A practical guide to deposits and interest
Deposits are the part of personal finance where the maths is genuinely certain. A fixed deposit at a quoted rate will pay exactly what the formula says, with no market risk to adjust for. That certainty is why deposits anchor most Indian households' savings — and also why the real questions here are not about returns at all, but about compounding frequency, taxation, liquidity, and whether the certainty is worth what it costs you in purchasing power.
Formula
M = P x (1 + r/n)^(n x t)
- P = the amount deposited
- r = annual interest rate as a decimal, so 7 per cent is 0.07
- n = compounding periods per year, which is 4 for the quarterly compounding most Indian banks use
- t = tenure in years
Compounding frequency quietly changes your return
Two deposits quoting the same rate can pay different amounts. A bank compounding quarterly credits interest four times a year, and each credit starts earning interest itself. Simple interest, by contrast, only ever pays on the original principal. On ₹5 lakh at 7 per cent for five years, simple interest yields ₹1,75,000 while quarterly compounding yields about ₹2,07,389 — a difference of over ₹32,000 on identical headline terms.
This is also why banks advertise an annualised yield that looks higher than the quoted rate. The yield is what quarterly compounding produces over a year; the quoted rate is the nominal figure. When comparing offers, make sure you are comparing like with like.
Fixed deposits versus recurring deposits
A fixed deposit puts a lump sum to work on day one, so the whole amount earns for the entire tenure. A recurring deposit builds up monthly, meaning the first instalment earns for the full term but the last earns for barely a month. For the same total money contributed, an FD will always finish ahead.
That does not make RDs inferior, because they answer a different question. An RD is for money you do not have yet. If you can save ₹10,000 a month but do not have ₹1.2 lakh today, the comparison with an FD is academic. The FD versus RD calculator exists to quantify the gap rather than to declare a winner.
Tax is where deposit returns usually lose
Fixed and recurring deposit interest is fully taxable at your slab rate, and it is taxed as it accrues each year, not when the deposit matures. For someone in the 30 per cent bracket, a 7 per cent deposit returns about 4.9 per cent after tax. Banks deduct TDS once interest crosses the threshold for the year, and that TDS is only a part-payment — you still owe the balance if your slab rate is higher.
This is the key reason the FD versus PPF comparison usually favours PPF for long-horizon money. PPF interest is exempt from tax entirely, so its headline rate is also its net rate, while an FD's headline rate is reduced by a third for higher earners.
The real return question
A deposit paying 7 per cent while inflation runs at 6 per cent is growing your purchasing power by roughly one per cent a year before tax. After tax at a higher slab, the real return turns negative, meaning the money buys less at maturity than it would have bought at the start despite the balance being larger.
The sensible conclusion is not that deposits are bad, but that they do a specific job: protecting capital you will need in the next few years, and holding emergency funds where certainty and instant access matter more than growth. Money you will not touch for fifteen years is usually poorly served by a deposit.
Safety, laddering, and breaking early
Deposits at scheduled banks are insured by the Deposit Insurance and Credit Guarantee Corporation up to ₹5 lakh per depositor per bank, covering principal and interest combined. Small finance banks often quote noticeably higher rates and carry the same insurance, which makes them reasonable within that limit and worth more thought beyond it.
Breaking a deposit early usually means the bank reapplies the rate that would have applied for the period actually completed, and may levy a penalty of around half to one per cent on top. Splitting a large sum into several smaller deposits maturing at different dates, known as laddering, lets you access part of the money without dismantling the whole arrangement.
Worked example: ₹5 lakh fixed deposit for five years
- Principal
- ₹5,00,000
- Interest rate
- 7% p.a.
- Compounding
- Quarterly
- Tenure
- 5 years
- Maturity value
- ₹7,07,389
- Interest earned
- ₹2,07,389
Simple interest on the same deposit would have paid ₹1,75,000, so quarterly compounding adds about ₹32,389. For a depositor in the 30 per cent slab, however, roughly ₹62,000 of that interest goes to tax, leaving a post-tax return close to 4.9 per cent a year.