Fixed deposits act as a safe haven for risk-averse investors who are looking to invest a certain amount of money for a predetermined period. As a traditional tool, it provides you with stable and assured returns, with several FD issuers offering competitive interest rates.
However, do you know how fixed deposit interest is calculated? Before you settle on a particular FD scheme, it’s important to estimate your potential interest returns.
Read on to learn the math behind FD interest calculations and how you can use an FD interest calculator to plan your investments better.
How Fixed Deposit Interest Is Calculated
The interest rate on a fixed deposit depends on various factors, such as the amount, tenor, frequency of interest payout, type of depositor, and the FD issuer. It’s crucial to understand that the interest amount may be paid at different intervals. This includes monthly, quarterly, half-yearly, or at maturity, depending on the choice of the depositor.
The formula for calculating the interest amount on a fixed deposit is different for simple interest and compound interest. The formula for simple interest is: Simple Interest = P x R x T / 100
Here,
- P is the amount deposited
- R is the interest rate per annum
- T is the tenor of the deposit in years
So, for example, if you were to deposit ₹2 Lakhs for 1 year at 7% p.a. simple interest, then the interest amount will be: Simple Interest = 2,00,000 x 7 x 1 / 100 = ₹14,000
The maturity amount will be: Principal + Simple Interest = 2,00,000 + 14,000 = ₹2,14,000
On the other hand, to calculate compound interest, you must use the formula: Compound Interest = P x (1 + R / N) ^ (N x T) – Principal
Where,
- P is the amount deposited
- R is the interest rate per annum
- N is the number of times interest is compounded each year
- T is the tenor of the deposit in years
Keeping in mind the example used earlier for simple interest, you can use the compound interest formula to determine the same like this: Compound Interest = 2,00,000 x (1 + 7 / 400) ^ (4 x 1) – 2,00,000 = ₹14,371.8
The maturity amount will be: Maturity Amount = Principal + Compound Interest = 2,00,000 + 14,371.8 = ₹2,14,371.8
As you can see, compound interest gives you a higher return as it takes into account the effect of compounding.
How to Use an FD Interest Calculator
An FD interest calculator is an online tool that helps you to calculate the interest and maturity amount of your fixed deposit easily and quickly. You just need to enter some basic details about your FD investment and the calculator will show you the results instantly.
You can also compare different FD schemes offered by various banks and financial institutions using an FD interest calculator and choose the one that suits your needs and goals. While the steps may vary across different FD calculators, you’re usually required to fill in the below-listed fields.
- Investment amount
- Tenor
- Type of investor, i.e regular or senior citizen
- Rate of interest
Once you fill in these fields, the calculator will automatically estimate the interest earnings and the total maturity amount.
An FD interest calculator can help you plan your investment better by showing you how much you can earn from your FD and how much tax you will have to pay on it. You can also use an FD interest calculator to find out how much you need to invest in an FD to achieve a certain financial goal. Alternatively, you can use it to find out how long you need to invest in an FD to get the desired return.
There are many websites that offer free FD interest calculators online. You can use any of them to calculate your FD returns and compare different FD schemes.
Conclusion
Fixed deposits are a great way to save and grow your money safely and steadily. However, to make the most of your FD investment, you need to understand how fixed deposit interest is calculated and how it affects your returns.
You also need to use an FD interest calculator to compare different FD schemes and choose the best one for yourself. By doing so, you can make the most of your FD returns and achieve your financial objectives with ease.
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