How is the interest calculated for savings account?
How is the interest calculated for savings account?
Many wonder how banks calculate their savings account interest. Let us understand this process with an example:
Earlier banks used to pay an interest rate of 4% p.a. against the lowest available balance in the account between the 10th and final day of a month. Any deposits happening during this period were not eligible for interest rate calculation of that month, but at the same time, withdrawals during the period were taken into account.
For instance, Vishal had a balance of Rs.50000 in his account as on January 10th. On January 20th, he received Rs.100000 as maturity bonus for his LIC policy. On 28th January he had withdrawn Rs. 125000 for making a down payment for his new flat, thereby reducing his account balance to Rs. 25000. In his case, the bank would consider Rs.25000 for interest calculation, as it is the lowest amount available in his account between 10th and 28th January. So, the interest amount Vishal is eligible for the month of February will be for Rs.25000 @ 4% p.a. which amounts to Rs.83.33.
Effective from April 1, 2010 onwards, following RBI's mandate to rework interest rate calculation methods, banks started calculating interest on a daily balance method
Let's see what difference this move can make to Vishal's interest earned on his savings account:
From January 1st to 20th, he will be paid an interest for Rs.50000.
From 20th to 28th, interest is calculated for Rs. 150000 and for the remaining three days, interest is calculated on Rs.25000/-
So, the interest he earns for January will be Rs.249.28/- against the older method, whereby he would have earned Rs. 83.33 only.
So, now every rupee you keep in your account earns for you and you need not plan ahead for your withdrawals to gain maximum benefits.
Many wonder how banks calculate their savings account interest. Let us understand this process with an example:
Earlier banks used to pay an interest rate of 4% p.a. against the lowest available balance in the account between the 10th and final day of a month. Any deposits happening during this period were not eligible for interest rate calculation of that month, but at the same time, withdrawals during the period were taken into account.
For instance, Vishal had a balance of Rs.50000 in his account as on January 10th. On January 20th, he received Rs.100000 as maturity bonus for his LIC policy. On 28th January he had withdrawn Rs. 125000 for making a down payment for his new flat, thereby reducing his account balance to Rs. 25000. In his case, the bank would consider Rs.25000 for interest calculation, as it is the lowest amount available in his account between 10th and 28th January. So, the interest amount Vishal is eligible for the month of February will be for Rs.25000 @ 4% p.a. which amounts to Rs.83.33.
Effective from April 1, 2010 onwards, following RBI's mandate to rework interest rate calculation methods, banks started calculating interest on a daily balance method
Let's see what difference this move can make to Vishal's interest earned on his savings account:
From January 1st to 20th, he will be paid an interest for Rs.50000.
From 20th to 28th, interest is calculated for Rs. 150000 and for the remaining three days, interest is calculated on Rs.25000/-
So, the interest he earns for January will be Rs.249.28/- against the older method, whereby he would have earned Rs. 83.33 only.
So, now every rupee you keep in your account earns for you and you need not plan ahead for your withdrawals to gain maximum benefits.
