Fixed Deposits - Is it a Good Idea

Fixed Deposits are one of the most popular deposits specially with a fixed income group. Are these a good invest ? ....

We need to understand the taxation rules and the interest provided by banks to analyze if they are good investment.

Let us take a scenario.

Principal  Amount  / Deposit Amt    : Rs 10000 
Interest  Rate    : 9% 
Period of Deposit in Months  : 36 months 
     
Total Interest Received : Rs. 3060
Total Maturity Amount : Rs  13060    

Interest earned on fixed deposit (FD) is taxed at the tax slab rate of the individual. So, if your tax slab rate is 20%, you will pay 20% on the interest earned. (i.e 20% of Rs 3060 equals Rs 612). So, effectively interest earned is Rs 2448.

Effective Total Maturity Amount = Rs. 12448
Effective Interest Rate : 7.4%

Would you decide to invest in an FD, if the net return from it was viewed 7.4 per cent instead of an overall return of 9 per cent?


Formula for Calculation :

A = Final Amount on Maturity
P = Initial Amount (i.e. Principal Amount)
r =  Interest rate
n = number of times the interest is compounded per year (i.e. for monthly compounding n will be 12, for half year compounding it will be 2 and for quarter it will be 4
t = number of years for which amount is invested