How FD interest is actually calculated
For a cumulative fixed deposit, Indian banks compound interest every quarter: A = P × (1 + r ÷ 4)^(4 × t), where P is your deposit, r is the annual rate and t is the tenure in years. Interest earned each quarter is added to the principal, so the next quarter's interest is calculated on a slightly larger amount.
This is why an FD's real return is a little higher than its advertised rate. A 7% FD compounded quarterly actually yields about 7.19% per year — the 'effective yield' shown above. For example, ₹5 lakh at 7% for 2 years grows to about ₹5,74,441, earning ₹74,441 in interest.
Cumulative vs payout FDs
A cumulative FD reinvests the interest and pays everything at maturity — that is what this calculator computes, and it earns the most. A non-cumulative (payout) FD pays interest to your account monthly or quarterly; useful for regular income, but you lose the compounding, so total earnings are lower for the same rate.
Senior citizens typically get 0.25–0.50% extra on the card rate at most banks, and small finance banks often pay 0.5–1% more than large banks — deposits in all scheduled banks are insured by DICGC up to ₹5 lakh per bank, per depositor.
Tax on FD interest — know before you invest
FD interest is fully taxable at your income slab rate — there is no special lower rate. Banks also deduct TDS (tax deducted at source) at 10% if your total interest across FDs in that bank exceeds ₹50,000 in a financial year (₹1 lakh for senior citizens, thresholds effective April 2025). Without a PAN on record, TDS is 20%.
TDS is not extra tax — it is adjusted when you file your return. If your total income is below the taxable limit, submit Form 15G (or 15H for seniors) to the bank to avoid TDS entirely. Because interest accrues yearly for tax even on a cumulative FD, declare it each year rather than only at maturity to avoid a mismatch with the bank's reporting.
Getting more from your FDs
A few practical rules seasoned depositors follow:
- Compare rates across banks before renewing — auto-renewal often locks you into a lower 'card' rate than the best available.
- Breaking an FD early usually costs a 0.5–1% penalty on the applicable rate. If you might need the money, split one big FD into several smaller ones so you only break what you need.
- Consider an FD ladder — splitting your corpus across 1 to 5 year maturities — for better liquidity and rate averaging. Our FD Ladder Planner does this for you.
- Match the tenure to the rate table: banks often pay peak rates for odd tenures like 444 days or 18 months, not the round 1/2/5 years.
Frequently asked questions
›How is FD interest calculated in India?
For cumulative FDs, banks compound interest quarterly: A = P × (1 + r/4)^(4t). A ₹1 lakh FD at 7% for one year grows to about ₹1,07,186 — slightly more than simple 7% because each quarter's interest starts earning interest itself.
›Is FD interest taxable?
Yes, fully — it is added to your income and taxed at your slab rate. Banks deduct 10% TDS if your interest at that bank crosses ₹50,000 a year (₹1 lakh for senior citizens). You can avoid TDS with Form 15G/15H if your total income is below the taxable limit.
›What happens if I break my FD before maturity?
The bank pays interest for the period the money actually stayed, at the rate applicable to that shorter period, usually minus a 0.5–1% premature withdrawal penalty. Some banks offer no-penalty FDs; check before booking.
›Are fixed deposits safe?
Deposits in all scheduled banks — including small finance banks — are insured by DICGC (a Reserve Bank of India subsidiary) up to ₹5 lakh per depositor per bank, covering principal and interest. Keeping under ₹5 lakh per bank gives you full protection.
›Which is better — FD or a debt mutual fund?
FDs give a guaranteed, known return and DICGC insurance; debt funds' returns vary but can be more tax-efficient for some investors and allow withdrawal anytime without penalty. For money you cannot afford to risk and a known horizon, FDs are the simpler choice.
›Do senior citizens get higher FD rates?
Yes. Most banks pay senior citizens (60+) an extra 0.25–0.50% over the regular rate, and several banks have special schemes with slightly higher premiums. Seniors also enjoy a higher TDS threshold of ₹1 lakh of interest per year.