How Indian FD interest is calculated
Almost every Indian bank compounds fixed deposit interest quarterly, not annually. This matters: a 7.25% FD compounded quarterly has an effective annual yield of 7.45%, so a naive annual calculation understates the maturity value.
- A
- Maturity amount
- P
- Principal deposited
- r
- Annual interest rate as a decimal
- t
- Tenure in years
Cumulative versus payout FDs
In a cumulative FD, interest is added to the principal each quarter and paid at maturity — you get the full benefit of compounding. In a payout FD, interest is paid out monthly or quarterly and never compounds, so the total return is lower but you receive regular income.
On ₹5,00,000 at 7.25% for 5 years, cumulative yields about ₹7,16,130 while quarterly payout yields ₹5,00,000 back plus ₹1,81,250 of interest — roughly ₹34,880 less.
TDS and tax on FD interest
FD interest is fully taxable as "income from other sources" at your slab rate. It is taxed on an accrual basis, meaning you owe tax each year on interest earned that year, even in a cumulative FD where you have not received the money yet.
When TDS applies
| Depositor | Threshold | TDS rate |
|---|---|---|
| Individual (PAN provided) | ₹50,000 | 10% |
| Senior citizen (60+) | ₹1,00,000 | 10% |
| No PAN on record | Any amount | 20% |
TDS is not the final tax. If your slab is 30%, the bank deducts 10% and you pay the remaining 20% when filing. If your total income is below the taxable limit, submit Form 15G — or Form 15H if you are a senior citizen — at the start of the financial year to prevent deduction entirely.
A worked example
At the 30% slab, tax of about ₹64,839 leaves a post-tax return near 5.43% a year — barely ahead of inflation.
What to weigh before locking money in
Premature withdrawal costs
Breaking an FD early carries a penalty, usually 0.5% to 1%, and interest is recalculated at the rate applicable for the period actually completed, not the rate you booked. Breaking a 5-year FD after 18 months means earning the 18-month rate minus the penalty.
Laddering
Rather than one large FD, split the amount across deposits maturing at staggered intervals — say five FDs maturing one year apart. You keep regular access to capital without penalties and can reinvest at prevailing rates as each matures.
Deposit insurance
DICGC insures deposits up to ₹5,00,000 per depositor per bank, covering principal and interest combined. Spreading larger amounts across banks keeps everything insured.
The inflation problem
A 7.25% FD at the 30% slab returns about 5.4% after tax. With inflation around 5% to 6%, real returns are close to zero or negative. FDs preserve nominal capital, not purchasing power — which is why they suit short horizons and emergency funds rather than long-term wealth building. Compare with the SIP calculator for the equity alternative.
Frequently asked questions
How is FD maturity calculated?
Using A = P × (1 + r/4)^(4t) for the quarterly compounding Indian banks use. Interest is added to the principal every quarter, so each quarter earns slightly more than the last.
A calculation using simple annual compounding will understate the result by around 3% over five years.
Is FD interest taxable?
Yes, fully, at your income tax slab rate, as income from other sources. It is taxed on accrual each year, even for cumulative FDs where you receive nothing until maturity.
Banks deduct 10% TDS once interest exceeds ₹50,000 in a financial year (₹1,00,000 for seniors), but that is an advance payment, not the final liability.
How can I avoid TDS on my FD?
If your total income is below the taxable threshold, submit Form 15G — or Form 15H if you are 60 or over — to your bank at the start of each financial year.
Note this only stops deduction. If you do have tax liability, submitting these forms wrongly can attract a penalty.
What happens if I break an FD early?
You pay a penalty of typically 0.5% to 1%, and the interest is recalculated at the rate that applied for the period actually completed rather than the booked rate.
Some banks offer sweep-in or flexi FDs which allow partial withdrawal without breaking the whole deposit.
Is a tax-saving FD worth it?
A 5-year tax-saving FD qualifies for the Section 80C deduction of up to ₹1,50,000, but the interest remains fully taxable and there is a hard 5-year lock-in with no premature withdrawal at all.
PPF offers a better deal for the same 80C slot — similar returns, completely tax-free. Compare with the PPF calculator.