Key points
- Most bank FDs compound interest quarterly: A = P × (1 + r/4)^(4 × years).
- ₹5 lakh at 7% for 5 years grows to about ₹7.07 lakh — an effective 7.19% a year.
- Interest is taxable every year at your slab rate, even on cumulative FDs.
- Banks deduct 10% TDS once interest crosses ₹50,000 a year (₹1 lakh for senior citizens).
How the interest is calculated
Banks in India compound FD interest every quarter for deposits of six months or more. The maturity amount of a cumulative FD is A = P × (1 + r ÷ 4)^(4 × t), where r is the annual rate (as a decimal) and t the years. Because interest earns interest, the effective yearly yield is slightly higher than the quoted rate: 7% compounded quarterly is about 7.19% a year.
Example: ₹5,00,000 at 7% for 5 years → 5,00,000 × 1.0175²⁰ ≈ ₹7,07,389, of which ₹2,07,389 is interest.
Cumulative vs payout FDs
A cumulative FD reinvests interest and pays everything at maturity — best for growing money. A non-cumulative (payout) FD pays interest monthly, quarterly or yearly — useful for regular income, such as for retirees. Monthly payouts are usually slightly lower than the quarterly rate because you receive the money sooner.
Tax on FD interest
- FD interest is “income from other sources”, taxed at your slab rate in the year it accrues — even if you receive it only at maturity.
- TDS: banks deduct 10% when your interest from that bank crosses ₹50,000 in a year (₹1 lakh for senior citizens), or 20% if the bank does not have your PAN.
- If your total income is below the taxable limit, submit Form 15G (below 60) or Form 15H (60 and above) at the start of each year to avoid TDS.
- TDS is not the final tax. If your slab is 20% or 30%, you pay the balance when filing; if you owe less, you claim a refund.
- Senior citizens can deduct up to ₹50,000 of deposit interest under Section 80TTB in the old regime.
Tax-saver FDs
A five-year tax-saving FD qualifies for the Section 80C deduction (up to ₹1.5 lakh, old regime). It cannot be withdrawn early or pledged for a loan, and its interest is still taxable.
How safe is an FD?
Deposits in banks — including small finance banks and cooperative banks — are insured by the DICGC up to ₹5 lakh per depositor per bank, covering principal and interest together. Spread larger amounts across banks if you want every rupee covered.
Senior citizen FDs
Most banks pay senior citizens (60 and above) an extra 0.25%–0.50% a year, and some pay more on longer tenures. Senior citizens also get a higher TDS threshold (₹1 lakh of interest a year per bank), can submit Form 15H to avoid TDS when their tax liability is nil, and, in the old regime, can deduct up to ₹50,000 of interest under Section 80TTB.
FD laddering
Instead of one large FD, split the money into several FDs maturing one after another — for example, five FDs of 1 to 5 years. Each year one matures, giving you access to money and a chance to reinvest at the prevailing rate. Laddering reduces the risk of locking everything in just before rates rise and keeps each deposit within the DICGC cover if spread across banks.
Frequently asked questions
Is FD interest taxable if I reinvest it?
Yes. Interest on cumulative FDs is taxable every year as it accrues, even though you receive it only at maturity. Declare it each year to avoid a large mismatch later.
What is the penalty for breaking an FD early?
Typically 0.5%–1% below the rate applicable for the period the deposit actually ran. Tax-saver FDs cannot be broken before five years.
Which is better: monthly or quarterly interest payout?
Quarterly payouts pay the full quoted rate; monthly payouts are slightly lower because you receive the money earlier. For growing money, choose the cumulative option.