Wednesday, July 15, 2015

Savings Bank Interest Rates in India

Savings Bank : A savings bank is a financial institution whose primary purpose is accepting savings deposits and paying interest on those deposits.

Saving Accounts: Saving accounts are accounts maintained by retail financial institutions that pay interest.
Savings Bank Interest Rate Calculation: 

Savings Bank Interest Rate calculation old method:
Earlier banks used to pay an interest rate of 4% p.a. against the lowest available balance in the account between the 10th and final day of a month. Any deposits in account during this period were not eligible for interest rate calculation of that month, but at the same time, withdrawals during the period were taken into account for interest calculation.

For Example:

You had a balance of Rs.50,000 in your account as on January 10th.
(Bal: Rs 50,000 )
On 20th of Jan, You received Rs.1,00,000 as maturity bonus for his LIC policy.
(Bal: Rs 1,50,000)
On 28th January You withdraw Rs. 1,25,000 for making a down payment for new flat, thereby reducing your account balance to Rs. 25,000.

In his case, the bank would consider Rs.25,000 for interest calculation, as it is the lowest amount available in your account between the day from 01st to 10th and 28th January.

So, the interest amount you are eligible for the month will be for Rs.25,000 @ 4% p.a. which amounts to Rs.83.33.

4/100*1/12*25000  (roi/100* no. of month/ total no.of months in a year*amount)
4/100*31/365*25000 (roi/100* no. of days/ total no. of days in a year*amount)

Effective from April 1, 2010 onwards, following RBI's mandate to rework interest rate calculation methods, banks started calculating interest on a daily balance method.

Saving Bank interest rate calculation on daily basis

Let's see what difference this move can makes to your interest earned on your savings account:

From January 1st to 20th, you will be paid an interest for Rs.50,000.
From 20th to 28th, interest is calculated for Rs. 1,50,000 and
for the remaining three days, interest is calculated on Rs.25,000/-
So, the interest you earn for January will be Rs.249.28/- against the older method, whereby you have earned Rs. 83.33 only.

So, now every rupee you keep in your account earns for you and you need not plan ahead for your withdrawals to gain maximum benefits.

Savings bank interest rates major changes 

on 1st July 1977: Rate on savings deposits with Cheque facilities fixed at 3% and on savings deposit without cheque book facility at 5%

on 2 March 1978: Interest rate fixed at 4%

on 24 April 1992: Interest rate fixed at 6%

on 1 March 2003: Interest rate fixed at 3.5%

on 1 April 2010: RBI deregulate the interest calculation old method of interest on low amount between the 10th and the last day of the month. RBI asks bank to compute interest on savings bank deposits on a daily average basis.

on 2 May 2011: Interest rate fixed at 4%

on 25 Oct 2011: savings bank deposit  rates deregulated.
Banks are free to determine their savings bank deposit interest rate. Banks will have to keep a uniform rate of interest for savings accounts with deposits up to ` 1 lakh, while differential interest rates could be set for savings bank deposits over ` 1 lakh.


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