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Interest on Savings Bank Account: How Is It Calculated?

interest calculation on savings accounts

interest calculation on savings accounts

The interest on savings account is calculated on a half-yearly basis and it’s usually credited in June and December. While the interest amount varies depending on the type of account, it may also differ from bank to bank. This particular practice has been operative since 30th October 2011 when RBI announced deregulation of savings bank deposit interest rate thereby making the banks free to determine their saving interest rate.

The interest on savings account are non taxable up to Rs.10,000. Also, if the interest crosses the threshold limit it becomes subject to tax.

Prior to that all banks were following a uniform interest rate of 4%. Deregulation has helped account holders earn more interest. However, except for a few private sector banks such as Kotak Mahindra, YES bank or Bandhan bank who are currently offering higher interest rate, majority of bank such as SBI, HDFC, and Axis are still at 4%.

How Do Banks Calculate Your Savings Account Interest?

Previously, the calculation was different. Though it was 4% per annum, the banks used to pay interest on the lowest available balance in the account between the 10th and last day of a month. Any deposit made in between would not attract any interest, but the withdrawals were taken in to consideration to calculate interest for the month.

Example –  As on 10th of July Mahesh has Rs.10,000 in his savings account, and on 15th his father sends him Rs.40,000 for hostel fees and other expenses. On 30th he withdraws Rs 45,000 and the remaining balance in the account comes down to Rs.5000. Assuming that there is no other deposit or withdrawal made in between, in this case the bank will calculate interest on Rs.5000, which is the lowest available amount between 10th and 31th July. Here the interest calculated for July will be Rs.16.66 at 4% per annum.

However, the above method was seen as unfriendly as customers couldn’t receive full benefits of the amount they maintained in the account. So with effects from April 1, 2010 the banks started calculating interest on a daily balance method following the guidelines laid down by RBI. This means the interest credited will be based on the closing balance you maintain every day, giving you the maximum benefits.

Let’s see how Mahesh benefits from the new interest calculation rules.

Balance in Mahesh’s account

On 1st july= Rs.10,000

On 15th july= Rs.50,000

On 30th july= Rs.5000 (after he has withdrawn Rs.45,000)

On 31Th July= Rs.5000

Now at 4% per annum rate of interest, Mahesh will get

Interest on Rs.10,000 for 14 days = Rs.16

Interest on Rs.50,000 for 15 days = Rs.80

Interest on Rs.5000 for remaining two days = Rs.2

Total interest he earns= Rs. 98

The comparison makes it absolutely clear as of which calculation method earns more interest.

RBI in it’s latest move asked banks to pay interest on savings banks account on quarterly basis or shorter duration, a move which will benefit crores of savings account holders.

Savings account comes with a host of benefits; earning you interest is one of them. However, choosing a bank purely on the basis of rate of interest they offer for savings account may not be a wise decision. You should give it a deliberate thought and evaluate different aspects of it before you decide to shift to a different bank who offer higher interest on savings account.

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