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Here are five things you need to know about annual interest returns:
1. The World Bank Estimate
The World Bank estimates that up to 2023, the penetration of banks in all segments of India increased from 35% in 2010 to 53% in 2014. When the ruling political parties at the center changed in 2014, and the present government floated its Jan Dhan Yojana Scheme, further proliferation of savings bank accounts took place. The scheme aimed at financial inclusion for all classes and masses of Indian society – and by January 2023, over 125 million new bank accounts had been opened.
The implications for more savings accounts and interest earned on them are tremendous. It would appear that savings account holders can keep their idle funds for extended periods and make interest on them to increase the deposit size. Today, most nationalized and private Indian banks offer 4% interest on savings deposits. However, people are also choosing other avenues of increasing the size of their savings instead of merely depending on 4% annualized interest rate returns.
2. How the interest used to be calculated
Before 2022, interest on saving accounts was calculated based on the lowest available deposit amount in the savings account. The savings account interest rate was estimated at 4% for the days from the 10th to the final day of that month. The prominent condition of this interest rate calculation was that any money deposited into the account during this month was not considered for the computation, but withdrawals were counted. Thus, one would need to deposit money before the 10th of every month only to bulk up the deposited amount and thus earn more through the 4% interest.
3. How the interest is calculated
In 2010, from April 1 to be precise, the RBI mandated that banks rework their computations for interest on saving accounts. Thus, banks started calculating the interest on a daily account basis. Let us use the example of Rupesh Kumar to illustrate the calculation:
Say Rupesh has an opening balance of Rs 30,000 on the 10th day of the month. On the 15th day, he was paid Rs 40,000 by a client. So the bank calculates interest on the deposit from the 10th to the 15th day. On the 25th of the month, Rupesh prepays Rs 50,000 on his home loan. Thus, the bank computes interest on the balance from the 15th to the 25th day. Finally, it calculates the interest on the balance between the 25th day and the month’s final day. This way, every rupee in Rupesh’s account earns interest, and there is no need to time money deposits.
4. Larger returns on savings bank accounts
After the RBI deregulated the 4% cap on savings account interest rates in India in October 2011, Indian banks were free to impose their preferred interest rates on savings deposits. Today, while most banks have stuck to 4% interest rates, some other banks in India offer up to 6% or even 7% interest on savings accounts.
Banks are keen to entice customers to open savings bank accounts with them. Still, they also encourage customers to maintain their deposits over a more prolonged period to earn higher interest. Premier banking institutions in India also offer ‘Sweep in/Sweep out’ accounts, which provide the benefits of more significant deposits in the form of fixed deposits; these can be liquidated in times of need. These accounts make it possible to earn decent sums of money through savings account interest.
