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?

arun

Hi,

I have a doubt , i deposit every month 10000 , this is 4th month , i did not get any interest in sbi

when they will credit interest…

i am remaining the same 30000 in my ac…

can u tell when will they credit interest amount ?

Manish Chauhan

Many banks credit it on 6 monthly basis also !

bijay

Dear Mr Manish,

I am about to develop my land into building via builder, the builder agreed to pay 40 lacs into my account as per joint venture agreement. If I’ll be keeping the same amount as main balance in my sbi account how much I’ll be getting interest from Bank and how to pay income tax on the same. Kindly explain the same in simple words.

Manish Chauhan

Hi bijay

This query belongs to CA domain, hence we are not the right people to comment on this issue.

I suggest you get in touch with a CA for this in your city.

We also have a CA partner incase you want to explore that, Just fill in your details here and they will give you a complimentary call back

http://www.jagoinvestor.com/solutions/ca-services

Manish

Rajat

How is end of day calculated? What if I use the money all day, and transfer it to the bank at 3.30 PM everyday and withdraw it back at 9.30 AM every morning. Will I earn 6% interest on my money?

Manish Chauhan

Not sure, but it would be END OF DAY , which is 12:00 at night !

Kartik

Hi Manish,

If I keep 1 lakh amount for six months continuously and then at the 6th month if the interest calculated (2000RS). Then this interest amount will be considered as principle for the next half year interest calculation?

Manish Chauhan

Only if its credited in your account. If its not, then it will be not !

grv

Hi Manish,

If a company pay salary after deducting income tax to his employee.And If employee keeps salary to his saving account then will employee have to pay tax on it?

Manish Chauhan

Not again … but any interest which he earns , on that amount he has to 🙂

Khushboo

If i have to pay my emi 2000 for a year then how much money i have to deposit which is use for my emi and my principle remain the same

Manish Chauhan

Hi Khushboo

I am not clear on what is your question. Please repeat it with more clarity

Manish

KranthiKumarM

HI Khushboo.. You need to keep Rs. 6,08,333 @ 4%. Then you will get interest of Rs. 2,000 per month. Formula is Interest*365*100/ ( (No. of days)* (Rate of interest) ).

AnkitMohanLal

what will be interest for 3 month on these transactions –

SerialNo Transaction Date Particular Narration Debit Credit Balance

12 03-Apr-2016 Transaction INTEREST 0.00 11.36 1164.00

13 31-Mar-2016 Cash WithDrawal SMS Charge 10.00 0.00 1143.00

14 03-May-2016 Cash Deposit ORC-MARCH-2016 0.00 576.00 1730.00

15 13-May-2016 Cash WithDrawal CSWD 1000.00 0.00 730.00

16 13-May-2016 Cash Deposit SPOT 0.00 360.00 1090.00

17 18-May-2016 Cash Deposit CSHD 0.00 900.00 1990.00

18 23-May-2016 Cash WithDrawal CSWD 500.00 0.00 1490.00

19 27-May-2016 Cash Deposit CSHD 0.00 414.00 1904.00

20 27-May-2016 Cash Deposit INCENTIVE-APL-2016 0.00 1532.00 3436.00

21 06-Jun-2016 Cash Deposit CSHD 0.00 700.00 4136.00

22 08-Jun-2016 Cash Deposit CSHD 0.00 650.00 4786.00

23 18-Jun-2016 Cash Deposit INCENTIVE-MAY-2016 0.00 760.00 5546.00

24 21-Jun-2016 Cash Deposit CSHD 0.00 220.00 5766.00

Narasimha

hi Manish if I am having 10000/- in my acc and I draw 2000 one day& 4000 another day.2000 etc.,, before 25th of the month .then how the interest can be caluculated on daily basis

Manish Chauhan

Just use the same method . Each day see the balance at the end of the day and calculate 4% interest on that. Keep adding that each day for 30 days .

Narasimha

Thank you Manish

Rahul

If I deposits 7lakh in my saving account then what interest I ll get after a month and will be my deposited amount is tax free

Manish Chauhan

It will be 4% annum calculated per day , Hence 30*700000*4%/365 = Rs 2301

Upto Rs 10,000 per year is exempted from tax if its coming from saving bank account interest !

Rahul

Thank you

Arvind

How can I get amount on 25th day of month

Example

In my account balance have like this

5th of month – 50000

10th – 60000

20th – 15000

25th – 200000

Now how can I calculate interst.

Manish Chauhan

Thats explained in the article, Calculate the interest for each day balance and add it up !

kifayat

i deposited 3 lac on 15/04/2016 and withdrew on 26/05/2016 but did not receive any interest from the bank, why.

Manish Chauhan

Its credited on quarterly basis . it will come later in ur accout

Rittika

You did not get interest because you did not submit your 3 lac within the 10th of the month….. Had you submitted the money within the 10th.. Your intetest would have been calculated . This is rules of banking .

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