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In a fixed deposit, you invest your lump sum money for a specific tenor at a fixed interest rate. You receive your invested amount along with the interest income at the time of maturity. A fixed deposit is widely preferred as it gives guaranteed interest income along with utmost safety. You might wonder how fixed deposit interest is calculated. The fixed deposit interest rates are calculated in two methods, simple interest and compound interest. Banks or NBFCs may use both these methods depending on the amount and tenor of the deposit. Let’s have a look at both simple interest and compound interest formula, and understand how fixed deposits are calculated.

## How Fixed Deposit Interest is Calculated?

### Simple Interest Formula for FD Interest Calculation

In the simple interest method, the fixed deposit is calculated by multiplying the principal, rate of interest and the time period. The simple interest formula of fixed deposit is:

Principal x Rate of Interest x Time Period divided by 100 or (P x R x T/100)

Where P= Principal amount; R = Rate of interest per annum; T= Tenor (in years). Let’s understand how to calculate FD interest using a simple interest formula with an example.

Suppose you have invested ₹10,000 at 8% per annum for a tenor of 5 years. Your fixed deposit interest will be calculated in the following way using a simple interest formula.

Step 1: 10,000 x 8 x 5 = ₹4,00,000

Step 2: ₹4,00,000/100 = ₹4,000

So, the interest you earn for 5 years is ₹4,000.

Therefore, if you invest ₹10,000 in a fixed deposit with an interest rate of 8% per annum, you will get ₹14,000 as maturity amount after 5 years with an interest income of ₹4,000.

### Compound Interest Formula for FD Interest Calculation

The compound interest formula for FD interest calculation is Compound Interest (CI) = P {(1 + i/100)n – 1}. In this method of calculating the interest income, you not only earn the interest on the principal amount but also on the interest amount. A lot of bank FDs offer compound interest ensuring you get a good interest rate on fixed deposits. Let’s have a look at an example to see how a fixed deposit is calculated using the compound interest formula.

To understand this, we are taking the invested amount of ₹10,000 at 8% per annum, the same as the above example.

For Year 1

To calculate interest income for the first year, we will use the formula of the simple interest method.

Therefore, 10,000x8x1/100 = ₹800

So the interest amount for the first year will be ₹800.

In compound interest calculation, this amount will be added back to the principal and the principal for the second year will become ₹10,800.

For Year 2

In the second year, you will earn an interest income of 8% on ₹10,800.

Therefore, 10,800x8x1/100 = ₹864

Now, your interest income has increased to ₹864. This will again be added to the principal amount making it ₹11,644. We can calculate the compound interest for the next three years using the same method. However, some banks offer compound interest monthly, quarterly and half-yearly. So, instead of calculating it per year, we can use a simple formula that multiplies the principal amount with the interest rate raised to the number of periods in years. The formula is, Compound Interest (CI) = P {(1 + i/100)n – 1}

Where, P = Principal amount; n = Number of years; i = Rate of interest per period

Therefore, in the above example, you get CI= 10,000 {(1+8/100)5 – 1} = ₹4,693

Hence, the total maturity amount you get is ₹14,693.

## Things to remember when Investing in an FD in 2021

With Bajaj Finance FD, you can achieve all your short-term as well as long-term financial goals. You can start your investment with an amount as low as ₹15,000. The interest rates on FD in Bajaj Finance are also one of the best in the market that are as high as up to 7.45%. With a flexible tenor ranging from 12 months to 60 months, you can invest your amount at your own convenience. The payout options are also flexible as you can receive your interest income on a monthly, quarterly, half annually or annual basis.

This attractive interest income can be earned in a safe market environment as Bajaj Finance FD comes with an FAAA rating by CRISIL and MAAA rating by ICRA. Starting your FD investment with Bajaj Finance is an easy and online process with a doorstep document collection facility as well. You can also take care of any emergency expenses by taking a loan against a fixed deposit of up to 75% of your FD amount.

## FAQs

#### ✔️Is FD safe?

FD is risk-free and guarantees fixed returns. Fixed deposit interest rates are higher than other risk-free investment instruments like Treasury Bills or Government Bonds.

#### ✔️How to calculate Fixed Deposit Interest rate?

It is calculated by multiplying the principal, rate of interest and the time period. The formula for Simple Interest (SI) is “principal x rate of interest x time period divided by 100” or (P x Rx T/100).

#### ✔️What are the Tax benefits on FD?

No TDS on Fixed Deposit is deducted on either (FD) or Recurring Deposit (RD) made with a post office. Senior Citizens (those above 60) can get up to Rs 50,000 per year in FD interest tax-free and no TDS will be deducted for interest received up to Rs 50,000 per annum for them.

#### ✔️How to invest in FD?

You can invest up to Rs. 1.5 lakh to get exemption from the income tax under Section 80C. A tax-saving fixed deposit can be opened @ 7.35% per annum.

#### ✔️When should I invest in FD?

Short-term fixed deposits are best utilized for short-term goals like 7 day to 2 years whereas long-term fixed deposits are best used for long-term goals. You can plan their maturity in accordance with your financial goals to ensure liquidity when required.