Depositing funds in a savings account will quickly assist you to discover your short-term monetary goals. With banks presenting different kinds of savings accounts such as tailor-made accounts for kids, savings account for females, and pensioners, you can pick a savings account that suits your lifestyle and usage.

One of the most critical points to register about a savings account is the interest rate it comes with. In this article, we will know more about how the savings account interest rate is calculated and the formula used to calculate the same. Let us find out the answer to the question asked frequently – How banks calculate interest on savings account? Read on to know the details.

The saving account interest rate is specified daily depending on your closing balance, as per the new regulations by the RBI. Established on the type of savings account and the bank's policy, the interest earned will be credited to your bank account, allowing you to save money on a half-yearly or quarterly basis. The Reserve Bank of India (RBI) has encouraged banks to credit interest on savings bank accounts quarterly, as this helps consumers save more money.

The following formula is typically used to explain calculating the savings interest rate. It is also how banks calculate interest in a savings account:

Interest calculated every month = Daily Balance * (Number of days) * Interest / (Days in the year)

For instance, the daily amount is ₹ 4 lakhs, and the interest rate on the particular savings account is 4% per year; the calculation will be as follows:

4 lakhs * 30 * (4/100) / 365 = ₹1315 per month in interest.

TDS on Savings Account Interest

The interest amount you accumulate from a savings account is known as “Income from Other Sources”. The interest must be filed for Income Tax Returns. However, TDS is not relevant for a savings account as per section 194 A of the IT Act. Savings Bank Account Interest amount surpassing Rs. 10, 000 will be taxed at the marginal tax rate of the account holder. It is also crucial to cite that interest from a savings account is not an exemption but a deduction when you are learning about how to calculate interest on savings account. The deduction is permitted for interest earnings up to Rs. 10,000 only. The savings account must be held with a renowned government-private bank or financial institution for this purpose.

Advantages of a Savings Account

There are innumerable advantages that a saving account will offer you. Here are some of the significant advantages of maintaining a savings account.

  • When you deposit funds in a savings account, you can guarantee that the money is safe. Whenever there is a financial emergency, the money can be used later in life.
  • The money deposited in a savings account can be accessed at any time. In case of a hasty need, you can draw cash from your bank or the debit card without bothers.
  • A savings account will allow you to begin investing with minimum cash. All you have to do is open a savings account with the minimum needed deposit and start deposit reserves whenever feasible.
  • Banks in India also give you access to the internet and phone banking with a savings account, unlocking an entirely new world of speedy transactions. You can transfer funds using NEFT and IMPS, pay utility bills, check transactions and link credit card accounts to your savings account using the Internet Banking structure without any bothers.
  • Some of the banks offer personal insurance advantages with a savings account.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.