What Is The Right Procedure Of Interest Calculation On Indian Savings Accounts?

Savings bank accounts are the first step to banking and your primary link that opens the doors of banking for you. It is a great way to inculcate savings of your hard-earned money, process financial transactions daily, and a great opportunity to earn interest on your accumulated funds. 

You get several advantages from open online savings account, and we have listed the best ones below.

· Digital banking services

· High-interest rates

· 24-by-7 banking possibilities

· ATM and Debit Card facilities

· Various offers, discounts, rebates, rewards, and cashback opportunities

· Doorstep banking features

· Ease and convenience of opening and operating digital savings bank accounts

· Easy money transfers and bill payments, and so much more

Everyone can open a savings bank account, from salaried to self-employed, housewives, senior citizens, and to even minors. Banks provide different savings accounts, which help you choose the best one according to the minimum balance requirements (not every category comes with a zero balance), features and benefits, and ease of banking.

But do you know how banks calculate interest on your bank balances? Let us find this out here.

How is Interest on Saving Accounts Calculated by Banks?

Since April 1, 2010, banks have followed a new method to calculate interest on your savings bank accounts. The key considerations for the calculation of interest are listed below.

· Banks calculate interest daily.

· Your daily savings bank balance is taken into consideration.

· RBI has issued a mandate to banks to pay out the interest every quarter. You can also request monthly payouts depending on your relationship with the bank.

· The interest is compounded, meaning when it is added to your balance, it is considered a part of your bank account, and interest is calculated on the whole amount.

Also Read: What Makes a Savings Account An Indispensable Choice?

· Interest earned is taxable, but an amount up to ₹ 10000 is exempted under Section 80TTA of the Income Tax Act, 1961.

The Formula for Calculating Interest on Savings Accounts

The formula for calculating the interest amount is as follows:

· Interest on savings account = Daily balance*Rate of interest* (No. of days/365)

To understand this better, consider the example given below.

Let us assume you have ₹ 50000 in your savings account on November 1 2022. You made the following transactions:

You withdrew ₹ 10000 on November 10 2022, and deposited ₹ 20000 on November 15, and there were no more transactions till November 30 2022.

Let’s see how the interest on your savings bank account will be calculated for November 2022: 

Date	Opening Balance	Deposit	Withdrawal	Outstanding
1.11.2022	50000	–	–	50000
10.11.2022	50000	–	10000	40000
15.11.2022	40000	20000	–	60000
30.11.2022	60000	–	–	60000

Calculation of savings account interest will be done as follows:

Let us assume the rate of interest offered by the bank is 4.25%

From 1.11.2022 – 10.11.2022, the outstanding balance was Rs. 50000. Thus, the interest will be calculated on Rs. 50000 for 10 days, which is:

· 50000*4.25/100*10/365= 58.21

From 10.11.2022 to 15.11.2022, the outstanding balance was Rs. 40000, so interest for 5 days, 

· 40000*4.25/100*5/365= 23.28 

From 15.11.2022- 30.11.2022, the outstanding balance was Rs. 60000, on which the interest for 15 days shall amount to, 

· 60000*4.25/100*15/365= 104.79 

Thus, the total interest earned for June will be, 

· 58.21+23.28+104.79= 186.28 

Interest Earned for November 2022 

Outstanding Balance	No. of days	Interest Calculation	Interest earned
50000	10	50000*4.25/100*10/365= 58.21	58.21
40000	5	40000*4.25/100*5/365= 23.28	23.28
60000	15	60000*4.25/100*15/365= 104.79	104.79
Total interest earned		186.28

A bank that gives out high interest rates savings account balances, which can range between 4%-6%, is quite a great deal to get. It is better not to compare the interest on a savings account to the interest rate earned on fixed deposits, as these are two different accounts that serve different purposes.

The liquidity and flexibility of deposits, payments, money transfers, and withdrawals you get using your savings bank account, you won’t get in fixed deposits.

Conclusion

This was all about how interest is calculated in your savings bank account. Opening a new savings bank account with RBL allows you to earn high interest rates, get the best of customer and banking services, pay minimal charges, and take advantage of growing your wealth.