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What is a Fixed Deposit?
A Fixed Deposit (FD) is a financial instrument offered by banks and NBFCs where you deposit a lump sum for a fixed tenure at a predetermined interest rate. Unlike savings accounts, the rate is locked in for the entire tenure — you won't benefit if rates rise, but you're protected if they fall.
At maturity, you receive your original principal plus all accumulated interest. FDs are backed by DICGC insurance up to ₹5 lakh per depositor per bank, making them one of the safest investment options available.
The FD Interest Formula
Fixed deposits use the compound interest formula:
A = P × (1 + r/n)^(n×t)
A = Maturity amount (principal + interest)
P = Principal (initial deposit)
r = Annual interest rate (as decimal, e.g. 7% = 0.07)
n = Compounding periods per year (1=annual, 4=quarterly, 12=monthly)
t = Time in years
Interest earned = A − P. The difference between quarterly and annual compounding may seem small on a 1-year FD, but grows significantly over longer tenures and larger deposits.
Compounding Frequency Comparison
Example: ₹1,00,000 at 7% for 1 year with different compounding frequencies:
| Compounding | Periods/Year (n) | Maturity Amount | Interest Earned |
|---|---|---|---|
| Annual | 1 | ₹1,07,000 | ₹7,000 |
| Quarterly | 4 | ₹1,07,186 | ₹7,186 |
| Monthly | 12 | ₹1,07,229 | ₹7,229 |
Most Indian banks compound FD interest quarterly. Always check the scheme documents.
Worked Example: ₹5,00,000 at 8% for 3 Years (Quarterly)
Given: P = ₹5,00,000 · r = 0.08 · n = 4 · t = 3
A = 5,00,000 × (1 + 0.08/4)^(4×3)
A = 5,00,000 × (1.02)^12
A = 5,00,000 × 1.26824
A = ₹6,34,121
Interest earned = ₹6,34,121 − ₹5,00,000 = ₹1,34,121
Effective Annual Rate (EAR)
The nominal interest rate (e.g. 8%) understates the actual return when compounding is more frequent than annual. The Effective Annual Rate (EAR) gives the true annual return:
For 8% quarterly: EAR = (1 + 0.08/4)^4 − 1 = (1.02)^4 − 1 = 8.24%
This means an 8% quarterly FD is equivalent to an 8.24% annually-compounded FD.
Tax on FD Interest
FD interest is fully taxable as "Income from Other Sources" at your income tax slab rate:
- •TDS threshold: TDS at 10% is deducted if total FD interest across all FDs in a bank exceeds ₹40,000/year (₹50,000 for senior citizens).
- •Form 15G/15H: Submit to the bank to avoid TDS if your total income is below the taxable limit (Form 15G for non-seniors, 15H for seniors aged 60+).
- •Accrual basis: Interest is taxable on an accrual basis each year (not just at maturity), even if you haven't received it.
- •Tax-saving FD: 5-year FD under Section 80C offers deduction up to ₹1.5 lakh on the invested amount, but interest is still taxable.
FD Laddering Strategy
Instead of putting all your money in one long-term FD, split it across multiple FDs with staggered maturities — e.g., 1 year, 2 years, and 3 years.
Benefits of Laddering:
- Regular liquidity — one FD matures each year
- Ability to reinvest at higher rates if rates rise
- Reduced penalty risk from premature withdrawal
- Diversification across interest rate environments
Calculate your exact FD maturity amount
Enter your principal, rate, tenure, and compounding frequency for instant results with a year-by-year growth table.
Use FD CalculatorFrequently Asked Questions
Is FD interest compounded or simple?
Cumulative FDs use compound interest (reinvested). Non-cumulative FDs pay out interest periodically — the principal still compounds, but payouts are made before maturity.
What happens if I break an FD early?
Premature withdrawal incurs a penalty — typically 0.5% to 1% less than the applicable rate for the actual holding period. Tax-saving FDs (5-year) cannot be broken prematurely.
Can NRIs invest in FDs?
Yes. NRIs can invest in NRE FDs (tax-free in India, repatriable) and NRO FDs (taxable, partially repatriable). NRE FD interest is exempt from Indian income tax.
Which bank gives the highest FD rates?
Small finance banks typically offer 0.5–1% higher rates than large public sector banks. Always compare rates on bank websites. Remember: rates above 7% from small banks are common, while large banks offer 6.5–7%.
How is FD interest calculated for partial year tenures?
For periods like 15 months: t = 15/12 = 1.25 years. A = P × (1 + r/n)^(n×1.25). Most banks use the actual number of days for precise calculation.