How to Calculate Fixed Deposit Interest?

If you choose to invest in a fixed deposit, you need a clear idea of how your investment will grow over time. In other words, it is essential to understand how fixed deposit interest is calculated. 

 

The interest on your FD is calculated primarily on the principal amount you deposit. Depending on the kind of deposit you choose (non-cumulative or cumulative) the interest you earn on your investment can be simple or compound interest. 

 

Simple interest is the interest that you earn on your investment amount alone. On the other hand, compound interest is what you earn on your principal and the interest accumulated so far. 

 

In other words, it is interest on interest, which is what the power of compounding represents. Let’s take a closer look at how to calculate the FD interest in both cases.

To get a better idea of how to calculate interest on FDs, you need to understand the mathematical formulae involved. 

 

Depending on whether you earn simple or compound interest on your deposit, the formula for how FD interest is calculated also varies, as outlined below. 

• Simple Interest Formula for FD Interest Calculation

Simple interest is the return you get from your fixed deposit investment without the power of compounding.You can calculate the simple interest on your fixed deposit using the formula -

 

Simple interest = (P x R x T) ÷ 100

 

Here, P is the principal investment amount, R is the rate of interest, and T is the tenor in years.

Here is an example to better understand how to calculate interest on fixed deposit in case of no compounding. The table below shows how the simple interest varies across different values of the principal, interest rate and tenor.

• Compound Interest Formula for FD Interest Calculation

Compound interest is the return that you earn when the power of compounding comes into effect. You can calculate the compound interest on fixed deposits by using the formula -

Compound interest =P (1 + r/n)nt - P

Here, P is the amount you have invested, r implies the interest rate, n means the number of times the interest is compounded during a year, and t indicates the investment tenor in years. 

 

If you want to get a better idea of how to calculate interest on fixed deposits when compounding comes into play, here is an example to help you out. 

 

Consider you invest ₹10 Lakhs in a cumulative fixed deposit for a tenor of 5 years. Say it earns interest at the rate of 6% per annum and the interest is compounded annually. 

 In this case, using the FD calculation formula, here is what we have.

 

Compound interest: 

 

= P (1 + r/n)nt - P

= 10,00,000 (1 + 0.06/1)1 x 5 - 10,00,000

= 13,38,226 - 10,00,000

= ₹3,38,226

 

Here is a snapshot of how the compound interest will be calculated for each year.

To calculate monthly interest in a Fixed Deposit (FD) account, you'll need to consider the following factors:

• Principal amount: The initial amount you deposit in the FD.

• Interest rate: The rate at which the FD earns interest, usually specified as an annual percentage.

• Tenor: The duration of the FD in months.

The formula to calculate the monthly interest earned in an FD is:

 

Monthly Interest = (Principal Amount * Interest Rate * Tenor) / 100

• Tenor of 1 Month

Here's an example calculation using the formula:

Let's say you have a Fixed Deposit with a principal amount of ₹1,00,000, an annual interest rate of 7%, and a tenor of 1 month.

 

Monthly Interest = (1,00,000 * 7 * (1/12)) / 100

 

= (7,00,000 / 12) / 100

= ₹5,833.33

Therefore, the monthly interest earned in this FD would be ₹5,833.33.

 

Remember that this calculation assumes the interest is compounded on a monthly basis. The actual interest calculation may vary depending on the specific terms and conditions of your FD account. It's always advisable to consult with your bank or financial institution for accurate and up-to-date information regarding interest calculations.

• Tenor of 12 Months

Interest = (Principal Amount * Interest Rate * Tenor) / 100

 

Here's an example calculation using the formula:

 

Let's assume you have a Fixed Deposit with a principal amount of ₹2,00,000 and an annual interest rate of 8% for a tenor of 12 months. 

 

Interest = (2,00,000 * 8 * (12/12)) / 100

= (160,000 * 1) / 100

= ₹16,000

Therefore, the interest earned on this 12-month FD would be ₹16,000.

 

Remember that this calculation assumes simple interest, where the interest is not compounded. Additionally, note that tax deductions and other factors may apply to the final interest amount. It's always recommended to consult with your bank or financial institution for precise and up-to-date information regarding FD interest calculations.

 

Now that you know how to calculate interest on FDs, you may wonder how you can get the best FD returns. After all, the better the interest rate, the higher the returns, right? There is more to it! Here are some essential tips to get optimal returns on your fixed deposit.

• Consider NBFC Fixed Deposits

Although they carry a slightly higher level of risk, NBFCs typically provide higher returns than bank FDs. So, if you find a trusted NBFC like Bajaj Finance, you can definitely opt for it to avail more optimal returns. 

• Compare FDs Before Investing

Always compare FD schemes from different banks and NBFCs and go for the one that gives higher returns on your investment. You can use an FD calculator to calculate interest on fixed deposits with different terms before you make a choice.

 

Additionally, you can compare various FD schemes on Bajaj Markets before zeroing in on a suitable plan.

• Opt for a Cumulative FD

Once you choose the plan that provides the best FD rates, you need to maximise your returns. When you select the cumulative option, you will receive your entire interest and your principal amount on maturity. 

 

The compounding effect of cumulative FD results in higher returns.

• Submit Form 15G/15H

In case your total income during the year does not exceed the basic exemption limit, you can submit form 15G or form 15H if you are a senior citizen. This helps you avoid TDS on FD interest. This will maximise the amount credited to your account from your FD investment. 

This should give you a fair idea of how fixed deposit interest is calculated and what you can do to optimise the returns on your FD. Plus, you are also aware of how to calculate the FD interest rate based on a few important criteria.

 

Before investing in a fixed deposit, ensure that you use an FD interest calculator to get a better idea of how your investment will grow over time.