If you decide to invest in a fixed deposit, you must have a clear understanding of how your money will increase over time. In simple words, it is crucial to comprehend how interest on fixed deposits is computed. The interest on the FD is mostly based on the principal amount deposited. The income you receive on your investment might be simple interest or interest payments, based on the kind of deposit you pick (cumulative or non-cumulative).
Simple interest refers to the interest earned just on your amount invested. In contrast, compound interest is generated on both the principle and the interest already gained. In other words, it is income on interest; this is the significance of compounding.
Let's examine the calculation of fixed deposit interest in both instances.
You have to look at the mathematical equations used to determine the interest on fixed deposit accounts in order to understand how it is computed. The method for calculating FD interest also differs depending as to whether you receive simple or compound interest on the deposit, as shown below.
The return you get from a fixed deposit investment without the benefit of compounding is known as simple interest. See the formula for calculating this sort of FD interest below.
Simple interest is identical to (P x R x T)/100.
Thus, P stands for the investment's principle, R for the interest rate, and T for the term in years.
The return you get when the force of compounding kicks in is known as compound interest. The following formula could be used to determine this kind of FD interest.
P (1 + r/n)nt - P is the compound interest rate.
In this case, P stands for the invested principal amount, r for the interest rate, n for the number of times the interest is compounded annually, and t for the investment duration in years.
This is an illustration to give you a better understanding of how compounding affects the calculation of interest on fixed deposit accounts. Let's assume you put 10 Lakh for a duration of 5 years in a cumulative fixed deposit and get interest at a rate of 6% annually on the same. Let's assume that interest is annualised.
Below is what we have in such a situation utilising the formula:
= P (1 + r/n)nt - P
= 10,00,000 (1 + 0.06/1)1 x 5 - 10,00,000
= 13,38,226 - 10,00,000
You may be asking how to receive the greatest FD returns now that you understand how fixed deposit interest is determined. Then again, isn't it true that the greater the interest rate, the larger the returns?
Here are a few crucial pointers for getting the best returns on your fixed deposit:
NBFCs often provide larger yields than bank FDs, albeit having a somewhat higher degree of risk. So, you should choose it if you locate a reputable NBFC in order to get higher than average returns.
FD plans from various banks and NBFCs should always be compared; choose the one that offers the highest returns on your investment. Before making a decision, you may compare the interest rates on fixed deposits offered by various programs using an FD calculator.
You must maximise your returns after selecting the plan with the greatest FD rates. You will get all of the interest on your principal amount at maturity if you select the cumulative choice. Higher returns are also obtained as a consequence of the continuous FD's compounding impact.
You may file form 15G (or form 15H if you're elderly) to keep away from TDS on FD interest if your annual total income falls under the basic exemption level. This will boost the amount of your FD investment that is delivered to your account.
You should now have a good understanding of how fixed deposit interest is determined as well as what you can do to maximize the returns on your FD. Choose an FD interest calculator to better understand how your money will increase over time before you place any fixed deposit investments.