Banking • Topic 2 of 3

Savings Account

What is a Savings Account? A Savings Account is a basic bank account where you can safely store money while earning interest. It is designed for everyday transactions and building savings over time.

Features of a Savings Account:

  • Liquidity: You can withdraw money anytime (with some limits)
  • Interest earned: Usually 2.5% to 4% per year
  • Minimum balance: Most banks require maintaining a minimum amount
  • ATM card: Access cash 24/7
  • Cheque book: Make payments to others
  • Passbook: Record of all transactions

How Interest is Calculated: Most banks calculate interest on the daily closing balance and pay it quarterly. The formula is: \[ \text{Interest} = \frac{\text{Principal} \times \text{Rate} \times \text{Time}}{100 \times 365} \times \text{number of days} \]

For simplified problems, we use simple interest on the minimum balance between the 10th and last day of each month.

Minimum Balance Rule: Banks charge a penalty if your balance falls below a certain amount (e.g., ₹1,000, ₹2,500, ₹5,000).

Advantages of Savings Account:

  • Safe and secure (insured up to ₹5 lakh)
  • Earns interest
  • Easy access to money
  • Online banking available
  • Auto-pay bills possible
Savings-account interest from the qualifying balance held in each part of a month Savings interest from monthly balances (January) ₹5,000 ₹7,000 ₹6,000 Jan 1–10 Jan 11–20 Jan 21–31 10 days 10 days 11 days Avg daily balance = 1,86,000 ÷ 31 = ₹6,000 Flow of a savings account: deposit, bank pays quarterly interest, withdraw for expenses The savings-account cycle You deposit money in Savings A/c earns interest paid quarterly You withdraw for expenses Keep at least the minimum balance, or a penalty applies Interest = (P × R × days) ÷ (100 × 365)
Solved Examples
1
Worked Example
Riya has a savings account with 3% annual interest. Her balance from 1st to 10th was ₹4,000, from 11th to 20th was ₹6,000, and from 21st to 31st was ₹5,000. Calculate the interest for January (31 days).
Solution
  1. Calculate products:
  2. 1st-10th (10 days): 4,000 × 10 = 40,000
  3. 11th-20th (10 days): 6,000 × 10 = 60,000
  4. 21st-31st (11 days): 5,000 × 11 = 55,000
  5. Total product = 40,000 + 60,000 + 55,000 = 1,55,000
  6. Average daily balance = 1,55,000 ÷ 31 = ₹5,000
  7. Interest = (5,000 × 3 × 31) ÷ (100 × 365)
  8. = (4,65,000) ÷ 36,500 = ₹12.74

Answer: ₹12.74 interest.

2
Worked Example
A savings account requires a minimum balance of ₹2,000. If a customer's balance falls to ₹1,500 for 5 days before being corrected, and the penalty is ₹250, what is the net effect on the account?
Solution
  1. Required minimum = ₹2,000
  2. Actual balance = ₹1,500 (short by ₹500)
  3. Penalty charged = ₹250
  4. Account decreases by ₹250 (penalty deduction)

Answer: Account balance reduces by ₹250.

3
Worked Example
Mr. Sharma's savings account had the following balances in March: ₹8,000 (March 1-15), ₹10,000 (March 16-25), ₹7,000 (March 26-31). The bank pays 4% interest. Find the interest for March (31 days).
Solution
  1. March 1-15: 15 days → 8,000 × 15 = 1,20,000
  2. March 16-25: 10 days → 10,000 × 10 = 1,00,000
  3. March 26-31: 6 days → 7,000 × 6 = 42,000
  4. Total product = 1,20,000 + 1,00,000 + 42,000 = 2,62,000
  5. Average daily balance = 2,62,000 ÷ 31 = ₹8,451.61
  6. Interest = (8,451.61 × 4 × 31) ÷ (100 × 365)
  7. = (10,48,000) ÷ 36,500 = ₹28.71

Answer: ₹28.71 interest.

Key Points

  • Savings accounts earn interest and allow easy withdrawals.
  • Interest is calculated on the average daily balance or minimum balance between 10th and last day.
  • Most banks pay interest quarterly (every 3 months).
  • Minimum balance must be maintained to avoid penalties.
  • Savings accounts are liquid (money available anytime).
Quick Check — 4 MCQs
Tap an option to check your answer0 / 4
Q1.Savings-account interest is usually computed on the:
Explanation: Minimum monthly balance.
Q2.A savings account earns:
Explanation: Interest.
Q3.The interest formula used is:
Explanation: Simple interest.
Q4.A higher balance earns:
Explanation: Interest grows with balance.
Practice more MCQs → 📝 Assignment · 35 marks