Fixed deposits (FDs) are a popular choice of investment for many. The reason which makes fixed deposits popular include the following -

• Guaranteed returns
• No risk of market volatility
• Protection of the capital invested
• Tax benefits on 5-year deposit schemes offered by banks and post offices
• Use as collateral security to avail loans
• Attractive interest rates

FD Interest Rate Calculation

You can calculate the FD interest which you would receive on your deposited amount using either of the following two ways -

• Through a mathematical formula
• Through an FD interest calculator

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.

Fixed Deposit Interest Rate Taxation

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.

• However, in the case of senior citizens, interest earned from fixed deposit schemes maintained with banks and post-offices would be tax-free up to Rs.50,000. This exemption is allowed under Section 80TTB of the Income Tax Act, 1961.
• TDS would be deducted on aggregate FD interest income for bank and post office fixed deposits if such income exceeds Rs.40,000. For senior citizens, TDS would be deducted if the FD interest income exceeds Rs.50,000. The rate of TDS is 10% if the PAN details are provided; else, it is 20%. However, due to the recent pandemic, the TDS rate has been lowered to 7.5% from 14th May 2020 to 31st March 2021. Form 15G/15H can be submitted to avoid TDS deduction.
• For FDs held with NBFCs, TDS would be deducted if the aggregate interest income exceeds Rs.5000. The rate would be the same as that of banks. You can submit Form 15G/15H if you want to avoid TDS deduction.

Things to Remember about FD Interest 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.

• If you withdraw the deposit before completing the tenure, it would be called a partial withdrawal. In case of such withdrawal, a penalty would be charged. This penalty would reduce the FD interest rate payable on your deposit.
• Some banks and NBFCs offer an additional interest rate if you are an existing account holder or employee of the institution. Similarly, you can earn an additional rate of interest if you reinvest the deposit after maturity.
• The FD interest rate is fixed when you invest in the scheme. After that, if the institution changes its rates, the rate on your existing scheme would not be altered.

Also Read: Benefits of Investing in a Fixed Deposit

Factors affecting FD Interest Rates

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.

Type of financial institution offering the scheme

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.

The amount of deposit

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 the deposit

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.

The type of depositor

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

The type of fixed deposit scheme

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.