How banks calculate FD interest
For a cumulative fixed deposit, Indian banks compound interest every quarter and pay everything at maturity. That is why the effective yield is slightly higher than the rate printed on the FD receipt. For deposits shorter than six months, most banks pay simple interest instead.
Cumulative: A = P × (1 + r/4)^(4 × years)
Quarterly payout = P × r ÷ 4
Monthly payout = P × (r/12) ÷ (1 + r/12) (discounted)Worked example
FD interest is fully taxable
Interest from fixed deposits is added to your income and taxed at your slab rate every year, even for a cumulative FD that pays only at maturity. Banks deduct TDS at 10% once your interest at that bank crosses ₹50,000 in a year (₹1,00,000 for senior citizens). If your total income is below the taxable limit, submit the declaration form to your bank at the start of the year to avoid TDS. From tax year 2026-27, one form (Form 121) replaces the old Form 15G and 15H.
The post-tax yield in the results is the number to compare with other options. In the 30% slab, a 7% FD returns under 5% after tax, often below inflation.
Getting more from fixed deposits
- Senior citizen rates: most banks add 0.25–0.50% for depositors aged 60 and above.
- Laddering: split a large amount into FDs maturing in 1, 2, 3, 4 and 5 years. You get regular liquidity and can reinvest at new rates each year.
- Deposit insurance: DICGC insures up to ₹5 lakh per depositor per bank, including interest. Spread larger sums across banks.
- Tax-saver FD: a 5-year lock-in FD qualifies for the investment deduction under the old tax regime only.
Compare with the RD calculator for monthly saving, or with government schemes like SCSS and POMIS for regular income.
Frequently asked questions
Is FD interest compounded monthly or quarterly?
Most Indian banks compound cumulative FD interest quarterly. The calculator uses quarterly compounding for 'at maturity' deposits of six months or more.
Can I break an FD early?
Yes, usually with a penalty of 0.5–1% on the interest rate. Tax-saver FDs cannot be broken before five years.
Are FDs safe?
Deposits in banks are insured by DICGC up to ₹5 lakh per depositor per bank, including interest. Small finance banks pay more but check their financial strength.
Official references: RBI – Deposit rates · DICGC – Deposit insurance