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I was told that sole proprietors in India use a current account for their business, rather than a savings account, to avoid interest.

I don't understand why — if you account for the interest properly and pay tax on it, it shouldn't be a problem, right? I won't have a transaction every day on this account, so a savings account should be fine. I see no reason to refuse the interest if I can earn it and, worse, pay more fees for a current account.

Is a sole proprietor not allowed to earn interest from a bank account?

Are there other factors in this decision?

In case it matters, I may be receiving money from iTunes Connect. Or, more generally, from the sale of apps. Is a current account a requirement for that?

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  • Did you opened saving account or current ? Bank manager is suggesting me to open current account. – Parag Bafna May 30 '19 at 3:55
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    Savings. Ignore them; they're doing that for their own benefit. – Kartick Vaddadi Jun 2 '19 at 5:47
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No. Current account is not a requirement. You can use savings account. You would need to pay taxes on interest.

Savings account have limitation on number of withdrawal in a quarter, hence most sole proprietorship have current account.

Edits:
Historically the withdrawals were by Slips/Cheque. The restriction was on these and not on standing instructions. Over the period the withdrawals from ATM were not counted, plus advent of internet banking / bill pay solutions; these were not included. Currently it is up to the Banks to impose any such restrictions on the Normal savings account and it is not mandated by RBI. On Basic Bank Deposit Accounts, there is an specific RBI circular.

However given the reporting requirements, quite a few Banks encourage sole proprietors to open a current account.

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  • Is the limitation restricted to cash withdrawals only? i.e can I limit my my cash withdrawals but make a high number of digital transfers to pay my suppliers on a frequent basis? – Ahmed Jul 22 '18 at 11:14
  • @Ahmed See edits. Even in older days, the limit was not restricted to "Cash" withdrawals, it was more on withdrawals from checks. – Dheer Jul 23 '18 at 4:42
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Current account offers a lot of benefits for sole proprietors. Think of it like bank account for a company. The bank provides a host of facilities for the company. A sole proprietor does not have enough value as that of a company for a bank but needs similar services. Thus Indian banks offer a toned down version of the account offered to a company.

Current account offer very good overdraft ( withdrawing money even if balance is zero). This feature is very useful as business cycles and payment schedules can be different for each supplier/customer the sole proprietor does business with. Imagine the sole proprietor account has balance of zero on day 0. customer X made payment by cheque on day 1. Cheques will get credited only on Day 3 (Assume Day 2 is a national holiday or weekend). Sole proprietor gave a cheque to his supplier on day 0. The supplier deposited the cheque on Day 0 and the sole proprietor's bank will debit the the proprietor's account on day 1. As customer's cheque will get credited only day 3, the overdraft facility will let the proprietor borrow from the bank

Interestingly, current accounts were offered long before Indian banks started offering customized accounts to corporate customers.

The payment schedule mentioned in my example is based on a clearing system > 10 years ago. Systems have become much simpler now but banks have always managed to offer something significantly extra on lines similar to my example above to proprietor over a savings bank account

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    Thanks, Ravi. I'm an independent software developer, and I don't have any suppliers to pay. I won't have many transactions either since I'll recieve money once a month from Apple. I don't need an overdraft since I don't have significant expenses, and I anyway have my savings to draw upon. Is there any concrete advantage to a current account for me? Or can I open a savings account in the name of the sole proprietorship and be done with it? – Kartick Vaddadi Sep 18 '16 at 7:20
  • Indian banks are a bit paranoid when someone wants to open savings account in the name of sole proprietorship. Technically you can open such a account and in your case it does make sense to do so. Just ensure that you have all the documents needed. In your case, opening savings account in under your single name( basically your personal account) will also help. The latter options needs lesser documentation. Tax implications as suggested by @Dheer will vary on the type of account you use – RAVI D PARIKH Sep 18 '16 at 7:47

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