How are Interest Rates Calculated on Fixed Deposits - A Guide
5 min read | 11 months ago
Why do so many Indians love FD deposits? A study by Kuvera threw up some rather interesting insights. Almost 44% of 1.6 million respondents talked of how they went for FDs whenever they wished to save money for specific purposes safely within three years. 23% also chose these investment options to park their emergency funds in order to combat inflation, while one out of ten invested to gain safety from volatility in the market. 12% also preferred these investments since they were not just familiar, but also simpler than many other options. All that is fine, but how are the interest rates calculated on FDs? Let us find out more in this article.
Importance of Interest Rates
One of the reasons that accounts for the huge popularity of fixed deposits is the
interest rate provided for them. The higher the interest rate, the more you earn
on your investment. Hence, you must know how interest rates are computed on
fixed deposits. It will help you have a better understanding while finding an
investment alternative.
Understanding Interest Rates on Fixed Deposits
Interest rate is the amount of money a bank or any financial institution pays you for depositing your money with them. It is generally calculated as a percent of the amount deposited. Fixed deposits offer interest based on the amount deposited, the period of investment and the rate of interest offered by the bank. The rate of interest can be calculated in two ways - simple interest and compound interest. Various factors that impact the interest rates in fixed deposits include inflation, economic conditions, RBI policies, and competition. Depending on all these factors, your interest rate can vary from 4.5% to 9.00%, as offered by Unity Small Finance Bank. Moreover, most banks offer special rates of FD interest for senior citizens, such as an additional interest rate of 0.5%.
Different Types of Fixed Deposit Interest Rates
1. Simple Interest
Simple interest is calculated on the principal amount deposited for the entire period of investment. It is a straightforward method of calculating interest and is usually offered on shorter-term fixed deposits.
2. Compound Interest
Compound interest is calculated on the principal amount deposited as well as the interest earned during the previous period. It is a more complex method of calculating interest, but offers higher returns than simple interest. Compound interest is usually offered on longer-term fixed deposits.
How to Calculate Interest on Fixed Deposits
Using the Simple Interest Formula
The simple interest formula is as follows: Interest = (Principal x Rate x Time)/100.
You can use this formula to calculate the interest earned on a fixed deposit
using simple interest. Here's an example of such. For simple Interest calculation
with a principal amount of 1,00,000, let's assume an interest rate of 5% per
annum for a period of 2 years. Simple Interest = (Principal * Rate * Time)/100 =
(1,00,000 * 5 * 2)/100 = 10,000 Therefore, the Simple Interest for a principal
amount of 1,00,000 at an interest rate of 5% per annum for a period of 2 years is
10,000.
Using the Compound Interest Formula
The compound interest formula is: A = P x (1 + r/n)^(nt). A is the total amount
earned, P is the principal amount, r is the interest rate, n is the number of times
interest is compounded per year, and t is the number of years. For an example of
compound Interest calculation with a principal amount of 1,00,000, let's assume
an interest rate of 10% per annum, compounded annually for a period of 3 years.
In this case, n = 1 (as the interest is compounded annually) Compound Interest =
1,00,000(1 + 0.1/1)^(1*3) - 1,00,000 = 1,00,000(1.1)^3 - 1,00,000 = 1,33,100 - 1,00,000 =
33,100 Therefore, the Compound Interest for a principal amount of 1,00,000 at an
interest rate of 10% per annum, compounded annually for a period of 3 years is
33,100.
Using an online calculator
There are several online calculators available that can help you calculate the
interest earned on an FD Deposit. All you need to do is enter the principal
amount, the interest rate, and the period of investment.
Conclusion
Fixed deposits are a popular investment option in India and offer a guaranteed return on investment. The interest rates offered on fixed deposits are one of the key factors that determine their popularity. Interest rates can be calculated by the methods stated above. Do take a look at them in order to understand the process behind the interest rates that you get on your FD.
FAQs
1. What factors determine the interest rate on fixed deposits?
The interest rate on fixed deposits is determined by the bank's policies, market conditions, and the deposit amount.2. How is the interest rate on fixed deposits calculated?
The interest rate on fixed deposits is calculated using the compound interest formula based on the deposit amount, tenure, and interest rate.3. Can I negotiate the interest rate on fixed deposits?
While banks do not usually negotiate interest rates for fixed deposits, some banks offer higher rates for senior citizens and long-term deposits.
4. How often do banks change the interest rate on fixed deposits?
Banks can change the interest rate on fixed deposits periodically, depending on
market conditions and their internal policies.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
