Fixed Deposit (FD) Interest Calculator
Understanding Fixed Deposits (FDs) and Interest Calculation
A Fixed Deposit (FD) is a popular financial instrument offered by banks and non-banking financial companies (NBFCs) that allows individuals to deposit a lump sum amount for a predetermined period at a fixed rate of interest. It's considered a safe investment option, especially for risk-averse investors, as it offers guaranteed returns.
The interest earned on an FD is calculated based on several factors:
- Principal Amount: This is the initial sum of money you invest in the FD.
- Annual Interest Rate: This is the percentage of interest the bank pays you annually on your principal amount. It's usually expressed as a yearly rate.
- Tenure: This is the duration for which you choose to keep your money deposited in the FD. It can range from a few days to several years.
- Compounding Frequency: This refers to how often the earned interest is added back to the principal amount, thereby earning further interest. Common compounding frequencies include annually, semi-annually, quarterly, monthly, and daily. More frequent compounding generally leads to higher overall returns due to the power of compounding.
How the Calculation Works
The formula used to calculate the maturity amount of a Fixed Deposit with compounding interest is:
A = P (1 + r/n)^(nt)
Where:
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (the initial deposit)
- r = the annual interest rate (as a decimal)
- n = the number of times that interest is compounded per year
- t = the number of years the money is invested or borrowed for
For this calculator, we convert the tenure in months to years (t = tenureMonths / 12) and the annual interest rate to a decimal (r = annualInterestRate / 100). The interest earned is then calculated as Maturity Amount – Principal Amount.
Example Calculation:
Let's say you invest ₹50,000 (Principal Amount) at an 7% annual interest rate for 24 months (Tenure in Months), compounded quarterly (Compounding Frequency).
- P = 50,000
- Annual Interest Rate = 7% = 0.07
- Tenure = 24 months = 2 years
- Compounding Frequency (n) = 4 (Quarterly)
Interest Rate per compounding period = 0.07 / 4 = 0.0175
Total number of compounding periods = 4 * 2 = 8
Maturity Amount (A) = 50,000 * (1 + 0.0175)^8 ≈ ₹57,394.60
Total Interest Earned = ₹57,394.60 – ₹50,000 = ₹7,394.60