Fixed Deposits (FDs) are a popular savings tool in India. They offer guaranteed returns and safety. If you plan to invest in an FD, you need to know how to calculate interest on FD.
What is a Fixed Deposit?
A Fixed Deposit (FD) is a bank investment. You deposit a lump sum for a fixed tenor. It earns a guaranteed interest rate. Interest is paid regularly or at maturity. FDs are low-risk and provide assured returns. They are popular for safety and stability. The principal is locked in for the period. Early withdrawals may incur penalties.
Types of Interest Calculation
Interest on FDs can be calculated in two ways:
- Simple Interest
- Compound Interest
Simple Interest Calculation
Simple interest is the easiest method to calculate. The formula is:
Simple Interest = Principal*Rate*Time
where,
Principal is the amount you invest
Rate is the interest rate per annum (p.a.)
Time is the tenor of the FD in years
Example:
Suppose you invest ₹50,000 in an FD for 3 years at an interest rate of 6% p.a. The simple interest calculation will be:
Simple Interest = ₹50,000 * 6% * 3 = ₹9,000
So, the interest you earn at the end of 3 years is ₹9,000.
Compound Interest Calculation
Compound interest is a bit more complex. It calculates interest on the principal and the interest earned so far. The formula is:
Compound Interest = Principal*(1 + Rate/n) n* Time
where,
Principal is the amount you invest
Rate is the interest rate p.a.
n is the number of times interest is compounded in a year
Time is the tenor of the FD in years
Interest can be compounded annually or on a half-yearly, quarterly, or monthly basis.
Example:
Suppose you invest ₹50,000 in an FD for 3 years at an interest rate of 6% p.a., compounded quarterly. The calculation will be:
Compound Interest = ₹50,000*(1+6%/4)4*3 = ₹59,780.90
So, the maturity amount is ₹59,780.90. The interest earned is:
₹59,780.90−₹50,000=₹9,780.90
Frequency of Interest Payout
The more frequent the payout, the higher the total interest earned due to compounding. Here’s how each payout interval works:
Monthly Payout
Interest is credited to your account every month. This option is useful if you need a regular income. The principal remains the same. Frequent compounding results in higher overall interest.
Quarterly Payout
Interest is credited every three months. This option provides a balance between frequent payouts and a higher interest accumulation.
Half-yearly Payout
Interest is credited twice a year. This method is less frequent than quarterly payouts. However, it results in a higher compounding effect compared to annual payouts.
Annual Payout
Interest is credited once a year. This option has the least frequent compounding. It leads to a lower total interest compared to other intervals.
Interest Rates
Interest rates on FDs vary between banks and NBFCs. It is crucial to compare rates before investing. You can find the latest rates on the official websites of banks and NBFCs. Here is a comparison of interest rates offered by different issuers for a tenor of 1 year or less:
| Issuer | Regular Citizen (Interest rate p.a.) | Senior Citizen (Interest rate p.a.) |
| HDFC Bank | 3.00% – 6% | 3.50% – 6.50% |
| Kotak Mahindra Bank | 2.75% – 6.50% | 3.25% – 7.00% |
| State Bank of India | 3.50% – 6.50% | 4.00% – 7.00% |
| Bank of India | 3.00% – 6.80% | 3.00% – 7.30% |
| Canara Bank | 4.00% – 6.85% | 4.00% – 7.35% |
| ICICI Bank | 3.00% – 6.00% | 3.50% – 6.50% |
| Axis Bank | 3.00% – 6.00% | 3.50% – 6.50% |
| AU Small Finance Bank | 3.75% – 7.25% | 4.25% – 7.75% |
| YES Bank | 3.25% – 7.25% | 3.75% – 7.75% |
Disclaimer: The particulars mentioned are subject to change at the discretion of the issuer. These interest rates are valid as of July 2024.
From the table, you can see that the interest rates vary widely. Senior citizens often get a higher rate. Comparing these rates helps you choose the most favourable option.
TDS on Fixed Deposits
Interest earned on FDs is taxable. If the interest earned exceeds ₹40,000 in a financial year, the bank or NBFC will deduct TDS (Tax Deducted at Source) at 10%. For senior citizens, the limit is ₹50,000. You can avoid TDS by submitting Form 15G or Form 15H if your total income is below the taxable limit.
Calculating Interest Manually vs Using Online Calculators
You can calculate interest on FDs manually using the formulas provided. However, online FD calculators make the process easier. These calculators are available on the websites of banks and NBFCs. They require you to enter the principal amount and interest rate. You also need to input the tenor and compounding frequency. The calculator then displays the maturity amount and the interest earned.
Steps to Calculate Interest Using an Online Calculator
- Visit the FD calculator on a bank or NBFC website
- Enter the principal amount you want to invest
- Enter the interest rate offered
- Select the tenor of the FD
- Choose the compounding frequency (annually, half-yearly, quarterly, or monthly)
- Click on ‘Calculate’
The calculator will show the maturity amount and the total interest earned.
Conclusion
Understanding how to calculate interest on FD is essential for investors. It helps in planning and maximising returns. You can use simple interest for short-term FDs. For long-term FDs, compound interest is more beneficial. Always compare interest rates from different banks and NBFCs. Consider the frequency of interest payout and the impact of TDS on your returns.
For accurate interest calculations, use the formulas provided or online FD calculators. This will ensure you make an informed decision and achieve your financial goals.