Banking

How Is FD Interest Calculated?

FD interest is calculated using compound interest. The maturity value depends on the principal, the interest rate, the term, and how often interest is compounded.

Last updated2026-10-05· RupeeVeda Editorial Team· Educational content, not financial advice · How we check our guides

Key Takeaways

  • Cumulative FDs use compound interest, not simple interest.
  • More frequent compounding gives a slightly higher maturity value.
  • Common compounding frequencies are quarterly, half-yearly, and yearly.
  • The rate you enter should be the actual rate quoted by your bank.

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The compound interest formula

For a cumulative FD, maturity value is:

M = P × (1 + r/n)n×t

where P is the principal, r is the annual rate (as a decimal), n is the number of compounding periods per year, and t is the term in years.

Why frequency matters

The more often interest is compounded, the sooner earned interest starts earning its own interest. Quarterly compounding therefore yields slightly more than annual compounding for the same rate. Many Indian banks compound FD interest quarterly, but you should confirm the frequency for your specific deposit.

Illustration: ₹2 lakh for one year at 6.5%

With quarterly compounding, the quarterly rate is 6.5 ÷ 4 = 1.625%. Maturity value = 2,00,000 × (1.01625)4 ≈ ₹2,13,320. Under simple interest it would be ₹2,13,000. The extra ₹320 is interest earned on the first three quarters' interest, and it means the effective annual yield is about 6.66% rather than 6.5%.

For a 3-year deposit the same rate gives 2,00,000 × (1.01625)12 ≈ ₹2,42,370 — not ₹2,39,000 as a flat 6.5% × 3 would suggest.

Details that change the number

  • Short deposits (under about six months) are often paid simple interest, because no quarter completes.
  • Odd periods (e.g. 400 days) are usually handled as whole quarters compounded plus simple interest for the remaining days — bank practice varies slightly, so the certificate may differ from a calculator by a few rupees.
  • Premature withdrawal re-prices the deposit at the rate for the period actually held, less a penalty, so breaking a 5-year FD after 1 year earns the 1-year rate minus the penalty — not the 5-year rate.
  • Senior-citizen rates are typically a fixed addition to the card rate and compound the same way.
  • TDS is deducted when interest in a financial year exceeds the bank's threshold; the gross interest still accrues to the deposit, but the maturity amount is net of tax deducted. See how FD interest is taxed.

Enter your bank's quoted rate and compounding frequency in the FD calculator to see the year-by-year growth.

Sources

We reference primary and official sources. Rate- and rule-dependent details must be verified against the latest official information.

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Cumulative vs Non-Cumulative FD

A cumulative FD reinvests interest until maturity for a higher final value; a non-cumulative FD pays interest out periodically for regular income.

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How Compound Interest Works

Compound interest is interest earned on both your principal and previously earned interest. Over time, and with more frequent compounding, it grows money faster than simple interest.

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How Is Interest on FDs and RDs Taxed?

Interest earned on fixed deposits and recurring deposits is fully taxable as 'income from other sources' at your slab rate. Banks may deduct TDS above thresholds, but you owe tax on the interest either way. The post-tax return is what to compare against alternatives.

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What Is a Fixed Deposit?

A fixed deposit is a deposit placed with a bank for a fixed term at an interest rate agreed at the time of booking, offering predictable returns and high capital stability.

Disclaimer: This article is for general education only and is not investment, tax, or financial advice. Statutory rates, tax rules, and regulations change over time — verify current figures with official primary sources before acting.