You invest a lump quantity of money for a certain period at a set interest rate in a fixed deposit. At maturity, you get your invested amount and the interest income. A fixed deposit is popular because it provides guaranteed interest income and the highest level of security. You may be curious about how limited deposit interest is computed.
The interest rates on fixed deposits are calculated using two methods: simple interest and compound interest. Banks or NBFCs may employ one of these approaches depending on the deposit term. Let’s look at how to calculate interest on a fixed deposit.
How is the interest on a fixed deposit calculated?
Below given are the methods for how to calculate interest on fixed deposits:
Simple Interest Formula for Calculating FD Interest
The fixed deposit is computed using the simple interest technique by multiplying the principal, interest rate, and period. The fixed deposit interest formula is as follows:
Principal x Interest Rate x Period multiplied by 100, or (P x R x T/100).
P is the principal amount, R denotes the annual interest rate, and T represents the term (in years). Let’s look at computing FD interest using a simple interest formula.
Assume you have invested Rs10,000 at an annual rate of 8% for five years. Your fixed deposit interest will be computed using the below basic interest calculation.
Step 1: 10,000 multiplied by 8 multiplied by 5 equals 4,00,000
Step 2: 4,000,000,000/100 = 4,000
So the interest earned over five years is 4,000.
As a result, if you put Rs10,000 in a fixed deposit with an annual interest rate of 8%, you would get Rs14,000 as a maturity amount after five years with a 4,000 interest income.
Compound Interest Formula for Calculating FD Interest
CI= P(1 + i/100)n – 1 is the compound interest formula for calculating FD interest. Using this way of computing interest income, you earn interest not only on the principal but also on the interest amount. Many bank FDs provide compound interest, ensuring that you obtain a decent interest rate on fixed deposits. Let us look at an example to show how the compound interest formula is used to compute a fixed deposit.
To illustrate, consider an investment of Rs 10,000 at an annual rate of 8%, as in the preceding example.
For the first year
We will use the basic interest method formula to compute interest income for the first year.
As a result, 10,000x8x1/100 = 800
As a result, the first year’s interest will be Rs 800.
This sum will be added back to the principle in the compound interest computation, and the principal for the second year will be Rs 10,800.
In Year 2,
In the second year, you will receive an interest rate of 8% on Rs 10,000.
As a result, 10,800x8x1/100 = 864
Your interest income has grown to Rs 864, which will be added to the principal amount. 11,644. We can compute the compound interest for the following three years using the same procedure. However, some banks give compound interest monthly, quarterly, and semi-annual. So, rather than calculating it year by year, we may apply a simple formula that multiplies the principal amount by the interest rate multiplied by the number of periods. Compound Interest (CI) is calculated as P(1 + i/100)n – 1.
Where, P = principal amount; n = number of years; I = periodic interest rate
As a result, in the above case, CI = 10,000 (1+8/100)5 – 1 = 4,693
As a result, the total maturity amount is 14,693.
What Are the Best Fixed Deposit Returns?
Once you’ve calculated the interest and decided on the deposit amount, here are a few pointers to assist you in discovering the best Fixed Deposit program for you and obtaining the most significant returns:
NBFCs outperform bank FDs in terms of returns. If the banks fail, you will get at least Rs. 5 lakh, including the principle and interest. So, if you come across a reputable NBFC, such as Bajaj Finance FD, you should consider it if you want to increase your earnings.
Constantly evaluate FD programs from several banks and NBFCs and choose the one that offers the most return on your investment. An FD calculator may calculate returns on various interest rates available in the market.
Form 15G for fixed deposit is a declaration that bank fixed deposit holders can fill out. Form 15G for fixed deposit holders are those whose ages are less than 60 years and are not HUF.
After selecting the plan with the best FD rates, you must optimize your returns. If you pick the cumulative option, you will get your complete interest on your principal amount when it matures. Higher returns arise from the compounding impact of cumulative FD.
To assure liquidity, you may also use a laddering approach. If you make a fixed investment of one crore, you can see how the laddering approach works.
Fixed deposits with longer maturities provide more excellent interest rates.
If you are a senior citizen, you may avoid paying TDS on FD interest by submitting form 15G or 15H.
Things to Consider When Investing in a Fixed Deposit in 2022
You may meet your short-term and long-term financial objectives with a Bajaj Finance FD. You may begin your investment with as little as Rs 15,000. Bajaj Finance’s FD interest rates are also among the finest in the industry, reaching 7.45 per cent. With a variable tenor ranging from 12 to 60 months, you may invest your money whenever convenient. You may get your interest income monthly, quarterly, half-yearly, or annual, also adjustable.
This appealing interest income may be obtained in a stable market environment since the Bajaj Finance FD has an FAAA rating from CRISIL and an MAAA rating from ICRA. Starting your FD investment with Bajaj Finance is a simple online procedure that includes document collecting at your doorstep. You may also cover any unexpected costs by borrowing up to 75 per cent of your fixed deposit value. It is how to calculate interest on a fixed deposit.