Daily Interest Calculation on Savings Account

Something really "interesting" happened for all those who have a savings account. Here's a summary of it in case you missed it earlier.

Starting April 1, 2010, the RBI has asked all commercial banks (excludes co-operative banks) to pay 3.5% interest interest on a daily basis to saving account holders. Prior to this, banks used to pay interest on the lowest balance in your savings account between the 10th and last day of the month.

For example, if you had Rs. 50,000 in your savings account between the 1st to the 29th - and you took out Rs. 49,000 on the last day, you'd be paid interest on the Rs. 1,000 that was left in your account!

Now, that will not be the case. If you take the above example, you'd earn interest on the Rs. 50,000 from the 1st day to the 29th day and only the interest for the 30th day will be calculated on the Rs. 1,000.

The calculation for daily interest works like this:
(Amount in your account x 3.5/100) / No. of days in year

So, for the first 29 days, you'd earn = (50,000 x 0.035 )/ 365 x 29 = Rs. 139
For the last day, you'd earn = (1000 x 0.035) / 365 = Rs. 0.10.

So that makes it Rs. 139.10 paise for the month.
By the earlier method, you'd have recevied = (1,000 x 0.035) / 365 x 30 = Rs. 2.87

So the difference in calculation does make a difference.

Why wasn't this done earlier?
Well, the RBI had recommended this method of calculation way back. But because banks didn't have the facilities (read computerization) to calculate interest on a daily basis, they decided to pay interest on the lowest amount in your account between the 10th and last day of the month.

Now, the RBI feels all commercial banks are equipped to carry out the computation that's required. So the rule was passed. But as you'd expect, banks are not happy about the increased payouts they'll have to make. There's a feeling that savings interest which is 3.5% would be reduced to accomodate the increase in payouts by the banks. This probably won't be the last you heared on this!