How to calculate interest on recurring deposits?

Pradeep Sharma left a comment the other day about how he had set up a recurring deposit with ICICI Bank and how the final amount he was calculating was different from the amount that the ICICI Bank representative told him.

That difference was due to the fact that while he was compounding interest monthly, banks usually compound interest quarterly and that’s why he was getting a different answer.

Paresh responded to that comment telling him what caused the difference, and when I looked at the response, I thought I’d add to it by providing a link to how interest on recurring deposits (RDs) are calculated.

I was surprised to see that while there were quite a few recurring deposit calculators, there were hardly any explanations and the few that existed were really very short explanations on how interest on RD was calculated.

So, I decided to give it a try myself, and it took me an embarrassingly long time and several mistakes to do that even though the concept is very simple.

Understand Compound Interest To Understand Recurring Deposit Interest

When you create a RD for Rs. 10,000 for 2 years, what you’re doing is depositing Rs. 10,000 with the bank every month for 24 months, and the bank pays you interest on Rs. 10,000 for 2 years compounding it quarterly, then for the next Rs. 10,000 it pays you interest for 23 months, and so on and so forth.

Banks usually compound interest quarterly, so the first thing is to look at the formula for compound interest.

That formula is as follows:

A formula for calculating annual compound interest is

A = P \left(1 + \frac{r}{n}\right)^{nt}

Where,

  • 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

In your recurring deposit, you use this formula to calculate the final amount with each installment, and at the end of the installments, you add them all up to get the final amount.

Think of RD Installments and Series of Principal Payments

Let’s take a simple example to understand this – suppose you start a recurring deposit for Rs. 47,000 per month for 2 years at 8.25% compounded quarterly. If you were to see this number as a standalone fixed deposit that you set up every month for 24 months, you could come up with a table like I have here. Before you get to the table, here is a brief explanation on the columns.

  • Month: First column is simply the Month.
  • Principal (P): Second column is P or principal investment which is going to be the same for 24 months,
  • Rate of Interest (r): r is going to 8.25% divided by 100.
  • 1+r/n: In our case, n is 4 since the interest is compounded quarterly, and 1+r/n is rate divided by compounding periods.
  • Months Remaining: This is simply how far away from 2 years you are because that’s how much time your money will grow for.
  • Months expressed in year: I’ve created a column for Months expressed in a year since that makes it easy to do the calculation in Excel.
  • nt: 4 multiplied by how many months are remaining as expressed in year.
  • (1+r/n)^nt: Rate of interest raised by the compounding factor.
  • Amount (A): Finally, this is the amount you if you plug in the numbers in a row in the compound interest formula.

So, Rs. 47000 compounded quarterly for 2 years at 8.25% will yield Rs. 55,338.51 after two years. The last row contains the grand total which is what the RD will yield at the end of the time period.

Month

P

r

1+r/n

Months remaining

Months expressed in year

nt

(1+r/n)^nt

A
1

47000

0.0825

1.020625

24

2

8.00

1.18

55338.51
2

47000

0.0825

1.020625

23

1.916666667

7.67

1.17

54963.21
3

47000

0.0825

1.020625

22

1.833333333

7.33

1.16

54590.45
4

47000

0.0825

1.020625

21

1.75

7.00

1.15

54220.22
5

47000

0.0825

1.020625

20

1.666666667

6.67

1.15

53852.50
6

47000

0.0825

1.020625

19

1.583333333

6.33

1.14

53487.27
7

47000

0.0825

1.020625

18

1.5

6.00

1.13

53124.53
8

47000

0.0825

1.020625

17

1.416666667

5.67

1.12

52764.24
9

47000

0.0825

1.020625

16

1.333333333

5.33

1.12

52406.39
10

47000

0.0825

1.020625

15

1.25

5.00

1.11

52050.97
11

47000

0.0825

1.020625

14

1.166666667

4.67

1.10

51697.97
12

47000

0.0825

1.020625

13

1.083333333

4.33

1.09

51347.35
13

47000

0.0825

1.020625

12

1

4.00

1.09

50999.12
14

47000

0.0825

1.020625

11

0.916666667

3.67

1.08

50653.24
15

47000

0.0825

1.020625

10

0.833333333

3.33

1.07

50309.72
16

47000

0.0825

1.020625

9

0.75

3.00

1.06

49968.52
17

47000

0.0825

1.020625

8

0.666666667

2.67

1.06

49629.63
18

47000

0.0825

1.020625

7

0.583333333

2.33

1.05

49293.05
19

47000

0.0825

1.020625

6

0.5

2.00

1.04

48958.74
20

47000

0.0825

1.020625

5

0.416666667

1.67

1.03

48626.71
21

47000

0.0825

1.020625

4

0.333333333

1.33

1.03

48296.92
22

47000

0.0825

1.020625

3

0.25

1.00

1.02

47969.38
23

47000

0.0825

1.020625

2

0.166666667

0.67

1.01

47644.05
24

47000

0.0825

1.020625

1

0.083333333

0.33

1.01

47320.93

Final Amount

12,29,514

I’ll be the first one to admit that this is not a very intuitive way to either explain or understand recurring deposits calculation, but this is the only way I could write which seemed to convey the calculation comprehensively.

If you have any questions or have links to better ways to explain this then please leave a comment!

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120 thoughts on “How to calculate interest on recurring deposits?”

  2. With havin so much content do you ever run into any problems of plagorism or copyright infringement?
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    Reply

  3. Someone help me find the formula for calculating future value for RD and deposit+interest for each period is added up to the deposit of the next period. Such that if I have RD of rs 19600 and it earns interest of rs30,my next principal amount will be 19600+30+19600

    Reply

  4. Not understood.
    I am investing Rs 1520 for 13 months
    And final amt I will get is Rs 21000.
    How do I calculate the Interest.
    The bank says it is 10.46%.
    Pl explain to me how they got this fig of 10.46.. In simple formula method.

    Reply

    1. Satish,

      If it’s quarterly cumulative then the Rate of Interest is 10.47087 % per Annum and if it’s monthly cumulative then the Rate of Interest is 10.3892 % per Annum.

      It’s not easy to explain the formula, but it’s basically Reversed Engineering. I have developed a SpreadSheet that gives me Future values of Recurring Deposits by giving Monthly Contribution, Rate of Interest and No. of Years. I considered 10.46% as the Baseline Interest and fine tuned it to arrive at 10.47087% as the final answer. This was done with Quarterly Cumulative Strategy.
      Similarly I did it for Monthly Cumulative Strategy to arrive at 10.3892% as the final answer.

      Hope this helps.

      Thanks.

      Anil

      Reply

  5. i want answer of this question.. how to calculate answer n what formula i used??

    Manisha is a smart investor. She has
    opened a Recurring Deposit (RD) account
    with a bank. She has negotiated smartly
    with the bank. Bank has agreed to vary the
    interest rate on her RD account such that
    she is always able to comfortably beat
    inflation.
    Your task is to calculate maturity value of
    her RD account in face of varying interest
    rates that she will enjoy.
    Input Format:
    First line contains principle amount P
    Second line contains original rate of
    interest per annum R
    Third line contains tenure in months T
    Next few lines contain a tuple with 3
    values. Each tuple contains delimited by
    whitespace, where updated _rate is applied
    on From_month and To_month, both
    inclusive.
    -1 shows the end of input
    Output Format:
    Print the maturity amount after specified
    tenure or month in the format
    “Final_Amount ”
    Constraints:
    P > 0 ; it can be float value
    R >=0 ; it can be float value
    T >0 ; it can be integer only
    Calculation should be done upto 11-digit
    precision
    Maturity amount should be printed to its
    nearest integer value
    Sample Input and Output
    SNo. Input
    1
    5000
    10
    12
    3 7 11
    8 12 12
    -1
    F
    2
    2565.50
    7.5
    12
    6 12 8
    -1
    F
    3 200.75
    6.9
    5
    -1

    Reply

  6. Here is the formula,
    M =R [ (1+i)^n – 1]
    ——————–
    1- (1+i)^ -1/3
    where,
    M = Maturity value
    R = Monthly installment
    n = Number of quarters
    i = Rate of interest/400

    Reply

  7. I wish to know in recurring deposit how much total amount shall i get when i am depositing 5000/ month @8% interest pa

    Reply
  8. Pingback: Overview of Recurring Deposits | Be Money Aware Blog

  9. Quite a nice explanation ! Is it a good idea to open a recurring deposit ? I think some SIPs provide same sort of structure and better returns. However, i am not that sure to invest in Mutual Funds.

    Reply

  10. Q. How to calculate months expressed in year (any formula or step)
    Q. How to calculate rate of interest raised by compound factor?

    plz explain

    Reply

  11. Hi.. The post was really helpful in calculating the interest.
    Just one query.. any idea how the ICICI iWish (Flexi-RD) interest is calculated. I am breaking my head trying to trace back how the interest deposited is calculated but cant seem to match up the figures..
    Any help would be greatly appreciated.

    Reply

  12. Hi,

    A loan of 10,00,000 is taken for 10 months. The loan amount is to be repaid in ten equal instalments of 1,00,000. The Rate of interest is 10% p.a compounded monthly. Interest will be debited in the account on the last day of the month and the same will be serviced on the same day itself, that means no overdue.

    In the above situation, whether there will be any change in the total interest (and total outflow) if the interest charged is simple interest or compound interest

    Thank you

    Reply

  13. The maturity value of RD quarterly compounding can be calculated using simple financial function (fv) on spreadsheet. However, the rate given has to be converted to effective monthly rate using financial functions nominal and effect on spreadsheet.

    Reply

    1. Dear friend, RD and Mutual Funds both are avenues for investing. However, both differ in their purposes. Both have their merits and demerits. RD will give you assured returns but the same will be subject to taxation and inflation, which will both erode the final returns. Mutual Funds on the other hand may not give you assured returns,but can beat inflation and taxation. So the question is not which one is better, but what for you are investing. In the long run Mutual Funds will always give you better returns.

      Reply

  17. Interest calculation by your way does not give exact amount for Indian Banking system where monthly deposit can start any date of month and quarter ends at 30th June, 30th September, 31st December and 31st March.

    For example:

    P=12000 on every 2nd of month starting from 2nd April,
    t=1 year,
    i=9.25%

    on 30th June interest=544.36
    on 30th Sept interest = 1399.43
    on 31st Dec interest = 2261.75
    on 31st March interest = 3053.14

    Total interest upto 31st March = 7258.69

    As per your formula interest =7309.86

    The difference is probably interest for 1 day 1st April.

    Reply

  19. P R 1+r/n Months remaining Months expressed in year nt (1+r/n)^nt A
    100 0.11 1.009166 36 3 36 1.388846 138.8845599
    100 0.11 1.009166 35 2.916666667 35 1.376231 137.6231065
    100 0.11 1.009166 34 2.833333333 34 1.363731 136.3731106
    100 0.11 1.009166 33 2.75 33 1.351345 135.1344681
    100 0.11 1.009166 32 2.666666667 32 1.339071 133.9070758
    100 0.11 1.009166 31 2.583333333 31 1.326908 132.6908316
    100 0.11 1.009166 30 2.5 30 1.314856 131.4856343
    100 0.11 1.009166 29 2.416666667 29 1.302914 130.2913835
    100 0.11 1.009166 28 2.333333333 28 1.291080 129.1079798
    100 0.11 1.009166 27 2.25 27 1.279353 127.9353246
    100 0.11 1.009166 26 2.166666667 26 1.267733 126.7733203
    100 0.11 1.009166 25 2.083333333 25 1.256219 125.6218703

    Reply

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