How are banks calculating interest on savings accounts?

Late last year RBI deregulated the interest rates on savings accounts and allowed banks to set their own rates. This resulted in banks raising their interest rates and creating two slabs of under a lakh and over a lakh.

For example, Yes Bank offers 6% on the saving bank balance of under Rs. 1 lakh and 7% on balances of over a lakh. Similarly, Kotak pays 5.5% for balances of less than a lakh and 6% on balances of over a lakh.

There were a few comments at the time asking about how interest will be calculated and if banks will take the lowest bank balance in a month to calculate that or something else like that.

I was reminded of this discussion when I came across a RBI notification that issues some clarifications on the way interest is calculated.

From reading the second point in there it’s quite clear that the banks will pay you the interest on the basis of your daily balance. So, they will see what your balance was at the end of the day and pay you interest based on that.

The second aspect of that is slightly unclear to me. I read it to understand that if you have a balance of Rs. 1,25,000 in your savings bank account at Yes Bank – they will pay you 6% for Rs. 1,00,000 and 7% for the Rs. 25,000 after that. They are not going to pay  you 7% for the whole amount, which is what I originally thought.

Does anyone have practical experience with this or knows for certain how this is going to be calculated? Please leave a comment or email me if you do as this is going to be of interest to a lot of people.


21 thoughts on “How are banks calculating interest on savings accounts?”

  1. i just wanted to know ,if i am deposit 140000 amount in yes bank(saving bank account).so waht will my return in my account and of the year

  2. Looking for some info in this regard:
    I have one account in cooperative bank and bank is not computerized..Bank have thousands of account holders..does any one know how they able to calculate interest on saving accounts on daily basis for thousands of accounts, without computers???

  3. plz help me in ths prblm

    recently i go to bank i asked the interst rates they said that 11%
    how can we calculate??
    suppose the principle amount is 100000

  4. Suppose I have deposidted Rs. 30000 in my Yes bank account on 1st Apr 2012 and the bank is offering 6% interest. Now at the end of April I would like to withdraw entire amount from the bank, then how much interest I would have earned?

  5. @Manshu

    I browsed throught the website of Yes Bank and what I understood from the facts stated was that they are paying 6% on deposits below 1L and 7% on deposits above 1 Lakh. So the example given by you in the above example is correct.

    And this was something bound to happen – With RBI having deregulated the Interest Rates such differential rates were bound to happen to attract customers … Just like banks have the power to lend loans at different rates to different customers, now they also have the powers to pay different interest to different customers…

  6. I recently tried to open an account with HDFC and their sales executive talks of a 6% interest rate on that account when the amount is over 1lakh. I received a call from the bank executive to confirm if I was informed correctly about the features. So the executive said that the account would receive a 4% interest rate until the balance is 1lakh. When the balance reaches 1.25lakhs, 25000 would be moved to an FD for 1 year and 1day at a higher interest rate.

    1. Oh a FD, but what if you want to withdraw the money, shouldn’t they just give the high interest on 25k without blocking it for a year. That defeats the whole purpose really.

  7. Outlook money had an article in Aug 2011 (which had inspired me to my post) It pays to strike the right balance which might help your readers

    Note: At present, each bank follows its own schedule including monthly, quarterly and and half yearly for paying interest rates on savings accounts. The Reserve Bank of India(RBI) wants banks to pay the interest to depositors at a uniform period of three months

  8. I did a post on how banks calculate the saving interest rate based on daily balance Saving Bank Account:Do you know how interest is calculated and more

    Quoting from it:
    If Savings bank account offers 4% interest per annum to the savers(Saving rates got deregulated on 25th Oct 2011 after that few banks revised their rates. ). The interest is calculated on the daily balance in your account. Let’s show it by an example

    Say on 1st Aug Rs 70,000 is credited into your account. On 5th August after some withdrawls balance in your account is Rs 55000. You had Rs 70,000 for 4 days at 4% per annum. So how much interest did you earn? The formula is:
    Interest = Principal or amount in the account * Number of days * Daily Interest Rate

    Daily Interest Rate = Interest rate per annum /365 days
    At 4% Daily Interest Rate is: 4%/365 = 0.010958%
    So after plugging in the values the calculations are as follows:
    When balance is 70,000 for 4 days = (70,000 * 4 * . 0.010958)/100 = 30.68
    When balance is 55,000 for 4 days = (55000 * 4 * . 0.010958)/100 = 30.14

    So my guess is it is based on balance amount. So 7% only on those days in which amount is over Rs 1,00,000.
    I have an account in HDFC bank which hasn’t raised it’s interest 🙁

  9. I doubted that the term “differential rate” means that the depositor will get lower rate for up to 1 lakh and any balance over will get the higher rate. So I checked with one of my friends who worked at a bank (in India) and he said that it is a simple formula where any balance above 1 lakh gets the higher rate. No tiering. Also, if RBI gives a directive on something like this it has to be sure the computer systems can handle it. When moving to the daily product method RBI had to ensure the systems can handle the new method. A 2 tier calculation means the banks system may have to change methodology on the software side.

    1. Okay, so according to your friend – in this example entire 1.25 lakhs gets 7% right? That’ll be good if that’s case. This is certainly one place where I’d be happy to be wrong.

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