Hello Financer

Basis of Interest Calculation

  • Interest on fixed deposits is calculated on the principal amount for a fixed tenure.
  • Banks use either simple interest or compound interest, depending on the deposit type.
  • The applicable interest rate is determined at the time of booking the FD.
  • Interest is computed for the full tenure and remains unchanged throughout.
  • The final maturity amount includes both the principal and accrued interest.

Cumulative vs Non-Cumulative FDs

  • In cumulative FDs, interest is added to the principal and compounded quarterly.
  • The total interest is paid only at maturity, offering higher returns.
  • In non-cumulative FDs, interest is paid at regular intervals (monthly, quarterly, etc.).
  • These are preferred by individuals seeking periodic income.
  • The payout frequency affects the total interest earned over time.

Tenure and Rate Influence

  • Longer tenures generally yield higher interest compared to shorter durations.
  • However, some banks offer the best rates at specific mid-term durations.
  • Interest rates are fixed and not impacted by market fluctuations during the deposit period.
  • Tenure and rate together define the maturity value.
  • Most banks offer rate slabs based on time frames like 1 year, 3 years, or 5 years.

Senior Citizen and Special Rates

  • Senior citizens earn an additional interest margin, typically 0.25% to 0.75% more.
  • This bonus applies across all standard tenures.
  • Some banks offer exclusive FD schemes with higher interest for seniors.
  • Special promotional FDs also feature limited-time rate offers for all depositors.
  • The benefit is reflected directly in the maturity amount.

Compounding and Effective Yield

  • Interest is usually compounded quarterly, increasing the effective return.
  • The Effective Yield is slightly higher than the nominal rate due to compounding.
  • For example, a 7.00% annual rate compounded quarterly may yield 7.19%.
  • Banks display both the interest rate and maturity amount for transparency.
  • Choosing compounding over periodic payouts boosts total return at maturity.
Posted in AccountsTags