Savings Account Interest: How Banks Calculate It on Your Daily Balance (With Examples)
Myth: your bank pays savings interest only on the lowest balance of the month. Fact: since 1 April 2010, savings interest in India is worked out on your balance at the end of every single day. Many people still keep money idle “until the 10th” or rush deposits at month-end because of a rule that no longer exists. Here is how savings account interest is actually calculated, with worked examples, and what that means for where you park your money.
How savings account interest is calculated: the daily product method
The Reserve Bank of India asked banks to pay savings account interest on a “daily product basis” with effect from 1 April 2010. Before that, interest was paid on the minimum balance held between the 10th and the last day of each month. A deposit made on the 11th earned nothing for that month, and a withdrawal on the 12th could wipe out interest on most of the balance.
Under the daily method, the bank takes your closing balance each day, applies the annual rate divided by 365, and adds it all up. The total is credited at intervals the bank chooses, usually quarterly.
The formula, in plain terms:
Interest = Σ (closing balance for the day × annual rate ÷ 365)
Since October 2011, banks set their own savings rates. Many large banks pay low rates on everyday balances; SBI, for example, shows 2.50% a year on its website, effective 15 June 2025.
A worked example: old method vs daily method
Take a 30-day month in which your account holds ₹50,000 for the first 20 days. Your salary of ₹1,00,000 arrives on day 21, taking the balance to ₹1,50,000 for the last 10 days. The rate is 2.5% a year.
| Method | How it works | Interest for the month |
|---|---|---|
| Old (minimum balance, 10th to month-end) | Lowest balance in that window is ₹50,000; interest on ₹50,000 for one month | ₹104.17 |
| Daily product (current) | ₹50,000 × 20 days + ₹1,50,000 × 10 days, at 2.5% ÷ 365 | ₹171.23 |
Our calculations. Under the daily method, your average balance for the month was ₹83,333.33, and you are paid on every rupee for every day it sat in the account.
What the daily method changes for you
Timing tricks no longer matter
There is no benefit to depositing before the 10th or holding off withdrawals until month-end. A ₹10,000 deposit earns roughly ₹3.42 for 5 days or ₹20.55 for 30 days at 2.5%: in direct proportion to the days it stays.
Small rates add up slowly
At 2.5%, ₹1 lakh left in savings for a full year earns about ₹2,500. The same amount in an SBI one-year fixed deposit at 6.25% would earn about ₹6,250 before tax. With retail inflation at 5.54% in September, money sitting at 2.5% loses buying power. See our CPI report.
Higher-rate savings accounts
Some banks pay a higher rate on larger balances, often in slabs. A few small finance banks advertise much higher rates. Two cautions: read whether the higher rate applies to the whole balance or only the part above a slab, and remember that deposit insurance covers up to ₹5 lakh per depositor per bank (our DICGC guide).
Slab rates: how they are applied
Suppose a bank pays 2.75% up to ₹10 lakh and 3% above. Most banks apply each rate only to the portion of the balance in that slab, like income tax slabs. So on ₹12 lakh, ₹10 lakh earns 2.75% and ₹2 lakh earns 3%. For a full year, that works out to ₹27,500 plus ₹6,000, or ₹33,500. If the bank instead applied 3% to the entire ₹12 lakh, the interest would be ₹36,000, a difference of ₹2,500. Some banks may apply the higher rate to the entire balance. The bank’s interest rate page or terms will say which.
When is interest credited?
RBI’s rule fixes how interest is calculated, not how often it is paid. Most banks credit savings interest quarterly, some monthly. Check your passbook or statement for “Int. Pd.” or “Credit Interest” entries. If an entry looks off, you can recompute it using the daily balances on your statement.
Better homes for idle money
| Option | Access | Typical use |
|---|---|---|
| Savings account | Instant | Monthly spending, one month’s buffer |
| Sweep-in or auto-sweep FD | Instant, broken in units | Emergency fund linked to savings |
| Short fixed deposits or a ladder | Premature withdrawal, usually with a penalty | Money needed within 1–3 years |
| Recurring deposit | At maturity | Saving a fixed amount monthly |
Read more on sweep-in FDs and building an FD ladder. If your account has a minimum balance requirement, keep enough there to avoid charges; our minimum balance guide explains RBI’s rules on penalties.
Tax on savings interest
Savings account interest is taxable as income. Under the old tax regime, a deduction is available on savings interest up to a limit, with a higher limit for senior citizens. Banks do not normally deduct TDS on savings interest, but you must still report it in your return. Your annual information statement on the income tax portal shows the interest banks have reported.
A quick check you can do
- Download one quarter’s statement.
- Note the closing balance for each day (or each block of days with the same balance).
- Multiply each balance by the number of days and add them up.
- Multiply the total by your rate and divide by 365.
- Compare with the interest credited. Small differences can come from rounding.
Quick answers before you go.
FAQs
How is savings account interest calculated in India?
On the daily closing balance, since 1 April 2010, as directed by RBI. Interest is credited periodically, usually every quarter.
Does depositing before the 10th earn more?
No. That mattered under the old minimum-balance method, not today.
Why is my savings interest so low?
Many large banks pay around 2.5% to 3% on regular balances. Moving surplus money to deposits or a sweep facility can earn more.
Does the daily method apply to every bank?
RBI moved banks to daily product calculation from April 2010. If your bank’s statement suggests a different method, ask the branch in writing how the credit was calculated.
Is savings interest tax-free?
No. It is taxable, though a limited deduction is available under the old regime.
Takeaway: Savings account interest is calculated on your balance every day, so timing deposits around the 10th no longer matters. What matters is the rate: at 2.5%, idle balances earn less than inflation, so keep only your spending buffer in savings.
Rules referred to
- RBI: payment of interest on savings bank account on daily product basis (from 1 April 2010)
- SBI deposit interest rates
Last verified: 14 Oct 2026, 7:50 PM IST against RBI’s notification on daily product interest (from 1 Apr 2010; the linked circular is addressed to urban co-operative banks) and SBI’s website (savings rate 2.50%, FD 6.25%). Examples are our calculations; slab rates are hypothetical.
