You can use the following formula to calculate your Annual Annuity Payment (AAP):
AAP = [P x r]/[1-(1+r)^-n]
Where – “P” is the Principal Amount, “r” is the Periodic Interest Rate and “n” is the Total number of Payments you receive.
For example, if you invest Rs. 10,00,000 at an annual rate of interest of 8%, intending to receive payments for 6 years, you’ll receive a yearly payment of
= [10,00,000 x 0.08]/[1-(1 + 0.08)^-6]
= [80,000]/[1-(1.08)^-6]
= [80,000]/[0.37]
= 2,16,315.40
Note – The “^” notation indicates raising the expression on the left to the exponential power on the right.
If you want to calculate the Monthly Annuity Payment (MAP), use below formula:
MAP = [P x( r/12)]/[1-(1+r/12)^-n]
Where “n” in months = 12 x 6 = 72 months
So for the above example –
= [10,00,000 x (0.08/12)]/[1-(1+0.08/12)^-72]
= [200]/ [0.38]
= 17,533.24
So in a year you will receive Rs. 210,398.88 (17,533.24 x 12).
This is a very difficult mathematical calculation, so if you don’t want to do it manually, you can use this calculator.
As per the above example, you see that monthly annuity is less than the annual annuity payment. So always opt for annual annuity payment option.