How Is the Interest Calculated on Indian Savings Accounts?

Savings accounts are the most popular and commonly used accounts to make savings. Individuals, salaried and non-salaried, and even minors can access these accounts. It is good to build a habit of saving, keeping money safe, and earning interest on saved funds.

But how do banks calculate the interest amount on savings accounts, and how is it credited to savings accounts? This comprehensive guide explores how banks calculate savings accounts’ interest.

Important Features of Interest Calculation on Savings Accounts

The Interest on Savings Accounts is calculated daily and paid out every quarter. Banks typically pay interest to savings accounts every quarter. But, you have the leverage to request banks to give you a monthly saving account interest credit.

Savings account interest is calculated using the below formula:

Interest = daily balance * interest rate per year * days/365

• Interest earned on savings accounts is taxed according to income tax rates. However, under Section 80TTA of the Income Tax Act, 1961, interest on savings accounts up to Rs 10,000 is allowed as a deduction from gross taxable income.
• When the Bank adds interest to your savings account, the balance is used to calculate future interest since interest is compounded.

How is Interest on Saving Accounts Calculated by Banks?

Before April 1, 2010, India’s system for calculating interest on savings accounts was significantly different than it is today. At that time, the Reserve Bank of India had important interest calculation and credit regulations.

Banks had to charge interest on the minimum account balance from the 10th to the last day of each month, which should be credited to the account only for Rs. 1 or more.

This was not a fair way to calculate interest on a savings account balance, as it only considered the account’s minimum balance.

The RBI decided in 2010 that interest on savings accounts is calculated based on the daily outstanding balance, so interest is accrued on your bank balance at the end of each day. After April 1, 2010, banks calculate daily interest on deposit account balances. RBI now requires banks to credit accounts with interest at least quarterly. The interest can be credited monthly to the digital savings account when the bank agrees to do so at your request.

Let us look at this example:

Mr. Roy has Rs. 10000 in his digital savings account on June 1, 2022. He withdraws Rs. 5000 after 7 days. And then, he deposited Rs. 3,000 on the 14th day, after which there were no transactions in his account.

If the interest rate is 4%, then let’s see how the interest on Mr. Roy’s is calculated in June 2022.

Calculation of savings account interest will be done as follows:

From 1.6.2022 – 6.6.2022, the outstanding balance was Rs. 10000. Thus, the interest will be calculated on Rs. 10000 for 7 days, which is:

10000*4/100*7/365= 7.67

From 7.6.2022 to 14.6.2022, the outstanding balance was Rs. 5000, so interest for 7 days,

5000*4/100*7/365= 3.83

From 14.6.2022- 30.6.2022, the outstanding balance was Rs. 8000, on which the interest for 18 days shall amount to,

8000*4/100*18/365= 15.78

Thus, the total interest earned for June will be,

7.67+3.83+15.78 = 27.28

Interest Earned for June 2022

This best savings account rates savings account interest will be credited monthly or quarterly, according to the rules and regulations followed by the bank.

Conclusion

This is how the interest on savings accounts in India is calculated. All you need to know is your bank’s rate of interest. And maintain your balance well, you can earn a decent amount of savings account interest daily!