How FD Interest Is Calculated (Compounding, TDS and Tips)

Fixed deposits are still one of the most popular ways Indians save – simple, predictable and offered by every bank. But when the maturity amount arrives, many people are surprised that it's a little more (or less) than they expected. That's because of three things: compounding, the type of FD you chose, and tax. This guide explains how banks actually calculate FD interest, with worked examples, and gives a few practical tips to earn more safely.

Simple vs compound interest

With simple interest, you earn interest only on the amount you deposited. ₹1,00,000 at 7% earns ₹7,000 every year, no matter what.

With compound interest, the interest is added to your deposit at regular intervals and then earns interest itself. Most Indian banks compound FD interest every quarter for deposits of six months or longer. The formula is:

Maturity = P × (1 + r ÷ 4)4 × t

where P is your deposit, r is the yearly rate (7% = 0.07) and t is the number of years.

A worked example

You deposit ₹1,00,000 at 7% in a cumulative FD, compounded quarterly:

In the first year you earn ₹7,186 instead of a flat ₹7,000 – the extra ₹186 is interest on interest. That's why a 7% FD has an effective yield of about 7.19%. Over five years, the compounding effect adds up to roughly ₹6,500 more than simple interest would give (₹35,000).

Cumulative vs payout FDs

• Cumulative FD: interest is added back to the deposit and paid at maturity. This gives the highest final amount because of compounding. Good if you don't need regular income.
• Non-cumulative (payout) FD: interest is paid to your account every month, quarter or year. It doesn't compound, so the total interest is lower, but you get a regular income – popular with retirees. For monthly payouts, banks often pay a slightly discounted rate.

For short FDs of less than six months, most banks pay simple interest at maturity. For example, ₹1,00,000 at 7% for 90 days earns about 1,00,000 × 7% × 90 ÷ 365 ≈ ₹1,726.

Senior citizen rates

Most banks offer residents aged 60 and above an extra 0.25% to 0.75% on FDs. On ₹1 lakh for 5 years, 7.5% instead of 7% raises the maturity from about ₹1,41,478 to ₹1,44,995 – around ₹3,500 more.

Tax and TDS on FD interest

FD interest is fully taxable. It is added to your total income and taxed at your slab rate, whether you receive it every quarter or only at maturity. (For cumulative FDs, interest is generally taxable each year as it accrues, even though you receive it later.)

Banks also deduct TDS (tax deducted at source) when your FD interest from that bank in a financial year crosses a threshold. From 1 April 2025, the limit was raised to ₹50,000 a year for most people and ₹1,00,000 for senior citizens. TDS is usually 10% if your PAN is linked, and higher if it isn't. TDS isn't an extra tax – it's adjusted against your final tax when you file your return.

If your total income is below the taxable limit, you can submit Form 15G (below 60) or Form 15H (60 and above) to your bank so that TDS isn't deducted.

Tips to earn more from FDs

• Compare rates across banks – different banks can pay noticeably different rates for the same tenure, and special tenures (like 444 days) sometimes pay more.
• Choose cumulative if you don't need regular income, to benefit from compounding.
• Ladder your FDs: instead of one ₹3 lakh FD for 3 years, open three ₹1 lakh FDs for 1, 2 and 3 years. Every year, one matures – giving you access to money and the chance to reinvest at the latest rates.
• Avoid breaking FDs early. Premature withdrawal usually means a lower rate plus a penalty, often 0.5–1%.
• Stay within insurance limits: DICGC insures deposits up to ₹5 lakh per depositor per bank. Spreading large amounts across banks adds safety.
• Remember inflation: if inflation is 5% and your FD earns 7% before tax, your real gain after tax is small. FDs are great for safety and short-term goals; for long-term growth, many people also consider other options such as a SIP.

Frequently asked questions