Banking
How Fixed Deposit Interest Is Calculated
Last updated 17 June 2026Key Takeaways
- FD interest is usually compound interest, not simple interest — each period's interest is added to the principal, so later interest is earned on a larger balance.
- Banks most commonly compound quarterly (every three months). ₹1,00,000 at an assumed 7% for 5 years gives about ₹1,41,478.
- Compounding beats simple interest: on that same deposit, compounding earns ₹41,478 versus ₹35,000 with simple interest — about ₹6,478 more.
- A cumulative FD compounds and pays at maturity; a non-cumulative FD pays interest out periodically and effectively earns simple interest on the principal.
- Use the FD calculator to apply your own amount, rate, tenure and compounding frequency instantly.
What Is FD Interest?
When you open a fixed deposit, the bank pays you interest for keeping your money with it over a fixed tenure. The rate is fixed when you open the FD and does not change for its life, regardless of later movements in market rates.
What makes an FD grow faster than you might expect is how that interest is applied. For most FDs, the interest you earn each period is added back to your deposit, and the next period's interest is then calculated on the new, larger balance. That is the principle of compounding — and it is the main thing this page explains.
Simple Interest vs Compound Interest
The difference between these two is the whole story of FD returns.
- Simple interest is calculated only on your original deposit, every period. Formula: SI = P × r × t.
- Compound interest is calculated on your original deposit plus the interest already earned. This is what most FDs use.
On ₹1,00,000 at an assumed 7% for 5 years:
| Method | Interest earned | Maturity value |
|---|---|---|
| Simple interest | ₹35,000 | ₹1,35,000 |
| Compound interest (quarterly) | ₹41,478 | ₹1,41,478 |
That extra ₹6,478 comes purely from interest earning further interest. The longer the tenure, the larger this gap becomes.
FD Interest Formula
For a cumulative FD, the maturity amount is:
A = P × (1 + r ÷ n)^(n × t)
In plain language: take your deposit, add a small slice of interest every compounding period, and let it grow for the whole tenure. The terms:
| Symbol | Meaning | Example |
|---|---|---|
| A | Maturity amount (what you get back) | ₹1,41,478 |
| P | Principal (what you deposit) | ₹1,00,000 |
| r | Annual interest rate as a decimal | 7% → 0.07 |
| n | Compounding periods per year | Quarterly → 4 |
| t | Tenure in years | 5 |
Interest earned = A − P. (For simple interest instead, use SI = P × r × t.)
Worked Example
Let's calculate ₹1,00,000 at an assumed 7% for 5 years, compounded quarterly, step by step.
Step 1 — Interest rate per period (r ÷ n). 0.07 ÷ 4 = 0.0175 (i.e., 1.75% per quarter)
Step 2 — Total number of periods (n × t). 4 × 5 = 20 quarters
Step 3 — Apply the formula. A = 1,00,000 × (1 + 0.0175)²⁰ A = 1,00,000 × (1.0175)²⁰ A = 1,00,000 × 1.41478 = ₹1,41,478
Step 4 — Interest earned. ₹1,41,478 − ₹1,00,000 = ₹41,478
So your ₹1 lakh earns about ₹41,478 over five years at this example rate. (7% is used only to illustrate — your bank's actual rate will differ.) Try your own figures in the FD calculator.
Quarterly Compounding Explained
"Compounded quarterly" means the bank calculates interest every three months, adds it to your balance, and then calculates the next quarter's interest on that higher balance. Here is exactly how the first year of our example unfolds (quarterly rate = 1.75%):
| Quarter | Opening balance | Interest @ 1.75% | Closing balance |
|---|---|---|---|
| Q1 | ₹1,00,000 | ₹1,750 | ₹1,01,750 |
| Q2 | ₹1,01,750 | ₹1,781 | ₹1,03,531 |
| Q3 | ₹1,03,531 | ₹1,812 | ₹1,05,343 |
| Q4 | ₹1,05,343 | ₹1,843 | ₹1,07,186 |
After one year the balance is about ₹1,07,186 — roughly ₹7,186 of interest, slightly more than the ₹7,000 simple interest would give in year one. Notice the interest amount rises each quarter even though the rate is unchanged, because it is calculated on a growing balance. Over 20 quarters this compounding produces the ₹1,41,478 maturity value.
Monthly vs Quarterly vs Annual Compounding
The more often interest is compounded, the slightly higher your return — because interest starts earning interest sooner. The table keeps the deposit at ₹1,00,000 at an assumed 7% for 5 years and changes only the frequency:
| Compounding frequency | Maturity value | Interest earned |
|---|---|---|
| Annually | ₹1,40,255 | ₹40,255 |
| Half-yearly | ₹1,41,060 | ₹41,060 |
| Quarterly (most common in India) | ₹1,41,478 | ₹41,478 |
| Monthly | ₹1,41,754 | ₹41,754 |
The difference between annual and monthly compounding here is about ₹1,500 over five years — real, but small. A related idea is the effective annual yield: a 7% rate compounded quarterly actually works out to about 7.19% a year ((1.0175)⁴ − 1), which is why the maturity exceeds a flat 7% calculation. Most Indian banks compound FD interest quarterly, so use that unless your bank states otherwise.
Cumulative vs Non-Cumulative FD
How interest is paid changes how it grows:
| Type | How interest is handled | Effect |
|---|---|---|
| Cumulative FD | Interest is reinvested (compounded) and paid with the principal at maturity | Compounding works fully; highest maturity value |
| Non-cumulative FD | Interest is paid out at regular intervals (monthly/quarterly/half-yearly/yearly) | No compounding on the paid-out interest; suits those wanting regular income |
Example. On ₹1,00,000 at an assumed 7%, a non-cumulative FD paying monthly would give roughly ₹583 every month (about ₹7,000 a year), with your ₹1,00,000 staying put — totalling ₹35,000 of interest over five years, the same as simple interest. A cumulative FD instead reinvests that interest and reaches ₹41,478. Retirees often choose non-cumulative for the steady payout; those growing a corpus choose cumulative. (For a related decision, see FD vs RD.)
Common Calculation Mistakes
- Using simple interest instead of compound — undercounts your maturity value (₹35,000 vs ₹41,478 in our example).
- Assuming annual compounding when your bank compounds quarterly — gives a slightly lower estimate than reality.
- Forgetting interest grows the balance — interest each quarter is on the new balance, not the original.
- Ignoring tax — FD interest is taxable at your slab and TDS may apply, so your post-tax return is lower than the maturity figure suggests.
- Confusing the nominal rate with the effective yield — 7% compounded quarterly is about 7.19% effective.
- Expecting a non-cumulative FD to compound — it doesn't; the paid-out interest leaves your account.
Expert Verdict
"The single most useful thing to understand about an FD is that quarterly compounding quietly does more work than the headline rate suggests — a 7% FD really yields about 7.19% a year. Two practical habits follow. First, when you compare or estimate, compound quarterly, because that's what most banks actually do. Second, judge an FD on its post-tax return, not the maturity figure on the certificate — interest is taxed at your slab, and that's where the real comparison with other options begins. Run your own numbers in the calculator rather than eyeballing them; the maths is simple but easy to get subtly wrong."
— The Tips4Banking Editorial Team · checked against primary sources before publishing
Frequently asked questions
How is FD interest calculated in India?
Most banks use compound interest, compounded quarterly, with A = P × (1 + r/n)^(n×t). Each quarter's interest is added to the balance, so later interest is calculated on a larger amount.
Do banks use simple or compound interest on FDs?
For cumulative FDs, banks use compound interest. Non-cumulative FDs pay interest out periodically and effectively earn simple interest on the principal.
How often is FD interest compounded?
Most Indian banks compound FD interest quarterly (every three months). Some products may compound monthly or pay interest out without compounding.
What is the interest on a ₹1 lakh FD?
At an example rate of 7% for 5 years compounded quarterly, ₹1,00,000 earns about ₹41,478, maturing at ₹1,41,478. Your actual interest depends on the bank's rate and tenure — use the FD calculator.
What is the FD interest formula?
A = 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 tenure in years.
What does "compounded quarterly" mean?
The bank calculates interest every three months and adds it to your balance, so the next quarter's interest is earned on the higher amount. This makes the deposit grow faster than annual compounding.
Does more frequent compounding mean more money?
Yes, slightly. Monthly compounding earns a little more than quarterly, which earns more than annual — but the difference is modest (about ₹1,500 over five years in our example).
What is the difference between cumulative and non-cumulative FDs?
A cumulative FD reinvests interest and pays it all at maturity (compounding). A non-cumulative FD pays interest out at regular intervals, suiting those who want a regular income but earning no compounding on the paid-out amount.
What is the effective interest rate on an FD?
The effective annual yield is higher than the nominal rate because of compounding. A 7% rate compounded quarterly gives an effective yield of about 7.19% per year.
Is FD interest calculated before or after tax?
The formula gives the gross maturity value. FD interest is taxable at your income-tax slab and TDS may be deducted, so your actual post-tax return is lower than the maturity figure.
Does the FD calculator account for tax?
The calculator estimates the gross maturity value using the compound-interest formula. It does not deduct tax or TDS, so factor those in when assessing your real return.
How is interest calculated if I break my FD early?
On premature withdrawal, interest is usually recalculated at the rate applicable for the period actually held, often with a penalty (commonly around 0.5%–1%). The maturity figure no longer applies.
Is FD interest calculated daily?
The interest accrues continuously but is typically compounded (added to the balance) quarterly for most bank FDs. The compounding frequency, not daily accrual, is what drives the maturity value.
Sources
- Reserve Bank of India — guidelines on bank term deposits, interest computation and premature withdrawal. (rbi.org.in)
- DICGC — deposit insurance cover of ₹5,00,000 per depositor per bank. (dicgc.org.in)
- Standard compound-interest formula (financial mathematics); all worked examples calculated and verified by the Tips4Banking editorial team.
Rates are examples only and vary by bank and tenure. FD interest is taxable; this page is information, not tax or investment advice.