Fixed Deposit also known as FD is an investment instrument offered by banks.
You deposit a certain amount of money in a bank as a fixed deposit and earn a higher interest rate than a savings account.
"Interest earned on a fixed deposit account is taxable."
The time for which you can create a fixed deposit depends on the bank you are opening your FD account. Generally, it is between 7 days to 10 years.
Once you put your money in a fixed deposit account then, it is locked until maturity.
If you want to withdraw your money before maturity then, you have to pay a penalty amount which varies from bank to bank.
"Most banks in India calculate fixed deposit interest quarterly."
Vijay is a 25-year-old man who opens a fixed deposit account with INR 100,000 (Indian Rupee One Lakh) for invests the money for 5 years. The bank is giving him 7.3% interest per annum compounded quarterly.
At the time of maturity (5 years later) he will receive INR 143,578.16 from the bank. So, he will earn INR 43,578.16 as interest in 5 years.
Check out this Fixed Deposit Calculator to calculate fixed deposit returns.
Total Interest: ₹43,578.16
The interest is calculated using Compound Interest.
We use the following formula to calculate compound interest compounded quarterly.
A = P ( 1 + R/400 )4n Where, P = Principal (the amount you invest) R = Rate of interest per annum n = Time in years A = Amount Compound Interest = A - P
Here is a quote from Albert Einstein on Compound Interest.
Compound interest is the 8th wonder of the world.
He who understands it, earns it... He who doesn't... pays it.
- Albert Einstein