Home » How do Banks Calculate Interest Rates on Fixed Deposits in 2022?

# How do Banks Calculate Interest Rates on Fixed Deposits in 2022?

A savings account is the standard place to put the money you intend to save. The ability to withdraw funds at any time makes this account so popular. Also, people like the stability and security of fixed deposits. However, most of us wouldnt be able to tell you how interest is determined for these accounts.

To better understand returns, let’s look at how banks calculate savings accounts and fixed deposit interest.

How do financial institutions figure out how much interest to pay on savings accounts? According to 2010 RBI regulations, savings account interest is calculated daily. What this means is that your daily ending balance will earn interest.

That can be expressed as follows:

Earnings from a savings account can be calculated as: Interest earned = principal balance * interest rate * (number of days/365)

Example  1

Let’s see if an example can assist us in getting a better grasp on it.

Let’s pretend that on Day 1, Mr. Shrinivas has Rs. 100,000 in his bank account. After 7 days, he takes out Rs. 50,000. And then on day 14, he deposited Rs.30,000. After that point, no further exchanges occur. Take a look at how much interest he made in January if the interest rate was 4%.

In this case, interest will be determined by,

The total amount owed from January 1, 2022, until June 1, 2022, was Rs. 100,000. As so, the interest on Rs. 100,000 for 7 days will be,

100,000*4/100*7/365= 76.71

The interest due for the 7 days beginning on 7.1.2022 and ending on 14.1.2022 was Rs. 50,000.

50,000*4/100*7/365= 38.35

Interest for 18 days on an outstanding balance of Rs. 80,000 from 14.1.2022-31.1.2022 is Rs.

80,000*4/100*18/365= 157.8

This means that the sum of January’s interest earnings will be,

76.71+38.35+157.8= 272.87

January’s Interest Earned: 272.87

Despite daily interest accrual, most banks only deposit it every six or three months.

Interest on Fixed Deposits and What to Do If You Need to Cash Out Early

The interest rate on the FD calculator is typically higher than in savings accounts. However, there is a commitment time that has to be completed. Any withdrawals made before the end of the specified term will incur a penalty, typically between 0.5% and 1% of the total amount withdrawn.

Interest is determined using the following formula, Interest= Principal*Rate of interest.

Example  2

Let’s look at an example to get a better grasp on this.

Ms. Simran has placed Rs. 100,000 in a one-year interest rate on the FD calculator of 8% per annum. Six-month interest is set at 6%. There is a 0.5% penalty for early withdrawal.

First scenario: Simran decides to cash out after one year at maturity.

Second Case: Ms. Simran quits too soon, after only six months.

If Ms. Simran stays with the FD for the whole term, like in the first scenario, she will be paid,

8% interest on Rs. 100,000.00

Value at Maturity: Rs. 1,08,000 (100,000 plus 8,000)

So, Ms. Simran will get Rs. 1,08,000 after a year.

Simran had left her position in the second case before her one-year term was over. To put it bluntly, she broke her FD six months later. This is one of the reasons why the interest will be calculated differently.

When she placed the deposit, the bank offered 8% interest if she kept the money in the account for a year. Since she’s withdrawing early, the bank will give her the new 6-month fixed deposit interest rate. The figure for this is 6%.

Because she withdrew her money too fast, the bank won’t pay her 8% interest for six months.  With this, she will receive interest in her money for six months. In addition, the bank will charge a penalty for withdrawing the money too soon (0.5%). Ms. Simran’s effective rate of interest is thus 5.50% (6% minus 0.50%).

What does the math say?

Six months’ worth of interest: \$5,500 (100,000 x 5.5%)

Value at a Premature Expiration after 6 Months: Rs 1,05,500

Therefore, returns on the interest rate on FD should consider factors other than only the interest rate. If you plan to withdraw money early, the bank won’t honour 8% six-month interest rate. It will only pay the interest application for the six months deposit period.

Tax Deducted at Source for Interest

Banks are obligated to withhold 10% of the interest rate on FD as TDS. In any case, there are two notable deviations from the same:

Earnings from a savings account are exempt from tax withholding.

If the rate of interest on FD is under Rs.10,000, no TDS is required to be withheld. The Rs. 10,000 cap is per financial institution.  If a bank pays interest on a Fixed Deposit totaling more than Rs. 10,000, it must deduct 10% TDS. No TDS is required if the total interest payable from both banks is less than Rs. 10,000. One pays Rs. 8,000 for the entire year, and the other pays Rs. 7,000.

Form 15G and Form 15H, applications to the bank for a reduction in TDS on interest, are described in detail here:

●      Form 15G and Form 15H,

●      Applications to Reduce TDS on Interest.

To know more, you can consult your bank.