How to Calculate Interest on Savings Account

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A detailed guide on how banks calculate interest on Savings Account

Key Takeaways

• The Reserve Bank of India has laid down guidelines for Savings Account interest calculation.
• The interest on a Savings Account is calculated daily.
• Banks typically offer uniform interest rates for balances up to INR 1 Lakh.
• You can earn higher interest on Premium Accounts.
• Banks credit the interest amount into your account on a quarterly or half-yearly basis.

A Savings Account is perhaps your entry into the financial world. It enables you to deposit and withdraw money, carry out fund transfers, make online payments, etc. A significant benefit of a Savings Account is the interest you earn. Banks pay interest on your Savings Account deposits. If you wish to open Savings Account online and find out how banks calculate interest on Savings Accounts, this article is for you.

How to Calculate Interest Rate on Savings Account

Per Reserve Bank of India (RBI) guidelines, Savings Account interest rate is calculated on a daily basis. The rules are as follows:

• The banks shall offer a flat rate of interest on balances up to INR 1 Lakh, regardless of the balance amount in your account.
• If your Savings Account balance exceeds INR 1 Lakh at the end of the day, banks may offer slightly higher interest rates.

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How to Calculate Interest Rate on Savings Account – The Formula

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 INR 1 Lakh. The bank offers an interest rate of 3.5% for balances up to INR 1 Lakh. Then, your daily interest amount will be:

[1,00,000 x (3.5/100)]/365 = INR 9.58

Remember, your daily interest amount will differ based on your outstanding daily balance.

Now that you know how to calculate interest on Savings Account, let us assess the interest you would earn on account balances for five consecutive days.

Per the above calculation, the interest earned on Savings Account for five days would be INR 45.03

Things to Know about Savings Account Interest Rates

Besides understanding how to calculate interest on Savings Account, here are some things you should know.

• Although the interest rate is calculated daily, banks credit the interest amount quarterly or half-yearly.
• The interest you earn gets compounded every quarter. Your interest amount from the previous quarter gets added to the balance in the new quarter.
• The bank pays you interest rates based on the type of Savings Account you hold. You typically earn higher interest rates on Premium or High-Yield Savings Bank Account
• The Savings Account interest rate increases when you maintain higher account balances.

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Final Note

While the RBI decides the base interest rate paid on Savings Accounts deposits, banks may offer a slightly higher interest rate over the base rate. This is especially true in the case of 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 bank. You can then select a bank offering a better interest rate than its competitors.

With the digibank by DBS app, you can open a new savings account in a few minutes! Download the app to get started.

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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.