Banks usually add FD interest to the deposit every quarter, so the interest earns interest too: maturity = P × (1 + R ÷ 400)^quarters. ₹1,00,000 at 7% for 5 years becomes ₹1,41,477.82. An FD that pays its interest out monthly or quarterly earns simple interest instead, and a monthly payout is slightly discounted.
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How is FD interest calculated?
In a cumulative FD (also called a reinvestment deposit) the interest stays in until maturity. Banks usually work out the interest every quarter, at a quarter of the yearly rate, and add it to the deposit, so each quarter earns a little more than the one before.
Maturity value = P × (1 + R ÷ 400)^n
P is the deposit, R the yearly rate in %, n the number of whole quarters (4 a year). Interest = maturity value − P.
₹1,00,000 at 7% for 5 years is 20 quarters: ₹1,00,000 × (1 + 7 ÷ 400)^20 = ₹1,00,000 × 1.0175^20 = ₹1,41,477.82. The interest is ₹41,477.82, against ₹35,000 at simple interest.
| After | Value of the FD | Interest earned that year |
|---|---|---|
| 1 year | ₹1,07,185.91 | ₹7,185.91 |
| 2 years | ₹1,14,888.18 | ₹7,702.27 |
| 3 years | ₹1,23,143.93 | ₹8,255.75 |
| 4 years | ₹1,31,992.93 | ₹8,849 |
| 5 years | ₹1,41,477.82 | ₹9,484.89 |
Is FD interest compounded quarterly?
Usually, yes. RBI’s FAQ on banking says interest on term deposits is payable at quarterly or longer rests, and banks commonly compound cumulative FDs every quarter. No RBI rule forces quarterly compounding, though, so a bank can choose a longer rest. RBI has asked banks to tell depositors how they calculate interest, and most publish the method on their website or deposit receipt. Check it before you compare two FDs.
Cumulative vs payout (non-cumulative) FD
In a payout or non-cumulative FD the interest is sent to your account every month, quarter, half-year or year instead of being added to the deposit. It earns no interest on interest, so it pays less over the same term, but you get the money as you go.
| Type of FD | Interest paid | Total interest in 5 years |
|---|---|---|
| Cumulative (added every quarter) | At maturity | ₹41,477.82 |
| Quarterly payout | ₹1,750 every quarter | ₹35,000 |
| Monthly payout | ₹579.94 every month | ₹34,796.40 |
FD monthly interest formula (monthly payout)
For a monthly payout, RBI’s FAQ says banks calculate the interest for the quarter and may pay it monthly at a discounted value. The discount is there because you get the first two payments before the quarter ends. Banks that publish their method commonly use:
Monthly interest = quarter’s interest ÷ (1 + q + q²), q = 1 + R ÷ 1200
R is the yearly rate in %. The yearly rate this pays is the quarter’s rate (R ÷ 4) ÷ (1 + q + q²) × 12.
For ₹1,00,000 at 7%: the quarter’s interest is ₹1,750; q = 1.005833, so 1 + q + q² = 3.0175. Each month pays ₹1,750 ÷ 3.0175 = ₹579.94, not ₹583.33 (7% ÷ 12). That is a yearly rate of 6.96%. If each monthly payment earned 7% until the quarter ended, the three would add up to exactly ₹1,750. A bank’s own formula can differ by a few paise.
Interest for part of a quarter (FDs in days)
An FD of 444 days, or 1 year 2 months, does not end on a quarter. The rule of the Indian Banks’ Association, quoted by RBI, is that for deposits shorter than three months, or where the last quarter is incomplete, interest is paid for the actual number of days, counting the year as 365 days (some banks count 366 in a leap year). So the whole quarters compound, and the days left over earn simple interest on the grown amount.
- Whole quarters. ₹1,00,000 at 7% opened on 1 January 2026: 4 quarters to 1 January 2027 make ₹1,07,185.91.
- Days left. From 1 January 2027 to maturity on 21 March 2027 is 79 days: ₹1,07,185.91 × 7% × 79 ÷ 365 = ₹1,623.94.
- Maturity. ₹1,07,185.91 + ₹1,623.94 = ₹1,08,809.85, of which ₹8,809.85 is interest.
A deposit shorter than a quarter earns simple interest only: ₹1,00,000 for 45 days at 7% is ₹1,00,000 × 7% × 45 ÷ 365 = ₹863.01.
Effective yield: why 7% becomes 7.19%
Because interest is added every quarter, a cumulative FD earns a little more in a year than its quoted rate. The effective yearly rate is (1 + R ÷ 400)^4 − 1: for 7% that is 7.19%, so ₹1,00,000 earns ₹7,185.91 in the first year, not ₹7,000.
| FD rate a year | Effective yearly rate | First year’s interest on ₹1,00,000 |
|---|---|---|
| 6% | 6.14% | ₹6,136.36 |
| 6.5% | 6.66% | ₹6,660.16 |
| 7% | 7.19% | ₹7,185.91 |
| 7.5% | 7.71% | ₹7,713.59 |
| 8% | 8.24% | ₹8,243.22 |
Some rate sheets also show an annualised yield: total interest ÷ years, as a percent of the deposit. For 5 years at 7% that is ₹41,477.82 ÷ 5 = ₹8,295.56 a year, or 8.3%. It looks higher only because the later years earn interest on interest; the rate is still 7% a year, or 7.19% effective. RBI’s deposit rules say a bank that advertises a compounded yield must also show the simple yearly rate.
Try it in the calculatorSee the effective rate of any FD rate: 7% added quarterlyBreaking an FD early
You can usually close an FD before it matures, but you lose some interest. Banks generally pay the rate that applied to the period the money actually stayed, which is often lower than the rate you booked, and may also cut a penalty. RBI leaves the penalty to each bank’s own policy and says banks should not normally refuse premature withdrawal to individuals. Some deposits are offered without an early-withdrawal option, so read the terms before you book.
TDS on FD interest
From 1 April 2026, under section 393 of the Income-tax Act, 2025, a bank, co-operative bank or post office deducts TDS once the interest it pays you in a tax year crosses ₹50,000, or ₹1,00,000 for a senior citizen. TDS is not an extra tax: FD interest is part of your income and is taxed at your rate either way, and the TDS counts towards that tax when you file your return.
If the tax on your total income for the year will be nil, you can give the bank a declaration so that it does not deduct TDS. Since 1 April 2026 this is Form 121, which replaced Forms 15G and 15H. Limits and forms can change with each Budget, so check the Income Tax Department’s website or ask your bank.
Is an FD insured? DICGC cover
Yes, up to a limit. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures each depositor up to ₹5,00,000 in each bank, principal and interest together. Deposits in all branches of one bank, held in the same right and capacity, count together. Commercial banks, regional rural banks, local area banks and co-operative banks are covered; primary co-operative societies are not.
Sources: RBI FAQ on banking, RBI circular of 8 April 2004 (IBA rule), DICGC FAQs, Income-tax Act, 2025, section 393. Checked in October 2026.
7 short answersFD interest calculation: common questions
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What is the formula for FD interest?
Maturity value = P × (1 + R ÷ 400)^n, where P is the deposit, R the yearly rate in % and n the number of quarters, because banks usually add interest every quarter. ₹1,00,000 at 7% for 5 years (20 quarters) grows to ₹1,41,477.82. A payout FD earns simple interest instead, P × R × years ÷ 100: ₹35,000 on the same deposit.
Why is monthly FD interest less than the rate divided by 12?
Because it is paid at a discounted value. The bank works out the quarter’s interest and pays it in three monthly parts, discounted because you get them earlier. On ₹1,00,000 at 7%, dividing by 12 gives ₹583.33 a month, but the discounted payout is ₹579.94, a yearly rate of 6.96%. By the quarter’s end the three payments are worth the full quarter’s interest.
What is the effective yield on an FD?
It is what the deposit really earns in a year once the quarterly interest is added in. 7% compounded quarterly is (1 + 7 ÷ 400)^4 − 1 = 7.19%. The "annualised yield" some banks show is different: total interest ÷ years, which for 5 years at 7% is 8.3%, because it includes interest on interest from the later years.
How is interest calculated on an FD of 444 days?
Whole quarters compound, and the days after the last full quarter earn simple interest for the actual days, the year counted as 365 days. ₹1,00,000 at 7% opened on 1 January 2026: 4 quarters make ₹1,07,185.91, then 79 days add ₹1,623.94, so the FD pays ₹1,08,809.85 after 444 days.
What happens to the interest if I break an FD early?
You usually get the rate for the period the money actually stayed, not the rate you booked, and the bank may cut a penalty. RBI lets each bank set its own penalty and says banks should not normally refuse premature withdrawal by individuals. Some deposits are sold without an early-withdrawal option, so check the terms before you book.
When is TDS deducted on FD interest?
When the interest one bank pays you in a tax year crosses ₹50,000, or ₹1,00,000 for a senior citizen, under section 393 of the Income-tax Act, 2025, which applies from 1 April 2026. If the tax on your total income will be nil, give the bank Form 121, which replaced Forms 15G and 15H. The interest is taxable either way.
Is my FD safe if the bank fails?
Up to ₹5,00,000 in each bank, yes. DICGC insures each depositor up to ₹5,00,000 per bank, principal and interest together, counting all branches of that bank. It covers commercial banks, regional rural banks, local area banks and co-operative banks. Money above that limit in one bank is not insured.