How to Calculate Interest on Savings Accounts?

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A detailed guide on how banks calculate interest on Savings Account

Key Takeaways

• The Reserve Bank of India (RBI) has established guidelines on how to calculate interest on Savings Accounts.
• Interest is computed based on the end-of-day balance in your account.
• Many banks offer a consistent interest rate for balances up to ₹1 Lakh.
• Premium Accounts can yield higher interest rates.
• Interest earned is usually credited to your Savings account quarterly or semi-annually, depending on the bank's policy.

Introduction

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.

RBI Guidelines for Interest Calculation on Savings Accounts

According to Reserve Bank of India regulations, interest on Savings Accounts is computed daily. Here are the guidelines:

• The banks shall offer a flat rate of interest on balances up to ₹1 Lakh, regardless of the balance amount in your account.
• If your Savings Account balance exceeds ₹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 Accounts: Using 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 ₹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.

According to the above calculation, the interest earned on the Savings Account for five days would be ₹45.03.

Things to Know About Savings Account Interest Rates

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

• Although the interest rate is calculated daily, banks typically credit the interest amounts to your savings account quarterly or half-yearly.
• Interest earned is compounded quarterly, meaning the interest from the previous quarter gets added to your balance, increasing your potential earnings in the next 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. OR The interest rate you earn depends on the type of Savings Account you hold. Premium or High-Yield Savings Accounts often offer higher rates compared to regular accounts.
• The Savings Account interest rate increases when you maintain higher account balances.OR Maintaining a higher account balance can result in increased interest earnings, as some banks offer tiered rates for larger balances.

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Factors Affecting Savings Account Interest

• Repo Rates

  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.

• Liquidity

  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.

• Profitability Preferences

  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.

Taxation of Savings Account Interest

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:

• Download the digibank app.
• Fill in your details and complete KYC (Know Your Customer).
• Activate your DBS Bank Savings Account.

Final Note

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.

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1. Does a Savings Account pay interest monthly?

   Not necessarily. Interest on Savings Accounts is usually calculated daily but credited quarterly or annually. Check with your bank to confirm their specific interest crediting schedule.

2. How can I determine the interest rate for my Savings Account?

   To find out the interest rate for your Savings Account:

   • Visit your bank's website and look for the section on Savings Accounts.
   • Check the interest rates listed there.
   • Contacting customer support if you cannot find the information online.

3. Do I have to pay tax on the interest earned from my Savings Account?

   Yes, you have to pay tax on the interest earned from your Savings Account. However, you can avail of a deduction under Section 80TTA of the Income Tax Act 1961, which allows the exemption of up to ₹10,000 annually on the interest earned. Amounts above this limit are taxable based on your income tax bracket.

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