How Does Interest on Savings Accounts Work?

A savings account is a basic bank account that allows you to park your money and earn interest on the same. The interest rate on savings account determines how much money the bank would pay you to keep your funds as deposit. In this article we are going to shed light upon how interest on savings account work.

Savings account interest rates

Numerous banks offer competitive interest rates on savings accounts to attract customers. Easy access, hassle-free deposit and withdrawal, and online banking, are some of the major benefits of a savings account. Therefore, opening a savings account can help you save and grow your money in the easiest way.

As per the latest mandate by the Reserve Bank of India, savings account interest rate is calculated on a daily basis depending upon the closing amount in your account. The total interest collected is credited to your savings account on half-yearly basis or quarterly basis depending on the account type and the rules of the bank.

However, the RBI has recently advised the banks to credit the interest on a quarterly basis as it will be beneficial to the customers.

Formula to calculate monthly savings account interest

The formula to calculate monthly interest on savings account is given below:

Monthly Interest earned = Daily Balance x (Number of days) x Interest / (Days in the year)

For instance, if the daily balance is Rs. 2 lakhs, and the savings account interest rate is 4% per annum, the monthly interest will be as follows.

Monthly Interest earned = 2,00,000 x 30 x (4/100) / 365 = Rs. 658

While it’s good to settle for a bank that offers attractive interest rates on savings account. You must also take into consideration the charges such as overdraft fee, ATM fee, minimum balance penalty, fees for bank cheques, etc. These charges levied by the bank could offset your interest earnings or even cost you more than what you would earn from savings account interest.

Tax benefit on savings account

The interest earned from savings account is considered to be as “Income from Other Sources”. This interest earning must be filed for Income Tax Returns. However, the deduction is allowed for interest incomes up to Rs. 10,000 only. Make sure that you open your savings account with a recognized public or private bank or with the Post Office.

You can make use of a Savings Account Interest Rate Calculator to find out the interest that you will be able to earn from a savings account. The online calculator is easy-to-use and provides accurate output. All you have to do is enter basic information like average balance and interest rate offered on savings account by the bank. Then, choose whether the interest will be credited on a monthly, quarterly, half-yearly or yearly basis. The calculator will then calculate the interest earnings you will get from your savings account. So why wait? Open a savings account with a reputed lender and start growing your money in the easiest way.