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?

Aravind

Hi Manish,

Small query. Forget about the interest %. How is the AQB calculated.? Let us say that Rs. 1000 is the minimum balance to be maintained. For a quarter it is 90 days. So, will it be OK if I maintain 90K-1Lac for a day and zero balance for the rest 89 days.?

Hope I didn’t confuse you.

Manish Chauhan

Yes, its totally fine.

ganesh

As you said the interest would be calculated in daily basis just consider the following scenario,suppose i deposit 10lakhs every day just before the closing time and transfer the amount after 2 hrs let say then my interest will be calculated for 10 lakhs right?or how will it be calculated?

Manish Chauhan

Yes, it would be calculated for 10 lacs only ..

It would be 10 lacs * 4%/365 = 109.5

Rajat

Does the same method apply to NRE savings accounts also?

Manish Chauhan

Yes

rahulganthade

Sir, I want to ask u that I have made Time deposits of 500000 for tenure of 3 months on auto renewal basis from which i m getting 7.5% interest. I fall under 20% I.T slab. So,what would u suggest me to keep that time deposit or keep the amount in saving account and enjoy 4% ROI. Please explain.

Manish Chauhan

I think FD is fine

Sen

I have a doubt on the amount to be considered for interest amount paid by banks. Since the bank pays interest amount halfyearly in my case and it over laps more than a FY. in that case how to do you calculate the exact amount of interest paid for that FY. For eg: int pd from 30.12.13 to 29.06.14 = Rs x amt ( FY ends on Apr but interest paid is upto June

Manish Chauhan

Why do you need it for 7 months only ? You need to pay tax on yearly basis right ?

Sen

May be I shall rephrase the statement with an example, interest is paid by the bank on halfyearly basis lets assume the interest paid for following periods and amount paid. 1) 30.12.14 to 29.06.15 ; Amount paid Rs 7000/- and 2) 30.06.15 to 30.12.16 ; Amount Paid Rs 8000/- In this case please do let me know the amount to be conisdered / calculated as interest paid for FY 14-15 & FY 15-16.

Manish Chauhan

What matters is that in which year you got it. In your exmaple it came in financial year 2015-2016 . SO the whole amount will be considered

frances

I have a balance of 7 lakhs in savings account. Is my interest taxable? I don’t have a PAN card yet

Manish Chauhan

Yes, your interest is taxable above 10k interest

siddharth vachhani

Respected

Sir,

I will become aware about how bank intrest calculated monthly or yearly and by which formula.

Please sir.

Thank’s.

Manish Chauhan

Whats the question ?

meharwalzs

Hi

Can you tell me the frequency of payment of interest on savings account and term deposits by different banks and can that be a criteria as to where one should park money.

Manish Chauhan

It depends . Some banks pay half yearly and some pay quarterly !

Gopal

Sir, could you please help us explain how will this interest be calculated in a Leap financial year, say 2015-16 (29-Feb-2016 falling in this year)… Will the denominator be considered as standard 365 or will it have to be 366, as the actual no. of days in the financial year… Thanks

Manish Chauhan

It should be 366 in that case

suman

Please tell me how the interest rate on RD(recurring deposits) is calculated? and give an easy formula, if possible.

Manish Chauhan

Its calculated on quarterly or monthly basis like a simple interest and added to the amount back or given back as opted by customer

deepak

7% interest is gr8 if u r a daily share trader…………

i mean earn 7 % from bank + earn profits from daily trading.

if u manage a nominal profit % of arnd 7 % through stock trading den total interest earned will b 15-25 %……….

now 15 % is a hell lot of interest ………..if u invest 5000 a month and earn 15 % compounded interest u can make arnd 80 lacs to 1.2 crore in 20 years. how about that

Manish Chauhan

It only looks great on paper .. reality is very different !

harkesh kumar

hi, I am harkesh kumar and my A/c in yes bank, I want to know that which month that yes bank provide us interest in a one year. (please discribe the month in year.)

Manish Chauhan

Its not fixed. Depends on the bank .. check it with your bank itself !

Gobinda Das

I couldn’t understand the method of calculating the interests of savings bank accounts. You are telling that the rate of interest is 4%. Then how the interest of Rs. 5,00,000/- becomes Rs. 1,369/- although in daily basis?

Anand

This is only for 25 days.

I=PNR/100 where P=500000;N=25/365;R=4

Is it clear now?

Manish Chauhan

Its clearly explained in the image table itself . Note that its calculated for days , not full year !

Mahesh

Hi Manish,

Thanks, Now i am clarified , Actually this time I read it more carefully

Apologies, for wasting your time…

Manish Chauhan

Welcome !

Mahesh

Hi,

Just need to ask you one question that if balance in saving account changes persistently then how they calculate interest rate . Could you please explain ?

Thanks,

Manish Chauhan

It is calculated on daily basis. Seems like you did not read the article itself .

Sachin

could anybody share per day interest rate calculator which is used for calculating interests in Indian bank accounts?

Manish Chauhan

Sachin

I dont think there is any ready made calculator like that, but you can create it in excel easily !

MANU

sir i want to know about intrest to my money …in my account having 500000@4%.how much intrest are getting monthly please caluculate and send me sir its very important

Manish Chauhan

It will be close to 1666

Tariq Anwar

Very informative article. Thanks http://www.jagoinvestor.com

harpreet

i have leased my premises to bank for 20000/- p.m after 3 years the rent was to be increased 10% . but bank continued to pay me same 20000/-p.m instead of 22000/- now 36 months have passed what amount should i claim from the bank as per rbi guidlines

Manish Chauhan

There is nothing like regulations here . You have to move as per your agreement . If its mentioned in agreement that 10% increase should be there, then bank has to pay increased rent to you. File a case on them !

arun kumar

Sir,

Is the exemption limit for tax on interest upto Rs. 10,000/- applicable for savings bank account or for fixed deposits or recurring deposits also? I come under the purview of 20% slab. My interest from fixed deposits is more than Rs. 10,000/-. I prefer to pay tax on interest through govt.Challan. In this context, I submit form 15G to the bank. Is it appropriate? I have to calculate tax on interest @ 20% only or plus educational cess whatever? My annual interest from bank deposits is Rs. 20,000/-.For how much amount I have to pay the tax. You are requested to kindly guide me.

With regards

arun kumar

Manish Chauhan

the exemption is only on saving bank interest, if your interest from saving bank is less than 10k , just ignore that part then

However for bank deposits and recurring deposits ,you need to pay the tax as per your slab rate . Note that form 15G has to be submitted in the start of the year, not now !

arun kumar

Thanks!