How to Calculate Interest on Savings Account

Savings bank accounts are great for saving money for the short term. Banks give interest on the money parked in savings bank accounts. 

But how is it calculated? Read to understand the concept before you go searching for an online savings account interest calculator.

How to Calculate Interest on Savings Account?

Banks calculate the interest amount based on their interest rate and the closing balance in your bank account each day. As you spend money from your account, the interest is calculated based on the new closing balance. 

At the end of the month, these are collated, and the amount you earned for a month is obtained. Here is the formula a savings account interest calculator uses - 

Interest = Closing balance x Rate of interest x (No. of days / 365)

How to Use the Saving Account Interest Rate Calculator Formula?

Using an example, let us try to understand the formula and calculation of the monthly interest amount. Let’s say Priya has a savings bank account and her bank gives her a 3% interest rate on funds. The following is Priya’s statement for a typical month -

As you can see, the closing balance keeps changing as Priya uses her bank account throughout the month. Banks use the closing balance of each day to calculate the total interest amount payable to a customer. 

According to this bank statement, Priya’s interest amount will be calculated in the following manner - 

From Day 1/09 to Day 6/09, the closing balance was Rs.1,40,000, and using the formula,

Interest = Rs.1,40,000 x (3 / 100) x (7 / 365) = Rs.1,40,000 x 0.03 x 0.02 = Rs.84

From Day 07/09 to Day 13/09, the closing balance was Rs.1,35,000, and using the formula,

Interest = Rs.1,35,000 x (3 / 100) x (7 / 365) = Rs.1,35,000 x 0.03 x 0.02 = Rs.81

From Day 14/09 to Day 30/09, the closing balance was Rs.1,65,000, and using the formula,

Interest = Rs.1,65,000 x (3 / 100) x (7 / 365) = Rs.1,35,000 x 0.03 x 0.02 = Rs.99

Thus, the total interest Priya earns over this month

= Rs.84 + Rs.81 + Rs.99 = Rs.264

Please note that even though banks calculate the interest based on the daily closing balance, they deposit the amount only on a quarterly or yearly basis.

TDS on Interest Earned on Savings Bank Account

Interest earned on funds in a savings bank account is considered ‘‘Income from Other Sources’’ and is taxable. However, TDS or Tax Deductible at Source is not applicable to savings accounts as per Section 194 A of the Income Tax Act. 

A deduction of taxes is not permitted if the interest earned is below Rs.10,000. But for this deduction, the account must be held at a renowned bank. Only if the interest amount surpasses Rs.10,000, it will be taxable according to the tax rate of the account holder. 

How Much Interest Do Banks Give on Savings Accounts?

Banks have slabs of interest based on how much money is kept in the bank account. As a general rule of thumb, you get a higher interest rate if you have more funds in your account. 

The following table lists the range of interest rates offered by the top banks in India -

Note: These rates are subject to change at the discretion of the bank.