How is Interest Calculated on Fixed Deposits in India?

By siliconindia   |   Thursday, July 12, 2018
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How is Interest Calculated on Fixed Deposits in India?

Fixed deposits (FDs) have been one of the most sought-after modes of investments among most Indians, thanks to their assured and guaranteed returns. While earlier, these deposits were offered primarily by banks and post offices, today you can open deposits offered by non- banking finance companies (NBFCs) as well, whose interest rates are generally higher than the market average.

However, have you ever thought how interest rates of FDs are calculated? What’s the formula that’s used to calculate the interest earned the subsequent maturity amount and the factors affecting the them? Read on to know the answer.

Formula for calculating FD interest rate

The formula used for calculating FD interest rate is as follows:

A = P (1 + r/25) 4n

Here A is the maturity amount, P is the deposit amount and n is the frequency of compounded interest. Using this above formula, you can determine the final maturity amount of your FD. For example, if you invest Rs.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 = Rs.1,34,489

Thus, the interest earned on your deposit is Rs.34,489.

However, to ease calculation there are many online FD Calculators where you just need to put the figures and the calculator would do the rest for you. You can also calculate FD interest rate on a spreadsheet by filling the required values.

Factors affecting interest earned and the maturity amount

There are several factors affecting the interest earned and the maturity amount. Some of them are as follows:

- Principal amount

The interest earned on your FD is directly proportional to the principal amount. It means higher the principal amount, greater is the interest earned. For instance, a principal amount of Rs.5 lakh would earn more interest than Rs.1 lakh.

- Deposit tenor

The interest earned and the maturity amount on FD depends on the tenor of the deposit. The higher the tenor, the higher is the interest and the subsequent maturity amount. This is because the longer you remain invested, the more time you give your money to grow, thanks to the power of compounding. For example, Bajaj Finance Fixed Deposit gives you flexible tenor ranging from 12-60 months, or 1-5 years, on your deposit.

- Rate of interest

The interest income and the maturity amount are directly proportional to the FD interest rate, i.e., higher is the interest rate, higher is the interest income and the maturity amount. For instance, Bajaj Finance Fixed Deposit offers an interest rate of 8.4% on your investment, which is higher than the market average.

- Deposit type

FDs are one of the most flexible financial instruments that allow you to choose the deposit type based on your liquidity needs. The two types of deposit are cumulative and non-cumulative. In cumulative FDs, the interest is paid at the time of maturity. On the other hand, in a non- cumulative FD, the interest is paid out monthly, quarterly, or half-yearly as per your choice. Cumulative FDs allow you to earn more as the interest income is reinvested.

- Type of citizen

Senior citizens are eligible for a slightly higher FD interest rate than others. It’s because a majority of them depend on the interest earned from FDs to address their daily needs. For example, Bajaj Finance Fixed Deposit offers 0.35% more interest over regular rates to senior citizens.

Interest rates are one of the prime considerations for choosing an FD. Use the above calculator and the formula to figure out the interest earned on your investment.

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