Recurring Deposits Calculation

Most of us very often open a recurring deposit with bank. But one thing I have observed that the calculation on recurring deposit in the mind of most account holder are not clear. There are many query about the interest calculation method of recurring deposit account. The people often in confusion why is the difference between their calculation and bank calculation. That difference is due to the fact that while they were compounding interest monthly, banks usually compound interest quarterly and that’s why they were getting a different answer.

There are many  recurring deposit calculators also available online but there were hardly any explanations So, after searching a lot of explanation about the interest calculation of recurring deposit I have got very simple and good explanation about the RD interest calculation with example.

When you create a RD for Rs. 20,000 for 2 years, what you’re doing is depositing Rs. 20,000 with the bank every month for 24 months, and the bank pays you interest on Rs. 20,000 for 2 years compounding it quarterly, then for the next Rs. 20,000 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

Where,

A = final amount

P = principal amount

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 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 ( No. of Months/ 12)	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

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

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Rajiv Gandhi Equity Savings Scheme

After announcement in the budget The government has finally approved much awaited “Rajiv Gandhi Equity Savings Scheme” (RGESS). Two things which come out clearly from the features of the scheme are: 1) it is a scheme intended to provide tax benefit to first time investors investing directly in equity, mutual fund and exchange traded funds (ETF).  2) It is an attempt to attract investors into stock market and broaden investor base in stocks.
 

The scheme offers tax benefits to investors whose income is up to Rs 10 lakh. This means that the scheme is open for investors paying income tax in two tax brackets—10% and 20%. For an investment up to Rs 50,000, 50% of investment will qualify for tax benefit. For an investor in 10% bracket, the total tax benefit offered by the scheme will be Rs2,500 ( 50% of Rs50,000 is Rs25,000 and 10% tax benefit on this amount is Rs2,500), while for an investor in 20% tax bracket this benefit will be Rs5,000 which can be availed only once. The tax benefits as such do not seem very attractive but in our country where investments are done on the basis of tax benefit, this amount is good enough to catch attention of an investor.
 

Tax benefits on stock investments are not new to the investors in India. Equity Linked Savings Scheme (ELSS)—a tax benefit product—has been in existence for quite some time now but has failed to attract investors. When Compared to ELSS in terms of tax benefits, RGESS looks like almost same. The major difference is that it is available to first time investors alone. The most important question that RGESS raises is, “Can tax incentives alone attract new investors to the stock market and broaden investor base in the country?”
 

As per existing tax provisions in India, investment in stocks is extremely attractive in terms of taxation of returns. There are no long-term capital gains taxes in the country for an investor if he purchases stocks which are traded on recognized stock exchanges and Securities Transaction Tax (STT) is paid on these stocks. Contrary to this, bank deposits and fixed deposits in particular are subject to taxation as per the tax slab in which income of an individual falls. Another attraction of investment in stocks is that it allows an investor to set off capital loss against capital gains subject to some conditions. But in bank deposits there are no such provisions.
 

In spite of there being very attractive tax structure for investment in stocks, investors prefer bank deposits to stock investment. RBI (Reserve Bank of India) data shows that banks deposits have shown consistence increase in deposits year on year basis. Even insurance as a product has shown similar trend. However, total change in stock investments during last ten years is less than a single year change in the bank deposits. In fact during last five years, due to bad performance of stock market, total change in the investment in stocks has been marginal.

Looking at the data and trends in investments in financial assets in India, can a marginal tax incentive actually attract investors in stock market?  If we believe the same , will they remain invested beyond the lock-in period? The answer seems to be an no at this stage. The failure of ELSS as a product is an example of it.
 

Investors have been avoiding equity market because of volatility and speculation in the market. The common investor today feels that volatility in India equity market is too much and have not much confidence with respect to investment in equity.
 

There should be prepared an environment for growth of equity market. This should start from investor education and strict regulatory controls in capital market. Investors need to be given confidence that equity market creates wealth in long term. Corporate governance practices need to be implemented strictly so that investors can believe on companies and their operations.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com