How Is Fixed Deposit Calculated?

Even though several reliable fixed deposit (FD) interest rate calculators have cropped up online, it never hurts to know the manual way to calculate. Fixed deposit calculations figure differently under two categories – simple interest and compound interest.

FDs earn simple interest on a lump sum principal investment at a pre-decided interest rate for a specific time duration. Here, the interest you earn is not added to the principal amount, so you don't earn interest on the combined amount.

Fixed deposits that earn compound interest also invest a pre-decided lump sum amount at a specific interest rate for a precise tenure. But here, the interest earned is added or reinvested in the principal amount, and investors start earning interest on the combined amount.   

How is the Simple Interest Rate of a Fixed Deposit Calculated?

This is the most straightforward way of calculating the interest rate on a fixed deposit. Here, you multiply your principal investment with the fixed rate of interest provided by the financial institution and the total tenure.

Therefore, the formula for calculating simple interest on a fixed deposit = P x R x T/ 100, where:

P = Principal or your total investment

R = Rate of interest (this varies as per the tenure. Typically, the higher the tenure, the better the ROI)

T = Time or tenure of the entire fixed deposit (in days, months or years)

Once you input these three values, divide them by a hundred, and you'll get the maturity amount.

For example, if you create a non-cumulative FD (one where you withdraw the interest earned per month) worth Rs. 10,00,000 at 6% ROI for 1 year, your simple interest earned would be Rs. 60,000 at maturity.

How is the Compound Interest Rate of a Fixed Deposit Calculated?

As mentioned earlier, compound interest is earned on both the principal as well as the interest component of your fixed deposit.

The formula to calculate it is P {(1+ i/100) n – 1}, where:

P = Principal

i = Rate of interest

n = number of years

For example, if you’ve created a cumulative fixed deposit that is compounded annually worth Rs. 10,000 at 8% for 5 years; the first year, you will earn simple interest worth:

10,000 x 8% x 1/ 100 = Rs. 800

In the second year, however, you will earn interest on not just Rs. 10,000 but on Rs. 10,800, and now your compound interest in year 2 will be Rs. 10,864. During the 3^rd year, your interest will not be calculated on Rs. 10,800 but on Rs. 10,864, and this compounding effect will go on till the end of your FD tenure.

But, instead of compounding it like this, financial institutions use the formula above to calculate your compound interest on maturity at the very start of your FD. So, as per the above formula, you earn:

10,000 {(1 + 8% / 100) x 5 – 1 = Rs. 4,693. So, the total maturity amount of your Rs. 10,00 worth FD compounded annually will be Rs. 14,693.

Final Thoughts

It's no secret that compounded ROI FDs earn higher returns than simple interest FDs. But simple interest FDs provide interest pay-outs at intervals ranging from monthly, quarterly, to half-yearly. An individual can choose any type of FD depending on their pay-out preferences.

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