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.
These are the kind of questions which were asked by reader Ravindra who was trying to tally the maturity value given by my fixed deposit calculators (which assume 365 days per year) with his bank statements.
There are many minor variations of the compounding formula. Different banks use different versions. So do many online calculators.
Why bother? After all the bank will only offer what it calculates. No doubt about that. However if you need to find out the tax (advance tax if applicable) to be paid each year, then the exact maturity value should tally with our calculation.
To me, there seems to be only one way to tally the results. When the bank statement does not match with a calculator, use the maturity value in the bank statement and determine the effective number of days in a year used in the calculation.
If it is 365, then great. My calculators will work fine. If it is less than 365 then you can use the result to get the maturity value given by the bank and find out the tax you need to pay each financial year along with the advance tax liability if applicable.
How it works:
1. Use the first calculator to:
- determine maturity value, using starting and ending dates of the FD.
- You can also calculate total pre-tax and post-tax corpus for 365 days and 360 days per year.
- to determine the effective number of days used by the bank in calculating FD maturity value. This is especially useful if the maturity value does not match with the bank statement
2. If the effective number of days is different from 360 or 365, enter it in the second calculator to determine:
- post-tax corpus. Pre-tax corpus will now tally with the bank statement.
- Tax to be paid each financial year
- advance tax liability if any
According to Ravindra, SBI uses 365 days per year. So my fixed deposit calculators will work just fine.
HDFC uses 363.927 per year. I can live with it although I don't understand the choice. This could be due to a difference in the way daily/monthly interest is calculated.
For example, if I say annual interest is 12%, then effective monthly interest is not 12%/12 = 1% but (1+12%)^(1/12)-1 = 0.949%. A small difference - nothing to lose sleep over. Many people avoid this complication and simply use 12%/12. For more details see: Mutual Fund SIP Returns Calculator
According to Ravindra, using my effective no of days in a year calculator, he gets 353.055 per year for a fixed deposit offered by IDBI bank. I don't understand this logic. Can you?
Do use the calculators and check with your bank statements and let me know if the bank records tally with the standard 365 days per year calculation or not. If you have friends or family working in banks please forward them this article and see if they can make sense out of this.
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