Have you ever noticed the variation in interest rates on savings accounts? Ever wondered why that is? Today, we’ll explore the different types of savings accounts available in India, examine the factors that influence interest rates, and understand the impact these rates have on your earnings. 

The dynamics of interest rates in savings accounts 

Interest rates are a crucial indicator of how much your savings will grow over time. There is a direct relationship between interest rates and your earnings. This means that higher rates will enhance your financial growth, allowing you to earn more from the parked funds in your account. Each financial institution provides a varied interest rate.   

How interest on a savings account is calculated? 

Most banks use the daily balance method to calculate interest on savings accounts. In this method, the interest is calculated based on the daily balance in your account.  

• Daily interest = Daily balance * interest rate/days in the year 

The accrued interest is then credited to the savings account quarterly.  

• Interest = Daily interest * number of days in the quarter 

Types of interest  

There are two types of interest, and understanding how each is calculated is crucial. This is because they significantly impact the growth of your savings.   

1. Simple interest: This is a straightforward way to calculate interest. It is calculated on the principal amount, i.e., the initial sum deposited into your account.   

It is calculated as:  

Simple interest = Principal x rate x time 

1. Compound interest: This method considers the interest earned on your account over time, in addition to the principal amount. To simplify, the interest earned in each period is added to the principal. This amount then forms the base for calculating the next period’s interest. 

It is calculated as: 

Compound interest = Principal + simple interest 

TDS on interest earned on savings accounts 

In India, you must state the interest earned under the category of income from other sources in tax returns. If the accumulated interest in a year exceeds ₹10,000, it is taxable as per the individual’s tax slab. Also, TDS (Tax Deducted at Source) is not applicable to savings accounts as per Section 194A of the IT Act.  

Types of savings accounts in India 

Besides your daily closing balance, the type of savings account you choose also impacts your earnings. Each option varies in terms of interest, monthly withdrawals and other charges. Here are the common kinds of savings accounts in India that you can consider: 

Regular savings account 

A regular savings account is the typical choice when you want to accumulate your funds in a bank account. A minimum deposit amount is required to open the account and even maintain it in some cases.  

Zero balance savings account  

Many banks have launched zero account opening online, too. In this case, you do not have to add a minimum deposit at the time of opening or maintain a minimum average monthly balance. The interest rate of this account is generally lower than other savings products. 

High-yielding savings account 

This savings account is the best option for maximising the growth of your savings. It has a more competitive interest rate than a regular savings account. High-yielding savings accounts are suitable for those who prefer enhanced banking features. They come with exclusive debit and credit cards, dedicated relationship manager, faster customer support and more. They have a higher minimum balance requirement. 

Specialty savings account 

This is a savings account you open for specific purposes, like travel, education, retirement, etc. It helps you reach specific financial goals. With limitations on withdrawals, it allows you to control spending. It further lets account holders earn interest on their savings to grow their money. However, there may be restrictions on who can open this kind of savings account. The interest rate is generally lower than regular and high-yielding savings accounts.  

Endnote 

You should opt for a savings account that promises better returns and provides robust services. So, evaluate your needs, compare different offerings and make a decision.