Introduction:
Calculating interest rates can seem like a tedious or daunting task, but understanding how fixed deposit or FD bank interest rates are calculated is a crucial step for getting the most out of your investments. FDs involve a one-time deposit and are considered a relatively secure investment. The deposit, also known as the principal, is under the bank’s safekeeping for a predefined and fixed duration of time, during which the deposit earns interest.
On maturity, once the tenure is over, the deposit is returned along with the interest. For calculating the interest on FDs, two methods are used: Simple interest and Compound interest. Depending on the amount deposited and the tenure, banks may use either or both.
The main difference between them is that with the latter, interest is earned not only on the principal but the interest too. Let us understand how bank interest rates in India are calculated using both these methods in-depth:
Simple Interest:
Simple interest (SI) is calculated by the following equation: “(principal x rate of interest x time period) divided by 100” or ((P x Rx T)/100).Here, P= Principal amount; R = Rate of interest per annum; T= Time period (No. of years)
For Example if you invest Rs.1,000 at an interest rate of 8% p.a. for a duration of 5 years, this is how the interest will be calculated.
Step 1: 1,000 x 8 x 5 = Rs.40,000
Step 2: Dividing that by 100 we get Rs.4,00.
Therefore the interest earned over 5 years will be Rs.4,00.
Adding that to the principal amount, you will be returned a total amount of Rs.14,00 after 5 years.
Compound Interest
For compound interest, interest is earned on the principal and interest as well.. Let us take an example where the interest rate offered by the bank is 9% p.a. on an FD with a duration of 5 years, and the investment is Rs.1,000.
Some banks may compound the interest on a monthly, quarterly or semi-annual basis. In order to simplify the calculation method, the following formula is used
Compound Interest (CI) = P {((1 + i/100)^n) – 1}
Here, P = Principal amount; n = number of years; i = rate of interest per period
Applying this formula to the given example:
CI= 1,000 {(1+9/100)5 – 1} = Rs 5,38.624
Total amount = Rs 15,38.624
Conclusion
Bank FD rates differ depending on the tenure of the FD. In order to ensure that you’re making the smartest investment for yourself, you can review the wide range of options offered on Finserv MARKETS. An online platform providing hassle-free and diverse investment options, Finserv MARKETS can help you pick an FD best-suited to your requirements. You can even use the Bank FD Calculator available on the site to calculate your returns easily.
