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Why your savings account will earn more interest now

Last updated on: April 19, 2010 08:18 IST

Why your savings account will earn more interest now



Idle money never has worked better for you. Your deposits lying in your Savings Bank Account will work better for you now than they did earlier.

Effective April 1st 2010 the RBI has issued an announcement by changing the terms of interest calculation for Savings Bank account deposits. The new method is a substantial departure from the old practice, whereby interest was calculated on the minimum balances held in these accounts from the 10th of each month to the last day of the same month.

In the older method, interest was calculated at 3.5 per cent per annum on the minimum balance between the 10th and the last day of the month. However, effective April 1st 2010 this model has changed to interest payable on the 'balance on a daily basis'.

This method of calculation is a paradigm shift from the conventional method of calculation that awarded the bank account holders with meagre interest earnings.

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Photographs: Investmentyogi

Why your savings account will earn more interest now

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The change in interest payable is as illustrated in the table below:

New interest rate computation
Date Transaction Amount Balance Old system New system
Amount Interest Amount Days Interest
1-Jun Opening balance Rs 12,000   Rs 12,000 1 Rs 1.15
2-Jun Deposit Rs 25,000 Rs 37,000   Rs 37,000 1 Rs 3.55
3-Jun Withdrawal Rs 5,000 Rs32,000     Rs32,000 5 Rs 15.35
8-Jun Withdrawal Rs 6,000 Rs 26,000     Rs 26,000 2 Rs 4.98
10-Jun Withdrawal Rs 12,000 Rs 14,000     Rs 14,000 3 Rs 4.02
13-Jun Deposit Rs 3,000 Rs 17,000     Rs 17,000 5 Rs 8.15
18-Jun Withdrawal Rs 2,500 Rs 14,500     Rs 14,500 8 Rs 11.12
26-Jun Withdrawal Rs 4,500 Rs 10,000     Rs 10,000 5 Rs 4.8
30-Jun Total interest   Rs 10,000 Rs 10,000 Rs 29.17 Total 30 Rs 53.12

If one were to go by the older method of interest calculated at 3.5 per cent per annum on the minimum balance between the 10th  and the last day of the month. The interest workings were calculated on the Rs 10,000 balance that was the minimum between the 10th and the 30th of the month.

However in the new system of calculation, interest is calculated on a daily basis thereby giving the depositor almost twice the amount of interest. With the interest amounts almost doubling it will provide a better cushion for the conservative investor who prefers the virtually risk free bank deposits to any other investments.

However in a rising interest regime; this move is more than what one could ask for- liquidity and higher interest. But don't make this a reason to be lazy- Invest your money according to your goals and your time horizon. Keep 2 to 6 months expenses as emergency funds in a combination of Bank accounts and liquid funds. Don't let that money be idle, even though it is better than before.

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