Understanding the New Method of Interest Calculation for Savings Bank Accounts

The Reserve Bank of India (RBI) has introduced a new method for calculating interest on savings bank accounts. This change has not only expanded the interest earning capabilities for account holders but has also created a more competitive environment for banks. In this article, we will delve into the new interest calculation method and how it differs from the previous one.

RBI’s New Regulation on Saving Bank Interest

As part of its deregulation drive, the RBI has mandated that interest on savings bank accounts will now be calculated on a daily basis for the closing day balance. This accumulated amount will be paid back to the account holder on a quarterly basis. This change involves calculating the interest based on the final balance for the day, eliminating the previous method where the interest was calculated against the lowest available balance during the month.

Impact on Interest Calculation

Previously, banks would calculate interest based on the lowest balance between the 10th and final day of a month. However, with the new method, the interest is calculated on the closing balance for each day, which can significantly increase the interest earned by account holders. Let's explore this with an example.

Example: Vishal’s Account

Vishal had a balance of Rs. 50,000 in his account as of January 10th. On January 20th, he received Rs. 100,000 as a maturity bonus for his LIC policy. On January 28th, he withdrew Rs. 125,000 for a down payment on his new flat, reducing his account balance to Rs. 25,000.

Under the old method, the bank would consider Rs. 25,000 as the lowest balance available between the 10th and 28th of January. Thus, the interest for February would be calculated on Rs. 25,000 at 4% per annum, equating to Rs. 83.33.

With the new method, the interest for January would be calculated as follows:

From January 1st to 20th, interest is calculated on Rs. 50,000. From January 20th to 28th, interest is calculated on Rs. 150,000 for 8 days and on Rs. 25,000 for the remaining 3 days.

This results in an interest earning of Rs. 249.28 for January, which is a significant increase from Rs. 83.33 under the old method.

The new method ensures that every rupee you keep in your account earns for you, eliminating the need for strategic withdrawals or deposits to maximize earnings.

Interest Rates for Different Banks

With the new method of interest calculation, the interest rates offered by various banks have also changed. Public sector banks often offer interest rates of around 4% per annum, while private sector banks like Kotak Mahindra and Yes Bank offer rates of 6% for balances of up to 1 lakh. RBL Bank offers an interest rate of about 7.1% for balances of 10 lakh and above.

These changes have created a competitive environment, ensuring better benefits for savings account holders.

To summarize, the new daily balance method for interest calculation on savings bank accounts has significantly increased the interest earned by account holders and created a more competitive market for banks. This change is beneficial for those looking to save more efficiently and earn better returns on their savings.