FD is the abbreviation for Fixed Deposit Account. You can book it in any private or nationalised bank or post office in India. Its main goal is to utilise the invested amount for future expenses. For example, you have enough money to buy a new smartphone within a budget of Rs. 10,000, but you can wait until next year to see if you can get a good deal on the upcoming new smartphones.
In this case, you can book an FD for 1 year, after which you can use the funds to buy a new smartphone of your choice. The interest rate on an FD is fixed at the time of account opening and does not change throughout the tenure. It is higher than the Savings Account interest rate and leads to higher earnings.
How does the FD calculator work?
An FD calculator helps you determine how much interest you can earn by booking an FD with a specific amount, interest rate, and tenure provided to the calculator. This will help you plan your investments to achieve your goals accordingly. There are two types of FDs:
- Cumulative Fixed Deposits: This FD helps you accumulate interest amounts that you earn every quarter. This interest amount enables you to earn more interest over time. Compounding in FD usually occurs every quarter, meaning that the interest calculated monthly will be added to your balance.
- Non-Cumulative Fixed Deposits: In this type of FD, you get regular payouts, either quarterly or half-yearly. These payouts typically represent the interest amounts you earn over a quarter or half a year. Instead of adding this interest to your balance amount, it is paid out to you as a bonus at regular intervals.
How do you calculate FD interest?
For example, if you deposit Rs. 5000 in a Cumulative Fixed Deposit with a 4.5% annual interest rate for one year, below are the steps to calculate interest on the Fixed Deposit calculator:
- Calculate the monthly interest rate from the annual interest rate: 4.5 / 12 = 0.375%. This is the monthly interest rate in the example.
- Now use the monthly interest rate formula: monthly interest rate * amount / 100 = 0.375% * Rs. 5000 / 100 = Rs. 18.75.
- Since you are considering quarterly compounding, you must calculate three months' interest by multiplying one month's interest by 3 = Rs. 18.75 * 3 = Rs. 56.25 (three months' interest on Rs. 5000).
- This interest has been added to your balance amount of Rs. 5,000, which now totals Rs. 5,056.25.
Conclusion
You can save income tax on an FD under Section 80C. However, the tenure must be at least five years. Maximum of Rs. 1.5 lakh can be claimed as a deduction under Section 80C while saving income tax.
