Savings accounts are basic bank accounts designed to park your money and provide fund access for daily expenses. To cope with inflation and grow wealth, banks also offer savings account interest rates that keep your money from devaluating every passing year.
The interest rate on a savings account varies depending on the banks. Moreover, online savings accounts offer high-interest rates due to ease of operation and several other factors. The article below gives an insight into savings account interest rates.
Understanding the interest rate on savings account
A savings account is a banking product helping you to save and grow your monies over time. When you open a savings bank account, the bank offers an interest rate at a fixed interval which can be on a quarterly, half-yearly or annual basis. According to the industry’s norm, most banks offer quarterly interest credits to your savings account, and the rates for most banks range between 4.5% to 6.0%.
However, a few banks, like IDFC FIRST Bank, offer a unique monthly interest credit on your savings accountwhere the interest on your monthly closing balance is credited every month, unlike most banks. A monthly interest deposit has several advantages, such as better compounding, eventually offering rapid growth of your deposits.
Let us assume the following example to understand how the savings account interest rates work. When you open a bank account and deposit funds, the bank promises to offer you a predetermined interest rate based on the funds deposited. The interest is calculated on your closing balances and added to your account monthly, quarterly, half-yearly or annually.
How is the interest rate calculated on the savings account?
According to the Reserve Bank of India (RBI) guidelines, the interest is calculated on the daily closing balance and credited to the savings account on a half-yearly or quarterly basis, depending on the bank’s rules. Most banks offer interest credits quarterly.
The formula below is generally used for savings account interest calculation:
Monthly Interest = Daily Balance * (Number of days) * Interest / (Days in the year)
Assuming the daily balance is ₹2 lakh, and the interest on a savings account is 5% P.A., the interest is calculated as follows:
Monthly Interest = 2 lakh * 30 * (5/100) / 365 = ₹821.91
TDS on savings account interest
The earnings from the savings account interest are categorised as “income from other sources”. Thus, you must pay a nominal tax per the prevailing tax rates on your capital gains in the savings account. Earning more than ₹10,000 per fiscal year through savings account interest is liable for taxation. However, your savings are not liable for tax; the government taxes only gains through the interest rate.
The deductions on savings account interest income are only allowed for earnings below ₹10,000, and you must hold a bank account in a post office, public or private bank.
A savings account is one of the best tools to park your money for gains and easy fund access. The banks offer attractive interest rates to beat inflation and provide enhanced banking services. However, before opening a bank account, ensure to go through the savings account interest rates, charges and the interest offered.
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