There is a huge cry over the recent SBI Bank’s move that from 1st April 2017 it will penalizing those savings account holders who not maintain the Monthly Average balance or MAB. But do you know how Monthly Average Balance or MAB is calculated?
Let us take an example of SBI Bank’s new Monthly Average Balance or MAB rates for the savings account.
Monthly Average Balance or MAB of SBI Bank’s Savings Account
Effective from 1st April 2017, SBI Bank will charge a penalty on all those savings accounts who not manage Monthly Average Balance or MAB. The applicable Monthly Average Balance or MAB are as below.
You noticed that maintenance of balance is based on the place you live in.
What is Monthly Average Balance or MAB?
Monthly Average Balance or MAB is defined as the sum of all the end of the day closing balance of your bank’s savings account divided by the number of days in that particular month. Same can be explained with below formula.
Monthly Average Balance or MAB=Sum of all the EOD closing balance / Number of days in that Month
I know many of us misunderstood it differently. If the non-maintenance of Monthly Average Balance or MAB means many of us feel that we must maintain that much amount minimum throughout the month. However, it is not the case like that.
Note that for this calculation, holidays are also considered. Hence, you have to consider all working days and as well as holidays of the month. The second point to be remembered is that the balance of each day is considered as END OF THE DAY balance than the average balance of the day.
Let me give you an example from below image. Let us Mr.X holding savings account and below are his transactions for the month of February 2017.
Now you noticed from above calculation that if your bank asks you to manage the average balance of Rs.6,393 (just took an example), then it does not mean that you must maintain Rs.6,393 from 1st day to last day of monthly always. However, if you manage the monthly average of Rs.6,393, then also it is fine.
Hence, it is monthly average that matters than the daily managing of Rs.6,393. Hope you got my point.
Few tricks to manage the Monthly Average Balance or MAB-
Let us say the average balance you have to manage is Rs.5,000 and the days in a month are 31 days.
# Keeping Rs.5,000 a day throughout a month is same as keeping Rs.55,000 for 3 days.
You no need to manage Rs.5,000 from the 1st day to 31st day of the month. Instead, even if you manage Rs.55,000 for 3 days also, then your average Rs.5,000 average managing of the month can be achieved. How?
Number of days in a month are 31 days. So average balance for the month=Rs.1,65,000/31=Rs.5,302. This Rs.5,302 is well above the bank mandaged Rs.5,000 average monthly limit.
Hence, if your bank suggests you to manage the monthly average of Rs.5,000, then DON”T PANIC. Instead, do some simple calculation. Consider the highest days in any month i.e. 31 days. multiply 31 days to Rs.5,000. The result will be Rs.1,55,000.
This Rs.1,55,000 is the total of your end of day balance for the whole 31 days. You can achieve this either in one day or in 31 days it does not matter.
If your end of the day balance is Rs.1,55,000 or above in a single day and later on it is ZERO balance, then also you no need to worry. Because you managed the AVERAGE balance for the month.
# Try to open the account in Urban, Non-Urban or in Rural areas.
Once the account opened, then request for internet banking facility. Once this is activated, then you no need to visit the bank branch so often.
You can handle all your banking transactions online. By this way, you can reduce your risk of managing the higher average balance in your account.
# Go for Public Sector Banks than Private Banks
Usually, public sector banks offer you to manage less balance than the private banks. I know that at the end it is comfort and service with bank that matters. However, if you are scary of penalty charges for no-maintenance of average balance, then I suggest you to go for public sector banks than private banks.
# Use Auto-Sweep Option
By using Auto-Sweep Option, you can track your average balance. In Auto Sweep option, you will specify the limit say like Rs.10,000. Any balance over and above Rs.10,000 you deposited into the savings account will be turned as FD. In this way, you no need to do the calculation of managing the average balance. Also, you earn something from your FD.
# Check the date range your bank consider
Few banks may follow the regular starting day of the month to end of the day of the month for calculation of average balance. However, it MAY differ with some banks and they may consider say like 5th of the month to 4th of next month.
Hence, clarify with your bank to avoid unnecessary confusion.
# The amount you keep to manage average balance will also earn some interest with some tax benefit
The cash you keep it in the savings account may be idle. But it will earn something than totally NIL. Usually, nowadays many banks offer you around 4% return on this cash. It is calculated as below.
Monthly Interest = Daily Balance * (Number of days) * Interest / (Days in the year)
Let us say the daily balance is Rs. 50,000 and the interest on the savings account is 4% per year the calculation will work out as below.
Monthly Interest = Rs.50,000 * 30 * (4/100) / 365 = Rs. 164.
The interest that you earn from the savings account is considered as “Income from Other Sources” However, you can claim deduction of up to Rs.10,000 on such interest earned under IT Sec.80TTA per year. This deduction is available only to individual and HUF. In Sec.80TTA of the Income tax act, interest up to Rs.10,000 earned from all savings bank account is exempt from tax. This is applicable for savings bank account, post office or co-operative banks.
Also, there is no TDS on the interest you earned. Whatever the interest over and above Rs.10,000 will be taxed as per your applicable tax rate.
What is the difference between Monthly Average Balance (MAB) and Quarterly Average Balance (QAB)?
I already explained you about monthly average balance or MAB. Few banks may insist you for Quarterly Average Balance or QAB.
In the case of Quarterly Average Balance, instead of a month (in the case of Monthly Average Balance or MAB), the calculation is for a quarter or for 3 months. It is calculated as below.
QAB = (Total of all the EOD closing balance)/(number of days in quarter)
Rest of all logic and calculation is same.
Which is beneficial Monthly Average Balance (MAB) or Quarterly Average Balance (QAB)?
Let us say the minimum balance requirement for monthly average balance is Rs.5,000. Then the total daily balance amount must be Rs.1,50,000 (if we consider the days in a month as 30). Therefore, if you maintain NIL for whole month and on last day if you deposited Rs.1,50,000, then you will be considered maintained the average balance.
Let us say the minimum balance requirement for quarterly average balance is Rs.5,000. Then the total daily balance amount must be Rs.4,50,000 (if we consider the days in a quarter as 90). Therefore you have to deposit even if you left the account with NIL balance and on last day of a quarter you deposited Rs.4,50,000, then also the account is considered as balance is maintained.
The logic why banks moved from QAB to MAB is because of this. They need your idle cash to run their shows. The probability of customers managing a certain minimum balance consistently is higher in the case of MAB than QAB.
In case of QAB, the probability is high that we (customers) may keep the account with NIL balance and at the end we may fill the gap with lump deposit for few days. However, in case of MAB, we have to do this activity on monthly basis. Hence, banks find it easy and adopted to MAB than QAB.