October 10, 2025
7 mins read
Interest on savings accounts and fixed deposits (FDs) is calculated based on different principles and formulas, depending on the product type. Banks in India generally offer interest on savings accounts based on the daily balance maintained. At the same time, fixed deposits follow either simple or compound interest, compounded at regular intervals like quarterly or annually.
Understanding the difference in how interest accrues between these two products helps you plan your finances better. While savings accounts offer liquidity with moderate returns, FDs offer higher returns but require locking in funds for a specific tenure. Both are key tools for preserving and growing funds with minimal risk.
Banks typically use the following formula to calculate interest on savings accounts:
Interest = (Daily End-of-Day Balance × Rate of Interest × Number of Days) / 365
For fixed deposits, the formula may differ based on whether the interest is simple or compounded. For compound interest:
Amount = Principal × (1 + Rate / n) ^ (n × Time)
Where:
Rate = annual interest rate
n = number of compounding periods per year
Time = investment duration in years.
Knowing which formula is applied to your deposit helps estimate returns accurately.
In India, the Reserve Bank mandates that banks calculate interest on savings accounts daily, but credit it monthly or quarterly. Interest is typically paid on the closing balance of each day.
For example, if your balance is ₹50,000 for 10 days and ₹70,000 for the next 20 days in a month, interest is calculated daily for each balance and then aggregated. The rate varies from 2.5% to 4% per annum for most banks. The actual amount you receive will depend on your average daily balance and the payout schedule of the bank.
Example:
Day 1–10: Balance = ₹50,000
Day 11–30: Balance = ₹70,000
Interest rate = 3.5% per annum
Total interest =
[(₹50,000 × 3.5 × 10) / 36500] +[(₹70,000 × 3.5 × 20) / 36500]
= ₹47.95 + ₹134.24 = ₹182.19 (approx.)
Most savings accounts offer simple interest calculated on the daily balance, which is then credited quarterly or monthly. However, in some special savings products or high-value accounts, banks may offer compound interest options where interest earned is added back to the principal periodically.
In compound interest accounts, the interest keeps accumulating on both the original amount and the previously credited interest. This creates a compounding effect over time. Though rare in standard savings accounts, this model is common in fixed deposits, especially cumulative FDs. Knowing this distinction helps estimate actual returns better.
Tax Deducted at Source (TDS) is not applicable on savings account interest unless the total interest earned in a financial year exceeds ₹10,000 (₹50,000 for senior citizens under Section 80TTB).
If the interest goes beyond the limit, it is added to your total income and taxed as per your applicable slab. However, for FDs, TDS is directly deducted by banks at 10% if the interest exceeds ₹40,000 in a year (₹50,000 for seniors). PAN submission is required to ensure correct deduction. It is vital to track cumulative interest from multiple accounts to avoid unexpected tax outgo.
To maximise interest on savings accounts:
Maintain higher average daily balances
Choose banks offering 3.5% to 6% interest instead of base rates.
Opt for sweep-in accounts that automatically move surplus funds into FDs
Use auto-transfer facilities to shift idle funds to short-term deposits.
Monitor minimum balance requirements to avoid penalties
These methods do not increase interest rates directly but help boost returns through better utilisation of idle cash. Comparing savings products across banks also ensures you earn the best available rate for your deposit profile.
Understanding how banks calculate interest on savings accounts and fixed deposits empowers you to make more informed financial decisions. While savings accounts offer flexibility and daily interest accrual, FDs provide better returns over a locked period using compound interest.
Interest formulas, payout frequencies, and applicable tax rules can impact actual earnings. Knowing these details lets you optimise savings and align them with your goals. Whether you’re looking to park emergency funds or earn a fixed return, knowing how interest works is the first step toward efficient money management.
Share this article: 
No result found
Banks calculate interest daily using your end-of-day balance. The interest is accumulated and credited monthly or quarterly, based on your bank’s policy.
Banks use either simple or compound interest formulas for FDs. Compound interest is commonly used and is applied quarterly or annually, depending on the product
Fixed-term savings or recurring deposits follow compound interest, where interest is calculated on both the principal and previously earned interest, typically every quarter.
FD interest rates are decided based on the RBI repo rate, inflation expectations, tenure of the deposit, and internal bank policies.
Banks determine savings account interest rates based on market conditions, RBI policy rates, and the bank's strategy. These rates may vary between 2.5% and 6%.
Disclaimer :
The information on this website is provided on "AS IS" basis. Bajaj Broking (BFSL) does not warrant the accuracy of the information given herein, either expressly or impliedly, for any particular purpose and expressly disclaims any warranties of merchantability or suitability for any particular purpose. While BFSL strives to ensure accuracy, it does not guarantee the completeness, reliability, or timeliness of the information. Users are advised to independently verify details and stay updated with any changes. The securities are quoted as an example and not as a recommendation. Past performance is not necessarily a guide to future performance.
The information provided on this website is for general informational purposes only and is subject to change without prior notice. BFSL shall not be responsible for any consequences arising from reliance on the information provided herein and shall not be held responsible for all or any actions that may subsequently result in any loss, damage and or liability. Interest rates, fees, and charges etc., are revised from time to time, for the latest details please refer to our Pricing page.
Neither the information, nor any opinion contained in this website constitutes a solicitation or offer by BFSL or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service.
BFSL is acting as distributor for non-broking products/ services such as IPO, Mutual Fund, Insurance, PMS, and NPS. These are not Exchange Traded Products. For more details on risk factors, terms and conditions please read the sales brochure carefully before investing.
Investments in the securities market are subject to market risk, read all related documents carefully before investing. This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
For more disclaimer, check here : https://www.bajajbroking.in/disclaimer
Level up your stock market experience: Download the Bajaj Broking App for effortless investing and trading
Open Your Free Demat Account
Enjoy low brokerage on delivery trades
|
Please Enter Mobile Number
Open Your Free Demat Account
Enjoy low brokerage on delivery trades
|
