What Is the Process of Calculating Interest on Fixed Deposits?

What Is the Process of Calculating Interest on Fixed Deposits?

Investing in a fixed deposit (FD) is one of the safest ways to build your fortune. However, before you put your hard-earned money into the account, you must learn how the interest is calculated. Having sound knowledge about this will make planning your investments easier.

Understanding the components

The formula for calculating your FD maturity amount depends on three main components, which are:

P: The ‘principal’ that you invest

R: The yearly rate of ‘interest’

T: The ‘time’ or ‘tenure’ of the investment in years

Factors that determine the formula

The formula to calculate the maturity amount of your FD depends on whether the compounding is carried out monthly, quarterly, every six months, or once a year. The formula consists of the money you invested, the fixed deposit interest rate offered, and the length of the investment period.

For yearly compounding, the formula will be: Maturity amount = P x (1+R/100) ^N

For quarterly compounding, the formula will be: Maturity amount = P x (1+(R/4)/100) ^4N

Quarterly compounding calculation – An illustration

Below is an example of quarterly compounding calculation to help you understand how the FD rate, principal investment, and tenure affect the maturity amount. 

Ajay has invested INR 20,000 in an FD for five years. He is offered an interest rate of 7.5%. Using the formula, we can calculate that his maturity amount will be INR 20,000 x (1+ (7.5/4)/100) ^4*5 = INR 27,484. So, the interest earned on this investment is INR 7,484.

How to make calculation simpler

The fixed deposit eligibility criteria vary from one financial institution to another. For instance, the minimum amount to open an FD differs across institutions. If you meet the criteria, you can invest in an FD. If you are finding it hard to calculate the interest or maturity amount before investing, you can use an online FD calculator. 

When using the calculator, you can input the amount of deposit, or principal. After this, choose the investment tenure, and then the frequency payout, which could be monthly, quarterly, short-term, or reinvestment. The FD interest rate will already be provided in the calculator. After clicking on the ‘calculate’ option, the estimated maturity amount will be displayed. The Mahindra Finance FD calculator is a good tool to use to know about the kind of returns you can expect from your investment. You can use it to determine what best works for you by trying different combinations.

Now that you know the process of calculating interest on fixed deposits, make wise yet safe investments without any delay.