Home Finance How Does a Bank and NBFC Calculate Interest on your Fixed Deposits?

How Does a Bank and NBFC Calculate Interest on your Fixed Deposits?

A fixed deposit is an investment scheme for a fixed duration at a fixed interest rate when you invest a minimum fixed deposit amount. At maturity, you will receive your invested amount and interest income from the investment. Generally, fixed deposits are preferred as they provide a guaranteed interest income in addition to a high level of safety. You may be wondering how fixed deposit interest is calculated. Two methods are used to calculate FD interest rates: simple interest and compound interest. Both of these methods may be used by banks or NBFCs, depending on the amount and the deposit term. 

Method for calculating the interest rate on a Fixed Deposit

Simple Interest 

It is also possible to calculate a fixed deposit on a minimum fixed deposit amount using the simple interest method by multiplying the principal amount, the interest rate, and the deposit term. There is a simple formula for calculating the interest on a fixed deposit as follows: 

Simple Interest = (P x R x T/100)

Compound Interest

A compound interest rate on Fixed Deposit on a minimum fixed deposit amount is calculated by using the formula

Compound Interest = P (1+r/n) by (n*t)

Here P stands for the principal amount, r represents the interest rate, n represents the number of compounding that occur during the year, and t is the number of years.

The interest income can be calculated using this method because you are earning interest on the principal amount and earning interest on the interest amount. In addition, many banks’ FD offer compound interest, so you can get a good interest rate from your FD account. 

Important tips for choosing the best Fixed Deposit scheme 

Compared to bank FDs, NBFCs offer higher returns on a minimum fixed deposit amount. However, it is essential to note that if the banks default, you will receive a minimum amount of Rs. 5 lakh, which includes both the principal amount and the interest. Therefore, if you find an NBFC with a good reputation, you can get a higher return on your investment from that NBFC. To get the best return on your investment amount, you should always check with different FD schemes from different banks and NBFCs. Choosing the best interest rate is the best way to maximize your returns. 

Use a Fixed deposit interest calculator to calculate the interest rate on a fixed deposit

Using a Fixed deposit interest calculator is one of the simplest ways to calculate the FD maturity amount and the interest rate. The Fixed deposit interest calculator estimates what interest you can earn on the deposit and what interest you will get at maturity. Calculating your deposit’s maturity amount and interest rate is a complicated process. You can, however, use a Fixed deposit interest calculator to calculate the same information with the click of a button. Using a fixed deposit calculator is an easy way of evaluating the maturity amounts and interest rates of various FDs offered by several banking institutions. Using a fixed deposit calculator can save significant time and effort. 

Conclusions

Due to the compounding effect, a cumulative FD results in a higher return on a minimum fixed deposit amount. You must keep in mind that the interest rate of each FD is not equal for all tenures. It is crucial to keep in mind that choosing the longest tenure does not guarantee the highest interest rate.

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