Fixed deposits or FDs are one of the most popular investment vehicles for the simplicity and safety that they offer. With returns higher than regular savings accounts, and virtually no risk as they are regulated by the RBI, FDs are preferred by a large number of investors looking for a stable option to invest their savings in. However, the key to generating the best returns from your FD investment is understanding how fixed deposit interest is calculated. FD returns are dictated by two main factors:
- Interest Rate
The higher the interest rate, and the longer the tenure of your FD, the greater your returns.
Types of Fixed Deposits
Before we understand how fixed deposit interest rate is calculated, it is important to understand the two types of FDs based on interest rate:
- Cumulative FD – In a cumulative FD, you are allowed to withdraw your payout only at maturity. The advantage, in this case, is that the interest keeps getting compounded till the end of the terms. Banks typically offer a slightly higher interest rate in the case of cumulative FDs
- Non-cumulative FD – In non-cumulative FDs, you can withdraw your interest quarterly, semi-annually, or annually depending on your bank and the scheme opted by you. Banks usually offer a discounted rate of interest in this case.
There are two ways to calculate interest rates on FDs – manually, and using an FD interest rate calculator.
How to Calculate FD Interest Rate Manually – To do this, first, you need to know what the tenure of your FD is. We can assume two cases here:
Tenure Less than 6 Months –In this case, simple interest is applicable on your FD. To calculate the interest on your FD, simply use the formula for simple interest below:
Interest = Principal x Rate of Interest (%) x Tenure of FD in Years/ 100
Tenure Greater than 6 Months – In this case, compound interest will apply to your FD. One also needs to be mindful of whether one has opted for a cumulative or non-cumulative FD as this will also have an effect on how fixed deposit interest is calculated. The formula for calculating compound interest is:
A = Principal (1+rate of interest/n) ^ (n * Tenure)
Where A = Amount at maturity, and
n = number of times the amount is compounded in a year.
How to Calculate FD Interest Using Online Calculator – Calculating FD interests manually can be cumbersome and is prone to human errors. It is better to use an online FD interest rate calculator such as this one by Finserv MARKETS. All you need to do is enter the principal amount, the tenure of the FD, and the interest rate to get the amount you can expect at maturity.
The Bottom Line
It is advisable to calculate how much you can expect upon maturity before investing in an FD. You can either do this manually, using the formulae for simple and compound interest, or you can use a simple online FD interest calculator that offers accurate, error-free, and fast calculations.