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calenderJun 12, 2024

How is Fixed Deposit interest calculated?

Fixed Deposits (FDs) are a popular investment choice owing to their safety and predictable returns. Understanding how is Fixed Deposit interest calculated can help you make informed decisions.

Key features of Fixed Deposits


A Fixed Deposit involves depositing a lump sum amount with a bank for a predetermined period. The bank pays interest on this amount, which is higher than the interest on a regular Savings Account.

  • Safety: FDs are considered low-risk investments as they are not affected by market fluctuations.
  • Fixed interest rates: The interest rate is fixed at the time of investment and remains unchanged throughout the tenure.
  • Flexible tenures: FDs can be opened for durations ranging from 7 days to 10 years.
  • Premature withdrawal: Although FDs can be withdrawn before maturity, this usually incurs a penalty fee.

Methods of calculating FD interest


1. Simple interest

Simple interest is calculated only on the principal amount and paid at regular intervals like month or quarterly in case you opt for non-cumulative FD. The formula for calculating the simple interest is: SI = (P *R * T) / 100
where:
P = Principal amount
R = Annual interest rate
T = Tenure (in years)

Example:
If you invest ₹2,00,000 for 5 years at an interest rate of 7% p.a., the calculation will be:
SI = (2,00,000 * 7 * 5/100) = ₹70,000.

2. Compound interest
Compound interest is calculated on both the principal and the accumulated interest. The formula for calculating the maturity amount via compound interest is:
M = P (1 + R/N) ^ (N*T)
where:
M = Maturity amount
P = Principal amount
R = Annual interest rate
N = Number of times interest is compounded per year
T = Tenure (in years)
Example:
If you invest ₹2,00,000 for 5 years at an interest rate of 7% p.a. assuming compounded on a quarterly basis, the calculation will be:
M = 2,00,000 (1 + {0.07/4}) ^ {5*4) = ₹2,82,955.
Compounded Interest = M – P = ₹2,82,955 - ₹2,00,000 = ₹82,955

Using an FD Calculator


Calculating the maturity amount of an FD manually can be complex and time-consuming. Axis Bank's FD Calculator simplifies this process by providing accurate results in seconds.

Steps to use the FD Calculator:


1. Choose the type of Fixed Deposit (cumulative or non-cumulative with payout frequency).
2. Enter the principal amount (investment amount).
3. Select the annual interest rate offered by the bank.
4. Choose the duration for the FD.
Once these details are entered, the calculator will display the maturity amount and the total interest earned.

Benefits of using an FD Calculator


  • Time saving: It quickly computes the maturity amount without manual calculations
  • Accuracy: It provides precise results, reducing the risk of errors
  • Comparison: It allows you to compare interest rates and maturity amounts across different banks
  • Financial planning: It helps in better planning by forecasting the returns on your investment

Also Read: How to get monthly income from Fixed Deposits?

Conclusion


Fixed Deposits are a reliable and safe investment option that offers higher returns than Savings Accounts. By understanding how FD interest is calculated and using tools like an FD Calculator, you can make informed decisions and optimise your returns.

With amounts starting at ₹5,000, Axis Bank’s Fixed Deposits offer a secure way to grow your savings at competitive interest rates, flexible tenures from 7 days to 10 years, and convenient online management.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.