What is the calculation process of fixed deposit?

Fixed deposits are considered to be one of the most sought-after investment options of people across the world as it is regarded as one of the safest instruments through which one can earn a fixed monthly or quarterly income, and that too at attractive interest rates. Fixed deposits also carry a cumulative interest option, where the investor gets the accumulated interest at the end of the tenure. As these financial instruments are not affected by market fluctuations, there is a relatively low-risk factor in these investments.

How much returns can one expect by investing in fixed deposits?

The returns as the name suggests are fixed, and the interest is generated throughout the tenure of the fixed deposit. For example, if you lock your investment in a fixed deposit with a tenure of 3 years, you will earn the interest at a fixed rate till the end of the tenure. Fixed deposit interest rates are changed at regular intervals by the Reserve Bank of India (RBI) which is referred to as the base rate. Banks or NBFCs decide on their fixed deposit rates above the RBI-approved base rate. Senior citizens are offered slightly higher interest rates than others.

How are returns on fixed deposits calculated?

There are two types of fixed deposits that financial institutions offer – Simple interest FD and Compound interest FD. You can take the help of an online FD calculator which can give you the exact amount by entering the desired numbers.

The fixed deposit calculator for simple interest uses the below-given formula:

M = P + (P x r x t/100)

Here,

P is the principal amount that you deposit

r is the rate of interest per annum

t is the tenure in years

For example, if you deposit a sum of Rs. 1,00,000 for 5 years at 10% interest, the equation reads –

M= Rs. 1,00,000 + (1,00,000 x 10 x 5/100)

= Rs. 1,50,000

For compound interest FD, the FD return calculator uses the following formula –

M= P + P {(1 + i/100) t – 1}

Here,

P is the principal amount

i is the rate of interest per period 

t is the tenure

For example, if you take the same variables, the compound interest FD will accrue,

M= Rs. 1,00,000 {(1 + 10/100) 5-1}

Or, Rs. 1,61,051

One point to be noted here is that fixed deposits attract tax. Secondly, if your goal is to create a corpus, you should opt for cumulative fixed deposits and if you are looking to earn a regular monthly or quarterly interest that gives you a fixed source of income, non-cumulative deposits are the best option.

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