How To Calculate Savings Account Interest

How To Calculate Interest on a Savings Account

01^st Nov 2023...

Published By : Team 811

Key Takeaways

Savings account interest is calculated daily based on the closing balance using the formula: Daily Balance × Days × Rate ÷ 365.
Banks credit the accumulated interest quarterly or half-yearly as per RBI’s recommendation for consumer benefit.
Interest from savings accounts is classified as “Income from Other Sources” and must be declared in income tax returns.
No TDS applies on savings interest, but amounts exceeding ₹10,000 in a year are taxable at the account holder’s slab rate.
A deduction of up to ₹10,000 on savings interest is available under Section 80TTA of the Income Tax Act.
Maintaining a higher balance, depositing regularly, and reducing withdrawals help maximise interest earnings.
Savings accounts also offer liquidity, digital access, and safety, making them ideal for short-term financial goals.

Saving money is one of the most important financial habits. Depositing funds in a savings account can help you reach short-term financial goals while keeping your money safe and accessible. Today, banks offer various types of savings accounts tailored to different customer groups, including students, senior citizens, and working professionals.

However, one question many savers have is: how do banks calculate interest on a savings account? Understanding this will help you make smarter financial decisions and maximise your earnings. Let’s explore how interest works, the formula used to calculate it, and ways to earn more from your savings.

What Is the Interest in a Savings Account?

When you deposit money in a savings account, the bank rewards you with interest for keeping your funds with them. This is essentially the bank’s way of compensating you for letting them use your money.

The bank invests or lends out these deposits and, in return, pays you a small percentage of that amount as interest. Over time, this amount grows as the interest compounds—meaning, you earn interest not only on your original deposit but also on the interest that accumulates over time. This compounding effect helps your savings grow steadily, even if you don’t add new deposits frequently.

Importance of Understanding How Interest Is Calculated

Understanding how savings account interest is calculated is crucial for effective financial planning. It empowers you to:

Compare different savings accounts: By evaluating the rates, compounding cycles, and fees, you can identify which bank offers the most beneficial terms.
Plan savings and withdrawals: Understanding how your money grows helps you plan deposits strategically, avoid unnecessary withdrawals, and maintain a higher balance.
Achieve financial goals: With a clear idea of interest growth, you can estimate how much you’ll have for future goals like buying a house, funding education, or planning retirement.

In short, being aware of how your bank credits interest gives you greater control over your finances.

How Is Interest Calculated on a Savings Account?

According to RBI regulations, interest on savings accounts is now calculated daily based on the closing balance. Banks then credit the accumulated interest quarterly or half-yearly, depending on their policy.

The formula used for calculation is:

Interest = Daily Balance × Number of Days × Interest Rate / 365

Example:
If your daily balance is ₹4,00,000 and your bank offers a 4% annual interest rate:
4,00,000 × 30 × (4 ÷ 100) ÷ 365 = ₹1,315

So, you would earn approximately ₹1,315 per month in interest.

Your savings grow faster when the compounding frequency is higher, and your balance remains consistent.

Factors That Affect Savings Account Interest

Several factors influence the total interest you earn from your savings account:

1. Account Balance

The higher your average daily balance, the greater your interest earnings. Some banks even offer tiered interest rates where larger balances earn higher rates.

2. Type of Savings Account

Different savings accounts offer varying interest rates and compounding schedules. For instance, a digital zero-balance savings account may offer competitive rates with minimal maintenance requirements.

3. Interest Rate Fluctuations

Savings account interest rates can change based on inflation, RBI’s monetary policy, and overall economic conditions.

4. Compounding Frequency

The more frequently your interest is compounded like daily, monthly, or quarterly—the faster your balance grows.

5. Bank Charges

Always factor in maintenance or transaction fees, as these can eat into your overall earnings.

TDS on Savings Account Interest

The interest you earn from a savings account is categorised as “Income from Other Sources” under the Income Tax Act.

TDS (Tax Deducted at Source) is not applicable to savings account interest as per Section 194A.
However, if your total interest earnings across all savings accounts exceed ₹10,000 in a financial year, that amount becomes taxable based on your applicable income tax slab.
This is considered a deduction, not an exemption, under Section 80TTA, allowing up to ₹10,000 in deductions on interest earned from savings accounts in a recognised bank or post office.

Benefits of Maintaining a Savings Account

Beyond earning interest, a savings account offers several other benefits:

Financial Safety: Keeps your money secure while ensuring easy accessibility during emergencies.
Liquidity: You can withdraw funds anytime through ATMs, cheques, or digital transfers.
Ease of Investing: Many banks allow automatic transfers to investments or deposits directly from your savings account.
Digital Banking Convenience: Enjoy online and mobile banking for quick transfers, bill payments, and account tracking.
Additional Perks: Some banks offer personal accident insurance, debit card benefits, or special interest features with savings accounts.

Tips to Increase Savings Account Interest

Earning more from your savings account is possible with a few mindful habits:

1. Deposit Regularly

Make small and consistent deposits to build your balance and earn higher interest.

2. Set Up Automatic Transfers

Automate transfers from your salary or current account to ensure consistent savings without effort.

3. Avoid Frequent Withdrawals

Maintaining your balance for longer helps the interest compound more effectively.

4. Opt for a High-Interest Account

Research and choose savings accounts that offer competitive rates and features like Kotak 811’s ActivMoney, which lets you earn up to 7% p.a. with no lock-in period.

5. Stay Updated on Rate Changes

Keep an eye on changes in interest rates or policies announced by your bank or the RBI to make timely adjustments to your savings strategy.

Conclusion

Understanding how interest is calculated on savings accounts is crucial for effective money management. It helps you plan your finances, compare account options, and make informed decisions that align with your goals. With the right savings account and consistent habits, your money can work harder for you.

So, whether you’re saving for the near future or long-term milestones, take advantage of compounding, maintain a healthy balance, and make your savings grow steadily.

FAQs on Interest on a Savings Account

1. How can I calculate the interest on my monthly savings account?

Banks calculate interest daily on your closing balance and credit it quarterly or half-yearly, using the formula:

Interest = Daily Balance × Number of Days × Interest Rate / 365

2. How can I calculate monthly savings account interest?

Apply the same formula over 30 days. For instance, ₹4,00,000 × 30 × (4 ÷ 100) ÷ 365 = ₹1,315.

3. What is compound interest in a savings account?

Compound interest means you earn interest not only on your deposits but also on the interest that has already been added to your account.

4. How often is interest credited to savings accounts?

Most banks credit savings account interest quarterly, though some may do it half-yearly.

5. Is savings account interest taxable?

Yes. Interest above ₹10,000 per year is taxable under the “Income from Other Sources” category.

6. How can I earn more interest from my savings account?

Choose a high-yield savings account, deposit regularly, avoid frequent withdrawals, and keep track of rate updates from your bank.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.