How to Calculate FD Interest?

A fixed deposit (FD) scheme is a popular investment instrument because it promises guaranteed returns. Your deposits earn interest over a fixed period at predetermined interest rates. Hence, the interest income earned from an FD helps you create a guaranteed corpus for your financial goals. 

But on what factors does the rate of interest for an FD scheme depend? Let’s take a look.

• The deposit amount
  The interest rate will differ based on your deposit value. For instance, deposits above ₹2 crores will attract a better rate than those below this figure.
• The term
  Under the FD scheme, you can choose a tenure between 7 days to 10 years. Interest rates will vary based on what term you are choosing.
• Age
  Senior citizens are entitled to higher interest rates than depositors who have not turned 60 yet.
• Financial Institution
  FDs are offered by banks, post offices and Non-Banking Financial Companies (NBFCs). Each of these institutions offer interest rates different from the other. Usually, NBFC FDs fetch a higher interest rate. In the case of bank deposits, the rates typically differ from one bank to the other.
• Type of deposit
  Fixed deposits can be cumulative or non-cumulative based on the framework for interest payouts. In cumulative deposits, you receive the interest income as a lump sum on maturity. In case of non-cumulative deposits, the interest is paid periodically all through the tenure.

The compounding frequency determines the interest income you will earn during the tenure. The more frequently the interest is compounded, the higher would be the returns and vice-versa.

Let’s now understand how to calculate FD interest.

How is Fixed Deposit Interest Calculated?

The interest in a fixed deposit scheme is calculated either as simple interest or compound interest.

Under the simple interest model, the interest is calculated on the amount that you deposit.

Compound interest comes into effect when the interest earned on a deposit gets added back to the capital. The subsequent interest is calculated after considering both principal and the accumulated interest. In other words, your interest earns more interest.

Let’s understand how to calculate the rate of interest on FD using two simple formulae.

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

Simple Interest Formula for FD Interest Calculation

Interest = Principal X Term X Interest Rate.

So, if you invest ₹50,000 (principal) in a fixed deposit for a term of 2 years at an interest rate of 5% per annum, the interest that you would earn would be as follows:

Interest earned = ₹50,000 X 2 years X 5% = ₹5000

Also Read: Post Office Fixed Deposit: Interest Rate, Tenure and More

Compound Interest Formula for FD Interest Calculation

The formula for compound interest is different. In this case, the amount that you get on maturity is calculated first. Then, this amount is deducted from the principal amount to get the interest.

The formula goes as follows:

Amount = Principal * (1 + Interest Rate) ^ Term

If the interest is compounded more than once a year, the formula changes to the following:

Amount = Principal * (1 + Interest Rate / compounding frequency) ^ (Term * Compounding frequency)

Deduct the calculated amount from the principal and you get the interest income.

For example, if you deposit ₹50,000 for 2 years and the interest rate offered is 5%, the compound interest would be calculated as follows, assuming that the interest is compounded annually:

Amount = Rs.50,000 (1 + 0.05) ^ 2

= ₹ 55,125.

Interest earned = ₹55,125 – ₹50,000 = ₹5125

You can also break down the formula and calculate the interest for each year. So, if you use the same example where the deposit amount is ₹50,000, the term 2 years and the rate is 5%, here’s how to calculate FD interest for every year:

• For year 1
  Interest for the first year = 5% of ₹50,000 = ₹2500
  Deposit value after the first year = ₹50,000 + ₹2500 = ₹52,500.
• For year 2
  Interest for the second year = 5% of ₹52,500 = ₹2625
  Deposit value after the second year = ₹52,500 = ₹2625 = ₹55,125

Also Read: Find the monthly FD interest that you can earn on an Rs.1 crore FD

Things to Keep in Mind 

When calculating the interest income from the fixed deposit, here are a few things you should keep in mind:

• The compounding frequency is an important criterion in calculating the interest rate. So, check the frequency when you are calculating.
• The interest would vary depending on the term. So, check your deposit tenure to find the applicable interest rate.
• If you choose the non-cumulative fixed deposit scheme, the interest income will be paid to you throughout the deposit term. You can choose the payout frequency at your discretion.
• There are online FD calculators that help you calculate the expected interest income. These calculators are free of cost and can be used for instant results if you do not want to do the calculations yourself.
• Comparing the fixed deposit schemes offered by different financial institutions is better. This would help you find the best interest rate on your deposit, thus maximising your returns.

Also Read: Cumulative FD: A Detailed Guide

Final Thoughts

The interest income earned on fixed deposits is what makes up your profit from such an instrument. Hence, it is crucial to explore and compare the various interest rates offered by financial institutions. In addition, knowing how the interest rate on FD will give you an understanding of your returns in real-time, helping you plan more efficiently for your goals – long-term and short-term.

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