Savings Account – How is interest calculated?

This is a very simple question but estimated 4,30,000 crore account holders dont know about!! We all know that its absyimal 3.5% per annum but it goes little beyond it and banks continue to swindle the poor customer unknowingly – here is how.

For example on April 10th, you have zero balance ( not possible but hypothetically) and you deposit 1 Lakh on April 11th into your account. Suppose you withdraw this 1 Lakh on may 31st – there is no interest paid – its a big fat zero – why?

The answer lies in simple rule that banks follow for savings account. All most all banks in India pay interest on minimum balance held between 10th and 30 or 31st of that month. So according to that rule your entire 51 days money did not get any interest but the bank has lent it to another customer at 9.5% and earned that income – this is a major source of income for all banks in India.

To avoid this pitfall do the following:

a)Make deposits in your savings account before or on the 10th of every month.

b)Ensure that you withdraw any funds only after the 31st or the last day of every month.

c)More importantly leave bare minimum funds in your savings account to pay for monthly expenses and immediate payments and move the rest in short term fixed deposits. This way you have liquidity and at the same time you continue to earn higher interest. Better yet, park funds in higher interest rate fixed deposits, and take an overdraft against the deposit for any contingencies.

18 Responses to Savings Account – How is interest calculated?

  1. Ankur says:

    if u want to earn interest.. then plz do not put any money in the savings account… that account is only for paying ur monthly bills… and nothing else

  2. some body says:


    very good point – i still remember how surprised i was when i first came to the usa and was informed that even money deposited on the last day of the month figures in the interest calculations!

    – s.b.

  3. neel3 says:

    I was reminded of these calculations we had in class x.
    Thanks for a recap-I had totally forgotten.

  4. kalyan says:

    Thanks for sharing the info, bust isn’t this practice going on a bit odd. I can share another kind of practice by the IT department, where we have to pay advance tax by 31st march, but any interest accruing from the bank can only be known in april, so either you have to pay extra amount and get the refund later, if there is or you will be penalised for not showing the interest. Now knowing the hassles of getting back refund from the IT dept., isn’t it a bit weird.

  5. Kalyan,
    The IT department rules was framed for mostly traders/corporate houses who accure profits due to business/capital gains which the Government wants to tax as quickly as possible. For exampe if an individual buys shares on december 2nd and sells it on 10th for a whooping 25000 difference, there is a capital gains of 10% to be paid and this needs to be paid immideatly in december itself as advance tax – otherwise penatly of 1.5% per month like a credit card company is levied. Sadly the person who pays tax regularly like the salaried class gets penalized!! Good point kalyan.

    Exactly, My head master Mr Keshava rao was reminded who taught me these calculations but I misearably failed in understanding those days. Now I do and count my paise as its so hard to earn.

    Right, there the checking accounts are re-imbursed for the huge cash piles in transit but in India, savings is the only account most people even know about!!

    Hope you get rich in pocket too 🙂

    Right words and thanks. Do revisit again.

  6. Prasanna Sastry says:

    Great Post MOhan avare I only knew that the amount deposited after 10th was not considered for interest but didnt know that any withdrawl would result in no interest for that month.

    Any way now on i shall be careful.

  7. Sastry sir,
    Even if it helps one person, the posting has served its purpose!. thanks.

  8. bachodi says:

    Wonderful information, But I was just wondering if all those 430000 crore account holders follow this, how will a bank survive. Will they be able to manage their organization?

  9. bach,
    The banks get a hefty profit margin using these funds. The irony is that near 90% of those SB account holders are ignorant of the calculation methodology, the next 10% only keep minimum balances or ignore losses.

    Unity is power, If these 43000 crore people just represent as one unit and submit an ultimatum to RBI for rules change or withdraw money, there will be a liquidity issue and RBI will have to intervene and change this stupid method of calculating interest.

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  11. Pradeep says:

    But on the positive side it could be in favour of citizen as well.

    In the above example if this guy had deposited 1 lac on 10th April and withdrew 1 lac on 1stMay, then he would earn interest for total 1 month on 1 lac, although he had kept his money for only 21 days!!!

  12. Kumar says:

    Now I think bank has to pay the interest on the daily basis.

  13. Jitendra Kumar says:

    I think the calculation of interest of saving account is on the basis of lowest account balance for a particular day. plz state that am i right?

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  16. sachin says:

    Saving Acc. Interest (I) = P r t
    P- Principle amount
    r- rate of interest
    t- total year

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