Top News

Whenever we have some extra money, the first thought that comes to mind is, "Let's put it in a Fixed Deposit (FD)." FD, or Fixed Deposit, is considered one of the safest and most reliable investments in India. But have you ever noticed how the interest that the bank pays you is calculated? FDs are calculated using the A, P, R, N, T formula.

People think that if the interest rate is 7%, then simply 7% will be added at the end of the year. But the reality is far more interesting and beneficial. Banks have a specific method for calculating interest on FDs, and understanding it can help you plan your earnings better. Let's learn the A to Z of FD calculation.

FD Calculation Formula

If you want to calculate it yourself, banks use this formula:

A = Total amount received at maturity
P = Principal amount (the amount you deposited)
r = Annual interest rate (in decimal)
n = Number of times compounding occurs in a year (4 for quarterly)
t = Total time (in years)

Simple Interest vs. Compound Interest

Most banks use 'compound interest' on FDs.
In this, interest is earned not only on your principal but also on the accumulated interest.
The interest earned on your FD in the bank is added to your principal every quarter.
In the next three months, you earn interest on both the old principal + the previous interest.

What is the math of quarterly compounding in FD?

In India, most banks calculate interest on a quarterly basis (every 3 months).

Let's say you made an FD of ₹1,00,000 for 1 year at 7% interest. After the first 3 months, the bank will calculate the interest on your ₹1,00,000 and add it to your account.
For the next 3 months, your principal amount will not be ₹1,00,000, but the increased amount.
At the end of the year, your 'effective yield' is always slightly higher than the interest rate quoted by the bank.

Pay-out option: When do you need the money?

When opening an FD, the bank asks you to choose between two options:

Cumulative: In this option, the interest is paid in a lump sum at maturity. This offers the maximum benefit of compounding because the money cannot be withdrawn in between.
Non-Cumulative: If you need money every month or every three months for household expenses, you can choose this option. In this case, the interest is credited to your account, which reduces the benefit of compounding.

What role does TDS calculation play in FDs?

The government also keeps an eye on the earnings from FDs.

If the annual interest on the FD exceeds ₹40,000 (₹50,000 for senior citizens), the bank deducts 10% TDS.
If you have not submitted your PAN card, this deduction can be up to 20%.
If you do not fall under the income tax bracket, you can save on TDS by submitting Form 15G or 15H to the bank.

What happens if you break the FD prematurely?

Sometimes, banks charge a 'penalty' for breaking an FD before maturity.
Banks deduct 0.5% to 1% from the agreed interest rate.
The interest is paid at the rate applicable for that period, not at the rate at which the FD was started.

Keep an eye on the calculations in your FD yourself

An FD is not just about depositing money, but about understanding how your money is working for you. Always try to choose the 'cumulative' option to take full advantage of the power of compounding. Before opening a Fixed Deposit (FD), be sure to compare the interest rates and compounding frequencies of different banks. Becoming a well-informed investor in 2026 will be your greatest asset. (Note: This news is based on general information; for more detailed advice, please consult a financial advisor.)

Important Questions Related to the Article (FAQs)

Q1 How is interest calculated on bank FDs?

Most banks calculate interest on FDs using quarterly compounding, meaning you earn interest on the interest as well.

Q2 What is the difference between simple and compound interest?

Simple interest is calculated only on the principal amount, while compound interest includes the accumulated interest, resulting in higher returns over time.

Q3 Why are cumulative FDs more beneficial?

In cumulative FDs, the interest is paid in a lump sum at maturity, allowing you to fully benefit from compounding.

Q4 When is TDS deducted on FDs?

If the annual interest exceeds ₹40,000 (₹50,000 for senior citizens), the bank deducts 10% TDS.

Q5 What is the Rule of 72?

Dividing 72 by the interest rate tells you approximately how many years it will take for your FD to double.