The Alluring 7% Offer
Several banks, particularly small finance banks, have been competing to attract depositors with higher-than-average interest rates. The latest to make waves is Unity Small Finance Bank, which began offering up to 7% per annum on its savings accounts from
August 1, 2026. For savers accustomed to the 3-4% range offered by larger commercial banks, this figure is understandably attractive. It suggests an opportunity to make your idle cash work significantly harder without locking it into a fixed deposit. However, as with most financial products, the headline rate is just the beginning of the story.
Reading Between the Lines: Tiered Rates
The most crucial detail to understand is that the 7% is not a flat rate on your entire balance. These accounts operate on a tiered or slab-based system. In the case of the Unity Small Finance Bank offer, the interest is calculated in brackets. You earn 4.5% on balances up to ₹1 lakh, 6% on the portion of your balance between ₹1 lakh and ₹5 lakh, and the 7% rate applies only to the amount of money you hold above the ₹5 lakh mark. This means a person with a balance of ₹6 lakh does not earn 7% on the full amount; they earn 7% only on ₹1 lakh. This structure significantly changes the effective rate of interest on your total savings.
Calculating Your Effective Interest Rate
Let’s do the math for a hypothetical balance of ₹6,00,000. On the first ₹1,00,000, you earn 4.5% = ₹4,500 On the next ₹4,00,000 (from 1L to 5L), you earn 6% = ₹24,000 On the final ₹1,00,000 (above 5L), you earn 7% = ₹7,000 Your total annual interest would be ₹4,500 + ₹24,000 + ₹7,000 = ₹35,500. While this is a healthy return, it represents an effective interest rate of about 5.92% on your total balance of ₹6 lakh—not the 7% headline rate. The higher your balance goes above ₹5 lakh, the closer your effective rate will inch towards 7%, but it will never quite reach it. This is the first major adjustment from the advertised rate to your actual earnings.
The Good News and Bad News About Tax
The next factor is tax. First, the good news: unlike with fixed deposits, banks do not deduct Tax at Source (TDS) on interest earned from a savings account for resident Indians. However, this does not mean the interest is tax-free. All interest you earn must be declared in your income tax return under 'Income from Other Sources' and is taxable at your applicable slab rate. There is a silver lining for those filing under the old tax regime. Section 80TTA of the Income Tax Act allows an individual to claim a deduction of up to ₹10,000 on interest earned from all savings accounts combined. So, in our example, if your total interest was ₹35,500, you could deduct ₹10,000, and only the remaining ₹25,500 would be added to your taxable income.
Factoring in the Real Enemy: Inflation
The final step in discovering your 'actual' return is to account for inflation, which erodes the purchasing power of your money. The nominal rate is what the bank gives you; the real rate of return is what you're left with after inflation. With India's Consumer Price Index (CPI) inflation hovering around 4.4% in mid-2026, this is a significant factor. If your post-tax effective interest rate is, for example, 5.2% (assuming you are in the 20% tax bracket on the taxable portion of your interest), your real rate of return would be roughly 0.8% (5.2% interest - 4.4% inflation). Suddenly, the impressive 7% has become a very modest, though still positive, real return.
