How Does A Bank Calculate Interest On Your Fixed Deposits?
Published on June 28, 2025 | By RB Credits
Fixed Deposits (FDs) are one of the most popular investment options in India. They provide assured returns with minimal risk, making them ideal for conservative investors.
1. Simple Interest Calculation
When a bank offers simple interest, the calculation is straightforward:
Formula: SI = (P × R × T) ÷ 100
- P = Principal (deposit amount)
- R = Rate of interest (annual)
- T = Time (in years)
Example: If you deposit ₹1,00,000 at 6% for 1 year → SI = ₹6,000.
2. Compound Interest Calculation
Most banks use compound interest for FDs, giving better returns over time.
Formula: A = P (1 + r/n)n×t
- A = Maturity Amount
- P = Principal
- r = Annual Interest Rate
- n = Compounding Frequency (quarterly, yearly, etc.)
- t = Time (in years)
Example: ₹1,00,000 at 6% compounded quarterly for 1 year → ₹1,06,136.
3. Why Compounding is Better
Compounding ensures that you earn "interest on interest." Over long tenures, this makes a significant difference compared to simple interest.
💡 Tip: Always check whether your FD is compounded quarterly or annually. Quarterly compounding gives higher returns.
Conclusion
FDs remain a safe and reliable option. Understanding how interest is calculated helps you make smarter investment choices.
