A lot of people do not know interest is calculated on their savings bank account.In this article I will explain all the aspects of interest on a savings bank account. Earlier all the banks had the same interest on their saving bank accounts, which was 4% , so a person had no choice in terms of interest rate, you would have got the same return with any bank. But, RBI has recently de-regulated **interest on saving bank** account and now banks can decide the interest they want to pay on saving bank. This has had a positive impact for customers, because now due to competition, banks like Kotak Bank and Yes Bank have started offering higher interest rates like 6% or 7% and using that parameter to attract lot of customers.

### How is interest on saving bank is Calculated ?

Coming to the main question, the procedure to calculate saving bank interest, we will first see how it was done earlier and then we will see how its done now.

**Old Method**

Earlier, Banks used to pay 3.5% interest on the minimum balance between 10th and last day of the month. This was not a very customer friendly method because if you kept Rs 5,00,000 in your saving account for the whole month and on 26th, & let’s say you take out 4,90,000. You would have got interest only on Rs 10,000 @3.5% , which is just Rs 28.

**New Method**

Now a new method is used to calculate the interest on saving bank account which is very fair. From April 1, 2010 , as per the RBI circular on new guidelines on saving bank interest calculation; this is the rule for interest calculation.

“The interest has to be calculated on daily basis for the closing day balance” – It’s that simple. So let’s say the interest rate is 4% , then you will get interest @4% on daily basis for your closing balance and it will get accumulated , but it will be paid back to your account only after 3 or 6 months. While RBI wants all the banks to pay the interest every quarter, each bank has its own criteria , like ICICI Bank pays it twice a year right now in Sept and March.

So now, if you see the same example we discussed above, with the new method of interest calculation, the interest will be 4% on 5 lacs (Rs 1,369) for 25 days (from start of month to 25th) and on 10,000 for next 5 days (Rs 5) (26th – 30th) . So the interest would be total Rs 1,374 . In the old method it was just Rs 28 . Can you see the gigantic difference?

### High Interest on Saving bank from some banks

You must have seen some banks are now offering 6-7% of interest rate and they have dual interest rates, like 5.5% below 1 lac and 6% above 6% (in case of Kotak Bank) , which means that you will be getting 5.5% on the amount below 1 lac and only on the difference amount above 1 lac, you will get 6% interest . So if you have a balance of Rs 1,50,000 in your bank (lets say kotak bank) , you will get 5.5% on 1,00,000 and 6% on 50,000 .

### You should be more interested in interest below 1 lac

If you see the average amount kept in saving bank account , it should not cross 1 lac for most of the people . While there are people who park their money in saving bank account for some time, but it does not happening with most people. So if some bank is giving higher interest for amounts above 1 lac, that’s a secondary benefit for you, not the basis of selection of bank. Because if you are anyways ready to keep a balance of more than 1 lac, why not just create a short term deposit online,which can be broken anyways or just activate your sweep in account option, so that an amount above a target amount automatically gets converted to FD and earn more money.

Do you now understand how interest on saving bank account is calculated? Will it help you manage your bank money in a better way?

Jay patel

If I want to deposit 10,000 in fixed deposit for a year. How much interest would I get??

Manish Chauhan

Around 7-8%

Bende

Thank you very much…I was looking for this info

Manish Chauhan

Glad to know that Bende ..

SunilJoshi

yeah , this information is useful to me. thanks a lot. . .

Hitesh

Thank You for this valuable information.

Gurpreet

HI,

TELL ME PLS HOW MUCH AMOUNT IS TAX FREE IN SAVING ACCOUNT

Manish Chauhan

Interest of upto 10k per year

Anil

I want to deposit 1 lac rs. Per year regular 5yrs. For 10-15 yrs how much get rs after 10-15 yrs plz suggest me

Manish Chauhan

Close to 40 lacs

Lokesh

I have a Kotak account and if they are offering an interest of 5.5% to 6% on Savings, but 4% on a Term Deposit of 15 days or less, then does it make sense to keep my funds in Savings instead of using Term Deposit? Does the mode of interest calculation impact the returns or the Interest Calculation method is same across Savings and Term Deposits? Thanks a lot for the wonderful article.

Manish Chauhan

You can put it in saving bank account. The intertest calculation happens in same manner

Lokesh

Thanks a lot.

Deys

Hi

I work in abroad and sent 10 lakhs in my indian account!! Is my money taxable or its tax free as its from foriegn country

Manish Chauhan

It would be tax free