Using Fixed Deposit calculator and other online tools to find the correct amount you will receive on maturity of Fixed Deposits and other investments makes life easy. Sometimes though, you would like to open the box and peek inside, see how it works. If you want to calculate the interest or the total amount you would receive on maturity of a Fixed Deposit, you can use a basic formula that is applicable across all banks.
The basic formula is:
- A is the maturity amount
- P is the Principal
- r is the rate of interest
- n is the compounding frequency
- t is the number of years or tenure of the deposit
However, sometimes, when you check against the bank’s calculation, you find that yours is probably lower. Why this discrepancy?
In India, banks compound the interest every quarter, that is, after every three months. So now, the compounding frequency is 4.
Suppose you have deposited an amount of Rs. 10,000 in a Fixed Deposit. The interest paid on the deposit is 5%. Convert the interest into a decimal for this calculation.
So, 5% = 0.05
You have made the deposit for a period of 2 years. So ‘t’ is 2. You know that n is 4 as interest is compounded quarterly.
So, applying these actual values
The maturity amount is Rs. 11,044.86
Total Interest Received (I) is A – P
So I = 11,044.86 – 10,000
I = Rs. 1044.86
Just remember that compounding the interest means adding the interest accrued to the principal amount. Next time, interest is calculated on this new amount, so it gives you more earnings than simple interest.
Points to remember while computing this amount using the above formula:
- (n) is the frequency of interest calculation, and t is the duration, generally in years
- Banks in india calculate interest quarterly, so it works out to 4 times in a year
- If you have made a deposit for 3 years, the number of times the interest is compounded would be 4 x 3 which is 12
- If you have made a six month deposit, the number of times the interest is compounded would be 4 x 0.5 which would be 2
- Remember to convert the interest amount into decimal for easier computation
Fixed Deposit in India
Fixed Deposits may not pay high interest, but they are safe instruments for investment. You can find ways to increase the earnings from Fixed Deposits, one of which is to have the interest compounded.
In India, banks compound interest quarterly, which is advantageous, as half-yearly or annual compounding would earn you less interest on the deposit. Use the fix deposit calculator at the bank website to quickly find what returns you would get on your investment if you choose to compound the interest.
There are many Fixed Deposit schemes in India, from banks, NBFCs, and corporates. Choose one carefully and use online FD interest calculator tools to find the amount you would get on maturity from each of the banks/NBFCs you have shortlisted.
You can also choose to invest in a Tax Saving FD Scheme, to get tax exemption on the invested amount upto a maximum of Rs. 1.5 Lakhs under Section 80C of the IT Act. Do the maths on FD interest calculation & tax benefits you would receive. As Tax-saving FDs are usually for a 5 year period, you will earn higher rate of interest. When you file IT returns, you will also benefit from the tax exemption on the amount invested. Taken together, this FD could give you high returns in the form of interest earnings and tax savings.