October 26, 2014

How to calculate interest on Recurring Deposit (Compound Interest)

Recurring deposit is one of the best savings scheme in India and almost everyone has done at least one RD account. But many people don't know how the interest is accumulated in these accounts. They are simply happy with what agents have explained them. But you should know where your money is invested and how much you will get in future and based on what calculation you are earning interest on your invested money. 

How to calculate interest on recurring deposits

There are 2 types of interest rates applied on savings schemes. Normal interest and compound interest rate. For recurring deposit the interest rate is calculated based on compound interest rate formula.

Also Read  How to open a Recurring Deposit Account Online in SBI

The annual compound interest formula is
A = P \left(1 + \frac{r}{n}\right)^{nt}
  • A = final amount
  • P = principal amount (initial investment)
  • r = annual nominal interest rate (as a decimal, not in percentage)
  • n = number of times the interest is compounded per year
  • t = number of years
Let's say you have a recurring deposit account with monthly investment of Rs 2000/- . As per current interest rate 8.40% with a maturity of 5 years.
Now in case of compound interest (e.g. compounded quarterly), the amount deposited for 1st month with interest accumulated for 60 months (here tenure 5 years) on that will consider together as principle for next month. But from next month on wards the tenure will reduce by 1 month.  So you will get a higher return than a normal direct interest rate investment.

Also Read  6 Best low risk investment schemes from Post office

I found a very good example on this in detailed manner in onemint.com blog. An elaborate month wise data is provided there. You can check with your amount deposited every month and calculate yourself.