Fixed Deposit: What It Is, How Interest is Calculated, Tax Rules
A Fixed Deposit is the simplest, safest savings instrument in India. You park a lump sum with a bank for a fixed period and earn a fixed interest rate.
How FD interest is calculated
Banks in India compound FD interest quarterly. The maturity formula for a cumulative FD is:
- · P = principal
- · R = annual rate in %
- · T = years
FD vs RD
FDs need a lump sum upfront. RDs let you deposit monthly. For the same rate and tenure, FDs earn more because the full amount compounds from day one.
Tax on FD interest
- Interest is fully taxable at your slab rate under 'Income from Other Sources'.
- TDS applies at 10% if interest crosses ₹40,000 in a year (₹50,000 for senior citizens) at a single bank.
- Submit Form 15G/15H if your total income is below the taxable limit to avoid TDS.
FD laddering
Split a large FD across multiple maturities (say ₹2 lakh × 5 tenures from 1–5 years). You get liquidity every year and hedge against rate changes.
Pro tips
- Small finance banks and post-office deposits often pay 0.5–1% more, with the same ₹5 lakh DICGC insurance cover.
- Choose 'reinvestment' over 'payout' when your goal is wealth, not monthly income.
Common mistakes
- Breaking FDs early — the bank pays a lower rate and often levies a penalty.
- Ignoring inflation — a 6.5% FD delivers just 1–2% real return after tax.
Frequently asked questions
Is FD interest safe?+
Deposits up to ₹5 lakh per bank per depositor are insured by DICGC. Beyond that, spread across banks.
Are tax-saving FDs different?+
Yes. 5-year tax-saving FDs qualify under Section 80C but have a lock-in and interest is still fully taxable.
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