Understanding Fixed Deposit Interest Rates

A Fixed Deposit (FD) offers a secure way to invest your hard-earned money. You simply have to book an FD online, deposit a lump sum, choose a specific period, and lock in your funds. The amount deposited in your FD will earn a fixed interest rate decided at the time of the account opening. This rate will remain constant throughout the tenure, unlike market-linked investments that fluctuate.

But how is this fixed interest rate determined? What factors influence the FD rates, and how to maximise your returns? Keep reading to find out.

Two types of FD interest

In India, banks typically use two methods to calculate interest on FDs:

• Simple interest: The interest is calculated only on the principal amount or the initial amount of money deposited.
• Compound interest: The interest is calculated on the principal amount and the interest accumulated over time.

Factors that influence the fixed deposit interest rates

When you research and compare the FD plans of various banks, you may find differences in the interest rates. Here are critical factors that influence these rates:

• FD tenure: Usually, longer tenures bring higher interest rates as banks benefit from the prolonged use of your funds. You can even use an FD interest rate calculator to see how different invested amounts and tenures can affect your maturity amount. This way, you can choose an FD tenure that yields the best possible returns.
• Your age: Senior citizens in India often get preferential interest rates, usually 0.25% to 0.5% higher than the rates offered to the general public.
• Economic factors: The current economic conditions coupled with monetary and fiscal policies, also influence the interest rates for fixed deposits.
• Inflation: Inflation robs you of your purchasing power. When inflation rates are high, banks often increase FD rates to compensate investors for the diminished purchasing power of their returns over time.
• Repo rate fluctuations: The  repo rate is the rate at which commercial banks borrow money from the Reserve Bank of India (RBI). Repo Rate also has an impact on the interest rates. An increase in the repo rate can lead to higher FD rates and vice versa.

Higher FD interest rates mean maximum growth, making IndusInd Bank Fixed Deposits a lucrative option. You get to earn an interest rate of up to 7.99% (limited period) along with other benefits such as:

• 100% paperless booking – you only have to provide your PAN and Aadhaar details.
• Multiple interest payout options
• Auto-renewal option
• Complete a video KYC and book a bank deposit of any amount
• Enjoy a five-year tax-saving FD and reduce your tax liabilities
• Availability of an online FD calculator for accurate planning and maximum returns

How to calculate FD interest?

To calculate your fixed deposit returns, this is the formula generally used:

A = P(1 + r/n)^nt

• A is the maturity amount.
• P is the principal or the initial amount of money deposited.
• r is the interest rate (expressed as a decimal).
• n is the number of times the interest is compounded per year.
• t is the tenure of the deposit (in years).

Let’s take an example to illustrate the concept of compound interest applied to an FD of ?50,000 with an annual interest rate of 6% over 3 years.

The table below outlines the annual growth of the FD and what you will get at maturity.

You can also input these details into an FD calculator to calculate the exact maturity value.

Key takeaways

Fixed deposits offer Deposit Insurance and Credit Guarantee Corporation (DICGC) backed safety, stability, and predictable returns, which make them a valuable addition to any investment portfolio. However, to maximise their value, understanding how FD interest rates work, the factors that influence them and using online tools to assess the impact of different rates on maturity amounts are also important.

This knowledge helps you refine your FD investment strategies and ensure they are optimised for high returns and aligned with your financial goals.