How to Calculate Interest on Fixed Deposits: The Compounding Effect

Savings Accounts offer a safe gateway to park and grow your money. But, if you want to maximise your savings, switching to Fixed Deposits could be a smart financial move. Understanding how to calculate interest on Fixed Deposits may help you get an idea why FDs remain as an excellent investment instrument, specially for the long term. 

In this blog, we have laid out the methods how Fixed Deposit interest is calculated. Let’s dive in! 

Different Types of FD Interest Calculations 

Fixed Deposits (FDs) are a popular investment choice due to their safety and predictable returns. There are two primary methods for FD interest calculation: 

Simple Interest Method
 

This method is easy to grasp and involves the following:

a) Formula: Principal x Rate of Interest x Time / 100
 

b) Example: For ₹1 lakh at an interest rate of 5% per annum for 3 years:
 

c) Calculation: ₹1,00,000 x 5 x 3 / 100 = ₹15,000   

So, the interest amount is ₹15,000. The maturity amount would be 

₹1,00,000 + ₹15,000 = ₹115000.

Kindly note that if the interest income is taxable if it exceeds ₹40,000 (for regular investors) or ₹50,000 (for senior citizens). The minimum TDS (Tax Deducted at Source) applicable 10%.

However, the simple interest method is used primarily for FDs with a tenure of less than 6 months. For other tenures, the compound interest calculation method is used. And this where it gets interesting.

Compound Interest Method
 

More complex to calculate but extremely useful when it comes to money matters, the compound interest method involves interest earning on the initial principal and on previously earned interest, meaning you earn interest on the accrued interest and principal amount when your FD gets reinvested. This helps in generating higher returns at the time of maturity. 

a) Formula: P(1 + i/n)^(n*t) 

Here P stands for the principal amount, i is the annual interest rate, n is the number of times interest applied per year, and t is the number of years. 

b) Example: For ₹1 lakh at an interest rate of 5% per annum compounded annually for 3 years: 

c) Calculation: ₹1,00,000 (1 + 0.05/1)^(1*3) = ₹1,15,762.50
 

So, you can clearly see the difference in the accumulated interest compared to the earlier example involving the simple interest calculation method.
 

Disclaimer: The above examples are for educational purposes only. Ujjivan SFB doesn’t take any responsibility regarding the accuracy of the information.

How Often is FD Interest Compounded?
 

The frequency of compounding for Fixed Deposits (FDs) typically falls into these categories:

a) Monthly: Interest is compounded every month. This means that each month’s interest is added to the principal, and the next month’s interest is calculated on the reinvested amount.

b) Quarterly: Interest is compounded every three months. The interest earned over a three-month period is added to the principal, and the next quarter’s interest is calculated on the  amount.

c) Half-Yearly: Interest is compounded every six months. The interest accrued over six months is added to the principal, and the interest for the next six months is calculated on the amount.

d) Annually: Interest is compounded once a year. The annual interest is added to the principal, and the interest for the following year is calculated on the amount. 

Please note that monthly interest pay-outs are for non-cumulative FDs. For cumulative FDs, the interest pay-outs happen on a quarterly, annually or at the time of maturity.

Online FD ROI Calculators to Calculate FD Interest Properly 

Manual FD interest calculations can be taxing and may leave room for errors. As an alternative, you can use an online Fixed Deposit ROI Calculator. An FD calculator helps you calculate the interest along with the maturity amount in a matter of seconds. All you need to do is enter the details of your FD, including deposit amount, tenure, and interest rate. Once done, you will be able to check your FD returns.  

Benefits of Using Online Calculators 

Using online calculators offers several advantages:

• Instant Results: Check your FD returns in seconds.
    
• Easy to Use: Online FD calculators feature a simple and user-friendly interface.
   
• Compare Returns: Vary the deposit amount and tenure to compare returns and invest accordingly. The point is to invest as per your financial goals.