How is interest calculated on a fixed deposit?

Posted by neha sharma on May 26th, 2019

A fixed deposit is one of the most popular investment options. In a fixed deposit, funds are locked in for a fixed period and they earn a fixed return. These fixed deposits can be opened for tenures ranging from as low as 7 days to 10 years. The rate of interest depends on the tenure of the fixed deposit. Each bank has their own fixed deposit rates and rules, but most of them offer flexible tenures and flexible amounts of deposits, subject to their minimum rules.

The interest calculation on a fixed deposit depends on the tenure of the deposit.

  1. Deposit tenure shorter than 90 days:

In such a case, the interest is calculated using the simple interest formula. The simple interest formula is:

Interest = Principal * Rate of Interest * Number of Days

  1. Deposit tenure more than 90 days:

For deposits that have a tenure longer than 90 days, interest is calculated quarterly.

However, the interest calculation also depends on the mode of interest payment. A depositor can opt for three different modes of interest payment:

  • Monthly interest payment
  • Quarterly interest payment
  • Reinvestment of interest

In the third option, any interest calculated at the end of a quarter on the fixed deposit will be added to the investment amount. Interest for the following quarter will be calculated on the original principal amount as well as the reinvested interest. Choosing this option will give a higher interest as compared to choosing an interest payout option. This is because the interest amount will also earn interest. This will lead to higher earnings. This is known as compounding and is one of the best ways to grow capital.

In case of monthly or quarterly interest payments, interest will be credited to the depositor’s savings account at the frequency chosen by him. In case of monthly interest payment, the interest is calculated quarterly, however, it is paid monthly.

These three payment options are not valid for deposits shorter than a quarter. In case of short tenure deposits, the whole amount of fixed deposit and interest matures at the end of the deposit tenure.

If you’re looking to calculate the interest on a fixed deposit, it is no longer required to invest in an FD and then find out the earnings on maturity. With advances in digital banking, most banks provide a fixed deposit calculator on their websites. This calculator is free of cost for the user and allows the user to calculate the maturity value of a given fixed deposit.

An FD calculator requires three main inputs:

  • Principal amount
  • Tenure
  • Rate of interest

Some FD calculators may have the rate of interest already factored into the calculator. This will automatically select the rate of interest based on the tenure of the deposit. Others may ask the user to input the rate of interest. The user will also have to select the method of interest payment. Once these are fed into the calculator, it will show the maturity amount of the fixed deposit.

Using a fixed deposit calculator is extremely simple and helps with investment planning. There is no need to remember tedious formulae or calculate it manually. Instead, by using an FD calculator, you can find out the maturity value of a deposit within seconds and plan the best tenure for your fixed deposit.

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neha sharma

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neha sharma
Joined: April 18th, 2019
Articles Posted: 59

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