How The Interest Rates Are Calculated On Your Savings Account

Interest is the cost of borrowing money. If the borrower takes the loan from your lender or bank, they have to pay the interest on the loan amount. When you take any loan from any bank, you can freely repay the loan in installments for some years.

In return, you must pay interest on the loan amount that you borrowed. If we talked about a savings account, you have to open a savings account and put some funds in it, and the bank is in a way borrowing money from you.

In return, the bank will pay you interest on the amount stored in your savings account. Read the article to learn about the interest rates that you earn on your savings account.

How is the savings account interest rate calculated?

In the case of FD, the interest calculator is easy to understand. You have to deposit the fixed sum at the start of your investment period, and that amount remains in the deposit account till the maturity date of FD.

• The savings bank account is different in this case. The money stored in your savings account is changed daily.
• When your salary is credited at the start of the month, the balance in your savings account is increased.
• On the other hand, when you withdraw money from your savings account, the balance will go down.
• How is it possible for banks to calculate the interest rates on fluctuating balance of your savings account? It is determined that the banks calculate the interest rate on your savings accounts daily.
• But the credited interest in your savings account is calculated quarterly, according to RBI calculations.

Types of interest on savings account 

Two types of interest apply to your savings account: simple interest and compound interest. Simple interest is the basic type evaluated only on the amount you deposited.

Compound interest is calculated on the deposited amount and interest that you earn on a deposit. The interest rate on your savings account is also compounded. It means you can earn interest on the interest of your savings account.

Savings accounts have come with the following particulars.

• Interest rate- 5% per annum
• Account balance- 1 Lac
• Credited interest- monthly

Tax on saving account interest

The process of increasing the saving account interest rate is also a different thing and paying the taxes on extra interest on your savings account is different. You must pay taxes on the interest you earn from the bank account.

The tax rate is the same as the income tax slab rate. So, if your income puts you in the 30% income tax slab, the interest rate also applies to your bank account interest.

Conclusion

Your money does not remain exactly how you deposited it if you have a savings account. You can get a better chance to earn interest on the amount stored in your savings account.