How Do Banks Calculate Interest On Savings Accounts In India? | October 2023

Savings accounts are the most common form of banking in India. They offer a safe place to store money, easy access to funds, and the added benefit of earning interest on your deposits.

Understanding how savings account interest is calculated is essential for optimising your savings. In this blog post, we will delve into the intricacies of how savings account interest is calculated in India.

Method of Calculation of Savings Account Interest: Daily Balance

Savings account interest in India is typically calculated based on two fundamental principles: Daily Balance and Monthly/Quarterly Compounding method. Most banks in India use the Daily Balance method to calculate interest. This means that the interest is calculated on the closing balance in your account at the end of each day. The sum of these daily balances over a specific period (usually a quarter or year) forms the basis for interest calculation.

How to Calculate Savings Account Interest?

The formula for calculating savings account interest using the Daily Balance method with monthly compounding is as follows:

Want more clarity on this? Why don’t we take up an example to calculate how savings account interest is calculated:

The outstanding balance changes over the course of the month. So, how do banks calculate savings account interest in this case? Let’s see.

Now, in case of the second account holder, here is what the account statement for the month of January would look like:

And how do banks calculate savings account interest in this case?

Factors Affecting Savings Account Interest

Several factors influence the savings account interest you earn in India:

The Type of Savings Account

Different types of savings accounts, such as regular savings accounts, senior citizen accounts, or premium accounts, may offer varying interest rates.

Bank or Financial Institution

Savings Account interest rates can vary significantly from one bank or financial institution to another. It's essential to compare rates before opening an account.

Minimum Balance

Some accounts require a minimum average monthly or quarterly balance to qualify for the stated interest rate.

Frequency of Compounding

As mentioned earlier, the frequency at which savings account interest is compounded (monthly or quarterly) affects your overall earnings.

Balance Slabs

Some banks offer tiered interest rates based on the account balance. Higher balances may earn a higher interest rate.

Taxation of Savings Account Interest

In India, the interest earned on savings accounts is subject to income tax.

However, there is a benefit known as Section 80TTA, which allows individuals to claim a deduction of up to Rs. 10,000 on the interest earned from savings accounts in a financial year. This helps reduce the tax liability on your savings account earnings.

Conclusion

Understanding how savings account interest is calculated in India empowers you to make informed financial decisions. By choosing the right type of savings account, considering the bank's interest rates, and being aware of compounding and taxation rules, you can make the most of your savings and watch them grow over time.

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‍Frequently Asked Questions‍

‍1. Does a savings account pay interest monthly?

‍Banks generally pay out the interest on savings accounts on a quarterly basis. However, they can choose to pay the interest monthly, if they wish to. Check in with your bank and find out how often they pay out the interest on your savings account.

‍2. How do you calculate monthly savings account interest?‍

The interest on your savings account is not calculated on a monthly basis. It is calculated each day, according to the formula shown below:

Interest = Daily balance * Rate of interest per annum * Number of days/365

‍3. Do I have to pay tax on the interest earned from my savings account?‍

Yes, the interest you earn on your savings account is taxed according to your income tax slab rate. But under section 80TTA of the Income Tax Act, 1961, you can claim savings account interest up to Rs. 10,000 as a deduction from your total taxable income.

‍4. Is the interest calculated on a savings account simple or compound interest?

‍The interest you earn on your savings account is compounded. This means that once the interest for a period is credited to your account, it is also considered as a part of the balance and used to compute the interest thereafter.