Monthly Average Balance confuses many. However, if you know how banks calculate MAB, it will be easy to manage the money in your accounts. Read on to know all about it.
Monthly Average Balance (MAB) confuses many account holders and they wrongly take it as maintenance of a specified amount in their Savings Bank Account all the time. However, MAB is actually calculated by adding up all end of day balances in an account in a month, and then dividing it by the number of days in that particular month. While calculating MAB, all bank holidays and working days are included too.
For example, Mr. A has a Savings Bank Account in a bank whose requirement of MAB is Rs. 10,000. It does not mean that A must maintain a balance of Rs. 10,000 at the end of each day of the month. It rather means that even if A has an EOD balance of Rs. 3 lakh (MAB X Number of days of the month) that is Rs 10,000 X 30 days even on just a single day of that month he has achieved the monthly average balance for that month. It does not matter whether he has nil EOD balance on the remaining days of the month.
Remember that for the purpose of MAB, only the end of the day balance is taken into account and not the average balance of the day.
Alternatively, Mr. A can maintain an EOD balance of Rs. 10,000 in this account on each and every single day of the month including holidays, or he can have an EOD balance between these two extremes – Nil EOD balance and Rs. 3 lakh EOD balance so far as the requirement is met.
MAB of Savings Bank Accounts varies from bank to bank and also depends on the location of the bank branch.
Why Do Banks Levy MAB?
Banks need money for their various activities and idle cash in accounts is a major source of this money. For a bank, a Monthly Average Balance system is better than a Quarterly Average Balance (QAB system) because with the same minimum balance a customer will have to deposit more money in his account in case of QAB as compared to MAB. So the chances of customers keeping more cash over a longer period of time are higher in MAB than in QAB.
How To Ensure You Maintain MAB
- The easiest way is to avoid opening multiple accounts. Multiple accounts not only block your money, but also make it difficult for you to maintain MAB in each and every account as different banks can have different MABs.
- Generally, public sector banks have smaller MAB requirement as compared to private sector banks. Additionally, the penalty imposed by public sector banks if you fail to maintain the minimum account balance is much less as compared to penalties levied by private banks.
- Regularly review your accounts so that any situation of a potential default can be rectified quickly.
- Clarify from your bank what date range it uses for MAB calculations. Banks may follow the normal dates i.e. starting date and ending date of the month. Or they may follow some other dates, say the 10th of the current month to the 9th of the next month. This clarity will avoid unnecessary confusion.
An advantage of keeping MAB is that the money in your Savings Bank Account will not only earn interest but this interest is also eligible for tax deduction up to Rs. 10,000 under Section 80 TTA of the Income Tax Act. This deduction is over and above the deductions available under Section 80 C. Also, no TDS is cut on such interest earned. Interest exceeding Rs. 10,000 will be taxed as per tax rate applicable.