How are deposit interest is calculated by bank?

The interest rate on a bank deposit (such as a fixed deposit or a recurring deposit) is usually calculated on a compound basis, which means that the interest earned is added to the principal (original) amount and becomes part of the principal for the next period. For example:

If you deposit Rs. 10,000 in a fixed deposit with an interest rate of 5% per year, and the term of the fixed deposit is 1 year, the interest earned will be Rs. 500 (5% of Rs. 10,000).


At the end of the first year, the total amount in the fixed deposit will be Rs. 10,500 (Rs. 10,000 principal + Rs. 500 interest).


If the interest rate remains unchanged, the interest earned in the second year will be calculated on the revised principal of Rs. 10,500, which means that the total interest earned in the second year will be Rs. 525 (5% of Rs. 10,500).


The total amount in the fixed deposit at the end of the second year will be Rs. 11,025 (Rs. 10,500 principal + Rs. 525 interest).

This process continues until the end of the fixed term, at which point the total amount in the fixed deposit will consist of the original principal and all the accumulated interest.

I hope this helps! Let me know if you have any other questions.