How Fixed Deposit Interest Is Calculated and Taxed, A Simple Guide

You put Rs 1 lakh in a 3‑year fixed deposit, the bank says the interest rate is 7%, and at maturity you get Rs 1,22,987. The extra Rs 22,987 is not 7% of Rs 1 lakh multiplied by 3. That would be Rs 21,000. The difference is compounding. Here is exactly how Indian banks calculate FD interest, how the tax department takes a share, and what you actually get in hand. This is for informational purposes only and is not financial advice.

The quarterly compounding formula Indian banks use

All scheduled commercial banks in India use quarterly compounding for fixed deposits. The formula is:

Maturity Amount = P × (1 + r/4)^(4×t)

Where P is the principal amount in rupees, r is the annual interest rate divided by 100 (so 7% becomes 0.07), and t is the tenure in years.

The interest is calculated every three months. After the first quarter, the interest is added to the principal. In the second quarter, you earn interest on the original principal plus the first quarter's interest. This repeats every quarter until maturity.

Take a real example: Rs 1 lakh at 7% for 3 years. r/4 = 0.07/4 = 0.0175. 4×t = 4×3 = 12. Maturity Amount = 1,00,000 × (1.0175)^12 = 1,00,000 × 1.2314 = Rs 1,23,140. The total interest earned is Rs 23,140. If this were calculated with simple interest, you would get only Rs 21,000. Quarterly compounding adds Rs 2,140 extra over three years.

You do not need to do this by hand. Open the FD calculator, enter the principal, the rate, and the tenure. It applies the same quarterly compounding formula inside your browser. Your deposit details never leave your device.

Cumulative vs non‑cumulative FD: which earns more?

In a cumulative FD, the interest is not paid out. It stays in the account, gets added to the principal every quarter, and the whole amount, principal plus all compounded interest, is paid at maturity. This gives you the highest total return because every rupee of interest stays in the account to earn further interest.

In a non‑cumulative FD, you tell the bank to pay the interest to you periodically: monthly, quarterly, or annually. The bank pays out a fixed amount each period, and at maturity only the original principal is returned. Because the interest is not reinvested, the total earnings over the tenure are lower than a cumulative FD at the same rate.

Which one you choose depends on your need. If you want a regular income, like a pensioner who needs monthly interest to cover expenses, a non‑cumulative FD makes sense. If you are saving for a goal and do not need the money until maturity, a cumulative FD earns more. The calculator shows cumulative FD projections. For non‑cumulative, you can estimate the periodic payout by applying the simple interest rate your bank quotes for that option.

How TDS and tax reduce your actual returns

FD interest is fully taxable. The bank adds the interest earned to your income and deducts TDS under Section 194A of the Income Tax Act. The rules are:

• If the total interest earned across all your FDs with that bank in a financial year is below Rs 40,000 (Rs 50,000 for senior citizens), no TDS is deducted.
• If the interest crosses the threshold, the bank deducts TDS at 10% of the interest amount.
• If you have not submitted your PAN to the bank, TDS is deducted at 20% instead of 10%.
• The TDS is only an advance tax. Your final tax liability on the interest depends on your income tax slab. If you fall in the 20% or 30% slab, you will owe additional tax beyond the 10% TDS when you file your return. If your total income is below the taxable limit, you can claim a refund of the deducted TDS by filing your return.

For example, if you earn Rs 60,000 as FD interest in a year and you are in the 20% slab, the bank deducts Rs 6,000 as TDS. Your actual tax liability on that interest is Rs 12,000 (20% of Rs 60,000). You need to pay the remaining Rs 6,000 when filing your return. The calculator shows gross interest before TDS and tax. Your post‑tax return will be lower. For an accurate after‑tax number, reduce the interest by your slab rate. A tax professional can help you calculate this for your specific case.

FAQ

Do senior citizens get a different FD rate?

Yes. Most banks offer an additional 0.25% to 0.50% interest rate to senior citizens. The higher rate applies to the entire tenure. The TDS threshold for senior citizens is also higher at Rs 50,000 per financial year. When using the calculator, enter the senior citizen rate your bank has quoted.

What happens if I break my FD before maturity?

The bank charges a penalty, usually 0.50% to 1% lower than the rate applicable for the period the deposit was held. The interest is recalculated at the reduced rate. The calculator assumes the deposit runs to full maturity. For premature withdrawal, ask your bank for the exact reduced rate and run a new calculation.

Can I use the calculator for tax‑saving FDs with a 5‑year lock‑in?

Yes. The same quarterly compounding formula applies. Enter the principal, the bank's rate, and 5 years as the tenure. Remember that tax‑saving FDs under Section 80C have a mandatory 5‑year lock‑in, and the interest is still fully taxable. The calculator shows the maturity amount but does not factor in the Section 80C tax deduction on the principal.