What is Demand Deposit?
A demand deposit is a type of bank account from which you can withdraw money at any time without any prior notice to the bank. In India, the most common example of a demand deposit is a savings account or a current account. When you put your money into these accounts, the bank holds the funds, but you remain free to access them whenever you wish through ATM withdrawals, cheques, internet banking, mobile wallets, or over-the-counter transactions. Because the money is available “on demand,” these accounts play a crucial role in daily financial transactions for individuals, small businesses, and large corporations alike.
How Does Demand Deposit Work?
Account Opening:
- To open a demand deposit account in India, you need to approach a bank (public sector, private sector, or cooperative) with required documents like proof of identity (Aadhaar, PAN card), proof of address (utility bill, passport), and passport-sized photographs. The bank verifies your details and creates an account in your name.
- You may choose between a savings account or a current account. Generally, individuals open savings accounts, while businesses and professionals choose current accounts because of higher transaction limits and specialized facilities.
Depositing Funds:
- Once the account is active, you can deposit money via cash deposit at the branch, cheque deposit, online transfer (NEFT/RTGS/IMPS), or through mobile banking.
- Many banks also allow automatic transfers from other accounts or utility reimbursements, making it easier to keep the account funded.
Withdrawing Funds:
- Withdrawals can be made through ATMs (using a debit card), by writing cheques, or by visiting the bank branch in person. On the digital front, internet banking and mobile banking apps offer “funds transfer” features to move money to other bank accounts or digital wallets.
- There are generally no restrictions on the number of withdrawals from a demand deposit account, though some banks may levy a small fee if you exceed a certain number of free transactions in a month.
Interest and Charges:
- Savings accounts typically earn interest, calculated on the daily closing balance, and credited quarterly or monthly. Current accounts usually do not earn interest, but they may offer overdraft facilities or cash management services for businesses.
- Banks may charge a nominal fee for services like issuing chequebooks, providing demand drafts, or if the account balance falls below the mandated minimum balance.
Components of Demand Deposit
- Account Holder Information: This includes the name of the individual or business, their address, contact details, and KYC (Know Your Customer) documents (Aadhaar, PAN, etc.). Proper KYC ensures that the bank meets regulatory requirements and prevents misuse of the banking system.
- Account Number and IFSC Code: Every demand deposit account in India is assigned a unique 11-digit number. Alongside this, the bank branch is identified by its IFSC (Indian Financial System Code). These codes are crucial for transferring funds between banks electronically.
- Cheque Book Facility: One of the most visible features of a demand deposit account is the cheque book. Cheques are written orders to the bank to pay a specified amount to someone. This paper-based instrument is still widely used in India for payments ranging from utility bills to paying rent.
- Debit Card: Upon opening a demand deposit account (typically a savings account), the bank issues a debit card linked to that account. The debit card allows cash withdrawals at ATMs, in-store purchases, and online shopping. For businesses with current accounts, special corporate debit cards may be provided.
- Online/Mobile Banking Access: Digital access is now a standard component. Banks provide net banking login credentials, and most also offer mobile banking apps. These services let account holders check balances, transfer funds, pay bills, and even open fixed deposits all from their smartphones or computers.
- Passbook or Account Statement: For traditional savings accounts, the bank issues a passbook to record transactions. Nowadays, account statements are also emailed or made available online, showing a detailed summary of deposits, withdrawals, and charges over a selected period.
Types of Demand Deposit
Savings Account:
- Purpose: Designed primarily for individuals to save money while earning interest.
- Minimum Balance: Banks usually require a modest minimum balance (e.g., ₹1,000-₹5,000), though some zero-balance schemes exist for students or senior citizens.
- Interest: Indian banks generally offer interest rates between 3% to 7% per annum (depending on the bank and the government’s base rate). The interest helps encourage saving habits among the public.
- Restrictions: RBI guidelines limit the number of free cash withdrawals and transactions to encourage sensible use of banking resources. Exceeding these limits may attract additional charges.
Current Account:
- Purpose: Suited for businesses, freelancers, traders, and professionals who need to make many transactions frequently.
- Minimum Balance: Typically, higher than savings accounts (e.g., ₹10,000-₹25,000), varying by bank and branch location. Falling below this balance may incur penalties.
- Interest: Current accounts generally do not earn interest, but banks may offer overdraft (OD) facilities based on account history and collateral.
- Transaction Volume: Unlimited transactions allowed, making it easier for businesses to manage payroll, vendor payments, and receivables without worrying about withdrawal limits.
Zero-Balance Accounts (No-Frills Accounts):
- Purpose: Targeted toward individuals at the lower end of the economic ladder to promote financial inclusion.
- Minimum Balance: No minimum balance requirement.
- Interest and Services: May not offer the same perks as standard savings accounts, but usually earn minimal interest. Some services might be limited compared to regular savings accounts.
Specialty Demand Deposit Accounts:
- Women’s Savings Account: Offers additional benefits such as higher interest rates, personalized chequebooks, and preferential services.
- Senior Citizen Accounts: Tailored for people over 60, with higher interest rates, free health checkups, and extra facilities like unlimited free withdrawals.
- Student Accounts: For students in schools, colleges, and universities often zero-balance with some special offers for educational loans or career counselling.
Feature of Demand Deposit
Liquidity:
The hallmark of demand deposit accounts is liquidity. You can access your money whenever you want, making it ideal for day-to-day needs paying bills, shopping, or meeting emergencies.
Safety:
In India, deposits up to ₹5 lakh per depositor per bank are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This insurance ensures that in the unlikely event of a bank failure, depositors still recover their principal (up to ₹5 lakh).
Cheque Clearing Facility:
Demand deposit accounts allow customers to issue cheques, which can be cleared through the Cheque Truncation System (CTS). In urban areas, most cheques clear within one working day of being deposited.
Electronic Transfers (NEFT/RTGS/IMPS):
The Reserve Bank of India (RBI) and participating banks provide electronic transfer facilities:
- NEFT (National Electronic Funds Transfer): Settles transactions in batches throughout the day.
- RTGS (Real-Time Gross Settlement): For high-value payments (₹2 lakh and above), processed in real time.
- IMPS (Immediate Payment Service): Available 24×7 for instant transfers of smaller amounts, usually up to ₹2 lakh at a time.
Overdraft Facility (Primarily in Current Accounts):
Many banks offer overdraft facilities against collateral or a fixed deposit. Businesses can withdraw beyond their available balance up to a sanctioned limit, helping manage short-term cash flow requirements.
Interest Earnings (Savings Accounts):
Savings account holders earn interest on the daily closing balance. The rate is usually declared by the bank at the start of the year and can vary based on RBI’s monetary policy. The interest is credited quarterly or monthly.
Online and Mobile Banking Features:
Demand deposit accounts integrate seamlessly with digital banking services, allowing users to:
- Check balances and view statements.
- Transfer funds between accounts or to other banks.
- Pay utility bills (electricity, water, gas), mobile recharges, and DTH subscriptions.
- Set up standing instructions (automatic payments) for recurring expenses such as rent or loan EMIs.
Benefits of Demand Deposit
- Convenience and Accessibility: With ATMs spread across India, mobile banking, and net banking platforms, you can access your demand deposit account 24×7 whether to withdraw cash, transfer funds, or check your balance. This convenience simplifies personal and business finance management.
- Financial Discipline: For individuals, having a demand deposit account encourages disciplined saving. By seeing your balance grow (and earning interest), you are motivated to spend wisely and set aside funds for emergencies.
- Safe Custody of Funds: Instead of keeping cash at home (which is susceptible to theft or loss), a demand deposit account stores your money securely. Bank lockers, online transaction alerts, and two-factor authentication add layers of security for your funds.
- Easy Payment Settlement: From paying your rent by cheque to reimbursing a vendor via NEFT, demand deposit accounts facilitate seamless settlement of payments. Businesses benefit from prompt payments, better record-keeping, and a professional image when transacting via cheques or electronic transfers.
- Access to Credit: Banks often review demand deposit accounts when evaluating credit applications. A savings account with a healthy balance or a current account with high transaction volumes can strengthen your creditworthiness and make it easier to obtain loans, credit cards, or overdraft facilities at favorable interest rates.
- Zero or Low Fees for Certain Customers: Many banks waive minimum balance requirements for specific categories senior citizens, women, students, or people in rural areas. This approach promotes financial inclusion and allows these groups to enjoy the benefits of banking without worrying about penalties.
- Interest Earnings: Unlike cash at home, money in a savings account earns interest. Although current account holders do not earn interest, they gain the advantage of unlimited transactions and overdraft facilities. The earned interest helps offset costs such as inflation or service charges.
Uses of Demand Deposit
Everyday Personal Expenses: Individuals use savings accounts for grocery shopping, paying utility bills, booking travel tickets, and other routine expenses. Because digital payments and ATMs are widely available, managing daily budgets becomes simpler.
Salary Accounts: Many employers in India credit salaries directly into employees’ demand deposit accounts. This eliminates the need for physical paychecks. Employees can then use the funds immediately transferring money, paying bills, or withdrawing cash.
Small Business Transactions: Shopkeepers, freelancers, and small businesses maintain current accounts to receive payments from customers, pay suppliers by cheque or online transfer, and manage payroll. The ability to deposit large amounts of cash and write multiple cheques makes current accounts indispensable for daily operations.
Bill Payments and Subscriptions: Demand deposit accounts integrate with auto-debit or standing instructions, allowing for seamless payment of recurring bills electricity, internet, insurance premiums, EMIs, and more. This helps avoid late fees and ensures timely disbursement.
Online Shopping and E-commerce: With the growth of digital marketplaces, demand deposit accounts serve as gateways for online payments. Debit cards linked to these accounts facilitate secure purchases on e-commerce platforms, helping users shop from home with confidence.
Investment and Financial Planning: Funds from a demand deposit account can be redirected into other financial products fixed deposits (FDs), recurring deposits (RDs), mutual funds, or government savings schemes like PPF or Sukanya Samriddhi Account.
Emergency Funds: Because money in a demand deposit account is readily available, most individuals maintain a certain balance as an emergency buffer. In unexpected situations medical emergencies, urgent travel, or sudden job changes having funds “on demand” can make a critical difference.