How does Bank calculate interest on Saving Account and FD in INDIA?

In India, savings accounts are probably the most used because they can be withdrawn quickly. Through online transactions, the savings account can be handy for daily use in the life of an ordinary person. Fixed deposits are also famous in the country, but for the return, they provide at the end of the deposit time. The banks offer interest on the amount you save in their treasury. Most ordinary people do not know how the interest on savings accounts and fixed deposits are calculated. Read along to find out about the process of the bank calculating interest rates.

Calculation of the interest on the amount present in the savings account

According to the reserve bank of India, a person gains some interest at the end of the day according to the amount present in their account. There is a formula for the interest on the savings accounts, which is,

Interest on the savings account= Rate of interest × (No. of days/365) × Daily balance

We can understand the process better by the use of an example. Let us take the case of a fictional character named Rohan. If Rohan has 5000 rupees in his account for seven days, and after that, he withdraws 3000 rupees. For the next seven days, his account has 2000 rupees. Assuming that the rate of interest provided by the bank is 5 percent, the interest would be counted as follows:

For 1st seven days,

5000 × (5/100) × (7/365) = 4.79

And for the next seven days,

2000 × (5/100) × (7/365) = 1.91

Now, the total interest earned by Rohan in these fifteen days by his savings account is 4.79+1.91 = 6.7 rupees. The calculation is based on the daily amount present in your savings account. However, the bank has some policies on how and when the interest is going to be applied to the account of every person. So, the amount is credited on a half-yearly or a yearly basis so that the chaos would calm down a bit. The savings account is a better and more feasible option for many people because the savings account provides them with the ability to withdraw their money anytime. Nowadays, there is also no use of ATM cards for transactions. Along with all these features, the savings account also provides you with some interest which would help you increase the amount of money you have deposited.

Calculation of interest in the case of fixed deposits

The fixed deposit provides marginally better interest than the savings accounts. The fixed deposit needs to be withdrawn after a certain lock-in period is signed by the person. If the person decides to withdraw the fixed deposit before the completion of the lock-in period, then the person has to bear the deduction of some percent of the interest money. There is a formula for the calculation of the interest applied on the fixed deposit of a person,

Interest applied= Principal amount × Rate of interest

We can also take an example to understand this concept better. Let us suppose that Rohan, the person we described in the previous example, has a fixed deposit of 1,00,000 rupees. The yearly interest rate of the fixed deposit is 8%, and the six months rate of interest is 6%. The penalty for early or premature withdrawal of the fixed deposit is 0.5%.

Now, if Rohan decides to withdraw his money after one year, the interest amount he will receive for his fixed amount will be,

Interest amount= 1,00,000 × 8% = 8000

So, now after the addition of the interest amount with the principal amount, the total amount becomes,

Total amount= 1,00,000 + 8,000 = 1,08,000 Rupees

In another case, if Rohan decides to break the fixed amount after six months, he will have a penalty of 0.5% because he has decided to withdraw the specified amount before the lock-in period. So, now the 6% rate of interest for six months becomes 5.5% after the deduction of the penalty amount. Now, Rohan is going to receive,

Interest after six months = 1,00,000 × 5.5% = 5,500

So, after adding the interest amount to the principal amount, Rohan will receive 1,05,500 rupees from the bank because of his withdrawal before the lock-in period.

TDA applied on the interest

As per the rule, banks would deduct 10% TDS from the interest they give customers on fixed deposits. The TDS rule has two exceptions in its applications.

1. If you have your money saved in your savings account and not in a fixed deposit, then the bank can’t deduct the TDS amount from the interest you have gained in your deposits.
2. The bank cannot charge TDS if the bank gives a cumulative interest of fewer than 10000 rupees. If the bank is providing interest of more than 10000, then the bank can deduct 10% as TDS from the interest amount. It means that if a person receives 8000 rupees as interest from one bank for all his fixed deposits in the whole year, then the bank can’t deduct the 10% from his interest.

Conclusion

The savings account doesn’t have any maturity or lock-in period. So, you can have that flexibility in withdrawing your money for use. However, you need to maintain a minimum balance in your account. Some banks offer a lower rate of interest for customers who have less in their savings accounts, whereas the people having more money in their accounts enjoy a better rate of interest. However, in the case of fixed deposits, you need to save your money in the bank for a certain period called the maturation period. You can withdraw your money after that period to avoid any deduction in the percent of your interest. The rate of interest is calculated differently in both cases. The calculation of the interest in a savings account depends upon the amount of money, whereas the calculation of the interest in a fixed deposit depends upon the time before withdrawal.