When you put money in a fixed deposit, the bank doesn't simply hand back your deposit plus a flat slice of interest at the end. It compounds your interest — for most bank FDs, once every quarter — so you steadily earn interest on your interest as the deposit runs its term. The standard formula banks use is A = P(1 + r/n)^(n·t), where A is the maturity amount, P is your principal, r is the annual interest rate written as a decimal, n is how many times a year the interest is compounded (four for the usual quarterly compounding), and t is the tenure in years. Get those four inputs right and you can work out the maturity value of almost any fixed deposit yourself.
The rest of this guide unpacks that formula in plain language: the difference between simple and compound interest, why banks settled on quarterly compounding, a fully worked example with real rupee figures, how changing the amount, rate or tenure moves the result, the difference between cumulative and non-cumulative FDs, what "annualised yield" actually means, and how tax quietly eats into the number the bank advertises.
Simple interest versus compound interest
The cleanest way to understand FD interest is to first see what it is *not*. Simple interest is calculated only on your original principal, year after year. Deposit ₹1,00,000 at 7% simple interest for five years and you earn ₹7,000 every year — a flat ₹35,000 over the term, leaving you with ₹1,35,000 at maturity. The interest never grows, because it's always calculated on the same ₹1,00,000.
Compound interest is different, and it's what fixed deposits actually pay. Here, the interest you earn is periodically added back to your balance, and the next round of interest is calculated on that larger balance. So in a compounding FD, the ₹1,750 of interest credited in the first quarter itself starts earning interest in the second quarter. Over a five-year deposit that snowball effect adds up to a meaningfully higher maturity value than simple interest would — and the longer the tenure, the wider that gap grows.
Why banks compound quarterly
In theory, interest could be compounded annually, half-yearly, quarterly, monthly or even daily, and the more often it compounds, the more you earn on the same headline rate. Indian banks have largely standardised on quarterly compounding for fixed deposits — interest is calculated and added to your balance four times a year, which is why n = 4 in the formula above.
Quarterly compounding is the convention you'll see quoted for most cumulative bank FDs, so it's the sensible default assumption when you estimate returns. It's worth remembering, though, that the compounding frequency is a genuine part of the deal, not a detail. Two FDs advertising the same 7% rate can return slightly different amounts if one compounds quarterly and the other only annually. When you compare deposits, check both the rate and how often it compounds.
A worked example: ₹1,00,000 at 7% for five years
Let's put real numbers through the formula. Suppose you deposit ₹1,00,000 (P) at an annual rate of 7% (r = 0.07), compounded quarterly (n = 4), for five years (t = 5).
First, work out the per-quarter rate: r divided by n is 0.07 divided by 4, which is 0.0175 — that's 1.75% credited each quarter. Next, count the number of compounding periods: n times t is 4 times 5, which is 20 quarters. The formula becomes A = 1,00,000 × (1 + 0.0175) raised to the power of 20, or 1,00,000 × (1.0175) to the power 20.
Working that out, (1.0175) to the power 20 comes to roughly 1.4149. Multiply by your ₹1,00,000 principal and the maturity amount lands at about ₹1,41,486 — call it ₹1.41 lakh. Your interest earned is therefore around ₹41,486.
Notice how that compares with simple interest. The same deposit at 7% simple interest would have earned a flat ₹35,000. Quarterly compounding earned you roughly ₹6,486 more on exactly the same money and the same headline rate — purely because your interest kept earning interest. That difference is the whole point of compounding, and it's why the number the bank quotes and the number you actually receive are not the same thing. Rather than doing this arithmetic by hand each time, you can run any amount, rate and tenure through our FD calculator to see the maturity value instantly.
How the amount, tenure and rate change the result
Three levers move an FD's maturity value, and they don't all behave the same way.
The principal scales the result in a straight line. Double your deposit and you double both the interest and the maturity amount — the percentage return is unchanged. A ₹2,00,000 deposit on the same terms as above simply matures at about ₹2,82,972 instead of ₹1,41,486.
The rate and the tenure, by contrast, compound. A higher rate doesn't just add a little more interest — because that extra interest itself compounds every quarter, small differences in the rate widen noticeably over long tenures. The same is true of time: stretch the deposit from five years to ten and the interest earned more than doubles, because the later years are compounding on a much larger accumulated balance. This is why a modest-looking rate over a long horizon can still build a surprisingly large corpus, and why patience matters more than chasing the last fraction of a percent.
Cumulative versus non-cumulative FDs
A fixed deposit can pay you in one of two ways, and the choice changes both your cash flow and your final return.
In a cumulative FD, the interest is not paid out along the way. It's reinvested every quarter and compounds inside the deposit, and you receive the entire lump sum — principal plus all the accumulated interest — only at maturity. This is the version the formula above describes, and it delivers the highest maturity value because nothing leaves the deposit to interrupt the compounding. Cumulative FDs suit savers who don't need regular income and simply want their money to grow into the largest possible sum.
In a non-cumulative FD, the interest is paid out to you at regular intervals — monthly, quarterly, half-yearly or annually, depending on what you choose — instead of being reinvested. Because the interest keeps leaving the deposit, it doesn't compound on itself, so the total return over the term is somewhat lower than a cumulative FD of the same rate and tenure. The trade-off is a steady income stream, which is exactly why retirees and anyone living off their savings often prefer this option. If you're building savings gradually through monthly instalments rather than a single lump sum, that's a recurring deposit instead — our RD calculator handles that case.
What "annualised yield" means
Because of quarterly compounding, the rate the bank quotes and the rate you effectively earn over a year aren't identical. The quoted 7% is the nominal annual rate. The annualised yield — sometimes called the effective annual yield — is what that nominal rate actually works out to once you account for interest compounding four times within the year.
Using our example, a nominal 7% compounded quarterly gives an effective annual yield of (1.0175) to the power 4, minus 1 — which comes to about 7.19%. So a deposit advertised at 7% is really earning you closer to 7.19% a year in effective terms, thanks to compounding. It's a small gap, but it's the honest measure of your return, and it's the fairer basis for comparing two deposits that compound at different frequencies.
Tax on FD interest and TDS
Here's the part that trips up many savers: FD interest is fully taxable. The interest you earn is added to your total income and taxed at your income tax slab rate, exactly like your salary. So a depositor in the 30% bracket keeps far less of a headline 7% than someone with little or no taxable income — which means the after-tax return, not the advertised rate, is what you should really compare across options. You can see roughly how much tax your overall income attracts using our income tax calculator.
Separately, banks deduct TDS (tax deducted at source) on FD interest once your interest from that bank crosses an annual threshold — typically at 10% if your PAN is on record, and higher if it isn't. It's important to understand that TDS is not a separate or final tax; it's an advance collection that's adjusted against your total tax liability when you file your return. If the bank deducted too much, you claim it back; if your slab rate is higher than the TDS rate, you pay the difference at filing. Depositors whose total income falls below the taxable limit can submit Form 15G (or Form 15H for senior citizens) to ask the bank not to deduct TDS at all. The exact thresholds and rules are revised from time to time, so treat these as the general framework and confirm the current figures before you plan around them.
The senior-citizen edge and the 5-year tax-saving FD
Two features are worth knowing before you open a deposit. First, senior citizens usually earn an extra margin on FD rates — commonly around 0.25% to 0.50% above the standard rate offered to other depositors, for the same tenure. On a long, large deposit that small edge compounds into a worthwhile difference, which makes FDs particularly attractive for retirees seeking safe, predictable returns.
Second, there's the five-year tax-saving FD. Unlike an ordinary fixed deposit, a deposit in this specific product qualifies for a deduction under Section 80C, up to the overall 80C ceiling, which can lower your taxable income in the year you invest. The catch is a mandatory five-year lock-in — you cannot break it early or take a loan against it — and the interest it earns is still fully taxable in the normal way. So it's a deposit that saves tax on the way in but not on the interest it generates, and it only makes sense if you're comfortable locking the money away for the full term.
The bottom line
Calculating FD interest comes down to one formula — A = P(1 + r/n)^(n·t) — and understanding that banks typically compound quarterly, so n is 4. Once you internalise that, the rest follows: compounding beats simple interest, longer tenures and higher rates compound harder, cumulative deposits grow the most while non-cumulative ones pay you along the way, the effective yield is slightly above the quoted rate, and tax at your slab is the number that really decides what you keep. Plug your own figures into the FD calculator to see your maturity value, and use the RD calculator if you're saving in monthly instalments instead. This article is for general education only and is not financial advice — confirm current rates, tax thresholds and rules from official sources before you commit your money.