# How to calculate interest rate for fixed deposit

Fixed deposit or FD is a kind of term deposit with higher interest rate. Because of its higher rate of interest and low risk, it is considered as one of the safest investment options in India. Almost every bank offers fixed deposit schemes in India at different interest rates, which can be calculated either manually or with the help of FD calculator or a fixed deposit calculator. What is an FD Calculator and how it works:

An FD calculator is a useful tool that helps you find out the maturity amount and the interest you earned from your fixed deposit account. FD Calculators are readily available online and are free of cost. To use the FD calculator, you just have to keep the following information handy:

1.    The amount you want to invest in fixed deposit scheme
2.    The rate of interest paid by the bank for your period
3.    Confirm with the bank, if the interest is compounded yearly, quarterly, monthly or half yearly. (Getting this number right is important as it will help you understand the number of times the interest is compounded. Monthly – 12, half yearly -2, yearly- 1 and quarterly- 4)
4.    The total time period you have invested the money in your fixed deposit account.

Calculating the interest rate on fixed deposits – the manual way

Apart from using the FD calculators, you can also find out the interest rate on fixed deposits manually by using the following method/formula:

A = P (1 + r/n) nt

Where,

A = the final amount or the maturity amount that will be received

P = It is the initial investment or the principal amount

R= Annual rate of interest. (It should not be in percentage) this means if interest on the FD is paid 5.5 %pa, it should be written as 0.055.

N = the number of times interest is compounded. (For monthly compounding, n will be 12, for half year compounding; n will be 2 and quarterly 4)

T = Total time period of investment

So let’s suppose you have invested 500000 for five years at a 7.50 percent compounding quarterly. So the total amount earned after five years including the amount invested initially will be:

A = 500000 (1+ 0.075/4) ^ (4*5) = Rs. 724974.01

Thus your total interest earned will be: A-P (maturity amount – principal amount)

Rs. 724974.01- 500000 = Rs. 224974.01 thus giving you an annual profit of 7.71%

The Bottom Line: All banks use the same formula to calculate the maturity amount of the fixed deposits. Generally, fixed deposit calculators calculate interest compounded quarterly. But some FD calculators also perform compounding of interest on monthly, quarterly, half yearly and yearly basis. So it is wise to know this detail to fetch accurate results.

Investing in a fixed deposit scheme is an extremely safe investment option with predictable returns. It is well suited for investors who wish to keep their money in safe hands with zero risks.

One thing you must know about Fixed Deposits is that these have zero liquidity, which means you cannot withdraw any amount before the maturity period. And if you do, a penalty will be applied and the rate of interest on your fixed deposit will also be reduced. It is also not suitable for the longer period of time. For that you can look for other alternatives such as SIP, PPF, etc. as SIP is safe, generate high returns and PPF have tax benefits. For further information on Fixed deposits, you can scroll through online websites.