In Indian households, Fixed deposits (FDs) due to their assured and guaranteed returns have been one of the preferred modes of investment. In earlier times FDs were mainly available at banks and post offices, though in recent times the scenario has changed, now, you can open deposits offered by non-banking finance companies (NBFCs) that actually provide a higher rate of interest than existing in the market
Have you ever wondered how interest rates are calculated on FDs?
Do you have the same question about the formula that’s used to calculate the interest earned, the factors affecting them, and the maturity amount?
The formula for calculating FD interest rate:
You can use the formula to calculate interest on FD
A = P (1 + r/25) 4n
Here the denotations used are:
A is the maturity amount,
P is the deposit amount, and
N is the frequency of compounded interest.
Using the above formula, you can determine the final maturity amount of your fixed deposit.
To explain better here is an example, if you invest 1 lakh for a tenor of 3 years at an interest rate of 10%, putting the values in the above formula would come to:
- A = 1,00,000 x {1+(10/25)} 4*3
- A = 1,00,000 x 1.34489
- A = 1,34,489
Hence the interest you earned on the fixed deposit is Rs. 34,489.
In case you find it problematic, you can use online calculators to make your job easy. Wherein you just need to put the figures, and the calculator would do the remaining task for you. The spreadsheet also offers you the feature to calculate the interest rate on your fixed deposit.
Factors you need to know that affect interest you earn and the maturity amount.
Many factors are affecting the interest earned and the maturity amount. Some of them are as follows:
– Principal amount
The interest you get on the fixed deposit is directly proportional to the principal amount. In simple terms, it implies the greater the principal amount; the higher the interest earned on it. For example, a principal amount of 10 lakh would definitely get more interest than 5 lakhs.
– Deposit tenor
The duration of the deposit would help you estimate the return you are going to get over it. The maturity amount will be more as the interest you will get will be greater depending upon the tenor. Due to compounding, the interest will be more. Financial companies give you flexible tenors on deposits ranging from 12-60 months or 1-5 years.
– Rate of interest
The interest income and the maturity amount are directly dependent on the FD interest rate, the greater the time period, the higher the rate of interest.
– Deposit type
Depending upon your liquidity needs, FDs are considered one of the most flexible financial instruments. The two types of deposits are cumulative and non-cumulative.
- Cumulative FDs: The interest in this type of FD is paid at the time of maturity.
- Non- cumulative FDs: The interest paid on this deposit is monthly, quarterly, or half-yearly as convenient to you. In this FD the interest earned is more than cumulative as the money gets reinvested.
– Depends on the category of citizen you are
Senior citizens usually get more interest in an FD than regular citizens. Since they are majorly dependent on the interest, they earn from FDs to address their daily necessities. Many renowned companies provide 0.35% more interest to senior citizens over the prevailing interest rates.
While choosing FD, people generally look for the highest interest rate. This task can be made simple for you by the online FD calculators available for your ease.
