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Anishka Bhadly
Anishka Bhadly is a content writer with a finance and business background. She has completed her bachelor's degree with a specialisation in finance and is currently pursuing an MBA in the finance field too. The knowledge she has gained from her studies and experience working with EdTech companies helped her combine theoretical knowledge with practical industry insight. Her expertise lies in creating well-researched, informative, and reader-friendly content in various banking, personal finance, loans, insurance, and investment-related topics.
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Fixed deposit (FD) interest is the income that the deposit owner receives for keeping funds in an FD scheme in a particular bank. There are several parameters determining the interest on a fixed deposit, including deposit amount, applicable interest rate, term of investment, and compounding frequency. In general, the rate depends on the FD tenor and the bank’s target clientele. Additionally, to estimate the FD interest, one should know the principal, the annual interest rate, and the investment period. In case of cumulative deposits, the interest is compounded periodically and added to the principal. Therefore, one can compute this value on one's own or use the bank's FD calculator to estimate the maturity proceeds.
The interest rate on a fixed deposit (FD) is mainly determined by various factors, including the amount of deposit, rate of interest, compounding frequency, and term of deposit.
Fixed deposit interest can be calculated using different methods based on deposit, interest rate, tenure, and compounding. Each approach will help you understand the interest you are likely to earn on your FD amount.
The simple interest method is often very easy to perform and understand. This method is mainly used for non-cumulative FDs that pay interest at regular intervals. The formula to calculate FD interest using the simple interest method is
Principal x Rate of Interest x Time/100
Let’s understand this with an example where we are getting a 5% per annum return for 3 years on ₹100,000. This means:
= ₹100,000 x 5 x 3 /100
= ₹15,000
The maturity amount will be ₹100,000 + ₹15,000 = ₹115,000.
The compound interest method is a bit difficult to calculate; however, it is much more helpful than the simple interest method. The formula includes the following:
P(1 + i/n)^(n*t)
Here:
Let’s understand this with an example with the same numbers as the simple interest formula.
= ₹100,000 (1 + 0.05/1)^(1*3)
= ₹115,762.50
We can clearly see the difference between the two methods.
Disclaimer: The above method examples are for educational purposes only; you should contact your bank or financial institution for exact interest rates and calculations.
Other than the above-mentioned method, you can easily calculate the FD interest rates using online FD interest calculators. Knowing various FD interest calculation methods will help you evaluate your profits. Compare the interest rates, duration, and compounding options to choose the best fixed deposit schemes according to your needs.
Calculating fixed deposit interest makes it easy to know the amount of money one stands to gain before opening the account. The final amount depends on several factors, including the sum deposited, rate of interest, duration, and compounding frequency. The simple-interest formula does not apply to cumulative FDs when interest is compounded, as accumulated interest is added to the principal for subsequent compounding. Therefore, it is vital to note that a bank’s fixed deposit rate, compounding method, premature withdrawal terms, and taxation policies differ. Comparing the variables helps one choose the best deposit scheme based on tenure, and not the highest rate on offer.
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The FD interest is calculated depending on the principal amount, rate of interest, tenure, and compounding frequency. Moreover, banks tend to provide either simple or compound interest on deposits according to their specific FD schemes.
The 7% interest of ₹100,000 would amount to ₹7,000 in a year before tax deduction if deposited with simple and annual compounding frequency.
If you are interested in calculating simple interest, then the formula would be P × R × T ÷ 100. However, cumulative FDs usually work on the principle of compound interest.
The interest on FDs is not typically calculated daily. Rather, it depends on the bank and the scheme selected. In addition, banks offer different compounding frequencies for their FD schemes that can range from quarterly to annually.
Is FD 100% safe?
In certain cases, no deposit is absolutely risk-free. Eligible bank deposits are insured by DICGC up to ₹5 lakh per depositor per bank, including principal and interest.
The returns on FDs are lower compared to what one could make by investing in the stock market, and the interest received is also subject to taxation according to the applicable tax laws.
Yes, you can keep ₹5,000,000 in a fixed deposit. However, it is to be noted that the insurance coverage of the DICGC is limited to only 5 lakhs per depositor.
It is difficult to say which is better between fixed deposits and stocks. While FDs have predictable returns, stocks carry a higher risk quotient and potentially offer higher rewards.
In case of monthly payouts, the interest on the FD is paid out every month, and in case of quarterly payouts, it is paid every quarter. On the other hand, cumulative FDs pay interest on maturity.
The depositor will have to deposit a certain amount of money with the bank for a specific period of time and at a specific rate of interest. The bank will then pay out the interest on the deposited amount according to the given terms and conditions of the FD.
