A savings account is where most people park their money. It’s convenient, secure, and comes with liquidity. But there’s also something else tied to it — interest. And depending on how it’s structured, the interest your savings account earns can make a real difference to your overall returns.

Understanding how savings account interest rates work can help you get more from your idle funds.So, how do these rates work, and how do they shape your overall returns? Take a look.

What You Earn Depends on the Rate and the Balance

Not all savings account interest rates are the same. Depending on the bank and the amount of money you maintain, the rate can range from 2.75% to 7.00% per year.

• Broadly, most public and private sector banks stick to the lower end, around 2.70% to 3.50%. On the other hand, small finance banks or digital-first ones may offer more — often 6% or even higher — especially when you keep larger sums parked for longer.
• Many banks also use a tiered system. That means you don’t earn the same rate on your entire balance. Instead, different portions earn different rates.

For example:

• The first ₹1 lakh might earn 2.75%
• The next ₹4 lakh might earn 3.25%
• Anything beyond that could fetch 3.50% or more

So if you’re holding ₹7 lakh, your interest is split across slabs — it’s not a flat percentage on the whole amount.

This is why understanding your bank’s rate structure matters. It gives you clarity on how your balance is working — and whether there’s room to optimise it.

How the Interest Gets Calculated

Contrary to what some believe, interest isn’t calculated monthly. Most banks calculate it daily on the closing balance and credit the amount quarterly.

Here’s a simple breakdown:

Daily balance × annual interest rate ÷ 365 = daily interest

This is then accumulated over the quarter and paid out

For example, if you maintain ₹2 lakh daily in an account with a 3.25% rate:

• Daily interest = ₹2,00,000 × (3.25 ÷ 100) ÷ 365 ≈ ₹17.81
• In a 30-day month, that’s about ₹534
• Over a year, around ₹6,500

Now imagine the impact if your bank offered just 0.50% more — your earnings would increase with no change in your effort or balance.

The Compounding Effect on Long-Term Balances

Savings interest may not feel like a game-changer in the short term, but over time, it adds up. Especially when your balance stays consistent and your bank credits interest regularly.

For Example:

• Take a ₹5 lakh balance.
• At an interest rate of 3.25%, you’d earn around ₹16,250 in a year, credited quarterly.
• If the rate were 4%, that figure would move closer to ₹20,000.

The gap of ₹3,750 in a year may not seem huge at first glance. But over five years, that’s nearly ₹19,000 extra—earned passively, without any additional effort or risk.

For accounts with consistently high balances — whether personal or joint — this quiet compounding makes a noticeable difference.

Why Rates Differ

Here’s what typically drives variation:

• Balance slabs: Higher balances may qualify for better rates
• Bank type: Some banks offer higher rates to attract new customers
• RBI policy: Savings account interest rates are partly influenced by repo rate trends and inflation targets
• Business focus: Certain institutions design rates based on deposit growth priorities

All these variables mean your earnings are directly tied to where you bank and how much you hold.

How to Interpret What You’re Offered

While comparing accounts, don’t just look at the headline rate. Check:

• Whether it’s a flat rate or tiered
• What balance qualifies for higher interest
• How frequently the interest is credited
• Whether there are conditions tied to earning the highest rate

Even a 1% difference on ₹5 lakh can mean a ₹5,000 swing in annual interest.

And remember — it’s not just about the rate. Service quality, ease of access, app experience, and security should also be considered when making your choice.

Tax Angle: What You Keep vs. What You Earn

Interest earned on your savings account isn’t fully tax-free. If you’re earning more than ₹10,000 in interest in a year, you’ll need to declare it in your income tax return. That’s where Section 80TTA comes in.

• This section lets individuals (below 60 years) claim a deduction of up to ₹10,000 on their savings account interest in a financial year.

So, if you earned ₹9,000, it’s fully exempt. If you earned ₹12,000, only ₹2,000 is taxable.

• For senior citizens, Section 80TTB offers a bigger benefit — up to ₹50,000 in exemption. And that includes interest from both savings accounts and fixed deposits.

Unlike FDs, banks don’t deduct TDS on savings account interest. But that doesn’t mean you can skip declaring it. If your total income is taxable, this interest still needs to be included.

Yes, your earnings from savings do matter. But what you keep after taxes matters just as much.

Use a Savings Interest Calculator

To plan more precisely, use a Savings Account Interest Calculator. Most banks offer this tool online. You simply enter your expected average balance, interest rate, and duration.

It shows:

• Daily interest earned
• Monthly or yearly earnings
• Total maturity amount if you keep the balance unchanged

This can be particularly useful when you have to decide where to park idle funds temporarily or estimate tax liability on interest.

Final Thoughts

The interest rate on your savings account isn’t just a background figure — it determines how much your idle money earns, day after day.

Even a small difference can compound into something significant. And while safety and access will always matter, earnings from your account do, too.

So, check the rate. Read the conditions. And make sure your bank is helping your money grow, not just holding it in place.