Earlier, any deposit in the account between the 10th and the end of the month, would not earn the account holder any interest as it is not part of the interest rate calculation. Any withdrawal between the same period, would result in lower interest income as the lowest balance would be taken into account for the calculation.
April 1st, 2010 brings around a pleasant surprise for savings bank account holders- interest income will be higher going forward. This is due to the fact that RBI has instructed banks to change the mechanism of interest income calculation- it’s now going to be based on the ‘daily balance method’ with the rate of interest remaining the same at 3.5% p.a.
Earlier method of interest rate calculation
Banks would pay interest @3.5% p.a. on the lowest available balance in the account between the 10th and the last day of the month.
Impact of the same
Any deposit in the account between the 10th and the end of the month, would not earn the account holder any interest as it is not part of the interest rate calculation. Any withdrawal between the same period, would result in lower interest income as the lowest balance would be taken into account for the calculation.
Mr. Ashwin had an account balance of Rs. 85,000 on the 10th of April. He received a payment of Rs. 300,000 on the 15th of April from the sale of some mutual fund units. On the 29th of April, he made a down payment of Rs. 320,000 to a builder for a property. This resulted in his account balance reducing to Rs. 65,000. For the interest income calculation for the month of April, the bank would take Rs. 65,000 as the base and pay him interest on that amount. So interest due to Mr. Ashwin would be on Rs. 65,000 for 30 days @ 3.5% p.a. which would be Rs. 187. In spite of having a high account balance for most period of the month, Mr. Ashwin lost interest income for the month.
Under this method of interest rate calculation, the best thing Mr. Ashwin could do is ensure that all transactions are done between the 1st and the 9th of the month so that he would get benefit of interest. This required proper planning.
New method of interest rate calculation
Interest will be paid @3.5% p.a. on the daily balance in the account at the end of the day. So here, the account holder will get interest on the actual day end balance.
Under this method, Mr. Ashwin’s interest income calculation would be:
- For the first 14 days of April, interest to be paid would be calculated on Rs. 85,000
- For the next 14 days of April, interest to be paid would be calculated on Rs.385,000 and
- For the balance 2 days, interest to be paid would be calculated on Rs. 65,000
So the total interest due to Mr. Ashwin would be Rs. 643.
Under this method, Mr. Ashwin’s interest income is much higher- to the tune of Rs. 456. Besides, he did not have to plan his withdrawals and deposits as he would receive interest on the actual account balance.
As a savings bank account holder, you should be pleased with the latest change. Who would not like to see higher balance on account of higher interest income?
PS: Interest rate calculation Formula
Daily interest =Amount (Daily balance)* Interest (3.5/100)/ Days in the year
with an easy to understand example., this one is the best article, i have read about daily interest rates on sb accounts
daily interest rates on sb accounts is good for all.