Comprehensive Guide On How To Calculate Fixed Deposit Interest Rates

Posted on Friday, May 24th, 2024 | By IndusInd Bank

Fixed deposit is one of the most preferred investment tools amongst low-risk appetite investors looking for safe and assured returns. Investors who want to invest in an FD need to open a fixed deposit account with a bank by providing the necessary documents. Before that, if you want to understand how the maturity amounts based on fixed deposit interest rates are calculated, then this article is for you. In this article, we will learn about the FD rates calculator and how it makes it easier to calculate the maturity amount. 

Also Read: Exploring The Benefits Of IndusInd Bank FD: Why Is It A Secure Investment Option 

Understanding Fixed Deposit Interest Rates 

Fixed deposit interest rates are determined by banks depending upon their terms and conditions. The rates are usually predetermined by banks and are dependent on the tenure of the investment. The fixed deposit interest rates are influenced by factors like the economic conditions of the nation, the monetary policy of the Reserve Bank of India, and peer competition.  

What is an FD Calculator? 

A fixed deposit calculator is a tool that helps you calculate the maturity amount, i.e., the amount that the FD will be worth at the time of maturity. An FD interest calculator is an online tool that is pre-fed with existing interest rates offered by the bank. Investors need to insert some pre-required information to get the correct maturity amount. These details include the principal amount, tenure, type of interest, and details of the mode of interest payment. Once all the details are entered, the FD rates calculator shall give details of the maturity amount. 

Formula to Calculate FD Interest 

The fixed deposit rates calculator is based on 3 things, namely principal, interest rate, and tenure of the investment. The formula for interest rate calculation is interest = P*R*N/100, where P stands for Principal, R stands for Rate of Interest and N stands for tenure for which the deposit is made.  

The FD interest rate calculator calculates the interest in two manners as follows: 

• Simple Interest:  

Under simple interest, the interest is calculated only on the principal amount for the tenure of the deposit. Let’s illustrate how the FD interest calculator calculates simple interest with an example: 

If you invest INR 10,000 at an annual simple interest rate of 8% for 5 years, the FD interest rate calculator determines the interest earned through the following steps: 

Step 1: Multiply the principal amount (₹ 10,000) by the interest rate (8%) and the tenure (5 years).  

₹ 10,000 * 8 * 5 = ₹ 400,000 

Step 2: Divide the result by 100 to obtain the interest earned. 

₹ 400,000/100 

Therefore, the interest earned over 5 years amounts to ₹ 4,000. So, the maturity amount shall be ₹ 10,000 + ₹ 4,000 = ₹ 14,000 

• Compound Interest:  

On the other hand, compound interest is calculated on the principal amount and accumulated interest, thereby significantly boosting the returns earned in the long run compared to the returns earned through simple interest. The compound interest is calculated with the help of the following formula:  

A = P(1+r/n)^n*t  

Where,  

A = Maturity Amount,  

P = Principal Amount,  

r = Rate of Interest,  

t = Duration of FD, & 

n = Compounded Interest Frequency 

Here’s an example to help you understand how compound interest is calculated: 

Principal amount (P) = ₹ 10,000 

Rate of Interest (r) = 8% (or 0.08 in decimal) 

Time (t) = 5 years 

Compounded Interest Frequency (n) = 1 (since interest is compounded annually) 

Let us substitute the values in the formula: 

A = ₹ 10,000 (1 + 0.08/5)^(1*5) 

A = ₹ 10,000 (1 + 0.08/5)^5 

A = ₹ 10,000 (1 + 0.08)^5 

A = ₹ 10,000 (1.08)^5 

A = ₹ 10,000 (1.46933) 

A = ₹ 14,693.30 

Also Read: How To Maximize Your Wealth With An FD Linked Savings Account 

Conclusion 

Banks decide the interest rate on investments made in a fixed deposit, and these interest rates vary for different investment amounts and investment durations. The FD interest rate calculator is a tool that will help understand the maturity amount an investor shall earn for his investment. With the help of an FD rate calculator, an investor can gain a complete understanding of his investments. Thus, investing in fixed deposits shall help an investor gradually increase returns with minimal risk. 

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.