What Is the Calculation Process of Fixed Deposit?

When you invest your money in financial vehicles such as fixed deposits, it is financially sound to calculate the return you will generate during the tenure of your investment. Since the FDs carry pre-determined interest rates fixed for the tenure, calculating returns using an FD calculator before investing allows you to analyse your financial situation in the distant future. At the same time, it also allows you to compare different investment options to maximise your earnings. So, let us see how you can calculate returns on your fixed deposit.

Calculation Process of Fixed Deposits

There are two ways to calculate the returns or maturity amount of your fixed deposit:

• Simple Interest Method
• Compound Interest Method

Calculating Fixed Deposit Returns Using Simple Interest Method

Simple interest formula is used when banks offer interest at a fixed rate over the tenure of your fixed deposit. But the bank does not reinvest interest, so there is no compounding of interest. Instead, you earn interest only on the principal amount. Here is the formula to calculate simple interest using the fixed deposit calculator:

Simple Interest = Principal Amount * Rate of Interest * Tenure / 100

Suppose you have Rs 50,000 that you want to invest in a fixed deposit for 5 years. The bank is offering 6% interest. Here is the amount of interest you will earn in 5 years:

Simple Interest = 50,000 * 6 * 5 / 100

Simple Interest = 15,000

In 5 years, you would earn Rs 15,000 in interest. So, at the maturity of your FD, you would have Rs 65,000.

Calculating Fixed Deposit Returns Using Compound Interest Method

When banks offer interest on principal as well as interest earned, the compound interest method is used to calculate returns on a fixed deposit. Here is how it works:

A = P (1 + R / N) (N * T)

Wherein:

• A is the amount you will get on maturity
• P is the principal amount, i.e., the amount you deposit
• R is the rate of interest
• N is the number of times interest will be compounded in a year
• T is the tenure of your fixed deposit

Now, suppose you have Rs 50,000 that you want to invest in a fixed deposit for 5 years. The bank is offering 6% interest, and the interest will compound half-yearly. Let us now calculate the amount you will have when your fixed deposit matures after 5 years.

A = 50,000 (1 + (6/100)/2) (2 * 5)

A = 50,000 (1 + 0.03) 10

A = 67,195.81

So, at the end of 5 years, your Rs 50,000 investment will earn you interest of Rs 17,195.81, and your FD’s maturity amount will stand at Rs 67,195.81. You can also use an FD interest calculator to determine your returns accurately.

Wrapping Up

Next time you invest in a fixed deposit, use these two formulae to calculate returns and maturity amount before depositing your cash. Or you can cut short the hassle and use online fixed deposit calculator. Just enter the principal amount, tenure and compounding option, and you will have your returns in front of you in just one click.