How Banks Calculate Savings Account Interest in 2026: Daily Balance, Quarterly Credit and Tiered Slabs

By Nitish Bharadwaj · Published Sep 28, 2026 · 6 min

Since April 2010, RBI has required banks to calculate savings account interest on a daily product basis. The bank takes the balance at the end of each day, applies the annual rate divided by 365, and adds it up. The total is credited at least every quarter, and some banks credit monthly. Banks must pay one rate on balances up to ₹1 lakh. Above that, tiered rates usually apply only to the part of the balance within each slab. Interest is taxable, with an 80TTA or 80TTB deduction in the old regime only.

Open your passbook at the end of June and you will see a small credit called 'SB interest'. Most people never check how the bank reached that number. It is worth knowing, because the method decides whether a large deposit on the 29th earns you anything, whether a mid-month withdrawal costs you, and whether a bank advertising 'up to 7%' will actually pay you 7%.

The Rule: Interest on Your Daily Closing Balance

From April 1, 2010, RBI required banks to pay savings account interest on a daily product basis. Before that, banks paid interest on the lowest balance between the 10th and the last day of each month. A deposit made on the 11th earned nothing until the next month, and a single low-balance day wiped out a month of interest on the rest.

Now the bank looks at your closing balance at the end of every day. Each day earns interest on that day's balance at the annual rate divided by 365. The bank adds up the daily amounts and credits the total on a set date. A deposit starts earning from the day it lands, and a withdrawal stops earning only from that day.

A Worked Example

Say your account pays 3% a year. You hold ₹1,00,000 from July 1 to July 30, then pay a ₹50,000 bill on July 31. The balance stays at ₹50,000 until September 30, the end of the quarter.

Interest = ₹61,00,000 × 3% ÷ 365 = about ₹501, credited on or around September 30. You earned on the full ₹1 lakh for the 30 days it sat there, and on ₹50,000 after that. Under the old monthly-minimum method, July would have earned only on ₹50,000 because of that one low day.

When the Interest Is Credited

RBI asked banks in 2016 to credit savings interest at quarterly or shorter intervals. Most public sector banks and many private banks credit it at the end of June, September, December and March. Several private and small finance banks credit it monthly.

The credit frequency matters a little, because credited interest starts earning interest the next day. At 3%, quarterly credit gives an effective yield of about 3.03% a year. At 7%, quarterly credit gives about 7.19% and monthly credit about 7.23%. That gap is small, so do not pick a bank on credit frequency alone.

Tiered Rates: What 'Up to 7%' Really Means

Banks set their own savings rates since RBI deregulated them in October 2011, but with one condition. The rate on balances up to ₹1 lakh must be the same for everyone, whatever the amount within that limit. Above ₹1 lakh, a bank can pay different rates for different balance bands.

The detail that matters is how those bands apply. Most banks with tiered rates apply each rate only to the part of your balance that falls in that slab, not to the whole balance. The headline rate is usually for the highest slab. Take an illustrative bank paying 3% up to ₹1 lakh, 6% from ₹1 lakh to ₹10 lakh and 7% above ₹10 lakh.

Someone holding ₹15 lakh at this bank earns about 6.1%, not 7%. The bank's rate page usually says whether rates apply on the incremental balance or the entire balance. Read that line before you move money for a headline rate. Our list of high-interest savings accounts shows how the slabs compare across banks.

What Does Not Change Your Interest

• Intraday movements. Only the end-of-day balance counts, so money that comes in and goes out on the same day earns nothing.
• Cheques deposited but not yet cleared. Interest starts when the funds are credited, not when you drop the cheque.
• Account status. An inoperative account keeps earning interest at the normal rate; the balance is not forfeited.
• Minimum balance penalties. These are charged separately and do not reduce the rate, but they can wipe out a quarter of interest on a small balance.

If your account often dips below the required average balance, the charges can cost more than the interest. Our guide to minimum balance penalties explains what banks can and cannot charge.

How Savings Interest Is Taxed

Savings interest is added to your income and taxed at your slab rate. Banks do not deduct TDS on it, so you must report it yourself. It appears in your Annual Information Statement (AIS), and the tax department matches it against your return.

The new regime is the default, and most salaried people now use it, so the whole amount is usually taxable. In our example, that means about ₹2,000 of taxable interest a year. Our 80TTA and 80TTB guide covers who can claim what in the old regime.

How to Check Your Bank Got It Right

1. Download the statement for the quarter and note the closing balance on each day that it changed.
2. Multiply each balance by the number of days it stayed unchanged, then add the results.
3. Multiply the total by your rate and divide by 365. For tiered rates, split each day's balance across the slabs first.
4. Compare with the credited amount. A difference of a rupee or two is rounding. A larger gap is worth raising with the branch, and then with the RBI Ombudsman if the bank does not respond within 30 days.

Daily-balance interest rewards money that sits in the account and takes nothing for timing tricks. The real decisions are how much to keep in savings at all, whether your balance crosses the slabs where tiered rates pay more, and whether an FD or sweep would earn more on the rest.