FDs earn simple interest on a lump sum principal investment at a pre-decided rate for a specific time. Here, the interest you earn does not add to the principal amount. Deposits earning compound interest invest a pre-decided lump sum at a particular interest rate for a precise tenure. But here, the interest earned gets reinvested in the principal amount, and investors start earning interest on the combined amount.
Though several reliable tools, like the FD calculator, are available online, it never hurts to know how to calculate the returns manually. You can consider calculating the interest using simple or compound interest formulas.
Simple interest formula
It is the most straightforward way of calculating the Fixed Deposit interest. You multiply your principal investment with the fixed interest rate and the total tenure to get the maturity amount. The formula is P x R x T/ 100, where:
P = Principal or your total investment
R = Rate of interest
T = Time or tenure of the entire Fixed Deposit (in days, months or years)
For example, if you create a Non-Cumulative FD worth Rs. 10,00,000 at 6% ROI for one year, your simple interest earned would be Rs. 60,000 at maturity.
Compound interest formula
The formula to calculate the compound interest rate on FD is P {(1+ i/100) n – 1}, where:
P = Principal amount
I = Interest rate
N = Number of years
A Cumulative Fixed Deposit compounded annually worth Rs. 10,000 at 8% for five years will earn simple interest worth Rs. 800 in the first year. In the second year, you will earn interest on not just Rs. 10,000 but on Rs. 10,800, and now your compound interest in the second year will be Rs. 10,864. During the third year, your interest will not be calculated on Rs. 10,800 but on Rs. 10,864, and this compounding effect will continue until the end of your FD tenure.
Using the calculator
Nowadays, technological advancements have made our lives hassle-free. You can now access the FD calculator online to calculate your estimated returns towards the end of the tenure. Financial planning becomes easier. You can prepare yourself for major investments. Once you know how much your Fixed Deposit will fetch you after the tenure ends, you can reinvest or withdraw the amount.
Enter your total investment amount, interest rate per annum, and investment tenure in years to get the estimated returns and total investment value on the calculator.
Final thoughts
Compounded ROI FDs earn higher returns than simple interest. But simple interest FDs provide payouts at intervals ranging from monthly to quarterly to half-yearly. An individual can choose any FD type depending on their payout preferences.
