You are at the bank, looking at your Savings Account statement. You see your balance and right below it, an "interest earned" line that has been steadily adding to your savings each quarter. This extra money is a reward from the bank for keeping your funds with them, but do you know how that interest is calculated? Understanding how to calculate interest on your Savings Account and the bank interest calculation formula can help you anticipate your future earnings and make better financial decisions.
Savings interest rate formula
Calculating the interest on your savings is not just a matter of curiosity but a necessary step in financial
planning. The basic formula, integral to understanding how to calculate interest rate on savings, is straightforward:
Interest = Principal x Rate x Time
Here,
Principal is the amount deposited
Rate is the annual interest rate
Time is the duration for which the money is deposited.
Also Read: 6 things to consider before opening a Savings Account
Calculating interest in a Savings Account
Understanding how financial institutions calculate interest on Savings
Accounts is important. To know this, let us first look at how interest is
typically calculated and then walk through an example.
Most banks use the daily balance method to calculate interest on Savings Accounts. This method involves applying the
interest rate to the account balance at the end of each day. The formula used is:
Daily Interest = Daily Balance × Interest Rate / Days in the Year
The interest rate is calculated on the balance maintained in a Savings Account on a daily basis, and it is credited to your account on a quarterly basis.
Example:
Let us say you have ₹10,000 (this will be the principal amount) in your Savings Account with an annual
interest rate of 4%. To find out how much interest you'll earn in a quarter (this will be the time for
calculating interest), follow these steps:
Calculate daily interest rate: 4% / 365 = 0.000109589 (approximately)
Apply daily interest to the account balance: ₹10,000 × 0.000109589 = ₹1.09589 per day
Multiply by the number of days in the quarter: For a 90-days, ₹1.0959×90=₹ 98.63
So, with a ₹10,000 deposit and a 4% annual interest rate, you would earn approximately ₹98.63 interest in a quarter.
This method allows the interest to compound, if the interest is credited quarterly. The next quarter, you would
calculate interest on ₹10,098.63, slightly increasing your interest earnings if the balance remains the same. Over
time, this compounding effect can significantly boost the growth of your savings.
Savings Account: Simple interest and compound interest
A crucial aspect of understanding how to calculate savings interest involves distinguishing between simple and
compound interest, as both significantly affect the growth of your savings over time.
Simple interest is the most straightforward method. It's calculated only on the principal amount: the initial sum
deposited into your Savings Account.
The formula for Simple Interest: Principal x Rate x Time.
Compound interest takes into account not only the principal amount but also the interest that has been added to your
account over time. This means you add the interest you earn each period to your principal, forming a new base for
calculating the interest of the next period.
TDS on Savings Account interest
For those wondering how to calculate interest on a Savings Account for income tax, it's crucial to understand that
any interest exceeding ₹10,000 in a financial year is taxable according to the individual’s tax slab. Additionally,
Section 194A of the IT Act states that TDS is not applicable to savings accounts.
Earning more interest in a Savings Account
Earning more interest in a Savings Account is a goal shared by many savers. The key is understanding the factors that
influence interest rates and how you can use them to your advantage. Here are some strategies to help you maximise
your interest earnings:
- Regular deposits: Consistently depositing money into your Savings Account can significantly
increase your balance and, consequently, the interest you earn. Even small, regular contributions can add up over
time.
- Use automatic transfers: Setting up automatic transfers from your Salary Account or Current
Account to your Savings Account can help in growing your balance without having to remember to make manual
transfers.
- Avoid unnecessary withdrawals: Frequent withdrawals can reduce your average daily balance,
leading to lower interest earnings. Try to minimise withdrawals to keep your balance as high as possible.
Conclusion
Understanding how to calculate the interest rate on your Savings Account is crucial for effective financial
management. It not only helps in planning your finances better but also ensures that you are making the most out of
your hard-earned money. By being aware of how interest accumulates, you can make informed decisions about your savings
and investments.
Axis Bank's Savings Account stands out as a compelling
choice. It offers numerous benefits that cater to a wide range of financial needs and goals. From competitive interest
rates to easy accessibility and exceptional customer service, Axis Bank ensures a rewarding experience for its
customers.
Disclaimer: This article is for information purpose only. The views expressed in this article
are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or
the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking
any financial decisions based on the contents and information. Please consult your financial advisor before making
any financial decision.
