How is Interest on Your Fixed Deposits Calculated

Even though several reliable fixed deposit (FD) interest rate calculators have cropped up online, it never hurts to know the manual way to calculate. Fixed deposit calculations figure differently under two categories – simple interest and compound interest.

FDs earn simple interest on a lump sum principal investment at a pre-decided interest rate for a specific time duration. Here, the interest you earn is not added to the principal amount, so you don't earn interest on the combined amount.

Fixed deposits that earn compound interest also invest a pre-decided lump sum amount at a specific interest rate for a precise tenure. But here, the interest earned is added or reinvested in the principal amount, and investors start earning interest on the combined amount.   

How does FD work?

A Fixed Deposit or FD is an investment that requires you to deposit money only once. You can deposit a specific sum of money known as the principal with your financial institution for a fixed duration of time. During the tenure, the principal earns an interest. Once the tenure is completed, you receive your deposit back, along with the interest.

Types of Interest rate on Fixed Deposits

There are two types of interest rates on Fixed Deposits. These include:

• Simple Interest: This is calculated on the principal amount or the original deposited amount of the FD. 
• Compound Interest: This is calculated on the principal amount as well as the interest earned.
• Cumulative Interest: In this case the interest gets compounded quarterly or annually.

Calculating Simple Interest Rate on Fixed Deposit

The formula to calculate simple interest rate on fixed deposit is:

Principal x rate of interest x FD tenure (in years) = Simple Interest

Let’s say you invest Rs 10,000 at 8% p.a for 5 years. Adding the figures to the formula above, we get:

10,000 x 8/100 x 5 = 4,000

And so, with simple interest, you will earn Rs 4,000 as interest on your FD.

Calculating Compound Interest Rate on Fixed Deposit

With this method, you earn interest on the principal as well as on the interest. For instance, if a bank offers an 8% annual interest rate on a 5-year deposit with annual compounding, and you invest INR 10,000, here’s how it works:

Year 1: Calculate interest using simple interest:

10,000 x 8/100 x 1 = 800.

The principal increases to 10,800.

Year 2: Interest on Rs 10,800:

10,800 x 8/100 = 864.

This amount is added, making the new principal Rs 11,664.

Using this method for all five years, or applying the formula for compound interest:

CI = P {[(1 + i/100)^n] – 1},

CI = 10,000 {[(1 + 8/100)^5] – 1} = 4,693.

Total amount = Rs 14,693.

How to calculate Cumulative Interest on Fixed Deposits?

Under this method, the interest gets compounded yearly or quarterly. In other words, the interest is accumulated until the FD matures and is paid with the principal amount at the end of the FD tenure. 

Let’s say you have invested in an FD for 3 years at an interest rate of 7%. In such a case, the interest earned for the years will be:

Final Thoughts

It's no secret that compounded ROI FDs earn higher returns than simple interest FDs. But simple interest FDs provide interest pay-outs at intervals ranging from monthly, quarterly, to half-yearly. An individual can choose any type of FD depending on their pay-out preferences.

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FAQs

What is the minimum tenure for fixed deposits?

The minimum tenure for a fixed deposit is 7 days. It can go up to 10 years. 

Are there separate FD deposit calculators for different banks?

Yes, different banks have different FD calculators. You can use Tata Capital Moneyfy’s free, easy-to-use and accurate FD calculator to help calculate your FD returns.

How many FD scheme interest rates can I calculate at a time using the FD calculator?

With Tata Capital Moneyfy’s free, easy-to-use and accurate FD calculator, you can calculate as many FD scheme interest rates as you want. 

Is the FD interest rate paid out monthly?

FD interest rates can be paid monthly, quarterly, or at maturity, depending on the financial institution's terms.