Understanding FD Interest Calculation
A Fixed Deposit (FD) is a lump-sum investment with a bank for a fixed tenure at a predetermined rate. The maturity amount depends on principal, rate, tenure, and compounding frequency. In India, banks typically compound FD interest quarterly. This guide explains how FD interest is calculated: the formula, cumulative vs non-cumulative options, worked examples, and tax treatment. All content is focused on FD interest mechanics.
Key Takeaways
- Compound interest: Interest earned on interest. Quarterly compounding is standard in India
- Cumulative FD: Interest at maturity. Reinvested, so maturity is highest
- Non-cumulative FD: Interest paid monthly/quarterly/annually. Useful for income
- Formula: A = P(1 + r/4)^(4n). P = principal, r = annual rate, n = years, 4 = quarterly compounding
- Tax: Interest taxable. TDS if >₹40,000/year. No tax benefit for regular FD (use 5-year tax-saving for 80C)
What Is Fixed Deposit?
FD is a lump-sum investment for a fixed period (7 days to 10 years) at a fixed interest rate. You deposit the principal once; the bank pays interest as per the chosen payout option. Principal is returned at maturity (or on premature closure with penalty). FDs are offered by banks, NBFCs, and post office. Bank FDs are insured up to ₹5 lakh per depositor per bank under DICGC.
Types of FD Interest Payout
- Cumulative: Interest is compounded and paid at maturity. No periodic payouts. Highest maturity for same principal, rate, and tenure.
- Non-cumulative monthly: Interest paid every month. Lower effective yield than cumulative (no compounding of interest).
- Non-cumulative quarterly: Interest paid every quarter. Slightly better than monthly for reinvestment.
- Non-cumulative annually: Interest paid once a year. Closer to cumulative if you reinvest.
FD Interest Formula
Worked Example
📊 ₹2,00,000 FD, 3 years, 6.5% p.a., quarterly compounding
Cumulative vs Non-Cumulative: Maturity Difference
For the same principal, rate, and tenure, cumulative FD gives the highest maturity because interest is reinvested. Non-cumulative pays out periodically, so you receive cash flow but the effective yield is lower unless you reinvest the interest elsewhere. If you need regular income (e.g. retirees), non-cumulative works. If your goal is maximum maturity, choose cumulative.
Senior Citizen Rates
Banks offer 0.25–0.75% extra to senior citizens (usually 60+). The formula is the same; only the rate is higher. Check your bank's senior citizen FD rates. Post office also has special schemes for seniors.
Tax on FD Interest
- Taxable: Interest is fully taxable as income from other sources. Added to total income, taxed at slab.
- TDS: If interest from a bank exceeds ₹40,000 (₹50,000 for seniors) in a year, bank deducts 10% TDS.
- Form 15H/15G: Submit to avoid TDS if total income is below taxable limit.
- 5-year tax-saving FD: 80C deduction up to ₹1.5 lakh. Interest taxable; no deduction on interest.
Use Our FD Calculator
Enter principal, tenure, and rate. Get maturity amount and interest. Compare cumulative vs non-cumulative and different tenures.
Disclaimer
Interest rates vary by bank and tenure. Check current rates. Formula may vary slightly by bank (e.g. 365/366 days).