How fixed deposit interest works
A fixed deposit pays a contracted rate for a contracted period, which makes it the most predictable savings product available in India. The maturity figure depends not just on the rate but on how often the bank compounds it — usually quarterly.
Formula
Maturity = P × (1 + r/n)^(n × t)
- P — the amount deposited
- r — annual interest rate as a decimal
- n — compounding periods per year, normally 4 for Indian bank FDs
- t — tenure in years
Quarterly compounding raises the real yield
A 7% FD compounded quarterly has an effective annual yield of about 7.19%, because each quarter’s interest starts earning interest itself. Banks often quote this separately as the annualised yield.
₹5 lakh at 7% for five years therefore matures at roughly ₹7.07 lakh, of which about ₹2.07 lakh is interest. The same rate on a simple-interest basis would have produced only ₹1.75 lakh.
Cumulative or payout matters more than you think
A cumulative FD reinvests interest until maturity, which is what this calculator assumes. A non-cumulative deposit pays interest out monthly or quarterly, so nothing compounds and the total return is lower.
Choose payout only if you need the income. If the money is not needed, the cumulative option is meaningfully better over long tenures.
Tax is charged on accrual, not on maturity
FD interest is taxable at your slab rate in the year it accrues, even in a cumulative deposit where you receive nothing until maturity. Banks deduct TDS once interest crosses the notified threshold, which recent Budgets have raised.
TDS is not the tax itself — it is an advance. If your slab rate is higher, you owe the difference when filing; if you have no taxable income, Form 15G or 15H prevents the deduction in the first place.
Safety, laddering, and breaking early
Bank deposits are insured by DICGC up to ₹5 lakh per depositor per bank, covering principal and interest together. Spreading large sums across banks keeps more of the money inside that cover.
Premature withdrawal typically costs a penalty of around 0.5-1% on the applicable rate. Splitting a large deposit into several smaller ones, or laddering across tenures, lets you break only part of the money if plans change.
Example: ₹5 lakh at 7% for 5 years
- Principal
- ₹5,00,000
- Rate
- 7% p.a., compounded quarterly
- Tenure
- 5 years
- Maturity value
- ≈ ₹7,07,388
- Interest earned
- ≈ ₹2,07,388
- Effective annual yield
- ≈ 7.19%
For a depositor in the 30% bracket, the post-tax return is closer to 4.8% a year — which is why FDs preserve capital well but struggle against inflation over long periods.