HIGHLIGHTS
- Facts about Fixed Deposit
- FD Interest Rate Calculation
- Fixed Deposit Interest Rate Taxation
- Things to Remember about FD Interest Rates
Fixed deposits (FDs) are a popular choice of investment for many. The reason which makes fixed deposits popular include the following -
You can calculate the FD interest which you would receive on your deposited amount using either of the following two ways -
The formula for calculating the total interest earned from the scheme is as follows -
{P * [(1+R/N) ^ (N*T)]} - P, wherein,
P = principal amount that you have deposited,
R = FD interest rate,
N = frequency at which the interest is compounded, and
T = tenure of the deposit.
For example, if you deposit Rs.10,000 for a period of 5 years at an interest rate of 7% compounded half-yearly, the interest which you would earn on your deposit would be calculated as follows -
P = Rs.10,000
R = 0.07
N = 2
T = 5 years
Interest earned = {10,000 * [(1+0.07/2)^ (2*5)]} - 10,000 = Rs.4106 (rounded-off)
The calculation might prove to be a challenge, which is why an online FD interest calculator helps you calculate the FD interest rate instantly. You have to enter the principal amount invested, interest rate, frequency of compounding, and the tenure of investment and the FD calculator calculates the interest in seconds.
Though fixed deposits guarantee the interest income on your investment, the tax implication of the interest should be noted. So, here are the tax implications of the interest income earned from fixed deposit schemes -
Interest earned from fixed deposit schemes is taxable in the hands of the investor. Tax is applicable at your income tax slab rates.
While FD interest rates are attractive and fixed, here are some points which you should know about them -
There might be a lock-in period under some FD schemes. Withdrawals from the scheme would not be allowed during the lock-in period.
Also Read: Benefits of Investing in a Fixed Deposit
When it comes to interest rates, you can get good returns on your investment if you pick the right scheme. So, let us take a look at the different aspects of FD interest rates.
FD interest rates depend on various factors. The interest rate ranges from 2.50% to 9%, depending on these factors. So, let us have a look at the factors which determine FD interest rates.
Banks, post-offices, and Non-Banking Financial Companies (NBFCs) are responsible for offering fixed deposits. All these institutions provide a different interest rate on their deposit schemes. In fact, in banks' case, newly established banks might offer a higher interest rate on their fixed deposits than established banks. However, banks and post-offices usually provide a lower rate of interest compared to NBFCs. Fixed deposits offered by NBFCs offer attractive interest rates, which can go up to 8% and higher, and that is why investors prefer NBFCs for FD investments.
Another factor that governs the FD interest rates is the amount that is being deposited. Usually, interest rates are different for amounts up to Rs.2 crores or Rs.5 crores. If the amount is higher than these limits, the FD interest rates differ.
The tenure of deposit also affects the FD interest rates. Fixed deposits are available for tenures ranging from 7 days to 10 years. Thus, the tenure of the deposit you choose would specify the interest rate. Usually, the higher the deposit tenure, the higher is the interest rate offered.
FD interest rates are different for investors aged below 60 years of age and for those who are senior citizens. Senior citizens enjoy up to 0.40% higher rate of interest compared to non-senior citizens. This is perhaps why fixed deposit schemes are so popular among the older population of the country.
Also Read: Senior Citizen FD
Nowadays, different types of fixed deposit schemes are available in the market. You can opt for cumulative FDs where the interest earned is added to the amount invested and remains invested in the scheme. Alternatively, you can choose non-cumulative FDs where the interest earned is paid out as regular income during the scheme's duration. There are flexi deposit schemes too, which allow easy withdrawals during the tenure and the facility of sweep-in or sweep-out from the savings account. Since FD schemes are different, their interest rates are also different. Cumulative FDs enjoy a higher interest rate compared to non-cumulative and flexi deposit schemes. The interest rate also varies between non-cumulative and flexi deposit schemes, where the former scheme enjoys a higher rate than the latter.
Fixed deposit schemes are a good way of earning guaranteed returns on your investment. You should invest in FD to diversify your portfolio. However, do compare the FD interest rates of different schemes before investing so that you can choose a scheme which offers the best rates for maximum returns.