A fixed deposit earns a set interest rate for a set term, and at most banks the interest on a cumulative deposit compounds every quarter. The maturity value is P × (1 + r/4)^(4 × t), where P is the deposit, r is the annual rate and t is years. A ₹2 lakh deposit at 7% for three years, compounded quarterly, matures at about ₹2,46,288, earning ₹46,288 in interest.
This guide walks through the calculation, the tax deducted at source, and how deposit insurance works.
What is the formula for fixed deposit maturity?
For a cumulative deposit with quarterly compounding:
- A = P × (1 + r ÷ 4)^(4t)
Worked example:
- P = ₹2,00,000
- r = 7%, so r ÷ 4 = 0.0175
- t = 3 years, so 4t = 12 quarters
- (1.0175)^12 = 1.23144
- A = 2,00,000 × 1.23144 ≈ ₹2,46,288
Interest earned is ₹46,288. Simple interest at 7% for three years would be ₹42,000, so compounding adds ₹4,288. Try other amounts and terms in the FD calculator, or compare the simple version with the simple interest calculator.
What is the effective annual yield?
Because interest compounds four times a year, the effective annual yield is higher than the stated rate. At 7% quarterly, the first year’s interest on ₹2 lakh is ₹14,372 rather than ₹14,000, an effective yield of about 7.19%. When comparing banks, look at both the rate and the compounding frequency. The general effect of compounding frequency is shown in the compound interest calculator.
Cumulative or payout: which option is better?
In a cumulative deposit, interest is added to the balance and paid at maturity, so it compounds. In a non-cumulative option, interest is paid out monthly, quarterly or yearly, which suits people who need regular income, such as retirees. The payout option earns less in total because the interest does not stay invested, and monthly payouts are often at a slightly discounted rate.
Is fixed deposit interest taxable?
Yes. Interest is added to your income and taxed at your slab rate, whether you receive it or it accumulates. Banks deduct tax at source under Section 194A once interest from that bank in a financial year exceeds the threshold. From 1 April 2025, the threshold for bank deposits is ₹50,000 for most depositors and ₹1,00,000 for senior citizens. If your total income is below the taxable limit, you can submit the prescribed declaration to the bank so tax is not deducted. TDS is not the final tax: it is credited against your liability when you file your return. Estimate the effect with the income tax calculator.
How safe is a bank deposit?
Bank deposits in India are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). According to the DICGC guide, each depositor is covered up to ₹5 lakh per bank, for principal and interest combined, across all accounts held in the same capacity and right at that bank. Deposits above that amount at a single bank are not insured. Splitting larger sums across several insured banks keeps more of your money within the cover. Deposits with non-banking finance companies are not covered by DICGC, so check the issuer’s credit rating before chasing a higher rate.
Can I withdraw before maturity?
Usually yes, but banks typically charge a penalty, often by paying a lower rate than the one agreed. Some deposits, such as tax-saving deposits, have a lock-in and cannot be withdrawn early. Read the terms before you invest, and ask the bank to show the penalty in rupees for your fixed deposit, not just as a percentage. If you might need the money, consider splitting it into several smaller deposits with different maturities, so you can break one without losing interest on all of them. This approach is often called laddering.
How does a fixed deposit compare with other options?
A bank deposit offers certainty and insurance up to the DICGC limit. A mutual fund plan may earn more over long periods but carries market risk and no guarantee; compare growth paths with the SIP calculator. For goals within three years and for emergency savings, the certainty of a deposit is often worth more than a possibly higher return. After tax and inflation, though, the real return on a deposit can be small, which matters for long-term goals.
How does inflation affect a fixed deposit?
Inflation reduces what your maturity amount can buy. If a fixed deposit pays 7% and prices rise 5% a year, your real return before tax is roughly 2%. If you pay tax at 30% on the interest, the post-tax return is about 4.9%, leaving a real return close to zero. That does not make a fixed deposit a bad choice. It means a fixed deposit is best used for safety and near-term goals, while long-term wealth usually needs some growth assets alongside it.
What should I check before opening one?
- The rate for your exact term, since rates differ by tenure
- Compounding frequency and the effective yield
- Senior citizen rates, if you qualify
- Premature withdrawal penalty
- Whether the issuer is a DICGC-insured bank
- Nomination details and how maturity proceeds are paid
Keep a record of each fixed deposit with its maturity date, and decide in advance whether to renew or withdraw, so auto-renewal does not lock your money in at a lower rate.
Sources
- DICGC: A guide to deposit insurance
- Income Tax Department: Threshold limits under the Income-tax Act
FAQ
What does “How Does a Fixed Deposit Work?” explain?
A fixed deposit earns a set interest rate for a set term, and at most banks the interest on a cumulative deposit compounds every quarter. The maturity value is P × (1 + r/4)^(4 × t), where P is the deposit, r is the ann…
How should I use this guide with a calculator?
Read the definitions and assumptions first, then open the linked calculator with the same inputs. Treat results as estimates, not professional advice.
Is this financial or medical advice?
No. Calcenzo content is educational. Confirm important decisions with a qualified professional and official sources for your situation.