How to Calculate Interest On Savings Account with Example?

Saving money in a bank account is not just about keeping your funds secure, it’s about growing them. Savings Accounts let you earn interest on your deposits, allowing you to build your savings over time. But what is this interest and how does the bank calculate it? Let's break down the process with a clear example, along with some useful tips on how to maximise your interest earnings. We will also explain the role of a Savings Account interest calculator and its steps for easy use.

Understanding How Interest is Calculated on Savings Accounts

Most banks apply the daily balance method in computing the interest on the Savings Accounts. This method applies the Savings Account interest rate to the account balance at the end of each day. The formula used in calculating daily interest is as follows:

Daily Interest = (Daily Balance x Interest Rate) / Days in the Year

This means that the interest rate is applied daily and interest generally gets added to your account every quarter. This process of daily compounding can result in significantly increasing the interest amount, especially, if one has a high balance in their account.

Example: Calculating Interest on a Savings Account

Now, let us take an example for a better understanding of how interest is calculated.

Assume that you have Rs. 10,000 in your Savings Account and the annual interest rate that the bank gives on your deposit is 4%. You want to calculate what interest you will get in a quarter.

1. Calculation of Daily interest rate:

Annual Interest Rate = 4%

Daily Interest Rate = 4%/ 365 = 0.000109589

2. Apply daily interest rate on your balance:

Rs. 10,000 × 0.000109589 = Rs. 1.09589 per day.

3. Multiply by the number of days in the quarter:

If the quarter is 90 days long then:

Rs. 1.09589 × 90 = Rs. 98.63

So with a deposit of Rs. 10,000 and an interest rate of 4% p.a., you will earn an interest of about Rs. 98.63 over the quarter.

This process of calculating daily interest and crediting it quarterly compounds the interest. Next quarter, the interest is calculated at Rs. 10,098.63 (initial balance + interest earned), and that would yield a bit more in terms of interest. As time goes on, the compounding element will help to enhance the growth of your savings considerably.

Using the Savings Account Interest Calculator

While calculating interest manually is a time-consuming task, financial institutions like ICICI Bank have a Savings Account Interest Calculator that allows you to calculate this amount without hassle. Here is how you will calculate the possible interest earnings using the calculator:

Step 1: Visit the ICICI Bank’s Savings Account Interest Calculator page.

Step 2: Once you’ve opened it, enter your current bank balance in the column as indicated. That serves as the take-off point to begin calculating.

Step 3: After that, input the number of days for interest calculation. This can be for a small period, for instance, 30 days or longer periods for long-term financial planning.

Step 4: After filling in all these details, click on the calculate button. Your account balance, the rate of interest, and the period will then be computed to calculate the estimated amount of interest.

Step 5: The amount of interest earned will then be displayed in the designated field. This amount will represent how much your savings will grow within your selected time frame.

This tool empowers you to get a swift idea of the amount of interest you will gain and helps you to get a clear picture of your savings strategies. You can also perform long-term planning for financial goals through it.

TDS on Savings Account Interest

It is to be noted that the interest generated from Savings Accounts is taxable under the Indian Taxation Law. If the interest you earn exceeds Rs. 10,000 in a financial year, it will be taxable according to your tax slab.

However, Section 194A of the Income Tax Act mentions that TDS is exempted for Savings Accounts. That is, banks cannot deduct TDS from interest earned on your Savings Account balance, but you are responsible for reporting and paying taxes on the interest you earn.

How to Earn More Interest on Your Savings Account?

Although saving accounts provide a secure means of earning interest, there are still strategies on how to increase this earning of interest. A few tips on growing savings are mentioned below:

1. Make Regular Deposits

The accumulation of regular deposits into your Savings Account increases the balance and thereby increases the interest earned. No matter how small, consistent deposits over time will be worth a lot. If you have the capability of allocating part of your salary or any extra money that you receive then your savings become huge in a short time.

2. Activate Automatic Transfers

If you often forget to transfer money into your Savings Account, then setting up automatic transfers from your salary or current account could be helpful to you. That way, money will constantly be transferred to your Savings Account. This means that your savings will keep growing without requiring you to put in any extra effort.

3. Minimise Unnecessary Withdrawals

Many withdrawals from Savings Accounts would lower the average day balance which directly results in the interest you can earn. So, avoid unnecessary withdrawals and try to keep the amount that is saved as high as it can be so you can collect more interest on your savings.

Wrapping Up

Learning how to calculate Savings Account interest teaches you better ways of making financial decisions. You can now use the Savings Account interest rate calculator to estimate how much you can earn and plan your savings better. You can then optimise deposits, automate transfers, and minimise withdrawals to ensure that the balance grows and therefore the interest earned on the deposit. If you have not yet opened one, then it's time to look into the benefits you enjoy when you open a bank account and let your money work for you.

# This is a guest article authored by ICICI Bank. For any enquiries or details, you can visit the author's website.