Savings accounts are one of the most fundamental financial products offered by banks. Trusted by millions, savings accounts allow you to safely store your hard-earned money, enjoy easy liquidity, and earn nominal interest. However, the normal savings account interest rate can vary depending on the bank’s policies but usually ranges from 2.70% to 3% p.a., depending on the amount saved. That said, some banks offer a higher interest rate on savings accounts to encourage and foster a healthy saving habit among depositors.
Also read: How is Tax Deducted on Fixed Deposit
If you are looking for a safe investment option, you can consider fixed deposit. They offer guaranteed returns and a fixed interest rate throughout your investment tenure.
Average savings account interest rates
Banks have a tiered savings account interest rate structure where different interest rates are applicable for different deposit and balance amounts. As of 10th April 2024, the average interest rate on savings accounts in India currently ranges from 2.70%-3% p.a. for balances up to Rs. 1 lakh. This is the standard rate of interest offered by most public and private sector banks. As per the tiered interest rate model, banks incentivise higher savings. Thus, average savings account interest rates are relatively higher for balances over Rs. 1 lakh (up to a specified limit).
Also read: How the Tenure on Your FD Affects Its Interest Rate
How do banks calculate savings account interest rates
According to RBI mandates, the normal savings account interest rate on your savings is determined daily based on the closing balance. In other words, banks calculate the interest rate applicable to the balance available in your account at the end of each day. The interest earned is credited on a quarterly or semi-annual basis, depending on the type of savings account you have and the bank’s internal policies.
The following formula is used to calculate interest on savings accounts:
Monthly Interest = Daily Balance x Number Of Days x Interest Rate / Days In The Year |
Let us take an example to understand this calculation. Let us say you maintain a daily balance of Rs. 4 lakh, and the normal savings account interest rate applicable on the account is 4% p.a. Then the monthly interest payable will amount to:
400000 x 30(4/100)/365 = Rs. 1,315 per month
Average savings account interest rates over time
The normal savings account interest rates in India have changed significantly over the last 17 years. In 1977, the RBI initially set the savings rate at 3% for accounts with a chequing facility and 5% for those without this facility. However, this was quickly revoked once depositors started opening multiple accounts to capitalise on these differential rates.
The following year, RBI debuted a single rate of 4.5% applicable to all savings accounts. In 1992, the savings account interest rate peaked at 6% and then fell to 3.5%. The RBI last raised the normal savings account interest rate on 3rd May 2011.
On 25th October 2011, the RBI deregulated savings interest rates, allowing banks complete autonomy to set their own rates. In 2017, SBI introduced a differential interest rate system based on deposit sizes. This quickly became an industry standard, with banks following in the footsteps of India’s largest public sector bank.
How to maximise the interest on your savings account
- Maintain a high monthly balance: As discussed earlier, banks calculate your interest earnings based on your daily savings account balance. Thus, the higher your balance, the greater your interest earnings. This principle also applies to zero balance savings accounts, where maintaining a high balance increases the interest returns on your saved funds.
- Open a high-interest savings account: Compare and review average savings account interest rates to find accounts that offer higher interest rates. Usually, private and small savings banks offer much higher rates of interest than public sector banks. Choose your banking partner carefully to maximise returns on savings.
- Choose specialised accounts: Several banks offer specialised savings accounts tailored to meet the unique savings requirements of the depositors. You will find savings accounts designed for children, senior citizens, women, NRIs, and students. These accounts offer higher interest rates and unique benefits for the depositor. For instance, banks generally offer higher than normal savings account interest rates for senior citizens. You can review these account types and choose one that best suits your needs to maximise interest earnings and enjoy tailored benefits.
- Opt for a sweep-in facility: You can leverage the auto sweep-in facility to indirectly earn higher interest on your idle savings. With the auto sweep-in facility activated, the bank transfers your surplus savings into a linked FD account. Since FD rates are generally higher than the average savings account interest rates, your idle funds can grow at a high interest rate of up to 8%. The auto sweep-in feature also ensures easy withdrawals, allowing you to avoid penalty charges on premature FD withdrawals and maintain ample liquidity.
The takeaway
Understanding average savings account interest rate is crucial to maximising your interest earnings for both regular and emergency expenses. While interest rates vary depending on the bank’s policies and your savings balance, even the highest savings interest rates cannot compete with interest yields from money market instruments or even fixed-income avenues like FDs. If you want the same capital protection as a savings account but higher yields, opt for a fixed deposit account. Corporate FDs like the Bajaj Finance Fixed Deposit offer high interest rates of up to 8.85% p.a. with flexible tenures, digital account management, and several other perks to maximise your yields and balance the lower savings returns.
