Introduction
Fixed deposit is a popular investment tool in India, and people use them to save money and earn fixed interest.
The interest rate on a fixed deposit is calculated based on the amount deposited in the account, the tenure selected, and the current interest rate. However, how to calculate FD interest? is the question that everyone has. Let us understand the concept of how to calculate interest on fixed deposits in this post.
How Interest Is Calculated on FD by Banks?
Before understanding how interest is calculated on FD, let us take a quick look at what an FD is.
A fixed deposit (FD) is a term deposit where you can invest money for a specific period and earn a fixed interest rate. Depositors may place their money in an FD for seven days to twenty years. The bank that offers fixed deposits calculates the interest rate in advance, and it stays the same during the duration of the FD.
Depositors can opt for cumulative or non-cumulative FD. If the deposit is a cumulative FD, the whole interest amount will be paid out at maturity; if it is a non-cumulative FD, the interest will be paid out over time.
However, how is fixed deposit interest calculated? is the question investors have while opening an FD. There are two types of FD interest – Simple and compound interest. Depending on the deposit size and duration, banks may employ either option.
One of India’s top fixed deposit schemes is offered by RBL Bank. We offer many unique benefits in addition to one of India’s highest FD interest rates. Your fixed deposits with us are eligible for interest payments of up to 7.25%.
How to calculate fixed deposit interest online? You can utilize our online FD interest calculator to compute the interest payments on your FD online.
1. Simple Interest
Simple interest is the easiest method of calculating interest on an FD. Interest on FD using simple interest can be calculated using the following formula:
Interest on FD = Principal amount * Interest rate on FD * Tenure of FD divided by 100 or (P x Rx T/100).
For instance, assume you invest Rs. 30,000 at 7% p.a. for six years. The interest on your fixed deposit will be:
Step 1: 30,000 x 7 x 6 = Rs. 12,60,000
Step 2: Now divide the amount by 100. You will get Rs. 12,600
Thus, the interest you earn for six years is Rs. 12,600.
2. Compound Interest
With this approach, investors receive interest not only on the principal but also on the interest earned. This is the second approach on “how to calculate interest on FD”.
For instance, assume you invest Rs. 30,000 at 7% p.a. for six years. The interest on your fixed deposit for the first year will be:
Interest on FD for the 1st year = 30,000*7%*1 = Rs. 2,100.
Now, for the second year, interest on FD will be calculated at Rs. 32,100 (30,000+2,100). So, interest will be 32,100*7%*1 = Rs. 2,247.
This method of calculating interest can also be used for the remaining periods. Instead of figuring out the interest for every year, you may figure out compound interest using the method below.
Compound Interest (CI) = P {(1 + i/100)^n – 1}, Where, P = amount deposited, i = interest rate on FD, and n = number of years.
Factors That Can Affect Fixed Deposit Rates
To maximise returns, sophisticated investors consider a few variables before opening a fixed deposit (FD) account. Additionally, before understanding “how to calculate the interest of fixed deposit”, understand the top five factors that can affect the fixed deposit interest rates.
1. Tenure
An FD’s interest rate and duration are directly correlated. Selecting a prolonged duration may often achieve the best FD interest rates.
Start investing as soon as you can. The earlier you begin, the more time your money has to earn interest, and the greater the interest rate will be.
2. Renewals
Using the auto-renewal option, investors may earn higher interest rates on fixed deposits. Furthermore, it is no longer necessary to keep track of renewal dates. With the online FD interest calculator, you may check your maturity amount at any moment.
3. Age
The investor’s age is considered when deciding the interest rate that will be charged on a fixed deposit. In comparison to normal investors, senior folks typically receive greater interest rates. We offer a 0.50% p.a. additional interest rate on senior citizens’ fixed deposits.
4. Reserve Bank of India (RBI)
The nation’s current economic, monetary, and fiscal policies heavily influence interest rates for fixed deposits. Interest rates on FDs will rise in response to an increase in the repo rate by the RBI and vice versa.
5. Inflation
If inflation in the economy is high, the RBI will increase the repo rate to combat inflation in the economy.
The banks will provide a greater interest rate on your FDs if the repo rate rises.
This should help you understand “how to calculate interest for fixed deposit”. Remember to start early, aim for a greater interest rate, and have a larger initial corpus.
