The difference between annual yield and annual interest and how it can be used to misrepresent gains from fixed deposits is discussed.

Let us face it, most investors are confused with the two percentages associated with a fixed deposit: annual interest and annual yield. Most people make the common mistake of assuming that the yield (often higher than the interest rate) is the  interest rate!

So let us try to understand what each term represents.

Annual Interest:

If I invest Rs. 100 in a FD that offer 10% per year, my investment will grow to

  • Rs. 110 at the end of 1 year
  • Rs. 121 at the end of 2 years
  • Rs. 133.1 at the end of 3 years.

If I want to represent this growth by a constant percentage, then I use the annual interest rate.

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How many days are there in a year?  According to Google it is 365.242 days. If I hold one year fixed deposits and determine maturity values using 365.242 days as the tenure, will my calculation match the maturity values listed in the bank statement? Unlikely.

Perhaps I should round it off and use 365 days? If my calculation still does not match the value the bank says it will offer, what should I do? Perhaps assume there are 360 days in a year? After all if I assume there are 30 days in a month then 12 X 30 = 360.

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Here are updated versions of three fixed deposit calculators.

  • FD calculator for investment tenure in months and years (tax to paid each FY and advance tax liability)
    • minor bug fixed
    FD calculator for investment tenure in days (tax to paid each FY and advance tax liability)
    • macro button added to stop and start calculations for easy use
    FD calculator for investment made in spouses name or minor childs name (tax to paid each FY and advance tax liability)
    • minor bugs fixed

    If you hold fixed deposits, I request you to compare the (pre-tax) maturity value given by these calculators with the value given by the bank. There may be situations where there is a discrepancy. I will post a couple of calculators next week which will help us understand and circumvent this discrepancy.

    You feedback is very important for making the calculators more efficient and usable. Do consider sharing these calculators with your friends and family.

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There are many articles on the web that talk about the difference in the way debt mutual funds and fixed deposits are taxed. Almost all of them (including the ones by self-proclaimed beacons of financial literacy) talk about post-tax returns typically over 3-5 year periods.

To my knowledge there is only one article, written by Subramoney which talks about the advantages of debt funds over fixed deposits when one stays invested for several years (much more than 5!): Money Control article dated Nov 26, 2011: Advantages of debt funds over fixed deposits

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Note: The variable RD calculator gives the total post-tax interest. I have assumed that only the variable payments are subject to a penalty. That is if a variable payment is not made before a certain date (reader Srinivas says it is 10th in his case) then interest on the variable payment for that month will not be paid.

There was an issue with interest calculation for each FY when the monthly payments become variable. So I had to remove the original download link. I am trying to resolve this.

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