Understanding Fixed Deposit (FD) Calculation Formula

In India, there are different investment avenues to choose from. But when it comes to long-term investing, FD or fixed deposit is often the most preferred choice for many. The reason for this is quite simple: It is the safest investment option, as you get assured returns at a fixed interest rate. 

In an FD investment, you open an FD account, deposit a lumpsum amount for a pre-determined period, and receive interest on the amount at a fixed rate, which may vary depending on the amount you invest and the tenure you choose. 

So, if you are planning to invest in an FD, you must be aware of how much interest you will earn over the tenure and, more importantly, how it is calculated. In this guide, we discuss the different aspects of interest on fixed deposit investment schemes.

Type of interest on fixed deposits

There are two types of interest on fixed deposits, which are categorised based on the interest calculation method – simple interest and compound interest. The financial organisation where you hold the FD may use the calculation method based on the tenure and the deposit amount. 

Are you wondering what is the difference between the two? In simple interest, the interest is earned only on the principal amount, i.e., the money you invest while opening the FD account. In compound interest, the interest is earned on the principal amount as well as on the interest earned in the previous cycle. 

Let us understand the simple and compound interest of FD calculations and know the formula for the same better with an example.

Simple Interest

The formula for simple interest is,

Simple Interest (SI) = principal (P) x rate of interest (R) x investment tenure (T) / 100

i.e., SI = p x r x t/100

Let’s assume, you invest Rs. 10,000 in FD for 5 years, and the financial organisation is offering you an interest of 8% per annum, as per the above formular, your interest will be =

10,000 x 8 x 5 / 100 = 4,000

So, the interest you earned for 5 years is Rs. 4,000 and your maturity value at the end of 5 years will be Rs. 14,000

Compound Interest

In this method, you earn an interest on the principal and the interest earned in the previous cycle. 

Let’s say, you invest Rs. 10,000 in FD for years and get interest at 8%. Your interest calculations will be

Year 1 

Here, we use the simple interest formula

10,000 x 8 x 1 / 100 = Rs. 800

So, the interest earned in the first year will be Rs. 800

This amount will be added to your principal amount. So, the principal amount for the second year is Rs. 10,800

Year 2

In the 2^nd year, you will earn 8% interest on Rs. 10,8000

10,800 x 8 x 1/100 = Rs 864

This interest will be added to the principal amount. So, now your deposit will be 10,800 + 864 = 11,644

This calculation cycle will continue for the entire investment tenure you choose. 

So, the formula for calculating compounding interest on FD is 

Compound Interest (CI) = P {[(1 + i/100)^n] – 1}

Here, in the above formula

P is the principal amount

N is the investment tenure or the number of years for which you want to stay investedI is the interest rate per period

Using an FD calculator

Now that you know how to calculate FD interest using the simple and compound interest formula, you can do it manually. However, manual calculation can seem overwhelming for many, and also there is always a risk of committing mistakes. 

So, the best way to calculate FD interest and know the exact interest you will be earning from your FD investment and the maturity value at the end of the investment tenure is to use the FD calculator. 

FD calculator is an easy-to-use online tool for calculating the exact interest you will receive on your FD investments. It works just like an EMI calculator and requires no technical expertise or experience. 

Today, almost all financial organisations, including banks and NBFCs that offer FD services, have this tool on their websites, and they encourage their existing and potential customers to use it so that they can make informed investment decisions. 

To use the FD calculator and know the interest and the maturity value, all you have to do is enter some basic details like investment amount, tenure, and interest rate. The tool will calculate automatically and show you the results within a few seconds.

Final Word

Investing in an FD scheme is great for our overall investment portfolio as it gives you a financial cushion with guaranteed returns. But the key to getting the most out of FD is to choose the right financial organisation where you can open an FD account. 

You can choose to invest in the FD scheme offered by Mahindra Finance, one of the leading NBFCs in India. This scheme offers a high interest rate on FD of up to 8.05%, allowing you to grow your money faster and build a sizeable corpus for your future goals. Apart from high interest, you get a wide range of other benefits, like the flexibility to choose investment amount and tenure and a 100% digital process, giving a seamless investment experience. 

So, whatever stage of your life you may be at, start investing in FD now and take a step towards a secure and financially independent future.