Fixed Deposits (FDs) are among the most popular ways to save and invest money. FDs offer better interest rates than savings accounts and keep your capital secure. Moreover, the interest earnings are predetermined based on the interest rates that the FD offers, which remain constant throughout the FD tenure. But how exactly is the interest on your FD calculated? Let us try and understand the FD interest calculation process in this article.

Fixed deposit interest rates

A fixed deposit allows you to deposit a specific amount of money for a fixed period with a bank. In return, the bank pays a specific rate of interest on your capital. The interest rates on FDs are generally higher than regular savings accounts. Banks set their FD interest rates based on several factors, including the Reserve Bank of India's policies, the bank's need for funds, and the overall economic conditions. Most banks offer higher interest rates for longer deposit periods. For example, a five-year FD might give you a higher interest rate than a one-year FD.

Calculating interest on fixed deposits

For fixed deposits with a tenure of up to one year, the simple interest formula can be applied, where:

Interest = Principal x Rate x Time

Here, the principal is your capital amount, the rate is the annual interest rate, and time is the number of years.

For example, if you invest ₹1,00,000 for one year at 7% interest:    
Interest = 1,00,000 x 7/100 x 1     
= ₹7,000

Calculating compound interest

For fixed deposits longer than a year, banks use compound interest. This means the interest earned is added to your principal at regular intervals, and subsequently you earn interest on this increased amount.

The formula for compound interest is more complex:    
A = P(1 + r/n)(nt)

Where:    
A = Final amount    
P = Principal amount    
r = Annual interest rate     
n = Number of times interest is compounded per year    
t = Number of years

Banks may choose to compound the interest monthly, quarterly, half-yearly, or yearly. More frequent compounding leads to slightly higher returns. For instance, monthly compounding on an FD will give you more interest than yearly compounding at the same interest rate.

If you’re confused about how this complex formula works, then you can simply use an online fixed deposit calculator to determine the interest earnings on your fixed deposit account by just inputting the capital, interest rate, and tenure.

If you wish to start investing in an FD, you can consider opening an online fixed deposit account with IndusInd Bank. Some of the salient features of IndusInd Bank Fixed Deposits include:

● Online FD account opening with instant online KYC   
● Competitive interest rates for higher returns   
● Easy to manage and operate FD through the IndusMobile app   
● Flexible tenures and multiple interest payment options to choose from

To conclude

Understanding how FD interest is calculated can help you make informed investment decisions. While the calculations may seem complex, the basic principle is simple: the longer you invest your capital and the higher the rate of interest, the more your money grows. However, make sure to compare rates from different banks, consider the compounding frequency, and factor in taxes when choosing your FD investments.