Fixed deposits are one of the most popular and convenient  investment options in the market, due to their assured returns.  But, have you ever wondered how interest on fixed deposit amounts are calculated in banks?  How are the interest rates calculated and what factors determine the final maturity amount? Here is a guide on how to calculate returns on your Fixed Deposits.
 

Reinvestment deposit interest compounded quarterly

The following formula is used for calculating maturity amount for your fixed deposits-
A = P (1 + (r/400))^n

Where “A” is the maturity amount, “P” the deposit amount, “r” is the rate of interest and “n” is the number of quarters for the chosen period.

For example, if you invest Rs.2 lakh for a period of 3 years at an interest rate of 10%, putting the values in the above formula would get you:

A= 200000 x (1+(10/400)^ (4 quarters x 3 years) = Rs.2,68,978
Thus, interest earned on the deposit for 3 years period on quarterly compounded basis is Rs.68,978/-.

For the ease of calculation you can take aid of our online financial calculator, where you just need to fill the values and tenor for which you propose to keep the funds with the bank; the calculator displays the maturity value along with the rate offered by the bank for the chosen tenor.  
 

The factors affecting the interest earned and the maturity amount are -
 

  • Principal amount - The interest earned is directly proportional to the principal amount. Higher the money deposited, higher the interest.
  • Rate of interest - Higher the rate of interest, higher the interest earned.
  • Deposit type - There are two kinds of fixed deposits. Cumulative deposits (quarterly compounded) allow interests to be paid at maturity and Fixed Deposits (interest non-cumulated) allow interests to be paid monthly or  quarterly, as per your choice. Cumulative deposits enable you to earn more as the interest income is reinvested. 
    If you choose to take monthly interest the rate of interest would be discounted at the same rate and hence, the interest quantum earned is slightly less than quarterly pay- out.  If you choose quarterly interest pay out option, the formula to arrive  at  interest quantum I is PxTxR/(365@x100) where P is principal invested, T is term in days, R is rate of interest (@366 days in a leap year).
  • Senior citizen (Age >=60 years) - Senior citizen get a slightly higher rate of interest (usually 0.5% more) than others because of their dependence on interest for their livelihood. 

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

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Frequently Asked Questions

When do I become liable for TDS?

You become liable for TDS* when the aggregate interest you earn for all deposits held in a particular customer ID is greater than Rs. 40,000/- (Rs.50,000 in case of senior citizen) in a financial year.

Disclaimers:
* Deposits held by minors are also subject to TDS. The credit for the TDS can be claimed by the person in whose hands the minor's income is included.

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When is TDS deducted?

TDS is deducted every time the Bank pays/re-invests interest during the financial year in accordance with the provisions of Income Tax Act as amended from time to time.

TDS is deducted every time the Bank pays/re-invests interest during the financial year. TDS is also deducted on unpaid interest accrued at the end of financial year viz. 31st March.

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Can TDS be recovered from principal of deposit in any case?

When interest amount is insufficient to recover TDS, the same is recovered from the principal of the deposit.

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Can the maturity amount of the deposit reduce due to TDS?

Yes, in case of reinvestment deposits, the interest reinvested is post TDS recovery.

Therefore, the maturity amount for re-investment deposits varies to the extent of tax and compounding effect on tax for the period subsequent of deduction till maturity.

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Does any change or enhancement in my deposit portfolio affect TDS liability?

TDS is deducted every time the Bank pays/re-invests interest during the financial year. TDS is also deducted on unpaid interest accrued at the end of financial year viz. 31st March.

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