How FD Interest Is Calculated: Quarterly Compounding Explained
Learn the FD interest formula banks use, why quarterly compounding beats simple interest, worked examples for 1 to 5 years, and how TDS on FD interest works.
The short answer
For a cumulative fixed deposit, banks add interest to your deposit every quarter, and the next quarter's interest is calculated on the larger amount. The maturity value is A = P × (1 + r/4)^(4 × t), where P is the deposit, r is the yearly rate as a decimal and t is the number of years. At 7.1% for 5 years, ₹1,00,000 grows to about ₹1,42,175, compared with ₹1,35,500 under simple interest. The FD Calculator runs this formula and shows the balance year by year.
Cumulative and payout FDs are calculated differently
Before using any formula, check which kind of deposit you have:
| FD type | What happens to interest | Is there compounding? |
|---|---|---|
| Cumulative (reinvestment) | Added to the deposit each quarter and paid at maturity | Yes |
| Quarterly payout | Paid to your savings account every quarter | No |
| Monthly payout | Paid every month | No |
SBI, for example, describes its Reinvestment Plan this way: "Interest on deposit is compounded quarterly and paid to depositor at the end of the term." Most Indian banks follow the same quarterly pattern for cumulative deposits, but check your own bank's deposit terms.
With a payout FD, your deposit stays at the original amount, so each payout is simple interest. On ₹1,00,000 at 7.1%, a quarterly payout is ₹1,00,000 × 7.1% ÷ 4 = ₹1,775 each quarter. The FD Calculator works out cumulative deposits, so use it for reinvestment FDs.
The formula, step by step
A = P × (1 + r/n)^(n × t)
- A = maturity amount
- P = principal (the amount you deposit)
- r = annual interest rate as a decimal (7.1% = 0.071)
- n = compounding periods per year (4 for quarterly)
- t = tenure in years
Interest earned = A − P.
Worked example: ₹1,00,000 at 7.1% for 5 years
In the first quarter you earn ₹1,775. In the second quarter, interest is calculated on ₹1,01,775, so you earn slightly more, and the gap grows every quarter. That is the whole effect of compounding.
Year-by-year growth
| End of year | Balance | Total interest |
|---|---|---|
| 1 | ₹1,07,291 | ₹7,291 |
| 2 | ₹1,15,114 | ₹15,114 |
| 3 | ₹1,23,508 | ₹23,508 |
| 4 | ₹1,32,513 | ₹32,513 |
| 5 | ₹1,42,175 | ₹42,175 |
These are the figures the FD Calculator's year table shows for the same inputs.
Why the "7.1%" FD actually yields 7.29% a year
After one year, ₹1,00,000 has grown by ₹7,291, not ₹7,100. That 7.291% is the effective annual yield: the rate you would need with yearly compounding to end up at the same place. Some banks publish this as "annualised yield" next to the headline rate. When you compare an FD with an investment quoted as a yearly return, compare effective yields, not headline rates.
How much does the compounding frequency matter?
The FD Calculator lets you switch between monthly, quarterly, half-yearly and annual compounding. For ₹1,00,000 at 7.1% for 5 years:
| Compounding | Maturity amount | Interest |
|---|---|---|
| Monthly | ₹1,42,469 | ₹42,469 |
| Quarterly | ₹1,42,175 | ₹42,175 |
| Half-yearly | ₹1,41,743 | ₹41,743 |
| Annually | ₹1,40,912 | ₹40,912 |
| Simple interest (no compounding) | ₹1,35,500 | ₹35,500 |
More frequent compounding earns a little more, but the difference between monthly and quarterly is only a few hundred rupees here. The interest rate and the tenure matter far more than the frequency. Choose the frequency your bank actually uses, which for cumulative FDs is usually quarterly.
Senior citizen rates
Banks often pay senior citizens a higher rate. The FD Calculator's Senior Citizen checkbox adds 0.5 percentage points to the rate you entered. At 7.6% instead of 7.1%, the same ₹1,00,000 for 5 years matures at about ₹1,45,708, or ₹3,533 more.
The real extra rate varies by bank and by scheme, and some special deposits for senior citizens pay more than 0.5%. For the most accurate result, untick the box and enter the exact senior citizen rate from your bank's rate card.
Using the FD Calculator
The calculator works in whole years. For tenures such as 400 days or 18 months, banks apply their own rules for the part-year, so use the bank's own calculator or rate card to confirm the exact maturity amount.
Tax on FD interest
FD interest is part of your taxable income for the year in which it is earned, even in a cumulative FD where you receive nothing until maturity. The calculator shows pre-tax figures.
Banks also deduct TDS (tax deducted at source) once your interest crosses a threshold. From 1 April 2025, the threshold per year was raised to ₹50,000 for most individuals and ₹1,00,000 for senior citizens. TDS is not an extra tax; it is credited against your final tax. If your total income is below the taxable limit, you can give the bank a declaration so that TDS is not deducted. From 1 April 2026 this declaration is Form 121, which replaced the older Forms 15G and 15H under the Income-tax Act, 2025. Ask your bank how it accepts the form.
To estimate your post-tax return, multiply the interest by (1 − your tax slab rate). At a 20% slab plus 4% cess, ₹42,175 of interest leaves roughly ₹42,175 × (1 − 0.208) ≈ ₹33,403 after tax.
Common mistakes
- Using the simple interest formula for a cumulative FD. It understates the maturity amount.
- Applying compounding to a payout FD. Payout interest does not compound because it leaves the deposit.
- Comparing headline rates across products without converting to effective yields.
- Forgetting tax, which can reduce real returns significantly at higher slabs.
- Assuming the senior rate is always 0.5% extra. It differs between banks.
Related tools and guides
Compare a lump-sum FD with monthly investing in the SIP Calculator, see long-term tax-free savings in the PPF Calculator, or read which bank FD gives better returns and mutual funds vs fixed deposits.
This guide explains the general rules and is not tax advice.
Frequently asked questions
What is the formula for FD interest?
For a cumulative FD compounded quarterly, maturity A = P x (1 + r/4)^(4t), where P is the deposit, r is the annual rate as a decimal and t is the tenure in years. Interest is A minus P.
How much will 1 lakh FD give in 5 years at 7.1%?
With quarterly compounding, Rs 1,00,000 grows to about Rs 1,42,175, so interest is about Rs 42,175 before tax.
Is FD interest compounded monthly or quarterly?
Most Indian banks compound cumulative FD interest quarterly. Payout FDs, which pay interest monthly or quarterly into your account, do not compound.
When is TDS deducted on FD interest?
From 1 April 2025, banks deduct TDS when your FD interest in a financial year exceeds Rs 50,000, or Rs 1,00,000 for senior citizens. TDS is adjusted against your final tax.
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