Savings Accounts are among the most common and accessible financial instruments in India. They promote the habit of saving among individuals and offer safety, liquidity, and a modest return in the form of interest. However, understanding how interest rates work on Savings Accounts in India is crucial for making informed financial decisions.

What are Savings Account interest rates?

A Savings Account interest rate is a fixed percentage based on your average account balance, based on interest over a specified period. In India, these rates are expressed annually (per annum) but are credited quarterly or monthly, depending on the bank’s policy. While the interest earned is not substantial compared to investment options like Fixed Deposits or Mutual Funds, it is a passive income stream and helps your money grow steadily.

How are interest rates calculated?

The RBI does not regulate interest rates on Savings Accounts, allowing banks to set their rates. Most banks now use the daily balance method to calculate interest, which means the interest is calculated based on the closing balance of each day and then credited to your account at the end of the quarter or month.

For example, if your average daily balance is Rs. 1,00,000 and the interest rate is 3.5% per annum, you will earn approximately Rs. 875 per quarter (Rs. 1,00,000 × 3.5% ÷ 4).

Factors that influence interest rates

Several factors can change the interest rate on a Savings Account:

Account balance: Some banks offer different interest rates depending on your balance.
RBI policy rates: Banks often align their savings rates with RBI’s monetary policy, especially the repo rate, which influences lending and deposit rates.
Digital Banking: With the rise of online account openings, banks increasingly offer higher interest rates and digital features to stand out in a crowded marketplace.

Tax implications

Interest earned on Savings Accounts attracts taxes under “Income from Other Sources.” However, under Section 80TTA of the Income Tax Act, individuals (below 60 years) can claim a deduction of up to Rs. 10,000 per annum on interest earned from Savings Accounts. This limit is higher at Rs. 50,000 for senior citizens under Section 80TTB.

Conclusion

While Savings Accounts are meant for safekeeping funds and daily transactions, the interest they generate should not be overlooked. Comparing rates across banks, understanding how interest is calculated, and being aware of tax implications can help maximise the returns on your savings. For those seeking better returns, exploring higher-interest options or maintaining optimal balances in strategic accounts can make a significant difference over time.