With the RBI increasing its repo rate, FD interest rates are also attractive. Top NBFCs, for instance, now offer AAA-rated FDs yielding interest at up to 7.95%. Benefiting from such rates, you can invest in an FD to meet short- to medium-term goals.
In such a case, you first want to know how to calculate FD interest. Read on to have all the necessary information at your fingertips.
How to calculate FD interest with the simple interest formula
If your investment is based on the simple interest formula, you can easily work out its returns. The formula for simple interest on FD investments is simple:
- M = P(1+r*t)
Here,
P = principal or initial investment
r = rate of interest/100
t = tenure in years
- Suppose you open a FD of ₹25,000 for 5 years at a rate of 7%. Your returns will be calculated as follows.
P = 25,000
r = 7/100
t = 5
M = 25,000*(1+0.07*5)
M = 25,000*(1.35)
M = ₹33,750
To know the interest earned, you need to do M-P, which in this case amounts to ₹8,750.
How to calculate FD interest with the compound interest formula
Even at the same fixed deposit interest rates, you get high returns when your investment uses the compound interest formula. The formula to calculate FD interest shown below:
- M= P(1+r/n)^n*t
Here,
M = maturity amount
P = principal or initial investment
r = rate of interest/100
t = tenure in years
n = compounding frequency
- Suppose you open a FD of ₹25,000 for 5 years at a rate of 7% and your investment is compounded quarterly. Your returns will be calculated as follows.
P = 25,000
r = 7/100
t = 5
n = 4
M = 25,000 * (1 + {7/100}/4)^[4*5]
M = 25,000 * (1 + {0.07}/4)^[20]
M = 25,000 * (1.0175)^[20]
M = 25,000 * 1.4147
M = ₹35,369
To know the interest earned, you need to do M-P, which in this case amounts to ₹10,369.
From the above two examples, you can better understand the power of compounding. Even for a small investment amount, the difference in the interest earned is noticeable. Below is another example to help you learn thoroughly how to calculate FD interest.
- Suppose you park ₹50,000 in an FD for 5 years at a rate of 7.5% and your investment is compounded annually. Your returns will be calculated as follows.
P = 50,000
r = 7.5/100
t = 5
n = 1
M = 50,000 * (1 + 0.075/1)^[1*5]
M = 50,000 * (1.075)^[5]
M = 50,000 * (1.075)^[5]
M = 50,000 * 1.4356
M = ₹71,781
To know the interest earned, you need to do M-P, which in this case amounts to ₹21,781.
As you can see, the compound interest formula for calculating FD interest is complex, and there is a high chance of errors.Thankfully, the easier route is using a digital tool with a defined algorithm that takes these variables and generates an error-free result. Financial institutions offer FD calculators to help you calculate FD returns without hassles.
Use an online FD calculator for effortless results
Obtaining results from an FD calculator is as easy as entering a few numbers into input fields or moving a slider. Here are the essential steps involved in using a fixed deposit calculator online.
- Open the FD calculator of your preferred financial institution by visiting the FD page of their website
- Keep on hand information pertaining to your fixed deposit such as the interest rate, tenure, and principal amount
- Enter the FD details into the input fields or with a slider
- View the results displayed on your screen
- Tweak the inputs, as required, to arrive at the ideal FD investment
Understand your post-tax FD returns
The returns earned on an FD are taxable. So, unless your income is below the taxable category, you will end up paying some amount on your FD earnings. To put this into perspective, consider the following formula for post-tax returns:
- Post-tax FD rate = FD interest rate x (1 – tax rate)
- So, if your FD offered interest at 7%, and you fall under the 10% tax bracket, your FD would effectively yield at:
Post-tax FD rate = 7*(1-0.10)
Post-tax FD rate = 6.3%
You can now put this figure back into the simple or compound interest formula to get tax-adjusted results.
In the final analysis, you will also have to adjust for inflation. This will help you understand accurately what role the fixed deposit plays in your portfolio. Nevertheless, consider investing with an NBFC like Bajaj Finance, Mahindra Finance or PNB Housing Finance for the best fixed deposit interest rates. This will help you keep multiplying your finances quickly and securely!
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