# How Fixed Deposit Interest is Calculated (2023)?

When it comes to saving money in safe options, bank Fixed Deposit (FD) are often the most preferred choice of Indians in 2023. But do you know How does a bank Calculate Interest on Fixed Deposits?

In this article, you will see how to calculate FD interest and maturity amount when you make a FD with your bank.

And I am sure when you plan to invest in a bank FD, you surely would want to know how much interest you would be earning from your fixed deposit throughout the period.

So, here is a detailed guide on how Fixed Deposit Interest is calculated.

How Fixed Deposit (FD) Interest is Calculated (2023)?

The banks may use one of the two methods to calculate interest on a Fixed Deposit. It can either be a FD with Simple Interest or it can be a FD with Compound Interest. Depending on the tenure and the amount of the deposit, the banks may offer different FD interest calculation approach.

What is the difference between FD Simple Interest or FD Compound Interest?

With simple interest FDs, the interest is calculated only on the principal amount. But with the compound interest FD, the interest is earned on the principal as well as the interest.

Let’s see with simple examples.

Fixed Deposit (FD) with Simple Interest

The formula for Simple Interest (SI) is as follows:

Principal x Interest Rate x Time Period divided by 100 [or (P x R x T)/100].

Suppose you make a bank FD of Rs 10 lakh at 7% per annum in simple interest rate for 5 years.

So your FD will generate 7% each year, i.e. 7% of Rs 10 lakh = Rs 70,000.

Since the FD is for 5 years and the methodology is simple interest (with no compounding), you will get Rs 70,000 each year for 5 years. So in total you get 5 x Rs 70,000 = Rs 3.5 lakh.

Therefore, if you invest Rs 10 lakh in a 5-year Fixed Deposit with 7% p.a. simple interest, you will get back INR 13.5 lakh (Rs 10 lakh principal + Rs 3.5 lakh interest) at the end of 5 years.

You will also have to pay taxes which we will come to later on.

Fixed Deposit (FD) with Compound Interest

The formula for Compound Interest (CI) is as follows:

Compound Interest (CI) = P {(1 + i/100)n – 1}

Where, P = Principal amount; n = number of years; i = rate of interest per period

Suppose you make a bank FD of Rs 10 lakh at 7% per annum in compound interest rate for 5 years.

Now in the 1st year, your FD will generate 7%, i.e. 7% of Rs 10 lakh = Rs 70,000. Unlike in simple interest, here in compound interest FD, this Rs 70,000 amount gets added back to the principal for the 2nd year. So, the principal for the second year becomes Rs 10.70 lakh.

In the 2nd year, your FD will generate 7%, on increased principal of Rs 10.70 lakh = Rs 74,900.This gets added back to the principal for the 3rd year. So, the principal for the 3rd year becomes Rs 11.45 lakh.

In the 3rd year, your FD will generate 7%, on increased principal of Rs 11.45 lakh = Rs 80,143.This gets added back to the principal for the 4th year. So, the principal for the 4th year becomes Rs 12.25 lakh.

In the 4th  year, your FD will generate 7%, on increased principal of Rs 12.25 lakh = Rs 85,753.This gets added back to the principal for the 5th year. So, the principal for the 5th year becomes Rs 13.11 lakh.

In the 5th  year, your FD will generate 7%, on increased principal of Rs 13.11 lakh = Rs 91,755. This gets added to the final maturity amount of 5th year and comes in total to Rs 14.03 lakh.

As you can see, the final maturity value of the FD is more in case of compound interest FD. And that is because in compounding, the interest is calculated each year on not just the principal but also on the interest of previous years.

So in the above examples, Rs 10 lakh FD for 5 years at 7%, will have a maturity value of Rs 13.5 lakh in simple interest FD and 14.03 lakh in case of compound interest FD.

There is one more thing that you need to understand about FDs – the difference between cumulative and non-cumulative fixed deposit. And that is because you need monthly interest from Rs 1 crore fixed deposit.

So in a cumulative fixed deposit, the interest is compounded every quarter or year and paid at the time of maturity. On the other hand in a non-cumulative FD, interest is paid out monthly (or quarterly, half-yearly, or annually as per the depositor’s choice).

Obviously, Non-cumulative FD is more suitable for those who want to earn regular income via monthly interest payouts – which is the case here.

But in general, the returns from a cumulative FD are higher return than non-cumulative. And that is because your money remains in the FD to be compounded, unlike in non-cumulative FD where money gets paid out monthly – so less money remains available for compounding.

So even though the cumulative FD option gives slightly higher interest rate as compared to non-cumulative fixed deposits, you only get principal and earned interest after maturity (which may be after several years depending on the chosen FD tenure).

If you’re considering investing in an FD, it’s important to understand how the interest is calculated by the banks and what exactly is the FD Interest Calculation Formula.

Also, most banks offer about 0.50% higher interest rates for senior citizens on fixed deposits.

Now let’s come to taxation of FD interest in India.

Fixed Deposit Interest Taxation

• The FD interest income fully taxable and when filing income tax, it comes under the head of ‘Income from Other Sources’.
• If the interest income from all FDs with a bank (but across all branches) is less than Rs 40,000, then the bank will not deduct any TDS. Otherwise, there would be a 10% TDS deduction if FD interest income exceeds Rs 40,000.
• But ideally, if your total income is less than minimum taxable amount (read if Rs 7 lakh is the zero tax limit in reality), then you are not required to pay any taxes. But if your FD interest is more than Rs 40,000, then the bank will deduct 10% TDS. In such a situation, to have zero TDS deduction by the bank, you need to submit Form 15G and Form 15H to the bank at the beginning of each financial year. The banks will not deduct TDS following the form submission.
• But if you fall in a higher tax bracket like 20% or 30%, then even though the bank is deducting 10% TDS, you have to pay the differential extra tax amount yourself before filing of returns for the year.

That’s it.