Soumya Prakash Pradhan

Fixed deposits (FDs) are a popular investment option for earning passive income. The interest rates on FDs are generally higher than those on savings accounts, and FDs are considered to be safe investments because they are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to a certain limit. 

However, not all FDs are created equal. By customizing your FD, you can maximize your returns and earn up to 9% p.a. in passive income.

Here, we will explain how to customize your FD and earn higher returns.

Cumulative vs. Non-cumulative FDs:

When you invest in an FD, you can choose to receive either a cumulative or non-cumulative return. In a non-cumulative FD, the interest is paid out periodically (usually monthly, quarterly, half-yearly or annually) to the investor.

In a cumulative FD, the interest is reinvested in the FD and compounded quarterly, which means that you earn interest on the interest you have already earned.

How to Calculate Your Returns on a Cumulative FD:

If you opt for a cumulative FD, the interest is compounded quarterly. The period of compounding may vary from bank to bank, so it is important to check with your bank before investing. To calculate your returns on a cumulative FD, you can use the following formula:

Annualized Yield = (Interest earned each year / Amount invested) x 100

For example, if you invest Rs 10,000 for 5 years at 7.5% p.a., your interest earned each year will be Rs 899.90, and your annualized yield will be 9%. Please note that these calculations are indicative and do not include TDS.

Bank Interest Rates on FDs:

Currently, different banks offer varying interest rates on FDs. As of February 2023, SBI offers 7% p.a. for 2 to 3 years and 6.5% p.a. for 3 to 5 years. HDFC Bank offers 7% p.a. for 2 to 5 years. Deutsche Bank offers 7.5% p.a. for 2 to 3 years and 7.5% p.a. for 3 to 5 years. IDFC Bank offers 7.5% p.a. for 2 to 3 years and 7% p.a. for 3 to 5 years.

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