FD
InvestmentFixed Deposit
A bank deposit instrument that earns a fixed interest rate for a predetermined period, offering capital protection and guaranteed returns.
Definition
A Fixed Deposit (FD) is a financial instrument offered by banks and non-banking financial companies (NBFCs) that provides investors with a higher rate of interest than a regular savings account, in exchange for keeping the money deposited for a fixed tenure.
The interest rate is locked in at the time of deposit and does not change during the tenure, regardless of market interest rate movements. This makes FDs a capital-protected, predictable-return instrument suitable for conservative investors.
FD tenures in India range from 7 days to 10 years. Interest can be received monthly, quarterly, annually, or at maturity (cumulative FDs).
Formula
Simple interest FD: Maturity Value = P + (P × r × t / 100)
Compound interest FD (quarterly compounding): Maturity Value = P × (1 + r / (4 × 100))^(4 × t)
Where P = principal, r = annual interest rate (%), t = tenure in years.
Most bank FDs use quarterly compounding.
Worked Example
You deposit ₹5,00,000 in an FD for 3 years at 7.5% per annum, compounded quarterly.
Maturity Value = 5,00,000 × (1 + 7.5 / 400)^12 = 5,00,000 × (1.01875)^12 ≈ ₹6,24,000
Interest earned = ₹1,24,000. However, if you are in the 30% tax bracket, you pay ₹37,200 in tax on this interest. Your post-tax return is approximately ₹86,800 — an effective post-tax rate of ~5.25%. Compare this with PPF which offers completely tax-free returns. Use the FD vs RD calculator to compare scenarios.
Key Things to Know
- TDS on FD: Banks automatically deduct TDS at 10% when annual FD interest exceeds ₹40,000. Submit Form 15G/15H if your income is below the taxable limit to avoid TDS deduction.
- Senior citizen rates: Most banks offer 0.25–0.75% higher interest rates on FDs for senior citizens (age 60+). Some banks offer an additional special rate for super senior citizens (80+).
- FD vs RD: An FD requires a lump sum deposit upfront. An RD allows monthly contributions. FD gives a slightly higher effective return if the lump sum is available from day one.
- Sweep-in FD: Some banks offer a sweep-in or auto-sweep facility where excess savings account balance is automatically converted into FD, earning higher interest while remaining accessible.
- DICGC insurance: The ₹5 lakh DICGC insurance limit applies per depositor per bank across all deposits — not per FD. Spreading large FDs across multiple banks increases effective insurance coverage.