How is FD interest calculated? This guide explains exactly how a fixed deposit grows, using the method most Indian banks follow: quarterly compounding. You will learn what a fixed deposit is, the maturity formula M = P(1 + r/4)^(4t), and how to read each part of it. We work through a full numeric example - 1,00,000 invested at 7% for 5 years - and show why compounding beats simple interest. We also cover cumulative versus non-cumulative deposits, a brief note on tax and TDS, and senior-citizen rates. Use the figures here to sanity-check what a bank quotes you.
What is a fixed deposit?
A fixed deposit (FD) is a lump sum you place with a bank or NBFC for a fixed tenure at a fixed interest rate agreed at the start. In return for locking the money away - anywhere from 7 days to 10 years - you earn a higher rate than a regular savings account. Because the rate is fixed when you open the FD, your return is predictable and does not move with later rate changes. You can usually withdraw early, but banks often apply a penalty and pay a slightly lower rate on premature closure.
How banks calculate FD interest
Most Indian banks compound FD interest quarterly. Compounding means each quarter's interest is added to the balance, and the next quarter earns interest on the larger amount. The standard maturity formula for a cumulative FD is:
M = P(1 + r/4)^(4t)
- M is the maturity amount (what you receive at the end).
- P is the principal (the amount you deposit).
- r is the annual interest rate written as a decimal, so 7% is 0.07.
- t is the tenure in years.
- Dividing r by 4 gives the quarterly rate, and 4t is the number of quarters.
The interest you actually earn is simply M - P. You can run any combination of amount, rate, and tenure through the FD Calculator instead of doing the powers by hand.
A worked example
Suppose you deposit P = 1,00,000 at an annual rate of 7% for t = 5 years, compounded quarterly. Work through the formula step by step:
- Convert the rate: r = 7% = 0.07, so the quarterly rate r/4 = 0.0175.
- Count the periods: 4t = 4 x 5 = 20 quarters.
- Raise the growth factor to that power: (1.0175)^20 is about 1.41478.
- Multiply by the principal: M = 1,00,000 x 1.41478, which is about 1,41,478.
- Subtract to find the interest: 1,41,478 - 1,00,000 = about 41,478.
So the deposit grows to roughly 1,41,478, and you earn about 41,478 in interest over five years. Exact paise can differ slightly by bank depending on day-count conventions and rounding.
Why quarterly compounding beats simple interest
With simple interest at the same 7% for 5 years, you would earn 1,00,000 x 0.07 x 5 = 35,000, giving a maturity of 1,35,000. Quarterly compounding instead returns about 1,41,478 - roughly 6,478 more on the same deposit. The gap comes from interest earning interest each quarter. The longer the tenure and the higher the rate, the wider this gap grows, which is why the compounding frequency matters as much as the headline rate.
Cumulative vs non-cumulative FDs
FDs come in two payout styles, and they grow differently:
- Cumulative FD: interest is reinvested every quarter and paid out as one lump sum at maturity. Because nothing is withdrawn, the full balance keeps compounding - this is the case the formula above describes.
- Non-cumulative FD: interest is paid out periodically (monthly, quarterly, half-yearly, or yearly) as income. Since the interest leaves the account, it does not compound, so the total return is lower than a cumulative FD of the same rate and tenure.
Choose cumulative if you want maximum growth and do not need the cash meanwhile; choose non-cumulative if you want a regular income stream from the deposit.
Taxes and TDS
FD interest is fully taxable as income and is added to your total income for the year at your applicable slab rate. Banks also deduct TDS (tax deducted at source) once your interest from that bank crosses a yearly threshold. TDS is only an advance deduction - it is adjusted against your final tax liability when you file your return, so it is not an extra charge. This is general information, not personal tax advice; rules and thresholds change, so confirm the current ones for your situation.
Senior-citizen rates
Banks usually offer senior citizens a slightly higher FD rate than the standard rate - often around 0.25% to 0.50% more, though it varies by bank and scheme. On a long tenure, even a small rate bump adds up through compounding. To compare a standard rate against a senior rate, plug both into the FD Calculator and read off the difference in maturity value.
Check your own numbers
Now that you know how is FD interest calculated, you can verify any quote before signing. Enter your principal, rate, and tenure in the FD Calculator to see the maturity amount and interest instantly, and explore how compounding works more generally with the Compound Interest Calculator. Remember that exact bank methods can vary slightly, so treat the result as a close, reliable estimate.
Frequently asked questions
- How is FD interest calculated in India?
- Most Indian banks compound FD interest quarterly using M = P(1 + r/4)^(4t), where P is the principal, r is the annual rate as a decimal, and t is the tenure in years. The interest earned is M minus P.
- What is the difference between cumulative and non-cumulative FDs?
- A cumulative FD reinvests interest every quarter and pays the whole amount at maturity, so it compounds. A non-cumulative FD pays interest out periodically, so that interest does not compound and the total return is lower.
- Is FD interest taxable?
- Yes, FD interest is taxable as income at your slab rate, and banks deduct TDS once interest crosses a yearly threshold. TDS is adjusted against your final tax when you file your return, so it is not an additional charge.