An FD interest rate calculator is an online tool that helps you determine the interest you will earn on a particular principal amount. It is a simple tool with a user-friendly interface, where you input the principal you wish to invest in and choose from a range of tenures. The interest for that tenure is usually automatically visible.
The instant an FD interest rate calculator receives these three values, it calculates the total amount you will earn at maturity. Now, there is only one type of FD interest rate calculator, but two types of interest rate calculations, namely simple interest and compound interest. The same FD interest rate calculator can calculate both.
Let us understand the difference between simple interest and compound interest.
Simple Vs. Compound Interest Rate
Simple interest is calculated annually on the total principal amount you deposit in your FD account. For example, an FD with a 7% interest rate on a principal of Rs. 10,000 after 1 year will earn:
(P x r x t)/100
P = principal
r = rate of interest
t = tenure
So, the answer is (10,000 x 7 x 1) / 100 = Rs 700.
Now, this very calculation can be accurately done by an FD interest rate calculator within a fraction of a second. With the help of this tool, you can check the returns for various principal amounts and settle on the one most beneficial to you.
The same you can do for any amount at any tenure, thus kicking off compound interest calculations.
Compound interest Rate Calculator
Things get more interesting and lucrative when your FD starts accumulating compound interest. Any interest earned is added to the original principal, which further accumulates interest. This forms compound interest.
Since most FDs compound interest annually, let us look at an example accordingly.
Suppose you invest Rs 10 lakhs in a cumulative fixed deposit, where the interest earned keeps getting reinvested. The tenure selected by you is 5 years, and the rate of interest provided by the bank is 6% per annum. In this case, the same FD interest rate calculator will use a different formula to calculate returns. The formula will be.
P (1 + r/n) nt – P
P = Principal
r = rate of interest
n = number of times interest is compounded in one year
t = tenure
So,
10,00,000 (1 + 0.06/1) 1x5 – 10,00,000
= Rs. 3,38,226
Had there been no compounding, the simple interest on this FD would have been Rs 60,000 per year and Rs. 3,00,000 after 5 years.
Final Thoughts
Both simple and compound interest rate calculators are available online. Be sure to use them before opening a fixed deposit. Also, if you wish to benefit from the power of compounding, open an FD at substantial interest rates for a longer tenure.
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