Good News for Savings Account Holders

We all hold savings bank accounts with different banks in India and we also know that the rate of interest that we earn on this money is a pathetic 3.5% per annum. This is very low considering the fact that our nations inflation is hovering around the 10% mark. There is some good news for all savings account holders because with effect from April 1st 2010, there is a small change in the way the interest accrued on our bank account is calculated.

Earlier Method: The minimum balance maintained in the account between the 10th and the last day of the month (say 30th or 31st) will be taken for the interest computation

New Method: The balance at the end of every day will be taken into account for interest computation.

Let us check this with a real time example:

Mr. X get his salary of Rs. 50,000/- on the 1st – Balance in Account Rs. 50,000/-
Withdraws Rs. 20,000/- for family expenditure on 8th – Balance in Acc Rs. 30,000/-
EMI on Personal loan Rs. 15,000/- deducted on 15th – Balance in Acc Rs. 15,000/-
Withdrawal of Rs. 10,000/- to meet sudden expenses on 25th – Balance in Acc Rs. 5,000/-

Now let us compute the Interest earned in the account by both ways.

As per the Earlier Method:

Amount considered for interest computation = Rs. 5,000/-

Interest earned for the month = Rs. 14.58/-

As per the New Method:

Balance considered for Interest for 7 days = Rs. 50,000/-
Balance considered for Interest for the next 7 days = Rs. 30,000/-
Balance considered for Interest for the next 10 days = Rs. 15,000/-
Balance considered for the last 6 days = Rs. 5,000/-

Total No. of days in the month = 30 days

Interest for first 7 days (Rs. 50,000/-) = Rs. 34.02/-
Interest for next 7 days (Rs. 30,000/-) = Rs. 20.41/-
Interest for next 10 days (Rs. 15,000/-) = Rs. 14.58/-
Interest for the last 6 days (Rs. 5,000/-) = Rs. 2.92/-

Total Interest Earned for the month = Rs. 71.93/-

This is nearly 5 times as that of the interest earned by the old method.

What is the Impact on us?

1. People who need cash for short term liquidity can retain the money in their bank accounts instead of transferring them to short term Fixed Deposits like 30 or 60 days because the interest on your savings account will be atleast as much as the FD and most importantly it is much more liquid and there are no penalties on withdrawal
2. People who had maintained a solid balance till the 25th or 26th of the month and had to withdraw money for some urgent reason need not lose out on the interest for those 25 or 26 days. Every ten thousand rupees in your savings account earns an interest of one rupee for every day that it is kept in your account.

Happy Investing!!!!!