Question

Interest on savings bank account is now calculated by banks on _________.

• A. daily product basis
• B. minimum balance from 7th to last day of the month
• C. minimum balance from 10th to last day of the month
• D. maximum balance during the month

Answer 1

Answer: (A)

daily product basis

Earlier banks used to pay an interest of 4% per annum against the lowest available balance in the account between the 10th and the 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.
Illustration: Suppose Vishal had a balance of Rs 50,000 in his account as on January 10. On January 20, he received Rs 1,00,000 as maturity bonus for his LIC policy. On January 28, he had withdrawn Rs 125000 for making a down payment for his new flat, thereby reducing his account balance to Rs 25,000. In his case, the bank would consider Rs 25,000 for interest calculation, as it is the lowest amount available in his account between 10th and 28th January. Therefore, the interest amount Vishal is eligible for the month of February will be for Rs 25000 at 4% per annum which amounts to Rs 83.33.
Effective from April 1, 2010 onward, following RBI's mandate to rework interest rate calculation methods, banks started calculating interest on daily balance method.
Let us see what difference this move can make to Vishal's interest earned on his savings account. From January 1 to 20, he will be paid an interest for Rs 50,000. From 20 to 28, interest is calculated for Rs 1,5,0000 and for the remaining, three days interest is calculated on Rs 25,000. Therefore, 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 rupees you keep in your account earns for you and you need not plan ahead for your withdrawals to gain maximum benefits.