FD Interest Calculation Explained: Compounding Frequency & Payout Options
By Pradipta Ray · Published
When a bank advertises a 7.10% Fixed Deposit interest rate, your actual annualized return (yield) is higher because commercial banks in India compound interest on a quarterly basis. Here is the mathematical formula behind bank FD calculations.
Many depositors assume that a ₹1,00,000 fixed deposit at 7% for 3 years simply pays ₹7,000 × 3 = ₹21,000 in interest. In reality, because Indian banks reinvest your interest every quarter, you earn interest on interest, producing a higher cumulative payout.
Direct Answer: Indian banks calculate FD maturity using quarterly compounding: A = P × [1 + r/400]^(4n). On a ₹1,00,000 deposit at 7.00% p.a. for 3 years, quarterly compounding generates ₹23,144 in total interest (annualized effective yield of 7.19%), rather than ₹21,000 simple interest.
Quarterly Compounding Impact on ₹1 Lakh Deposit (at 7.00% p.a.)
| Tenure | Total Principal | Maturity Amount | Total Interest Earned | Effective Annual Yield |
|---|---|---|---|---|
| 1 Year (4 quarters) | ₹1,00,000 | ₹1,07,186 | ₹7,186 | 7.19% |
| 2 Years (8 quarters) | ₹1,00,000 | ₹1,14,888 | ₹14,888 | 7.44% |
| 3 Years (12 quarters) | ₹1,00,000 | ₹1,23,144 | ₹23,144 | 7.71% |
| 5 Years (20 quarters) | ₹1,00,000 | ₹1,41,478 | ₹41,478 | 8.30% |
| 10 Years (40 quarters) | ₹1,00,000 | ₹2,00,160 | ₹1,00,160 | 10.02% |
TDS Rules on Bank Fixed Deposits
Banks deduct 10% TDS under Section 194A if total annual interest across all branches exceeds ₹40,000 (or ₹50,000 for senior citizens). If you have not provided your PAN, the TDS rate doubles to 20%. If your total taxable income is below the basic exemption threshold, submit Form 15G (or Form 15H for senior citizens) at the start of each financial year to prevent TDS deduction.
Checklist for Opening a High-Yield Fixed Deposit
Check special bucket tenures: Banks often offer their peak interest rates on specific odd tenures like 400 days, 444 days, or 555 days rather than round 1 or 2-year periods.
Senior citizen advantage: Ensure eligible senior family members open the deposit to secure an additional 0.50% to 0.75% interest premium.
Premature withdrawal penalty: Most banks levy a 0.50% to 1.00% penalty on the applicable rate if an FD is broken before maturity.
Frequently asked questions
How often do Indian banks compound FD interest?
What is the difference between cumulative and non-cumulative FD?
What is the formula for quarterly compounded FD maturity?
Calculators for this
Related reading
An FD at 7.5% and PPF at 7.1% are not what they look like. FD interest is taxed at your slab and PPF interest is not.
Comprehensive comparison between Mutual Fund SIPs and Bank Fixed Deposits in India. Compare after-tax returns, volatility, inflation beating, and liquidity.
Calculate State Bank of India (SBI) Fixed Deposit interest using official rates. Learn quarterly compounding formula, senior citizen rates, and Amrit Kalash yield.
Authoritative Sources
- Reserve Bank of India Master Direction - Interest Rates on Deposits· verified 1 August 2026
- Indian Banks' Association Model Deposit Policy· verified 1 July 2026