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A detailed guide on how banks calculate interest on Savings Account
Are you considering exploring the world of finance? A Savings Account might be the perfect place to start. It's a versatile tool that allows you to deposit, withdraw, and transfer money conveniently, often with online access for added ease.
But the real perk of a Savings Account is the interest you earn on your deposits. Banks essentially pay interest on your account deposits, helping your savings grow over time.
If you wish to open a Savings Account online and find out how banks calculate interest on Savings Accounts, you've come to the right place. This blog will walk you through everything you need to know.
According to Reserve Bank of India regulations, interest on Savings Accounts is computed daily. Here are the guidelines:
Whether you open Savings Account online or offline, the interest calculation formula remains the same.
Daily Interest = (Daily Balance x Interest Rate)/365
Assume your daily account balance is ₹1 Lakh and the bank offers an interest rate of 3.5% for balances up to ₹1 Lakh. Then, your daily interest amount will be:
[1,00,000 x (3.5/100)]/365 = ₹9.58
Remember, your daily interest amount will differ based on your outstanding daily balance.
Now that you know how to calculate interest on a Savings Account, let us assess the interest you would earn on account balances for five consecutive days.
Days
Account Balance
Interest Calculation
Interest Amount
1
₹1,00,000
[1,00,000 x (3.5/100)]/365
9.58
2
₹80,000
[80,000 x (3.5/100)]/365
7.67
3
₹95,000
[95,000 x (3.5/100)]/365
9.10
4
5
According to the above calculation, the interest earned on the Savings Account for five days would be ₹45.03.
Besides understanding how to calculate interest on Savings Accounts, here are some things you should know:
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The repo rate is the interest rate commercial banks pay to borrow money from the central bank. When the repo rates increases borrowing becomes costlier for banks. To offset this, banks often increase their Savings Account’s interest rates to attract more deposits.
Besides repo rates, a bank's liquidity (readily available cash) affects Savings Account interest rates. More liquidity allows banks, to offer higher interest rates. On the other hand, lower liquidity may lead to reduced Savings Account interest rates as banks manage their financial obligations cautiously.
Each bank's profitability goals influence Savings Account interest rates. Established banks may prioritise profit margins, potentially offering lower Savings Account rates. Newer banks might prioritise attracting customers by offering higher interest rates, even if it impacts their profitability.
Earning interest on your Savings Account is beneficial, but the interest earned is taxable income. The tax rate applied varies based on your income tax bracket. For instance, if you fall under the 30% tax bracket, that rate would be applied to the interest income.
However, there's a silver lining. Section 80TTA of the Income Tax Act (1961) offers a deduction on interest earned from Savings Accounts. This deduction allows you to exempt up to ₹10,000 annually. Therefore, only interest exceeding this limit is subject to tax.
Open Savings Account in 3 easy steps:
While the RBI sets the base interest rate for Savings Account deposits, banks have the flexibility to offer a slightly higher interest rate over the base rate, especially for Premium accounts. As such, when you choose to open a Savings Account, you must check both, the RBI base rate and the interest rate offered by the different banks. This way, you can select a bank offering a more competitive rate.
With the digibank by DBS app, you can open a new savings account in a few minutes! Download the app to get started.
*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.
