How to calculate interest on savings bank account?

Many people do not know how banks calculate interest on their savings bank account. Till last year every bank had the same interest rates until the Reserve Bank of India in October 2011, deregulated the savings bank interest rate.

Banks are now free to determine their savings bank interest rate, subject to uniformity being maintained upto Rs 1 lakh. A bank can provide differential rates of interest, savings bank deposits over Rs 1 lakh.

However, interest rates for Non-Resident (External) Accounts Scheme and Ordinary Non-Resident will remain unchanged.

How old rates were calculated?

Earlier, till April 1, 2010 banks used to calculated interest rates by different method. This was based on the minimum available balance in the account between the 10th and last day of a month.

This method was not beneficial for customers say for example if you had kept Rs 2,00,000 in your saving account @ 4% for the entire month and on 26th, you remove Rs 1,80,000. You would have got interest only on Rs 20,000, which is just Rs 65.

How present interest rate is calculated?

As per the new method interest rate is calculated on daily basis on your closing amount. However, interest accumulated will be paid quarterly or half yearly depending on the bank.

The RBI expects banks to credit SB interest rates on quarterly basis.

Here is a comparison on how the new method is more beneficial

If you take the same example we discussed above, with the new method of interest calculation, the interest will be 4% on Rs 2 lacs balance, which translates to Rs 657 for 30 days.

Monthy interest = Amount (Daily balance) * (No of days)* Interest / Days in the year.

=200000*30*4/100*365
= Rs 657

Amount=200000
No of days=30
Interest= 4/100
Days in the year= 365

The new method is definitely beneficial to account holders.

Deregulation has increased competition between banks to hike SB deposit rates.

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