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A fixed deposit (FD) is the simplest guaranteed-return investment: you lock a lump sum with a bank for a fixed tenure, and the bank pays you interest at a fixed rate. There is no market risk, and the maturity value is known on day one. But the interest is not just "rate × years" — banks compound it, which means the interest itself starts earning interest. That is why two FDs at the same rate can pay different amounts, and why you should always work out the maturity value before you book.
The FD interest formula
For a cumulative FD — where interest is reinvested instead of paid out — the maturity value follows the standard compound interest formula:
A = P × (1 + r/n)^(n×t)
P is your deposit, r is the annual interest rate as a decimal (7% = 0.07), n is how many times interest compounds each year, and t is the tenure in years. The total interest you earn is simply A − P. Most banks compound FD interest quarterly, so n = 4, but some deposits compound monthly, half-yearly or annually — check your bank's terms, because the frequency changes the final amount.
Worked example
Deposit ₹1,00,000 for 3 years at 7% per year, compounded quarterly. The quarterly rate is 7 ÷ 4 = 1.75%, applied 12 times: ₹1,00,000 × 1.0175^12 = ₹1,23,144. That is ₹23,144 of interest, and the effective annual yield works out to about 7.19% — higher than the 7% headline rate, because of compounding. Simple interest on the same deposit would pay only ₹21,000, so quarterly compounding adds ₹2,144 for free. Try your own numbers in our free FD Calculator — it runs the same formula instantly.
Cumulative vs payout FDs
There are two kinds of FD. A cumulative FD reinvests the interest every quarter and pays everything at maturity — this is the version the formula above describes, and it gives the largest final amount. A non-cumulative (payout) FD pays the interest out to you monthly or quarterly, so the principal never grows; total interest is just P × r × t, and the principal is returned at maturity. Payout FDs suit retirees who need regular income, but they always earn less overall than a cumulative FD at the same rate. Note that a monthly payout is slightly less than one-third of the quarterly payout, because the bank discounts it — another reason to compare on the effective yield, not the headline rate.
Short-term FDs under 6 months
For tenures shorter than about six months, banks do not compound at all — they pay simple interest on the exact number of days: I = P × r × days ÷ 36,500. So a ₹2,00,000 deposit for 90 days at 6% earns ₹2,00,000 × 0.06 × 90 ÷ 365 ≈ ₹2,959. If you are parking money for a few weeks, the rate matters far less than the tenure — check the day count before comparing offers.
What changes your interest
Four things decide what you actually earn. First, the rate — rates vary by bank, tenure and deposit size, and they change often, so check current rates on your bank's rate card rather than trusting an old figure. Second, the tenure — longer deposits compound more, so the interest grows faster in the later years. Third, the compounding frequency — monthly beats quarterly, which beats annual, by a small margin. Fourth, who you are — many banks offer higher rates to senior citizens, so check current rates for your category. And remember that breaking an FD early usually costs a penalty of around 0.5–1% on the rate, so pick a tenure you can actually hold.
Is FD interest taxable?
Yes. FD interest is added to your income and taxed at your slab rate, and the bank may deduct TDS when the interest crosses the current threshold — check current thresholds for the figure that applies to you. That is why two FDs with the same headline rate can leave very different amounts in your hand: always compare FDs on the after-tax return, not the advertised rate. Our FD Calculator shows the pre-tax maturity value — apply your slab rate to see what you keep.