One of the best savings opportunities offered by both government-backed and private financial institutions is fixed deposits, which help consumers save funds while collecting interest over a given maturity period. Customers like it as an investment option because of the guaranteed returns along with other advantages.
The preference of choosing fixed deposit is evident because, as per the statistical returns published by the Reserve Bank of India, the contribution of fixed deposits across all types of deposit stood at 57.7 percent in the fiscal year 2017-18.
With such safe and secure investment opportunities, consumers need to know how to calculate interest rates so that they can measure the anticipated returns from the investment and properly manage their finances.
What are the variables required for calculating the interest earned?
Financial firms encourage consumers to invest in fixed deposit schemes and pay them returns for the term on the amount invested. Interest can either be used regularly by the customer or can be obtained after the fixed deposit maturity period.
The interest pay-out estimate depends on several factors in both situations, as described below.
- Sum of deposit: The principal amount or the cumulative amount deposited.
- FD interest rates: Applicable interest rate defined by the financial institution offered to clients.
- Deposit Period: Tenure (in months) during which the sum is invested. The term deposit reaches maturity date and may be withdrawn by the client, or one can opt for renewal after this time.
MyLoanCare FD calculator can help you in calculating the interest calculation.
How to calculate interest rate pay-out?
These input variables are required, as described above, to determine the interest pay-out for a given term deposit. To conveniently compute the interest, consumers can use a fixed deposit calculator or can go through the traditional calculation technique.
The maturity amount includes the interest pay-out, in the case of cumulative FDs.
Formula to calculate Maturity amount: A = P [(1+r/n) ^ (n*t)]
- A is the Maturity Amount.
- P is the principal deposit amount.
- The interest rate is denoted by ‘r.’
- The compounding rate of interest in a year (annually, half-yearly, quarterly, or monthly) is ‘n.’
- The period of deposit is ‘t.’
E.g., A client invests a sum of ₹ 20 lakh in a cumulative FD for four years. The rate of interest given to them is 6.5 percent for the fixed deposit, which is compounded annually.
In this case, based on the formula mentioned above, the total Maturity Amount would be ₹ 25,72,933.
The formula for Interest pay-out
By determining the difference between the maturity sum and the deposit amount, the interest pay-out for clients can be calculated.
Interest pay-out = amount of maturity (A) – the amount of deposit (P).
The interest you will earn will be ₹ 25,72,933 – ₹ 20,00,000 = ₹ 5,72,933.
Interest is measured based on the simple interest formula for instances of a non-cumulative fixed deposit with a tenor of 1 year.
Interest pay-out = (P x r x t)/100
- P is the deposit amount.
- F is the rate of interest.
- T is the tenor of deposit.
Note: This calculation is applicable only in situations when the interest pay-out is to be calculated on the principal amount only.
For instance, for a tenor of 1 year at an interest rate of 7.6 percent, a client deposits an amount of ₹10 lakh in a non-cumulative fixed deposit. The interest pay-out to the client annually would be ₹ 76,000 in this situation.
Depending on the form of a fixed deposit account and the interest compounding frequency one has chosen, this calculation remains accurate and valid. It should also be noticed that the premature withdrawal of FDs impairs their interest calculation. In addition to adjusting the maturity level and interest paid-out, early withdrawal triggers financial loss as they will have to pay extra fines.
Clients would be able to manage their budgets better by learning how to calculate interest. They will be able to know the maturity sum and pay-out interest, with their financial criteria in mind.
Typically, because of higher and guaranteed returns, senior citizens enjoy investing in non-cumulative FDs. Running these calculations will allow them to assess the periodic interest at the end of the tenor that they are searching for or measure the lump sum number.