# How is interest in my bank account calculated?

I am a software professional. I have one question. How do banks calculate interest on money deposited, if I get, say, 10% per annum?

Say I deposit say Rs.1000 on the 1st day of the month; then I deposit Rs.1000 on fifth; then I deposit Rs.1000 on tenth day of the month; and in the same way on 15th, 20th, 25th, 30th.

According to the rule of RBI in India banks deposit interest monthly.

So I have Rs.7000 in my bank account.

• Can I get interest on Rs.7000 even if I deposit the last Rs.1000 on the 30th of the month?
• Is their software sophisticated to keep each transaction and calculate interest accordingly?
• Many banks calculate interest on the average balance during each month. In your example, the average balance would be (1000x31+2000x26+3000x21+...+7000x1)/31 and the interest would be 0.1/12 times the average balance. I have no idea how Indian banks calculate the interest, but I have absolutely no doubt in my mind that no bank anywhere in the world will pay you a full month's interest on the balance at the end of the month. – Dilip Sarwate Apr 2 '12 at 13:16
• – Chris W. Rea Apr 2 '12 at 16:27

I really does depend on the bank. Here is a fairly typical page on interest calculations. The key phrase is:

Interest is calculated on each day's final balance and paid monthly.

So at the end of each day the amount of interest is calculated for that day, based on how much is in the account. At the end of the month the amount of interest for each day is totalled, and added to the account balance. That calculation is extremely similar to duffbeer703's "compound monthly using the average balance for the month", provided the account doesn't have tiered interest rates and the balance doesn't go negative.

The software that banks use is easily sophisticated enough to handle that kind of calculation.

Your bank should be able to give you a statement of exactly how the interest is calculated.

It depends on the country and possibly the bank. In the United States, my savings accounts compound monthly, using the average balance for the month.

You should have an account agreement or terms document that details how the bank does computations like interest payments.

Some banks are giving you interest on the minimum balance between 10th and last day of the month.

However, with automation, RBI has changed the instruction and now for automated branches they are calculated on a daily balance basis. Since you have deposited 1000 on the last day of the month, you will get interest only for a day.

A more elaborate article can be found here.