Fixed deposits remain India's most trusted investment — but most people do not know how their interest is actually calculated, when TDS gets deducted, or how much a senior citizen premium actually adds up to over 5 years. This guide explains the FD formula, all compounding frequencies, TDS rules, best rates in 2026, and exactly when a tax-saving FD makes sense — with fully worked examples.
Every fixed deposit in India uses the compound interest formula. Unlike simple interest where you earn only on the principal, compound interest earns you interest on your interest — which is why an FD grows faster the longer you hold it.
The formula is: A = P × (1 + r/n)^(n×t)
Total interest earned = A minus P. The difference between your maturity amount and your deposit is your entire return. For a cumulative FD, this full amount arrives at maturity. For a non-cumulative FD, interest is paid out at intervals and the principal is returned at the end.
Most Indian banks compound quarterly — meaning n = 4 in the formula. Some banks offer monthly compounding, which gives slightly higher returns. Annual compounding gives the lowest return at the same stated rate. Always check the compounding frequency before booking.
A few banks and post office schemes use simple interest for FDs below one year. On a ₹1 lakh FD at 7% for 6 months: simple interest gives ₹3,500, while quarterly compounding gives ₹3,543 — a small difference at short tenures but it grows significantly over 3–5 years. Always confirm which method your bank uses for the specific tenure you are booking.
The same interest rate produces different maturity amounts depending on how often the bank compounds it. Here is a direct comparison on ₹5 lakh at 7% for 3 years across all four frequencies:
| Compounding Frequency | n (times/year) | Maturity Amount | Total Interest | Extra vs Annual |
|---|---|---|---|---|
| Annual | 1 | ₹6,12,520 | ₹1,12,520 | — |
| Half-Yearly | 2 | ₹6,13,591 | ₹1,13,591 | +₹1,071 |
| Quarterly (most common) | 4 | ₹6,14,134 | ₹1,14,134 | +₹1,614 |
| Monthly | 12 | ₹6,14,494 | ₹1,14,494 | +₹1,974 |
Based on ₹5,00,000 principal at 7% p.a. for 3 years. Quarterly compounding highlighted as the most common across Indian banks.
Key takeaway: The difference between monthly and quarterly compounding is small — ₹360 on ₹5 lakh over 3 years. Don't chase compounding frequency too aggressively. A bank offering quarterly compounding at 7.5% beats monthly compounding at 7% by a wide margin. Rate matters more than frequency at typical FD amounts.
This is the most important decision when booking an FD. Both earn the same interest rate — but they differ completely in when and how you receive the money.
Rule of thumb: If you do not need the money during the FD tenure — choose cumulative. If you are a retiree or depend on the FD for monthly expenses — choose non-cumulative with quarterly or monthly payout. The cumulative option always gives a higher final return at the same rate.
FD rates vary significantly across bank categories. Small finance banks consistently offer the highest rates but come with different risk profiles. Major PSU and private banks offer lower rates but higher trust and deposit insurance coverage.
Indicative rates for 1–3 year tenures as of May 2026. Rates change frequently — always verify on the bank's official website before booking.
| Tenure | SBI | HDFC Bank | Post Office | Small Finance Banks |
|---|---|---|---|---|
| 7 days – 3 months | 3.50% | 3.50% | Not available | 4.50% – 5.50% |
| 3 months – 6 months | 5.50% | 5.75% | Not available | 6.00% – 7.00% |
| 6 months – 1 year | 6.75% | 6.60% | Not available | 7.50% – 8.50% |
| 1 year – 2 years | 6.80% | 7.00% | 6.90% | 8.00% – 9.00% |
| 2 years – 3 years | 7.00% | 7.25% | 7.00% | 8.25% – 9.25% |
| 3 years – 5 years | 6.75% | 7.00% | 7.50% | 7.75% – 8.75% |
| 5 years (Tax-saving) | 6.50% | 7.00% | 7.50% | 7.50% – 8.25% |
Small finance bank risk note: Small finance banks offer much higher rates but carry higher risk than major PSU banks. All deposits up to ₹5 lakh are covered by DICGC insurance — the same as any other bank. If your FD amount exceeds ₹5 lakh at a small finance bank, the excess is uninsured. Split large deposits across banks if you want full DICGC coverage.
Almost all Indian banks offer an additional interest rate premium to senior citizens (aged 60 and above) on their fixed deposits. This premium typically ranges from 0.25% to 0.75% above the regular rate and applies to FDs up to ₹2 crore at most banks.
| Bank | Senior Citizen Premium | Effective Best Rate (Senior) | TDS Threshold |
|---|---|---|---|
| SBI | +0.50% | 7.75% | ₹50,000/year |
| HDFC Bank | +0.50% | 8.25% | ₹50,000/year |
| ICICI Bank | +0.50% | 8.25% | ₹50,000/year |
| Post Office TD | No extra premium | 7.50% | ₹50,000/year |
| Small Finance Banks | +0.25% – +0.50% | Up to 10.00% | ₹50,000/year |
Beyond the rate premium, senior citizens also benefit from a higher TDS exemption threshold of ₹50,000 per year (versus ₹40,000 for general customers) before the bank is required to deduct TDS at 10%. Super senior citizens (aged 80+) receive an additional premium of 0.10%–0.25% at select banks.
Senior citizen tip: If your total income (including FD interest) is below ₹3 lakh (the old regime exemption for senior citizens), submit Form 15H at the start of every April to your bank. This prevents TDS deduction entirely and avoids the hassle of claiming a refund via ITR. Form 15H must be resubmitted every financial year — it does not carry over automatically.
TDS (Tax Deducted at Source) on FD interest is one of the most misunderstood topics in personal finance. Many people assume TDS is the final tax on their FD — it is not. TDS is just an advance tax collected by the bank on behalf of the government. Your actual tax liability depends on your income slab.
| Investor Type | TDS Threshold | TDS Rate (with PAN) | TDS Rate (without PAN) |
|---|---|---|---|
| General (below 60 years) | ₹40,000/year per bank | 10% | 20% |
| Senior Citizen (60–79 years) | ₹50,000/year per bank | 10% | 20% |
| Super Senior Citizen (80+) | ₹50,000/year per bank | 10% | 20% |
Critical point: The TDS threshold is per bank — not per FD. If you have three FDs at the same bank earning ₹15,000 interest each (total ₹45,000), TDS applies on the full ₹45,000. But if those three FDs are at three different banks (₹15,000 each), no TDS is deducted anywhere. Splitting FDs across banks is a legitimate strategy to stay below the per-bank TDS threshold.
Form 15G is for individuals below 60 whose total income for the year is expected to be below the basic exemption limit (₹2.5 lakh under old regime, ₹3 lakh for senior citizens). Form 15H is exclusively for senior citizens aged 60 and above whose tax liability is expected to be nil.
Visit your bank branch or submit via netbanking (most major banks now accept Form 15G/15H online). Submit at the beginning of each financial year — ideally in April. If you miss it, TDS deducted before submission cannot be reversed by the bank; you must claim it as a refund via ITR.
The form must be submitted to each bank individually — it does not apply across institutions. If you have FDs at SBI and HDFC, submit Form 15G/15H at both banks. Keep a copy of the acknowledgment from each bank.
Submitting Form 15G/15H does not mean the interest is tax-free — it only prevents TDS deduction. FD interest is still fully taxable as Income from Other Sources and must be declared in your ITR every year. Failure to declare it creates a mismatch with Form 26AS and triggers notices.
Do not submit false 15G/15H. Submitting Form 15G or 15H when your income exceeds the taxable limit is a punishable offence under Section 277 of the Income Tax Act. If your income is above the threshold and you submit a false form, the bank will not deduct TDS — but you are still liable for the full tax plus interest and penalties.
Three complete FD calculations at common investment amounts — showing maturity value, total interest, TDS, and take-home at maturity. All examples use SBI's 7% rate, 3-year tenure, quarterly compounding, general category investor with PAN submitted.
TDS is not a final tax. In Example 3, the ₹25,023 TDS is deducted by the bank and deposited with the government. When the senior citizen files their ITR, this TDS is credited against their total tax liability. If their total income puts them in the 5% slab or below the exemption limit, most or all of the TDS comes back as a refund. Always file ITR to claim TDS credit.
A tax-saving FD is a special fixed deposit with a mandatory 5-year lock-in period that qualifies for deduction under Section 80C of the Income Tax Act. You can claim up to ₹1.5 lakh invested in a tax-saving FD as a deduction from your taxable income — but only under the old tax regime.
| Feature | Tax-Saving FD | Regular FD |
|---|---|---|
| Section 80C deduction | Yes — up to ₹1.5 lakh | No |
| Lock-in period | Exactly 5 years — cannot break early | Premature withdrawal allowed (with penalty) |
| Interest taxable? | Yes — fully taxable every year | Yes — fully taxable every year |
| TDS applicable? | Yes — same rules as regular FD | Yes — same rules |
| Loan against FD | Not allowed | Allowed |
| Joint account | Only first holder gets 80C benefit | Both holders can use |
| Available in old regime? | Yes | N/A |
| Available in new regime? | No 80C benefit | N/A |
Common misconception: The 80C deduction on a tax-saving FD applies only to the principal invested — not to the interest. The interest earned on a tax-saving FD is fully taxable every year as Income from Other Sources. You get a deduction on the way in, but you pay tax on all earnings on the way out. It is not a tax-free instrument like PPF or ELSS in terms of the return.
Most people book an FD at their salary bank out of convenience — without checking if a better rate is available elsewhere. The difference between SBI's 7% and a small finance bank's 9% on ₹5 lakh over 3 years is over ₹40,000 in extra interest. Spending 10 minutes comparing rates before booking can be the highest-return activity in personal finance.
Many eligible taxpayers submit Form 15G or 15H once and assume it continues automatically. It does not — it expires at the end of each financial year and must be resubmitted every April. Missing the resubmission means the bank deducts TDS throughout the year. You can still claim it back via ITR, but it locks up cash unnecessarily.
If your PAN is not linked to your FD account, the bank is required to deduct TDS at 20% instead of 10% once interest crosses the threshold. This is not a fine — it is just a higher TDS rate that you claim back via ITR. But it unnecessarily locks up more money. Always ensure your PAN is registered with your bank before booking any FD above ₹40,000 expected annual interest.
FD interest must be declared in your income tax return every year — including cumulative FDs where you have not yet received the interest. The bank reports interest accrued to the Income Tax Department via Form 26AS. If you skip declaring it, the ITR system flags the mismatch and sends an automated notice. Declare all FD interest proactively — it is far simpler than responding to a scrutiny notice.
Most banks charge a premature withdrawal penalty of 0.5%–1% on the applicable rate for the period held. On a ₹5 lakh FD broken after 2 years of a 3-year tenure, the penalty can reduce your effective return significantly. Before breaking an FD, calculate the penalty and compare it against the cost of a personal loan or overdraft facility against the FD — which is often cheaper than the penalty.
FD optimisation checklist: Compare rates across at least 3 banks → Link PAN to FD account → Submit Form 15G/15H every April if eligible → Choose cumulative if you don't need interim income → Declare all FD interest in ITR every year → Keep FD tenure aligned with your actual need to avoid premature withdrawal penalty.