There are various accounts offered by Banks bearing different interest rates such as savings account, fixed deposits and public provident fund account. But the calculation of interest is not same for all accounts. For instance interest on Fixed Deposits is compounded quarterly while interest on Provident Fund is calculated on monthly basis.

Let’s dive into the details of interest calculation by banks on different accounts.

### How bank calculate interest on fixed deposit?

Calculation of Interest is totally based on the “times of compounding” i.e. the number of times the bank compounds interest, for instance 4 times (quarterly).

#### Fixed Deposit Interest Formula

Maturity Value (A) = P x (1 + r/n)^{nt}

So for the maturity value of Fixed Deposit of Rs.1,00,000 fetching interest @ 9.00% p.a. after 5 years would be

- Principal Amount (P) = Rs.1,00,000
- Rate of Interest (r) = 9% = 0.09
- Number of Period (t) = 5 years
- Frequency of Compounding Interest (n) = 4 (quarterly)

Maturity Value (A) = P x (1 + r/n)^{nt}

=1,00,000 X (1 + 0.09/4)^{4×5}

= 1,00,000 x (1 + 0.0225)^{20}

= 1,00,000 x (1.0225)^{20}

= 1,00,000 x 1.560509

Maturity Value (A) = Rs.1,56,051

Interest Earned = A-P = Rs.1,56,051-Rs.1,00,000 = Rs.56,051

Always Remember: Higher the compounding, higher the interest you will get.

### How bank calculate interest on recurring deposit?

The calculation of interest on recurring deposit is similar to that of fixed deposit. Each deposit/installment would be considered as a separate deposit and interest would be calculated on each installment for the remaining time period.

#### Recurring Deposit Interest Formula

The formula is same as of Fixed Deposit

Maturity Value (A)= P x (1+r/n)^{nt}

For instance, Recurring Deposit of Rs.10,000 for 2 years @ 8.75% would get you:

- Here (P) is each installment = Rs.10,000
- Rate of Interest (r) = 8.75% = 0.0875
- Number of Period (t) = 2 years
- Frequency of Compounding Interest (n) = 4 (quarterly)

For easy understanding I am presenting interest calculation in a table form

### How bank calculate interest on public provident fund?

Calculation of Interest on Provident Fund depends on the date of deposition of contribution. Interest is calculated on the balance carried forward from the last month *plus* amount deposited before 5^{th} of the month.

So if you are in a habit of depositing PPF contribution after 5^{th} and hoping to get interest on it than you would be let down.

Let’s see how PPF interest is calculated, considering three instances: The interest rate is taken as 8.7% p.a. which is what PPF account holders are getting this year.

1. Single Contribution of Rs.1,20,000 on or before 5^{th} April.

2. Monthly Contribution of Rs.10,000 before 5^{th} of each month

3. Monthly Contribution of Rs.10,000 on or after 5^{th} of each month.

So there is a substantial difference in the amount of interest according to the timing of contribution made.

The interest earned in a year is added back to your account only at the end of the year.

### How bank calculate interest on savings account?

The interest on savings account is calculated on daily basis on the closing balance of the day. Unlike PPF account the interest is credited to the account every 6 months.

To understand the calculation better, let’s take an example of Sanyam having account balance of Rs.75,000 on 1^{st} January, he withdraws Rs.25,000 on 15^{th} January and deposited Rs.60,000 on 22^{nd} January. Now the interest will be calculated as:

Few banks also provide interest on dual rates i.e. for higher interest rate on higher balance such as 5% for balance above Rs.1 lakhs and 4% below Rs.1 lakhs. In this case, interest will be calculated as follows:

Words of Wisdom:

Each type of account has its own pros and cons, Fixed Deposit gives high return but money gets locked for certain period. Recurring deposit on the other hand is useful tool but interest amount could be low as compared to fixed deposit for same time period.

On the other hand savings account is not at all suitable for keeping high balance; either transfer it to fixed deposit account through flexi scheme or open a recurring deposit account.

PPF account should be taken purely for tax-planning and for retirement corpus because the money gets locked for at least 15 years.

RAKTIM DAS says

Collect the following data: principal>Rs 25000 & present interest rate of SBI

To be found: compound interest when interest is compounded half yearly & calculate the amount after 3 years

Sushil says

Please inform me to calculate the fix maturity amount formula in FD

Ex. How to calculate the principle amount,

If I want fix 1 lack rupees maturity amount in various Interest rate and for the various year in FD.

So how many rupees I have to invest in FD for 1lack rupees maturity amount.

ajay says

how to calculate RATE OF INTEREST of recurring deposit.

Suppose I’m investing 2500 per month in recurring deposit account for 2 years with rate of interest 8% compounded quarterly. Now I have to find out MATURITY AMOUNT. For this i will use formula :

ACTUAL AMOUNT (MATURITY AMOUNT) = PRINCIPLE AMOUNT *( (1+RATE/100/4)^(4*2)-1)/(1-(1+RATE/100/4)^(-1/3))

ACTUAL AMOUNT (MATURITY AMOUNT) = PRINCIPLE AMOUNT *( (1+8/100/4)^(4*2)-1)/(1-(1+8/100/4)^(-1/3))

ACTUAL AMOUNT (MATURITY AMOUNT) = 65229/-

========================

Please read my question carefully and answer.

Now I want to know the FORMULA OF HOW TO CALCULATE RATE OF INTEREST.

Suppose I’m investing 2500 per month in recurring deposit account interest compounded quarterly. My MATURITY AMOUNT IS 65229/-.

But i don’t know what INTEREST RATE I HAVE GOT. I want to find out INTEREST RATE . WHAT FORMULA SHOULD I USE TO FIND OUT RATE OF INTEREST

PLEASE REPLY.

ajay says

how to calculate RATE OF INTEREST of recurring deposit.

Suppose I’m investing 2500 per month in recurring deposit account for 2 years with rate of interest 8% compounded quarterly. Now I have to find out MATURITY AMOUNT. For this i will use formula :

ACTUAL AMOUNT (MATURITY AMOUNT) = PRINCIPLE AMOUNT *( (1+RATE/100/4)^(4*2)-1)/(1-(1+RATE/100/4)^(-1/3))

ACTUAL AMOUNT (MATURITY AMOUNT) = PRINCIPLE AMOUNT *( (1+8/100/4)^(4*2)-1)/(1-(1+8/100/4)^(-1/3))

ACTUAL AMOUNT (MATURITY AMOUNT) = 65229/-

========================

Now I want to know the FORMULA OF HOW TO CALCULATE RATE OF INTEREST.

Suppose I’m investing 2500 per month in recurring deposit account interest compounded quarterly. My MATURITY AMOUNT IS 65229/-.

But i don’t know what INTEREST RATE I HAVE GOT. I want to find out INTEREST RATE . WHAT FORMULA SHOULD I USE TO FIND OUT RATE OF INTEREST

PLEASE REPLY.

ajay says

please explain how to calculate rate of interest of recurring deposit.

i want to know how to find out rate of interest of recurring deposit by using formula………..please reply……please……

Sanyam says

You can simple calculate by using this formula: Maturity Value (A)= P x (1+r/n)nt

Ravindar kumar says

Bhot achi soch hai hamare pardhan mantry ji ki

rishi says

Thanks for the latest post. Kudos

rishi says

Thanks for the illustrated post. Kudos

Rishi Rama Sharma

Anonymous says

Month by month interest on delay interim maintenance paid after ,,25 year this is simple or comound