Fixed deposits are the most preferred investment option in India. If you don’t know what a fixed deposit is, here is an explanation. You put your money with a financial institution for a predetermined period. In return, you get interest on your deposit. There are numerous choices available to you if you have some extra money and wish to invest in fixed deposits. You can deposit money for durations ranging from a few days to a few years. Naturally, the interest rates given on fixed deposits with shorter durations will be lower than those offered on deposits with longer maturities. For instance, the interest rate on a 30-day FD might be in the range of 6%. The interest rate on a deposit for a year could be 7%.
A fixed deposit with a high interest can help you grow money over time. You may need to compare the interest rates charged by multiple financial institutions to find the best rate. However, variations are typically minor. You must keep in mind that risk and returns are directly correlated. A higher level of risk is always associated with high-interest rates. Your decision to invest in a fixed deposit will depend on the level of returns you are willing to accept. Fixed deposit returns are often lower than those from other investment options like stocks, but they also carry lesser risks. Learn carefully what is an FD account and what are their pros and cons before investing.
You must understand different types of fixed deposits before knowing about the interest rates. There are various fixed deposit options available in India. One may invest in one or more of these types of FDs depending on one’s financial objectives.
Some of the FDs that one can apply for are listed below:
- Cumulative fixed deposit- As per instructions from the Reserve Bank of India, interest on fixed deposits is to be calculated at quarterly compounding intervals. The interest must be paid at a rate determined by the financial institution based on the length of the deposits. The depositor benefits in this arrangement by receiving interest on both the principal and interest parts.
- Non-cumulative fixed deposit- Interest is given to the depositor on a regular basis rather than accumulating in this program. The depositor receives a passive income as a result.
- Tax saving fixed deposit- These fixed deposits have a five-year lock-in term and qualify for tax deductions under Section 80C. According to income tax regulations, the highest deduction that may be claimed is up to Rs. 1,50,000 each year.
- Flexi fixed deposit- Savings and current account selective schemes offer the option of the auto sweep. Here, balances that are above a specified threshold are transferred to Flexi Deposits in multiples of the sweep-out account. The threshold amount, sweep-out amount, and deposit term are scheme specific.
How is a fixed deposit (FD) interest calculated?
Interest rate is the most important component that attracts investors. You must know what the interest rate for fixed deposit. It will help you choose the perfect investment instrument.
Compound interest (CI) and simple interest (SI) are two methods for figuring out the interest on an FD. Financial institutions may use one or both techniques to determine the interest on FDs depending on the amount deposited and the tenure.
The following formula is used to compute interest using the SI method:
S.I. = (P×R×T)/100
Here, P stands for principal, T for the time in years, and I for interest rate.
For instance, you made a 4-year investment of Rs. 5,000 at 7% annual growth. You will be able to apply for the S.I. formula to determine the interest that you will get over the course of four years.
S.I. = (5,000 x 7 x 4) / 100 = 1,40,000 / 100 = Rs. 1,400
So, the interest amount is Rs. 1,400.
The following formula is used to calculate interest using the CI method:
CI = P {(1+i/100)n -1}
Here P denotes the principal amount, n is the number of years, and i is the interest rate.
For instance, you made a 5-year investment of Rs. 7,000 at 8% annual growth. Then, using the CI formula, it is possible to determine the amount of interest that you will earn under the CI method.
C.I. = 7,000{(1+8/100)5 -1} = Rs. 3,285. 29
Thus, Rs. 3,285 will be the interest earned.
One may quickly determine the interest you will earn on your FD amount using an online FD calculator provided by financial experts like Bajaj Finserv.