Unsure of how to calculate interest on an FD? Continue reading this article to find out.
Fixed deposits have always been one of the most popular investment options in India due to the low amount of default risk. A fixed deposit is an investment option where you park a certain sum of money in a bank or a financial institution for a specified tenure. In return, you receive interest on the amount you deposited.
Although the concept seems simple, many people are often unsure about how to calculate interest on a fixed deposit. If you’re having trouble with this too, then here’s a quick guide that can help you out. In addition to this, we’ll also take a look at how you can use an FD calculator to easily calculate FD interest.
So, let’s get started.
How to calculate interest on your fixed deposit?
Calculating just how much interest a fixed deposit gives you over its tenure is actually quite easy. All that you need to do is use the following formula.
|FD at maturity (M) = P x [1 + (R ÷ 100)]NT|
Here’s what the variables stand for.
P = Principal, which is the initial amount of investment
R = The rate of FD interest
N = Compounding frequency such as annual, half-yearly, quarterly or monthly
T = Tenure of the FD
Once you’ve calculated the maturity value of the FD, you just need to subtract the principal from the maturity amount to get the interest component. Simple, isn’t it?
Here’s the formula for the same.
|Interest (I) = FD at maturity (M) – P|
Calculation of interest on FD: An example
Let’s now take up an example to better understand this calculation. Assume that you wish to start a fixed deposit. Here’s some relevant information.
- The initial amount of investment is going to be Rs. 10 lakhs.
- The prevailing FD interest rate is currently at 6.5% per annum.
- The compounding frequency is annual.
- The tenure of the FD is going to be 5 years.
Let’s use this information in the above-mentioned formula.
= Rs. 10 lakhs x [1 + (6.5 ÷ 100)]1×5
= Rs. 10 lakhs x [1.37]
= Rs. 13,70,000
= Maturity amount – Principal
= Rs. 13,70,000 – Rs. 10,00,000
= Rs. 3,70,000
As you can see from the above, the amount of interest that your FD of Rs. 10 lakhs earns at the end of the 5-year tenure is Rs. 3,70,000.
All said and done, you cannot perform this kind of calculation each time you want to find out the interest on your FD, right? Fortunately, there’s a far easier way for you to calculate the interest on your FD. You can simply use an online FD calculator.
What is an FD calculator?
An FD calculator is a specialized financial tool that’s designed to help make the calculation of interest on fixed deposits easier. All that you need to do is enter values such as the principal amount, the FD interest rate, the compounding frequency, and the tenure. The tool will automatically calculate the interest that you’re likely to receive at the end of the FD’s tenure in an instant.
Since they do away with the need to manually calculate the interest, FD calculators are not only fast and convenient, but also accurate. There are a lot of online FD calculators that you can use for free. You can check out the FD calculator online on the Finserv MARKETS website to get a better idea of how this tool works.