A savings account not only simplifies your daily financial transactions but also acts as an investment vehicle, as your deposited funds earn interest. This passive earning pattern, although seemingly nominal, leverages the power of compounding to add up over time and boosts your account balance.
Given its importance for your financial health, let’s understand critical aspects of savings account interest rates and learn useful strategies to maximize your earnings.
Understanding what bank savings interest rates
Interest rates on savings accounts are the percentage of your deposited amount that banks pay you.
These rates can vary widely between different banks and types of savings accounts. A high savings account interest rate means more earnings on your deposited balance which makes this a crucial factor to consider.
How to calculate interest on a savings account?
As per the guidelines of the Reserve Bank of India, interest on savings accounts is calculated daily based on your closing balance.
Your bank may deposit the accrued interest into your account on a semi-annually, quarterly, or monthly basis, depending on the type of savings account you hold and their policy. Here is the formula to calculate interest on a savings bank account:
Interest on a monthly basis = Daily Balance * (Number of days) * Interest / (Days in the year)
Let’s say you open an online savings account that offers an annual interest rate of 4%. If you keep a daily balance of ₹4000 for the first 30 days after opening the account, the calculation for the interest earned in this period would be as follows:
- Interest rate: 4%
- Daily balance: ₹4000
- Number of days: 30
- Days in the year: 365
Interest = 400000 * 30 * (4/100) / 365 = ₹1,315 per month
Taxation on interest income from savings accounts
The interest from your savings account is treated as “income from other sources” and the applicable tax bracket determines your tax on the total income. Interest earned up to ₹10,000 per financial year is not taxable under section 80TTA of the Income Tax Act, 1961.
This exemption applies to all individuals and HUF (Hindu Undivided Family) who are less than 60 years of age. For senior citizens, there is a higher exemption threshold of ₹50,000 per year under the section 80TTB. If the interest exceeds these limits, you must pay tax on it at your slab rate.
Note that TDS does not apply to the interest accrued in savings accounts, as per section 194A of the Income Tax Act.
Tips to earn more interest through savings accounts
From choosing the best savings account for interest rates and features like auto-sweep, here are four practical tips to maximize interest earnings.
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Enable the auto-sweep feature
You simply have to set a threshold after which surplus funds from your savings account will be automatically transferred into fixed deposits and earn higher interest. This way, you get dual benefits i.e., interest rates of FDs and 24/7 liquidity of a savings account.
Leverage exclusive savings accounts
If you are a senior citizen or a woman, look for savings accounts specifically designed for your demographic. Many banks offer these accounts with higher interest rates and additional valuable benefits.
Select accounts with high rewards
Some savings accounts offer high cashback on certain purchases or reward points that can be redeemed for goods and services. Although not in the form of interest earnings, these perks can enhance the overall returns on your money.
The bottom line
It’s important to be aware of these aspects and strategies related to bank savings interest rates to maximize your financial returns.
It is all about choosing the right account, staying updated about rates, maintaining the required balance to avoid fees, using tax exemptions strategically, and capitalizing on any additional perks or rewards.
Apply these strategies today to turn a simple savings account into a valuable tool for growing your finances.