Does FD interest compound quarterly or annually in India?

Most banks in India compound FD interest quarterly. This means interest is calculated every three months and added to the principal. Some banks offer monthly compounding. Annual compounding is less common. Quarterly compounding gives a slightly higher effective yield than annual compounding for the same nominal rate.

What is TDS on FD interest and when is it deducted?

TDS (Tax Deducted at Source) on FD interest is 10% if your total interest from all FDs at one bank exceeds ₹40,000 in a financial year (₹50,000 for senior citizens). If you have not submitted your PAN, TDS is 20%. Submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) at the start of each financial year if your total income is below the taxable threshold to avoid TDS deduction.

How do I calculate FD maturity amount manually?

For compound interest (quarterly): Maturity Amount = P x (1 + r/4)^(4n), where P is principal, r is annual interest rate as a decimal, and n is tenure in years. Example: ₹1 lakh at 7.5% for 3 years = 1,00,000 x (1 + 0.075/4)^12 = 1,00,000 x (1.01875)^12 = ₹1,25,058.

Is FD interest fully taxable?

Yes, FD interest is fully taxable as Income from Other Sources at your applicable slab rate. If you earn ₹70,000 interest on FDs and are in the 30% bracket, you pay ₹21,000 tax on it (plus cess). TDS is just an advance deduction - you must declare all FD interest in your ITR regardless of whether TDS was deducted.

Which banks offer the highest FD interest rates in 2026?

Small finance banks typically offer the highest rates (7.5–9% for regular citizens as of early 2026). Major private banks like HDFC and ICICI offer 7–7.5%. Public sector banks like SBI offer 6.5–7.1%. Senior citizens get an additional 0.25–0.75% over regular rates. Always verify current rates directly with the bank before investing.

How FD Interest Is Calculated in India 2026 - Formula, Compounding & Real Examples

Written by Mihir Bhattacharya | Updated: April 2026 | 10 min read

A ₹1 lakh FD earning 7.5% for 3 years gives you ₹25,058 in interest - but a savings account at the same 7.5% rate gives only ₹22,500. The difference? Quarterly compounding. Understanding how banks actually calculate FD interest helps you compare offers accurately, verify your maturity amounts, and avoid tax surprises. This guide explains the FD interest formula, how quarterly compounding works, how TDS is applied, and real calculation examples for the most common deposit amounts.

Simple Interest vs Compound Interest on FDs

Banks in India compute FD interest using compound interest in most cases, not simple interest. This is an important distinction.

Simple Interest (rarely used)

Interest = Principal × Rate × Time

Example: ₹1 lakh at 7.5% for 3 years = ₹1,00,000 × 7.5% × 3 = ₹22,500 interest

A few banks offer simple interest for short-tenure FDs (under 6 months) paid at maturity. But most FDs use compound interest.

Compound Interest (standard for FDs)

Interest is calculated periodically (monthly, quarterly, or annually) and added back to the principal. Your next period's interest earns on a larger base. This is the power of compounding.

Formula: A = P × (1 + r/n)^(n×t)

A = Maturity amount
P = Principal (deposit amount)
r = Annual interest rate (as decimal, e.g., 7.5% = 0.075)
n = Number of times interest compounds per year (quarterly = 4)
t = Tenure in years

Quarterly Compounding: How Most Indian Banks Calculate FD

The vast majority of banks in India - including SBI, HDFC, ICICI, Axis - compound FD interest quarterly. This means interest is calculated and added to your balance every 3 months.

Step-by-Step: Quarterly Compounding Calculation

Example: ₹1,00,000 deposited at 7.5% per annum for 1 year with quarterly compounding.

Quarterly rate = 7.5% / 4 = 1.875% per quarter

Quarter	Opening Balance	Interest @ 1.875%	Closing Balance
Q1 (Apr–Jun)	₹1,00,000	₹1,875	₹1,01,875
Q2 (Jul–Sep)	₹1,01,875	₹1,910	₹1,03,785
Q3 (Oct–Dec)	₹1,03,785	₹1,946	₹1,05,731
Q4 (Jan–Mar)	₹1,05,731	₹1,982	₹1,07,713

Total interest earned: ₹7,713 compared to ₹7,500 under simple interest - compounding adds ₹213 extra on a 1-year FD.

The difference becomes much larger over longer tenures. Over 5 years at 7.5%, quarterly compounding earns ₹44,995 on ₹1 lakh vs ₹37,500 under simple interest - ₹7,495 extra.

Maturity Amount Table: Common FD Scenarios at 7.5% (Quarterly Compounding)

Principal	1 Year	3 Years	5 Years
₹50,000	₹53,857	₹62,529	₹72,498
₹1,00,000	₹1,07,713	₹1,25,058	₹1,44,995
₹5,00,000	₹5,38,565	₹6,25,290	₹7,24,975
₹10,00,000	₹10,77,130	₹12,50,580	₹14,49,950

Calculated using quarterly compounding formula. Verify with your bank for exact amounts - minor variations due to rounding.

TDS on FD Interest: Rules for FY 2025-26

TDS (Tax Deducted at Source) is deducted by the bank before paying FD interest once you cross the threshold. Understanding the rules prevents surprise deductions.

TDS Threshold Limits

Category	TDS Threshold (Annual)	TDS Rate
Individuals (below 60)	₹40,000	10%
Senior Citizens (60+)	₹50,000	10%
PAN not submitted	Any amount	20%

Important: TDS is per Bank, not per FD

The threshold applies to the total interest earned across all your FDs at the same bank in a financial year. If you have three FDs at one bank earning ₹15,000, ₹18,000 and ₹12,000 respectively = ₹45,000 total, TDS applies on the entire amount.

How to Avoid TDS (If Income Is Below Taxable Limit)

Form 15G: Submit to your bank if you are below 60 years and your total income is below the basic exemption limit (₹2.5 lakh under old regime / ₹3 lakh under new regime)
Form 15H: For senior citizens (60+) with total income below taxable threshold
Submit fresh forms every financial year - they expire on March 31st

Cumulative vs Non-Cumulative FDs: How Interest Is Paid

Cumulative FD

Interest is compounded quarterly but paid only at maturity, along with the principal. You receive the full maturity amount at the end of the tenure. Best for long-term wealth building.

Non-Cumulative FD (Periodic Payout)

Interest is paid out at regular intervals - monthly, quarterly, half-yearly, or annually - while the principal remains locked. Preferred by retirees and those needing regular income.

Note: Non-cumulative FDs often offer a slightly lower effective yield than cumulative FDs at the same stated rate, because the periodic payouts are not reinvested at the same rate automatically.

Effective Annual Yield vs Stated Interest Rate

When a bank advertises a 7.5% FD, that is the nominal annual rate. The actual return due to quarterly compounding is slightly higher - the Effective Annual Rate (EAR).

EAR = (1 + r/n)^n − 1

At 7.5% with quarterly compounding: EAR = (1 + 0.075/4)^4 − 1 = 7.714%

Nominal Rate	EAR (Quarterly)	Extra on ₹1 lakh per year
6.50%	6.661%	₹161
7.00%	7.186%	₹186
7.50%	7.714%	₹214
8.00%	8.243%	₹243

Related Resources

Disclaimer: Interest rates, TDS thresholds, and form limits mentioned are based on FY 2025-26 regulations and are subject to change. Always confirm current rates and limits with your bank or a qualified financial advisor before making investment decisions.

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