A fixed deposit scheme is a very common investment option for many Indians. A survey by SEBI (Securities and Exchange Board of India) says 95% of Indian households prefer FD investments for predetermined returns. Irrespective of market fluctuations, you will always earn a fixed interest on your FD investment.
Further, FDs offer higher returns than regular savings accounts while keeping the risk minimal.
Besides guaranteed returns, non-cumulative FDs help you create a regular income source. The interest that you earn is paid out at periodic intervals i.e. monthly, quarterly, semi-annually, or annually. These FDs create a regular income stream for your post-retirement years or to supplement your current earnings.
Before investing, you should build an understanding of monthly interest payout on FD to estimate how much you can earn and what are its benefits.
Monthly Interest Payout on Fixed Deposit
As mentioned earlier, the monthly interest on fixed deposits can offer a steady, predictable and regular source of income. You can receive the interest income every month on a specified date. However, you will receive the principal amount back when the fixed deposit matures.
Almost all financial institutions’ fixed deposits, like Banks and deposit-taking Non-Banking Financial Companies (NBFCs), offer the monthly interest payout option. You can choose the option while opening the fixed deposit. Once selected, the monthly interest payment would start the following month.
How to calculate Interest for a Monthly Payout?
Most financial institutions specify the interest rate on an annual basis. To find out the monthly interest rate on the FD, you can use the annual rate and divide it by 12. Alternatively, using the principal, you can calculate interest amount annually and then back-calculate the monthly interest rate.
However, it would be best to check the compounding frequency while calculating monthly interest payout. If the frequency is yearly, you can divide the interest rate by 12 to get the monthly rate. However, the calculation would change if the interest frequency is quarterly, monthly or half-yearly.
The following examples would help you understand how to calculate the monthly interest payout on FD.
|Interest rate||7% per annum|
|Monthly interest rate||7% / 12 = 0.005833%|
|Monthly interest amount||0.005833% of ₹ 50,000 =₹ 291.66Alternatively,Monthly interest = (7% of ₹ 50,000) / 12= ₹291.66|
|Monthly interest rate||₹291.66/₹50,000= 0.005833= 0.5833%|
Referring to the above example you can cross check your monthly interest by calculating it with an absolute number and cross check it with the interest computed by simply dividing by 12.
|Interest rate||7% per annum|
|Amount after a year||50,000 (1 + 0.07/2) ^ (1 * 2)= ₹53,561.25|
|Interest after a year||= ₹53,561.25 – ₹50,000= ₹3561.25|
|Monthly interest amount||₹3561.25/12 =₹296.77|
|Monthly interest rate||₹296.77/₹50,000= 0.0059354= 0.59354%|
If mathematical calculations prove challenging, you can use the fixed deposit calculators that many financial institutions offer. These online calculators help you calculate the effective monthly interest rate and the interest amount. You just have to provide the following details –
- The deposit amount.
- The tenure.
- The rate of interest on an annual basis.
- The compounding frequency – annually, monthly, half-yearly or quarterly.
- Choose the mode of payout as monthly.
Once you provide the details, you can calculate the interest income you can earn from your deposit annually and monthly.
Also Read: NPS Tax Benefits: Everything to Know
Advantages of Monthly Interest Payment on FD
With the non-cumulative fixed deposit, you get these benefits from monthly payouts –
- You get a guaranteed and regular source of income every month throughout the deposit tenure.
- The monthly interest payouts help you supplement the primary source of income.
- You can put the monthly interest payouts into another investment avenue and earn returns further.
- You can create a larger corpus to meet your financial goals as your savings increase.
Monthly payouts are suitable for retired individuals because these come with a regular income stream.
Also Read: How to Calculate FD Interest?
A non-cumulative fixed deposit scheme can create a monthly income stream for your expenses. The interest income would depend on the financial institution’s deposit rates, the tenure selected and the deposit amount. Further, senior citizens generally receive a higher interest rate as compared to general FD accounts.
You can calculate the monthly interest amount on FD using mathematical calculations or the online fixed deposit calculator. The calculations can help you estimate the monthly payouts to budget your expenses accordingly.
You can choose fixed deposit schemes that offer the highest monthly interest rates. This would ensure you get maximum returns from your deposits and can grow your wealth.
Is the monthly interest income taxable?
If you are aged below 60 years, the monthly interest you earn from your fixed deposit scheme would be taxable. The interest income would be aggregated over the financial year. It would be recorded under the heading ‘ income from other sources.’ Then, the interest income would become a part of your taxable income and be taxed at your income tax slab rates.
For instance, say you earn a monthly interest of 2000 from a fixed deposit account, and you fall in the 20% tax bracket. In this case, the aggregate interest income over a financial year amounts to 24,000. This income would be taxed at 20%, meaning you would have to pay a tax of 4800 on the interest income of 24,000.
However, the rules are different for senior citizens. Senior citizens are allowed a deduction of up to ₹50,000 on the interest income earned in a financial year. So, if their aggregate monthly interest income is within ₹50,000 in a financial year, they can claim a deduction under Section 80 TTB of the Income Tax Act, 1961. So, in the previous example, if you are a senior citizen, the monthly interest of Rs.2000 would be tax-free
What are the rules for TDS on interest income?
TDS is applicable on your fixed deposit interest if the aggregate interest income exceeds 40,000 in a financial year. The financial institution deducts a 10% tax at source from the interest income before crediting the interest into your account.
In the case of senior citizens, the limit is ₹50,000. If the interest income is within 50,000, there is no TDS. However, if it exceeds ₹50,000, 10% TDS will apply.
While the TDS is 10%, you might have to pay an additional tax on the interest income if you fall in the higher tax slabs. So, if you are in the 20% tax slab, you would have to pay another 10% tax on the interest. Alternatively, if you fall in the 5% tax bracket, you can claim a refund on the excess 5% TDS.
What are the minimum and maximum deposit amounts for the monthly interest rate?
The minimum deposit amount depends on the financial institution. Some require a minimum deposit starting from ₹1000, while others may have higher minimum deposit amounts.
As for the maximum deposit amount, there’s usually no limit.
Can I withdraw the fixed deposit before its tenure?
Yes, many fixed deposits allow premature withdrawals wherein you can withdraw the FD before the stipulated tenure. However, financial institutions levy a penalty in such cases and reduce the interest rates. It is usually charged around 0.5% – 1.00% of the interest rate.
Is a fixed deposit a good investment option?
Yes, a fixed deposit is a good investment option because of the following reasons:
> It is affordable.
> You get a guaranteed interest rate and are not exposed to volatility.
> Tax Saver FDs help you save taxes on a lock-in period of 5 years.
> Senior citizens get to enjoy higher interest rates and tax benefits on interest income.
> You can also choose a flexible deposit tenure depending on your needs.
Jatin is an Investment Professional in the making with expanding expertise in the debt and equity markets. He has completed his Bachelor of Technology in Civil Engineering from the Manipal Institute of Technology. He has helped build Wint Wealth in various capacities ranging from being a member of the Investor Relations Team to contributing actively at the Founder's Office. He has been an integral part of the Assets Team for about a year now.