Reinvest interest income

In an FD you are given two options; either withdraw the interest income or reinvest it. If you opt for the withdrawal option your saving account will be credited by your interest income.

The interest will be higher than the previous year if you go for the reinvestment option. Instead, if you withdraw the interest you will get the same amount of interest every year till the maturity.

Let us understand this with the help of an example

Suppose you are considering investing Rs. 50,000 in an FD scheme for five years at the rate of 9.5% p. a and the interest is calculated on a quarterly basis. If you choose the reinvestment option, your total interest earned at the end of five years would be Rs. 29,955.49. If you withdraw interest every year, the interest income will sum up to Rs 24,609.55. That is a difference of Rs 5,345.94. This difference depends upon the amount of FD, the greater the amount, the greater s this difference.