Everyone works hard to earn money. However, there are ways to earn extra. While there are many strategies that investors may follow, from conservative to dynamic and aggressive, most of us attest to having at least one savings account at the bank. While the returns are guaranteed, it is always a good practice to understand how it is calculated. This article will help you better understand how interest is calculated. Read along to learn everything about calculating savings interest!
Understanding Savings Account Interest Rates in India
How savings account interest rates work
A savings account is a deposit account offered by banks in India that pays interest on the deposited amount. A bank’s interest rate is the return the depositor earns on the money deposited in the savings account. The percentage may differ from one bank to another based on their policies.
Different types of savings accounts and their interest rates
Regular savings account: This is a standard savings account that anyone can open. The interest rate offered by the bank may vary depending on the amount deposited and the bank’s policies.
Senior citizen savings account: This type of savings account is designed for seniors over 60. The interest rate on these accounts is higher than that on regular savings accounts.
Women’s savings account: Some banks in India offer savings accounts exclusively for women. The interest rate on these accounts may be higher than that on regular savings accounts.
Salary savings account: This type of savings account is offered to employees of certain companies. The interest rate on these accounts may be higher than that on regular savings accounts.
Factors that affect savings account interest rates
Reserve Bank of India (RBI) policies: The RBI may increase or decrease the repo rate (the rate at which it lends money to banks), which may affect the interest rates banks offer.
Inflation rate: Inflation is the rate at which the prices of goods and services increase over time. Banks may offer higher interest rates to compensate for the inflation rate.
Bank policies: Each bank may have its policies for determining the interest rates offered on savings accounts. The interest rates may vary based on the amount deposited, the type of savings account, and the deposit duration.
Calculating Interest Rates
It is essential to note that the RBI requires any interest on savings accounts to be calculated on your daily outstanding balance. This means your interest is calculated daily based on the amount in your bank account. This means that your interest is subject to any withdrawals and deposits that may change the end-of-day balance of your savings account.
To put it in an equation,
Interest= Account Daily Balance × Rate of Interest × Number of Days (365) ×100
Example:
Let’s say you have an ICICI Bank savings account with a consistent end-of-day balance of Rs 50,000 throughout the month. Here is how the interest earned in one year is calculated. Let’s assume the interest rate is 3.5%:
Determine the interest rate per day
Divide the annual interest rate by the number of days in the year:
3.5%/365 days = 0.0096% per day
Step 2: Calculate the interest earned in one day
Multiply the balance in the savings account by the interest rate per day
50,000 x 0.0096% = Rs 4.80 per day
Step 3: Calculate the interest earned in one year
Multiply the interest earned per day by the number of days in a year:
Rs. 4.80 x 365 days = Rs 1,752
So in this example, the interest earned on the savings account in one year is Rs 1,752. This amount will be added to the account balance at the end of the year.
Note: If your closing balance differs at the end of each day, the interest would differ for each amount and then added up. Banks generally release interest income to their customers every three months.
How to Check Your Savings Account Interest Rate in India
Once you have understood the different methods of calculating savings account interest rates, you can easily check your account’s interest rate using various methods. Here are someways to calculate and check your savings account interest rate:
1. Online banking: Most banks in India provide online banking facilities, which allow you to access your account information anywhere and anytime. To check your savings account interest rate, log in to your online banking account and navigate to the account information section. Here, you can view your account balance, transaction history, and the interest earned.
2. Bank customer service: If you cannot access online banking, contact your bank’s customer service to check your savings account interest. You can call the customer service helpline, email the bank, or visit a nearby branch to get the required information. Make sure to have your account number and identification documents ready for verification.
3. Bank passbook: Your bank passbook also contains all the necessary information about your savings account, including the interest rate. Whenever you make a transaction, your passbook gets updated, and you can check the interest earned on your account by reviewing the last entry. Make sure to update your passbook regularly to keep track of your account balance and interest earned.