How banks compound a fixed deposit
A cumulative FD adds interest to the balance on each compounding date, and that interest then earns interest of its own. Indian banks usually compound quarterly, so that is the default here.
The formula is A = P × (1 + r/n)^(n × t), with r the annual rate as a decimal, n the compounding periods per year and t the tenure in years. If the tenure ends between compounding dates, the leftover months earn simple interest, which is how banks treat a broken period.
Example: ₹1 lakh for five years at 7%
A deposit of ₹1,00,000 at 7% compounded quarterly earns 1.75% every quarter for 20 quarters. It matures at ₹1,41,477.82, so the interest earned is ₹41,477.82. The effective annual yield is 7.19%, a little above the quoted rate because of compounding.
Monthly compounding on the same deposit gives ₹1,41,762.53, about ₹285 more. A payout FD at 7% pays ₹1,750.00 a quarter, or ₹35,000.00 over five years, and returns the original ₹1 lakh at maturity.
Cumulative or payout FD
A cumulative FD pays everything at maturity. A payout, or non-cumulative, FD sends interest to your savings account monthly, quarterly or yearly. That interest leaves the deposit and earns nothing further, so the calculator treats it as simple interest.
Payout FDs suit retirees who want a regular income. Monthly payout plans often pay slightly less than a third of the quarterly amount, because the money arrives sooner.
Senior citizen rates and early withdrawal
RBI rules let banks run deposit schemes for resident senior citizens at higher fixed rates than regular deposits. The extra margin varies by bank and tenure, so enter the senior citizen rate from your bank's card to see what it adds.
Under RBI's directions, an FD closed before maturity earns the rate for the period the money actually stayed, not the contracted rate, and the bank may deduct a penalty set by its board-approved policy, which must be disclosed when you open the deposit. Deposits of ₹1 crore or less held by individuals must allow premature withdrawal.
TDS, Form 121 and deposit insurance
FD interest is taxable at your slab rate every year, even on a cumulative deposit that pays nothing until maturity. As of November 2026, under the Income-tax Act, 2025, a bank deducts 10% TDS once the interest it pays you in a tax year exceeds ₹50,000, or ₹1,00,000 for senior citizens; without your PAN it deducts more.
If the tax on your total income will be nil, you can give the bank Form 121, which replaced Forms 15G and 15H from 1 April 2026. DICGC insures deposits up to ₹5 lakh per depositor per bank, principal and interest together, so very large sums are safer split across banks.