What is the method of calculating interest rate for fixed deposit?

What is the method of calculating interest rate for fixed deposit?

When it comes to investments, there is a range of options for both long and short term financial growth. However, fixed deposits are definitely the soundest. FDs offer you a fixed rate of interest until maturity, which makes them the safest option available, and they also offer a higher rate of interest than your standard savings account.

Each financial institution offers a different fixed deposit rate, so it is important to check all available options and calculate your potential interest rate before opening an account. Here’s how.

Know the basics

Before you calculate your FD interest, you need to ascertain a few facts about your fixed deposit. First, you need to decide what amount you wish to invest. For example, you may have Rs.20,000 that you’d like to put into an FD account. Next, you will have to decide whether you’d like to earn interest at regular intervals or whether you’d like the total amount to earn interest until maturity. After you’ve decided the type of account, you’ll need to decide on the tenor or term for which you’d like the amount to be invested. Usually, the longer the term, the higher the interest rate you’ll be offered. And finally, you need to know the interest that is being offered by your financial institution, which will vary between each financial institution.

Understand the varying fixed deposit rates

Financial institutions, banks or NBFCs, typically offer different rates of interest for different FD tenors. For example, a rate of interest for a short-term FD would be a lot less than that which is offered for a long-term investment. Similarly, cumulative and non-cumulative account types will be offered different interest rates. Plus, you may encounter special tenor schemes that pay more for 15 years than say 24 years. The rates will also change based on market fluctuations and the RBI’s repo rate, so it is important to ensure that you check the most up-to-date rates on offer. What’s more, senior citizens might be offered a special rate of interest as well. For example, the Bajaj Finance FD offers an additional 0.35% interest rate for seniors at 9.10%.

Follow the formula

A simple formula by which you can calculate your compounded FD interest, meaning the total interest you will earn upon maturity, is A = P (1 + r/25)4n. Here, P is the amount invested, r is the annual interest rate and n is the tenor in years. Say you’re investing Rs. 1 lakh for 3 years at an interest rate of 10% per annum. Your maturity amount, or A, will equal 100000*(1+(10/25))^(4*3), which is Rs. 1,34,489. Your interest earned is Rs. 34,489.

Use an online calculator

Calculating your FD interest manually can be a tedious process, even for the most prolific math whizz, and it leaves a lot of room for error. To ensure your calculations are completely accurate, you may want to use a free online FD interest calculator, a tool offered by almost all major financial institutions. This calculator allows you to compute your interest amount based on your deposit type, whether you’re choosing a payout on maturity or interest payment at regular intervals, and also includes special concessions that may be offered to senior citizens. The FD interest calculator will also automatically adjust the interest rate depending on the tenor you choose, which reduces any chances of manual error. This makes it easier for you to forecast your earnings as precisely as possible, and thus address any goals you may have. It also allows you to choose the best FD for yourself and also helps you compute the taxes you may have to pay.

The first step to opening a fixed deposit is making an informed decision based on the variety of options that are available to you. Calculate your potential interest to ensure you’re meeting your short and long term investment goals, and that you’re making the best decision for your finances.

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