The term discounted rate of interest refers to a reduced effective rate applied when interest on a fixed deposit is paid out periodically (monthly, quarterly, etc.) instead of being reinvested and compounded until maturity.
In other words, if you choose a payout scheme where the interest is distributed before maturity, say monthly the bank adjusts the annual nominal rate downward to reflect the fact that you are receiving interest earlier, without compounding.
This adjustment is meant to reflect the time value of money interest paid earlier is inherently more valuable than the same interest credited at maturity.
The “discounted rate” ensures fairness for both you (the depositor) and the bank.
When you opt for monthly or periodic interest payout on a FD instead of cumulative (compounded) option.
Because the bank pays interest in advance, they “discount” the nominal annual rate to account for lost compounding effectively lowering the yield slightly.
For depositors needing cash flow (income regularly), periodic payout with discounted rate may suit better though overall yield may be lower compared to compounding until maturity.
If the nominal annual rate (ROI) on a FD is say 7.20% p.a., but you select monthly payout instead of compounding, the bank calculates a “reduction factor” to adjust the interest rate.
The formula for the reduction factor involves compounding the nominal rate over the payout intervals (e.g. monthly), summing up the discounted values, then dividing the nominal rate adjusted by the number of intervals by this factor to get the applicable discounted rate. As interest is paid early (each month), future compounding benefit is lost.
This is all about what is discounted rate of interest on fixed deposit.
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What is Discounted Rate of Interest on Fixed Deposit?
priya
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2025-11-28T16:28:23+00:00 2025-11-28T16:28:25+00:00Comment
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