Savings Accounts are a great financial tool to save money and earn decent interests. And banks are offering several attractive offers to the borrowers looking to open a savings account. They accomplish this by receiving deposits from savers and then lending those amounts to borrowers. The interest earned by banks on their loans is what permits them to pay interest to their depositors. 

People who deposit money in a savings account lend it to the bank. The bank will also pay customers interest on that money, just like any other lender. Customers’ interest rates are decided by various criteria, including the quantity of their deposit, the kind of account, and market rates. 

Understanding how banks compute savings account interest will help one get the best savings interest rates and make wise decisions about where to put their money. 

Meaning of Savings Account

A savings account is a type of bank account primarily intended for consumers to hold and save money while collecting interest on the amount invested. It is one of India’s most common bank accounts, with all major banks and financial institutions offering it.

Savings accounts in India often yield a lesser interest rate than other investment alternatives, such as term deposits or mutual funds, but they also provide liquidity, safety, and convenience. Savings accounts in India include features such as a debit card, online banking, mobile banking, and other facilities that allow the account user to withdraw or transfer cash easily.

One of the best bank to open account in India is RBL Bank. The RBL Savings Bank Account provides a secure place to safeguard one’s hard-earned money while earning the best savings interest rates on balance. RBL’s exceptional customer service and product offerings go beyond traditional banking needs, providing a delightful banking experience.  

How do Banks Compute Interest on Bank Accounts? 

The interest one earns on their savings account is a considerable reward. Banks provide interest on deposits to savings accounts. According to RBI regulations, the interest rate on the savings account is computed daily depending on the closing balance. It means that a depositor earns interest on their savings account balance at the end of each day.

So, monthly interest earnings = Daily Balance*Rate of Interest*Number of Days/365

For instance, assuming one has a daily balance of Rs. 1 lakhs from 1st Jan to 5th Jan, with a savings interest rate of 4% per annum, they would earn an interest of Rs. 54.79 (1,00,000*4/100*5/365). If they then deposit Rs. 50,000 on 6th Jan and make no other transactions until 10th Jan, their new balance would be Rs. 1,50,000, and they would earn an interest of Rs. 82.19. In total, over the 10 days, they would earn an interest of Rs. 136.98.

The interest generated is then credited to the account semi-annually or quarterly, depending on the type of savings account one has and the bank’s policy. It is worth mentioning that the RBI has advised banking institutions to credit interest on savings accounts quarterly to encourage people to save more.

Also Read: An Essential Guide to Women Savings Accounts

Compounding is one of the benefits of a savings account, in which the interest received is added to the principal amount, and then interest is earned on the new sum. In other words, when the bank credits interest to the savings account, it increases the principal amount, and the depositor earns interest on the whole amount in the future. As a result, putting money in a savings account increases earnings.

What Must You Know About Savings Account Interest Rates?

Besides knowing how to compute interest on savings accounts, it is crucial to understand a few aspects of the savings account interest rates. 

• The interest rate received on the savings account depends on the type of account held by one. Premium or high-yield savings bank accounts usually offer higher interest rates.
• While the interest rate is calculated daily, banks generally credit the interest amount quarterly or half-yearly.
• The interest gets compounded every quarter, as the interest from the previous quarter gets added to the balance in the new quarter.
• Maintaining a higher balance can provide a higher interest rate on the savings account. 

Conclusion 

Understanding how banks compute and pay interest on savings accounts will assist a person in making prudent financial choices. Consider compounding, account type, and account balance to maximise the interest earned. One may get the best savings interest rates and maintain financial security by considering these considerations.