurer's desk has the narrowest use of all. When the health cover premium of Rs 14,400/- paid in September has to be proved, what settles it is one dated debit on one statement, and the whole rest of the year is irrelevant. The narrow use changes what a statement is for. A statement is not only a record of a year; it is the evidence for a single line in it, and somebody may need that evidence at very short notice.

And the household's own use is the most direct. The household can see what nobody outside can: which credit was the counter and which was the buffer, whether a debit was spending or a movement, and which month the electricity jumped and why. A statement records where money went and never whether it should have gone there, and reading it as a judgement rather than a record is how a useful document turns into an unpleasant one. The Bhosale household ran short in five of twelve months and ended the year Rs 22,560/- ahead. Both of those sentences are true, both come off the same statements, and neither is a verdict on anybody.

The Bhosale household, Meghna Bhosale, Ashok Bhosale, Ira Bhosale and Sahyadri Freight Services Private Limited are invented.
Educational material. Not advice on any investment, tax, budget or market position.