A common way to measure if an investment is worthwhile is by comparing its returns with other instruments. For FDs, this is done by calculating the interest income earned per month or year.
For FDs with interest compounding once a year, the interest calculation is pretty straightforward. You can calculate the exact expected monthly returns using the equation method, simple interest method, or compound interest method.
A basic understanding of the interest calculation is extremely useful to weigh the pros and cons of investing in FDs. Keep reading to know more about interest calculation, with the help of the ₹1 interest for ₹1 Lakh illustration.
To understand how interest is calculated and how this appreciates the value of your principal investment, first consider that you are earning ₹1 interest for ₹1 Lakh. This implies that for every ₹100 invested/deposited, you are earning ₹1 as interest.
This interest is added to the principal and the cumulative figure is the total value of your investment. The effective monthly interest rate is 1%, and the yearly interest rate is 12%.
Once this is established, here is a look at the three methods you can use to estimate the monthly earnings for ₹1 interest for ₹1 Lakh.
Calculation Method |
Formula |
Illustration |
‘₹1 interest for ₹1 Lakh per month’ Method |
Considering the yearly interest rate as 12%
The monthly interest payout = Invested amount x 1/100 |
To calculate ₹1 interest for ₹1 Lakh per month:
Monthly interest payout = 1,00,000 * 1/100 = ₹1000
The total yearly interest earnings for ₹1 interest for ₹1 Lakh per month = ₹12,000. |
Simple Interest Method |
I = p × r × t
Here, I = Interest amount p = Principal amount r = Interest rate t = Investment tenor |
To calculate the yearly interest payout: 1,00,000 * 12/100 * 1 = ₹12,000
Monthly interest: 12,000/12 = ₹1,000 |
Compound Interest Method |
[P*(1 + R)^nt] - P
Here, P = Principal amount R = Rate of interest n = Number of periods t = Time period |
To calculate the ₹1 interest for ₹1 Lakh: [1,00,000 X (1+12/100)^1*1] - 1,00,000 = ₹12,000
Monthly interest payout: 12,000 / 12 = ₹1,000 |
This example illustrates that the calculation of ₹1 interest for ₹1 Lakh per month is ₹1,000, irrespective of the calculation method used. This method also makes it easier to plan a future expense as you know how much to invest.
All you need to do is substitute ₹1 in this example for the amount you need every month, and apply the formula. This way, you can gauge how much you need to invest to arrive at the required figure.
If you don’t want to be hassled by manual calculation, use the online FD calculator available on Bajaj Markets. It simplifies interest calculation, automatically generating the interest earned based on your principal investment and tenor.
Bajaj Markets also allows you to compare FD rates by leading issuers, calculate returns, and invest online, all on one platform.
FAQs on How to Calculate ₹1 Interest for ₹1 Lakh Per Month
Is 1% monthly interest the same as 12% yearly interest?
Yes, these are the same. 1% interest compounded annually is 12%.
What does ₹1 interest for ₹1 Lakh per month mean?
It means that for every ₹100 invested, you get a return of 1% (monthly) and 12% (yearly). It facilitates interest calculation.
Is compound interest better than other interest calculation methods?
All interest calculation methods yield the same returns. However, the total interest and monthly payout may differ in the compound interest calculation method if interest is compounded twice in a year.
What is the disadvantage of opting for monthly FD interest payouts?
While monthly interest earnings act as a steady income stream, sometimes financial institutions offer better interest rates on FDs with annual interest payouts.
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