A Fixed Deposit (FD) is one of the most popular and trusted investment options in India. Whether you are a salaried professional, a retiree, or someone looking for guaranteed returns, FDs offer a safe and predictable way to grow your money. In this comprehensive guide, we will explain how FD interest is calculated, compare different types of FDs, look at the latest bank rates for 2026, and share tips to maximize your returns.
What is a Fixed Deposit?
A Fixed Deposit is a financial instrument offered by banks and non-banking financial companies (NBFCs) where you deposit a lump sum amount for a fixed tenure at a predetermined interest rate. Unlike a savings account, the money in an FD is locked in for the chosen period, and in return, you earn a higher rate of interest.
Here are the key features of a Fixed Deposit:
- Minimum amount: Most banks allow FDs starting from as low as ₹1,000, though some offer FDs from ₹100 for specific schemes.
- Tenure options: FDs can be opened for periods ranging from 7 days to 10 years. The most common tenures are 1 year, 3 years, and 5 years.
- Guaranteed returns: The interest rate is fixed at the time of deposit and does not change during the tenure, regardless of market conditions.
- Safety: Bank FDs are insured up to ₹5 lakh per depositor per bank by the DICGC (Deposit Insurance and Credit Guarantee Corporation).
- Loan facility: You can avail a loan against your FD, typically up to 90% of the deposit amount.
- Premature withdrawal: Most banks allow premature withdrawal of FDs, though a penalty of 0.5% to 1% on the applicable interest rate is usually charged.
FDs are ideal for conservative investors who prioritize capital protection and guaranteed returns over higher but uncertain market-linked returns.
How FD Interest is Calculated
FD interest can be calculated using two methods: Simple Interest and Compound Interest. Most banks use compound interest for FDs with tenure longer than 6 months.
Compound Interest Formula
The standard formula used by FD calculators is:
M = P × (1 + r/n)^(n×t)
Where:
- M = Maturity amount
- P = Principal (deposit amount)
- r = Annual interest rate (in decimal, e.g., 7% = 0.07)
- n = Number of times interest is compounded per year (quarterly = 4, monthly = 12)
- t = Tenure in years
Worked Example
Let us calculate the maturity amount for an FD of ₹1,00,000 at 7% annual interest for 5 years, compounded quarterly.
- P = ₹1,00,000
- r = 7% = 0.07
- n = 4 (quarterly compounding)
- t = 5 years
- M = 1,00,000 × (1 + 0.07/4)^(4×5)
- M = 1,00,000 × (1 + 0.0175)^20
- M = 1,00,000 × (1.0175)^20
- M = 1,00,000 × 1.414778
- M = ₹1,41,478
The total interest earned is ₹41,478. This means your ₹1,00,000 grows to ₹1,41,478 in 5 years with quarterly compounding at 7%. Notice that this is higher than what simple interest would yield (₹35,000), thanks to the power of compounding — you earn interest on your interest.
Simple Interest Formula
For very short-term FDs (less than 6 months), some banks use simple interest:
SI = P × r × t
Using the same example: SI = 1,00,000 × 0.07 × 5 = ₹35,000. The difference of ₹6,478 shows why compound interest is significantly more beneficial for longer tenures.
Cumulative vs Non-Cumulative FD
When opening an FD, you need to choose how you want to receive the interest. There are two options:
| Feature | Cumulative FD | Non-Cumulative FD |
|---|---|---|
| Interest payout | At maturity (reinvested) | Monthly, quarterly, half-yearly, or yearly |
| Compounding benefit | Yes — interest earns interest | No — interest is paid out |
| Maturity amount | Higher (principal + compounded interest) | Lower (only principal returned) |
| Regular income | No | Yes — provides periodic cash flow |
| Best for | Wealth creation, long-term goals | Retirees, those needing monthly income |
When to choose Cumulative: If you do not need regular income and want maximum returns. The compounding effect makes a significant difference over longer tenures. A ₹1,00,000 FD at 7% for 5 years gives ₹1,41,478 in cumulative mode versus approximately ₹1,35,000 in non-cumulative (quarterly payout) mode.
When to choose Non-Cumulative: If you are a retiree or need a steady stream of income to cover monthly expenses. The interest payout acts like a pension, providing predictable cash flow without touching the principal.
FD Interest Rates 2026 — All Banks
FD interest rates vary across banks and tenures. Below are the approximate FD rates offered by major banks in India as of mid-2026 for general citizens (senior citizens get 0.25% to 0.75% extra):
| Bank | 1 Year | 3 Years | 5 Years |
|---|---|---|---|
| SBI | 6.80% | 7.00% | 6.75% |
| HDFC Bank | 6.85% | 7.10% | 7.00% |
| ICICI Bank | 6.90% | 7.15% | 7.00% |
| Axis Bank | 6.85% | 7.10% | 7.00% |
| Kotak Mahindra | 6.75% | 7.00% | 6.75% |
| PNB | 6.80% | 7.00% | 6.75% |
| Bank of Baroda | 6.75% | 7.00% | 6.75% |
Note: These rates are indicative and subject to change. Always check the bank's official website for the latest rates before investing. Small finance banks and NBFCs often offer 0.5% to 1.5% higher rates than major banks, but they may carry slightly higher risk.
Tax on FD Interest
FD interest is fully taxable under the head "Income from Other Sources" and is added to your total income. Here is what you need to know about taxation:
TDS on FD Interest
Banks deduct TDS (Tax Deducted at Source) under Section 194A if your total interest income from all FDs exceeds:
- ₹40,000 per year for general citizens (₹50,000 for senior citizens) — applicable from FY 2019-20 onwards.
- TDS is deducted at 10% if PAN is provided, or 20% if PAN is not provided.
Section 80TTB for Senior Citizens
Senior citizens (aged 60 and above) can claim a deduction of up to ₹50,000 on interest income from savings accounts, FDs, and RDs under Section 80TTB. This is a significant benefit that reduces the tax burden for retirees who depend on FD interest income.
How to Avoid TDS
If your total income is below the taxable limit, you can submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to the bank to prevent TDS deduction. These forms are declarations that your estimated total income for the year will be below the basic exemption limit.
Even if TDS is deducted, you can claim a refund while filing your income tax return if your actual tax liability is lower. The key point is that FD interest is taxable at your income tax slab rate — if you are in the 30% bracket, you will owe additional tax beyond the 10% TDS already deducted.
FD vs RD vs SIP — Which is Better?
Choosing between FD, RD (Recurring Deposit), and SIP (Systematic Investment Plan) depends on your financial goals, risk appetite, and cash flow situation:
| Feature | Fixed Deposit | Recurring Deposit | SIP (Mutual Fund) |
|---|---|---|---|
| Investment type | Lump sum | Monthly installments | Monthly installments |
| Returns | 6.5%–7.5% (guaranteed) | 6.5%–7.5% (guaranteed) | 10%–14% (market-linked) |
| Risk | Nearly zero | Nearly zero | Moderate to high |
| Liquidity | Premature withdrawal with penalty | Premature withdrawal with penalty | Redeemable anytime (exit load may apply) |
| Tax benefit | 5-year tax-saving FD under 80C | No tax benefit | ELSS funds qualify under 80C |
| Best for | Lump sum idle money, capital protection | Building savings habit, no lump sum | Long-term wealth creation (5+ years) |
If you have a lump sum and want guaranteed returns, FD is the right choice. If you want to build a savings habit with small monthly amounts, choose RD. If you have a long investment horizon and can tolerate market fluctuations, SIP in equity mutual funds can deliver significantly higher returns over 10+ years.
Tips to Maximize FD Returns
- Ladder your FDs: Instead of putting all your money in one FD, split it across multiple FDs with different tenures (1 year, 2 years, 3 years, 5 years). This ensures you have access to funds periodically and can reinvest at potentially higher rates.
- Choose cumulative mode: Unless you need regular income, always opt for cumulative FDs to benefit from the compounding effect. The difference can be substantial over 5+ years.
- Compare rates across banks: Don't just go with your existing bank. Small finance banks like AU Small Finance Bank, Equitas, and Ujjivan often offer 0.5% to 1.5% higher rates than major banks. These banks are also covered by DICGC insurance up to ₹5 lakh.
- Book FDs when rates are high: FD rates are influenced by RBI's repo rate. When RBI raises rates, banks typically increase FD rates. Lock in higher rates by choosing longer tenures during high-interest-rate periods.
- Claim 80C deduction: A 5-year tax-saving FD qualifies for deduction under Section 80C up to ₹1.5 lakh. While the interest is still taxable, the principal deduction reduces your overall tax liability.
Want to calculate your FD returns?
Use our free FD Calculator to compute maturity amount, interest earned, and compare different scenarios instantly.
Use FD Calculator →Frequently Asked Questions
What is the minimum amount to open an FD?
Most banks allow you to open an FD with as low as ₹1,000. Some banks offer FDs starting from ₹100 for special schemes. There is no upper limit, though deposits above ₹2 crore may be classified as bulk deposits with different rates.
Is FD interest taxable if I reinvest it (cumulative FD)?
Yes, FD interest is taxable on an accrual basis, meaning you must pay tax on the interest earned each year, even if you have chosen a cumulative FD where the interest is paid at maturity. The interest is added to your income and taxed at your applicable slab rate.
Can I break my FD before maturity?
Yes, most banks allow premature withdrawal of FDs. However, a penalty of 0.5% to 1% is usually charged on the applicable interest rate for the period the deposit was held. Some banks offer penalty-free premature withdrawal for senior citizens.
Which is better — bank FD or company FD?
Company FDs (offered by NBFCs and corporates like Bajaj Finance, Shriram Transport) typically offer 0.5% to 2% higher interest rates than bank FDs. However, company FDs are not covered by DICGC insurance and carry higher credit risk. For safety, stick with bank FDs; for higher returns and if you can assess the company's credit rating (AAA preferred), company FDs can be considered.
What happens to my FD if the bank shuts down?
Bank deposits (savings, FD, RD) are insured up to ₹5 lakh per depositor per bank by the DICGC. If a bank fails, you will receive up to ₹5 lakh (including principal and interest) within a few months. To stay safe, spread your deposits across multiple banks if the total exceeds ₹5 lakh.