How does the Bank Calculate the Simple Interest Rate

What are Fixed deposit accounts, and why are they famous?

  • Fixed Deposits are also known as term deposits in banks is a popular way of one-time deposit investment for the salaried class. Low risk and high returns primarily being the reason. The salaried class usually uses their savings for such an investment. 
  • The Reserve Bank of India made it compulsory for the banks to have Deposit Insurance. The money invested in any bank is insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, covering your deposit up to Rs 1 lakh. In case of insolvency, your investment remains safe.

How does the bank calculate the simple interest rate?

It is essential to know to calculate the FD interest to make a proper assessment of your investment. It may not sound very easy; hence, we will simplify it for you.

  • You deposit a principal amount with the bank for a fixed period. The deposit will earn interest for this period. After the end of the tenure, you get your deposit back. 
  • You can open an FD with an amount as low as ₹1000 for a minimum of 7 days and a maximum of 10 years with a bank account.
  • Suppose you want to open an FD account without having to open a savings account. In that case, you have to undergo the bank’s KYC (Know Your Customer) process.
  • Take help of online  FD calculator to get the idea of the precise amount

Banks usually calculate interest in two ways, Simple Interest and Compound Interest depending upon the loan tenure and the deposit amount. Here, we will discuss how banks calculate simple interest.

What is the difference between the two?

  • In case of Simple interest, you earn interest only on the principal whereas, in the Compound interest case, the interest is earned on the principal amount as well as the interest.
  • Calculating simple interest is easy. You multiply the principal, interest rate and the time period.
  • Formula: (P x Rx T/100) or Principal x Interest rate x time period (Years) divided by 100

Example

  • If you invest ₹ 20,000 at 8% p.a. for 5 years, the interest calculated.
    • ₹ 20,000 x 8 x 5 = ₹ 8,00,000
    • Now divide that by 100. You get ₹ 8,000.
  • The interest earned in this period is ₹ 8000
  • So, the interest earned for 5 years is ₹ 8,000.
  • Therefore, if you invest ₹ 20,000 in a fixed deposit with 8% p. a. simple interest, you will get back ₹28,000 at the end of 5 years.

Best Banks offering highest FD rates

BanksFD Interest Rates Senior Citizen FD Interest Rates Tenure
Bajaj Finance Fd Interest Rates6.90% – 7.10% 7.15% – 7.35%12 months to 60 months
HDFC FD interest rates6.35% – 6.45% 6.60% – 6.70% 33 months to 66 months
PNB Housing Finance Rates6.20% – 6.70%6.70% – 7.20% 12 months to 120 months

For more interest rates offered by different banks, click here

  • In FDs, the interest rate does not remain the same for all tenures. Choosing the longest tenure doesn’t necessarily give you the highest rate of interest. 
  • Check the interest rate for different tenures at the bank’s website and choose the tenure that provides the highest interest rate.

Conclusion:

Opening FD (Fixed Deposit) is a safe and also lucrative investment option. Learning how banks calculate simple interest is essential to make informed decisions about investments. To invest now in FDs, click here

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