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How to Calculate Fixed Deposit Returns A Simple Guide
Posted on Friday, February 23rd, 2024 | By IndusInd Bank
Whether you are a working professional or a recently retired person, one type of investment that is bound to be part of your portfolio is a fixed deposit. A fixed deposit (FD) is typically opened with banks and can provide a relatively stable income at regular intervals. This article will particularly dwell on the various types of interest rates and the formulae underlying the typical FD interest rates calculator.
The Concept of Fixed Deposits
A fixed deposit is a form of fixed investment typically provided by banks. When you open a fixed deposit, you essentially invest a lump sum amount for a specific tenure and a fixed rate of interest. The interest earned on this deposit is paid at fixed intervals or is reinvested depending on what’s suitable for you. Anyone with a bank account can invest in a fixed deposit. You can open a fixed deposit with as little as Rs 1,000 and the tenure can be a minimum of 7 days.
The Two Types of Fixed Deposits Interest
There are two methods of calculating interest on fixed deposits: simple and compound. Where simple interest is concerned, interest is generated only on the principal amount, whereas for compound interest, the interest is earned on both the principal and the interest.
Simple Interest Calculation
Simple interest is calculated using the following formula:
SI = P * R * T/100, where
SI = Simple Interest, P = Principal, R = Rate of interest, T = Time period (in years)
For example, assume you have opened a fixed deposit of Rs 20,000 for 3 years at 8%. Then simple interest will be calculated like this:
SI = 20,000*3*(8/100) = 4,800
Thus, at the end of 3 years, you will receive both the principal and the interest amount which will amount to Rs 24,800.
Compound Interest Calculation
In compound interest calculation, interest is generated on both the principal and the interest.
Taking the example from above, suppose you open a fixed deposit of Rs 20,000 for 3 years at 8% interest that is compounded annually. Then, this is how it will work:
| Year | Amount Deposited | Interest Earned | Total Amount |
| Year 1 | 20,000 | 20,000*1*(8/100) = 1,600 | 21,600 |
| Year 2 | 21,600 | 21,600*1*(8/100) = 1,728 | 23,328 |
| Year 3 | 23,328 | 23,328*1*(8/100) = 1,866 | 25,194 |
Translating this into a standard formula:
CI = P {[(1 + i/100)^n] – 1}, where
CI = Compound interest, P = Principal, n = Number of years, i = rate of interest per period
Thus, taking the above example,
CI = 20,000 {[(1 + 8/100)^3] – 1 = Rs 5,194, and
Total amount = 20,000 + 5,194 = Rs 25, 194
How to Calculate FD Interest?
Interest on fixed deposits is calculated monthly, quarterly, or yearly and you can use an FD interest rates calculator to arrive at this. The formula is as follows:
A = P(1+r/n)^n*t, where
A = Maturity amount, P = Principal, r = Rate of interest, n = Number of times interest is compounded per year, t = time
How Does Cumulative Interest in FD Work?
Interest is compounded quarterly or annually on a cumulative fixed deposit. This interest accumulates till maturity and is paid back along with the principal at the end of tenure.
Here’s an example to illustrate this:
If you have opened an FD of Rs 50,000 offering 6% for 3 years, then this is what you will get back at the end of 3 years. A fixed deposit calculator will help you arrive at this figure.
| Year | Amount Deposited | Interest Earned | Total Amount |
| Year 1 | 50,000 | 3,000 | 53,000 |
| Year 2 | 53,000 | 3,180 | 56,180 |
| Year 3 | 56,180 | 3,371 | 59,551 |
Also Read: Step-By-Step Procedure for Renewing and Withdrawing a Fixed Deposit
Conclusion
Different banks provide different interest rates on different tenures. This information along with a fixed deposit interest rate calculator is available on the bank’s website and you can make an informed decision accordingly.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and 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.
