How Much Should You Invest in a Fixed Deposit to Earn ₹1 Lakh?

In India, a Fixed Deposit or FD is the first choice for investors when it comes to putting their hard-earned money into a deposit that generates income in the future. FDs help you earn interest and grow your money so that you can fulfil various financial obligations like a wedding, travel plan, any financial emergency, home purchase, car purchase, etc. However, a key question arises here: What should be the amount that you must invest in an FD to earn ₹1 lakh interest? This blog will help you answer the question. 

Understanding Fixed Deposit Interest Pay-Outs

When you choose to open an FD account with the bank, you get the option to select from various payouts for interest. It can be: monthly, quarterly, or at maturity. Here is what each of these means:

 

• In non-cumulative Fixed Deposits, interest is paid out at regular intervals—monthly or quarterly—rather than being reinvested. These use the simple interest method and are ideal if you’re looking for a steady income from your investment.

• In contrast, cumulative Fixed Deposits reinvest the interest earned, which is paid out only at maturity. This allows your money to benefit from compound interest, helping you grow your savings more effectively over time.

 

How Much Should You Invest to Earn ₹1 Lakh in Interest?

If you’re aiming to earn ₹1 lakh purely from interest, the amount you need to invest will depend on factors like the interest rate and investment duration.

• Scenario 1: Investment of ₹2,50,000 for 5 Years

Let’s assume you invest ₹2,50,000 in a Fixed Deposit for a tenure of 5 years. The interest rate applicable for a 5-year FD is 6.90%. 

If you opt for interest payout at the time of FD maturity, your interest earnings would be ₹1,01,961.

 

• Scenario 2: Investment of ₹2,00,000 for 6 Years

If you invest ₹2,00,000 in a Fixed Deposit for a tenure of 6 years (6Y 1M) at an interest rate of 6.80%, your interest earnings at the time of maturity would be around ₹1,01,407. 

 

Note: It is important to consider the tenure and applicable interest rate before booking an FD.

Factors Affecting FD Returns

The returns on your Fixed Deposit depend on several key factors that influence how much interest you earn over time. Here are the main elements to consider:

 

1. Interest Rate

The interest rate plays a crucial role in determining your FD returns. Different banks offer varying FD interest rates, so it is wise to compare and choose the highest FD rates to maximise returns.

 

2. Tenure of the FD

The interest rate varies depending on the tenure, so choose the FD duration wisely. Longer tenures often come with higher interest rates, helping you maximise your returns over time.

 

3. Type of FD: Cumulative vs. Non-Cumulative

Cumulative FDs provide higher returns as the interest is reinvested and compounded until maturity. In contrast, non-cumulative FDs pay interest periodically, making them suitable for those needing regular income.

 

4. Tax Deduction on FD Interest

Interest earned on Fixed Deposits (FDs) is taxable under the Income Tax Act. If your total FD interest exceeds ₹50,000 in a financial year (₹1,00,000 for senior citizens), banks are required to deduct TDS at 10%. Planning your investments wisely can help you manage and potentially reduce your tax liability.

How to Calculate FD Returns?

To calculate FD returns, you can use the following formula:

 

A = P × (1 + r/n)^(n × t)

 

Where:

– A = Maturity amount

– P = Principal amount invested

– r = Annual interest rate (in decimal)

– n = Number of times interest is compounded per year

– t = Tenure in years

Benefits of Investing in a Fixed Deposit

 

1. Assured Returns

Unlike market-linked investments, FDs provide assured returns, making them a safe choice for risk-averse investors.

 

2. Flexible Tenure

FDs offer flexible tenure options ranging from 7 days to 10 years, allowing investors to choose as per their financial goals.

 

3. Loan Against FD

Many banks offer loans against FD, allowing you to borrow funds against your deposit amount.

 

4. Senior Citizen Benefits

Senior citizens get higher FD interest rates, making it an attractive investment option for retirement planning.

How to Get the Best FD Returns?

• Compare FD Interest Rates

Always compare FD interest rates offered by different banks and NBFCs before investing. Look for the highest FD rates to maximise returns.

• Choose the Right Tenure

Opt for an FD tenure that balances liquidity and high returns. Longer tenures usually provide better compounding benefits.

• Consider Laddering Your FDs

Instead of investing a lump sum in a single FD, consider splitting it into multiple FDs with different maturities. This strategy provides liquidity while ensuring better returns.

• Reinvest Interest Earnings

If you don’t need periodic payouts, opt for cumulative FDs where interest is reinvested and compounded for higher returns.

Premature FD Withdrawal and Its Impact

Premature withdrawal of an FD means breaking the deposit before its maturity date. While it provides liquidity in emergencies, it comes with certain consequences:

 

1. Penalty Charges: Many banks in India levy a penalty ranging from 0.5% to 1% on the applicable interest rate.
2. Lower Interest Rate: If withdrawn early, the interest is recalculated at the rate applicable for the actual tenure completed, which may be lower than the original FD rate.
3. Loss of Compounding Benefits: For cumulative FDs, withdrawing before maturity means losing the advantage of compounding, which affects overall returns.

Conclusion

Investing in a Fixed Deposit can be a great way to earn safe and predictable returns. To earn ₹ 1 lakh in interest, you need to invest an appropriate amount based on tenure and interest rate. Comparing FD interest rates, choosing cumulative options, and reinvesting interest can help maximise your returns. However, it is essential to consider inflation, taxation, and liquidity before making a decision. Always check the latest FD interest rates and plan your investment wisely to achieve your financial goals.