How is Fixed Deposit (FD) interest compounded in Indian banks?

In accordance with Reserve Bank of India (RBI) guidelines, bank fixed deposits with a tenure exceeding 6 months are compounded on a quarterly basis (4 times per year). For cumulative FDs, the interest is reinvested every quarter and paid out along with the principal at maturity.

What is the difference between Cumulative and Non-Cumulative Fixed Deposits?

In a Cumulative FD (reinvestment plan), interest is reinvested every quarter, maximizing compounding wealth at maturity. In a Non-Cumulative FD, the accrued interest is paid out periodically (monthly, quarterly, or half-yearly) to the depositor's savings account to provide regular cash flow, resulting in a lower final payout.

What is the TDS threshold on FD and RD interest under Section 194A?

For regular individuals below 60 years of age, banks deduct 10% TDS if total interest income from all deposits in the bank exceeds ₹40,000 in a financial year. For Senior Citizens (aged 60 and above), the tax exemption threshold is ₹50,000 per financial year under Section 80TTB. If your total income is below the taxable threshold, you can submit Form 15G (or Form 15H for senior citizens) to avoid TDS.

How does Recurring Deposit (RD) interest compounding work?

An RD involves a fixed monthly installment. In Indian banks, interest on recurring deposits is also compounded on a quarterly basis. Each monthly installment earns interest for the remaining fraction of quarters until maturity, following the standardized Indian Banks' Association (IBA) quarterly compounding formula.

What additional interest rate do Senior Citizens receive on FDs?

Most public and private sector banks in India offer an additional interest rate premium of 0.50% p.a. to senior citizens (aged 60 to 79). Super senior citizens (aged 80 and above) frequently receive an additional 0.75% to 0.80% p.a. on specific long-term deposit tenures.

FD & RD Calculator India: Fixed & Recurring Deposit Returns

Comprehensive Banking Guide to Fixed & Recurring Deposits

Fixed Deposits (FD) and Recurring Deposits (RD) remain the foundation of risk-free savings for millions of Indian households. Administered under Reserve Bank of India (RBI) regulations and insured up to ₹5,00,000 per depositor per bank by the Deposit Insurance and Credit Guarantee Corporation (DICGC), these guaranteed instruments offer predictable wealth accumulation and cash flow stability.

1. Understanding the RBI Quarterly Compounding Mechanism

In accordance with Indian banking norms, interest on term deposits of 6 months or longer is compounded on a quarterly basis (every 3 months: March, June, September, December). The mathematical formula for cumulative fixed deposit maturity is:

A = P × (1 + r / 400)^{4 × t}

Where A is the maturity amount, P is the principal deposit, r is the nominal annual interest rate (%), and t is the tenure in years. Because interest is reinvested every quarter, the Effective Annual Yield (APY) is always higher than the advertised nominal rate (e.g., 7.00% nominal rate yields approximately 7.19% compounded annually).

2. Cumulative vs. Non-Cumulative Payout Options

Cumulative (Reinvestment)

Interest is added to principal every 3 months. Maximum wealth growth at maturity. Ideal for long-term goal savers.

Quarterly Payout

Exact accrued interest credited every quarter to your savings account. Ideal for regular quarterly expense planning.

Monthly Payout

Interest is paid out monthly at a discounted rate to offset loss of quarterly compounding. Ideal for retirees seeking monthly pension-like income.

3. Section 194A TDS Rules & Form 15G / 15H Exemption

Under Section 194A of the Indian Income Tax Act, banks are mandated to deduct 10% Tax Deducted at Source (TDS) on deposit interest if it exceeds statutory annual limits:

Regular Citizens (<60 years): TDS is deducted if total interest from all deposits across a bank's branches exceeds ₹40,000 per financial year.
Senior Citizens (≥60 years): TDS threshold is ₹50,000 per financial year under Section 80TTB.
Non-PAN Penalty: If PAN is not provided, the bank is legally required to deduct TDS at 20%.
Form 15G / 15H: If your total taxable income is below the basic tax exemption limit (₹2.5L/₹3L under Old Regime or ₹3L under New Regime), submit Form 15G (for under 60) or Form 15H (for senior citizens) at the start of the financial year to stop TDS deduction.

4. Senior Citizen Interest Rate Privileges

Indian commercial and small finance banks grant special interest bonuses for elderly depositors:

Senior Citizens (60–79 years): Standard +0.50% p.a. premium over the normal card rate across virtually all tenures.
Super Senior Citizens (80+ years): Additional +0.75% to +0.80% p.a. offered by select institutions like PNB, Union Bank, and Indian Bank.
Special Bank Schemes: Programs like SBI WeCare, HDFC Senior Citizen Care, and ICICI Golden Years offer enhanced interest for tenures of 5 years to 10 years.

5. 5-Year Tax Saver Fixed Deposit (Section 80C)

A 5-Year Tax Saving FD qualifies for tax deduction up to ₹1,50,000 under Section 80C of the Income Tax Act. However, note the key statutory restrictions:

Mandatory lock-in period of 5 years with zero premature withdrawal allowed.
No loan or overdraft facility can be sanctioned against a tax-saver FD.
Interest earned is fully taxable according to your income tax slab (unlike PPF which is completely EEE tax-free).

6. Frequently Asked Questions (FAQ)

Yes. Under the Finance Act 2015 amendments to Section 194A, Recurring Deposits are subject to the exact same TDS rules as Fixed Deposits. If combined interest from FDs and RDs across a bank exceeds ₹40,000 (₹50,000 for senior citizens), 10% TDS will be deducted.

Yes. Deposits including principal and accrued interest are insured up to ₹5,00,000 across all accounts in a single insured bank by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India.

Regular FDs can be closed prematurely. Banks typically levy a 0.5% to 1.0% interest penalty on the applicable rate for the period the deposit actually remained with the bank. Note that 5-Year Tax Saver FDs cannot be closed prematurely under any circumstances.

Fixed Deposit (FD) & Recurring Deposit (RD) Calculator

Fixed Deposit Parameters

Annual Deposit Growth Schedule