A time deposit is a good option to “park” your money. The interest is considerably lower than other investment options, but the security it brings is what some people prefer.
This article will address the most common misconception of people about the interest rates of time deposit. Some people think that if your bank says that their interest rate is 2% then you’ll get the whole 2% even if you prematurely withdraw the funds or if you got the shorter term.
You won’t get the whole 2%. Here is the proper way to compute your time deposit interest.
Let’s say you deposited P100,000 in a time deposit account with 2% interest per annum. You originally opted for the 1-year maturity but an emergency came and you have to withdraw your money after just 60 days.
You will not get P102,000 which is the basic 2% computation. Here are the steps:
Get the principal amount and multiply by the interest per annum.
P100,000 * 2% = P2,000
Get the total number of days and divide by 365 days. In this case, 60 days.
60 / 365 = 0.16
Multiply by your total in step 1.
2,000 * 0.16 = P320
Multiply by .80. This is because the interest that you will get from a time deposit account will be subject to 20% tax. This means you only get 80% of your interest earnings.
320 * 0.80 = P256
Add your step 4 total to the principal amount, then that is what you will get from the bank. Aside from the penalties and charges for premature withdrawal.
P100,000 + P256 = P100,256.00
This is the conventional computation, you may also want to ask your bank if they use the 365 count or the 360. When computing your interest for premature withdrawal of time investment funds, you also have to remember that aside from the tax and the low interest, you will also be subject to penalties or charges depending on the bank.