How Does a Bank Calculate Interest on Your Fixed Deposits

When it comes to long-term investments, a Fixed Deposit (FD) is often one of the most preferred choices for investors. You can open an FD Account with a bank wherein you are required to deposit a fixed amount in lumpsum for a specific period, and you are offered an assured interest rate that varies depending on the deposited amount and tenure you choose. If you are planning to invest in an FD, you would surely want to know how much interest you would be earning throughout the period. So, here is a detailed guide on how to calculate fd interest.

How does FD Work?

A Fixed Deposit is a safe and easy investment that requires a one-time deposit only. You can deposit a sum of money called principal with the bank for a fixed time period (tenure). The deposit will earn interest during this period. At the end of it, you will get your deposit back along with interest. Anyone with a bank account can open an FD for as low as INR 1,000. The minimum tenure is 7 days.

Read More – How to make FD effectively work for You

Types of Interest on Fixed Deposits

There are two methods used to calculate interest on a Fixed Deposit: Simple Interest and Compound Interest. Banks may use both depending on the tenure and the amount of the deposit.

What is the difference between the two? With simple interest, interest is earned only on the principal amount. With compound interest, the interest is earned on the principal as well as the interest.

Simple Interest

The formula for Simple Interest (SI) is “principal x rate of interest x time period divided by 100” or (P x R x T/100).

Where,

P= Principal amount; R = Rate of interest per annum; T= No. of periods (in years)

Example,

Now, if you invest INR 10,000 at 8% p.a. for 5 years, you can calculate the interest like this.

• Step 1: 10,000 x 8 x 5 = INR 4,00,000.

• Step 2: Now divide that by 100. You get INR 4,000.

• So, the interest you earn for 5 years is INR 4,000.

Therefore, if you invest INR 10,000 in a Fixed Deposit with 8% p.a. simple interest, you will get back INR 14,000 at the end of 5 years.

Compound Interest

In this method, you earn interest on the principal, and you earn interest on the interest also. Many banks offer compound interest on Fixed Deposits, but you should ensure that you get a good interest rate.

For example, if a bank offers 8% p.a. for a 5-year deposit where the interest is compounded annually. So, if you invest INR 10,000, we can calculate the interest as given below:

• Year 1

First, we use the simple interest method for the first year.

10,000x8x1/100 = INR 800

So, the interest earned for the first year is INR 800.

This amount is added back to the principal. So, the principal for the second year becomes INR 10,800. 

• Year 2

Now, in the second year, you will earn 8% on INR 10,800.

10,800x8x1/100 = INR 864

You earn INR 864 interest. This is again added back to the principal. So now your deposit has INR 11,644.

Like this, we can calculate the compound interest for the next three years. But some banks compound interest monthly, quarterly, and half-yearly. So, instead of calculating it like this, we can use a simple formula that multiplies the principal amount with the interest rate raised to the number of periods in years.

Compound Interest (CI) = P {[(1 + i/100)^n] – 1}

Where, P = Principal amount; n = number of years; i = rate of interest per period

Therefore, in the example above, you earn

CI= 10,000 {(1+8/100)5 – 1} = INR 4,693

Total amount = INR 14,693

FD Interest Calculation Formula

If you want to know how much interest you would be earning at the end of the tenure, then you can use the following formula for manual FD Interest Calculation:

A= P(1+r/n)^n*t 

Where,

A = Maturity Amount, 

P = Principal Amount, 

r = Rate of Interest, 

t = Duration of FD, &

n = Compounded Interest Frequency

Is FD interest calculated monthly?

Fixed Deposit Interest is calculated monthly, quarterly, or yearly. This varies across different banks. 

Read More : - Monthly Interest Payout on Fixed Deposit

Which bank offers the highest FD rates?

Banking need not be complicated, and banks like AU Small Finance Bank offer simple and easy banking, free from all hassles.  If you are investing in a Regular Fixed Account with us, you can earn high interest, depending on the amount and FD tenure.  Investing in our FDs gives you benefits that include compound interest, high-interest rates, and Monthly Interest Payouts.

How to calculate Cumulative Interest on FD?

Under Cumulative Fixed Deposit, the interest gets compounded every quarterly or yearly. The interest gets accumulated until maturity, and it is paid along with the principal amount at the end of the FD tenure. Let’s understand this with the help of an example: 

Assuming you have invested in a Cumulative FD for a period of 3 years that has an interest rate of 7% p.a. The interest earned for the years will be as follows:

Interest Rates are subject to change, for latest Fixed Deposit Interest Rates for domestic & NRE**/NRO Retail FDs please check here

Key Takeaways

When you invest in an FD, remember that the interest rate is not the same for all tenures. If you choose the longest tenure available, doesn’t mean you will get the highest interest rate. You should check the interest rate table, usually available on the bank’s website, and choose the tenure that gives you the high-interest rate with compound interest formula.

FD is a very safe and lucrative investment. Invest smartly and you can reap the rewards by making your money work for you.

*T & C Apply

** For NRE Fixed Deposit: tenures of 12 months 1 day & above are applicable.