How it works
A fixed deposit locks a sum with a bank for a fixed term at a rate agreed on day one. Unlike market-linked investments, the maturity amount is known in advance and does not move — which is exactly why it suits an emergency fund or a goal less than three years away, and why it is a poor vehicle for a twenty-year one.
Compounding frequency matters more than people expect. ₹1,00,000 at 7% for five years matures at ₹1,41,478 compounded quarterly against ₹1,40,255 compounded annually. The gap is small on one deposit and meaningful across a portfolio — and it is why comparing FDs on the effective annual yield rather than the headline rate is the fairer test.
M = P x (1 + r/n)^(n x t)
- P is the deposit amount
- r is the annual interest rate as a decimal
- n is compounding periods per year — 4 for the quarterly standard
- t is the tenure in years
- Compare effective yield, not the card rateTwo FDs at 7% can mature differently if one compounds quarterly and the other annually.
- Match the tenure to the goalBreaking an FD early typically costs a 0.5–1% rate penalty, which can wipe out most of a short deposit’s interest.
- Use the senior citizen rate where eligibleMost banks add about 0.50%, and a deposit in a senior parent’s name is a common and legitimate way to use it.
- Plan for TDSBanks deduct 10% TDS once FY interest crosses ₹50,000, or ₹1,00,000 for senior citizens. It is adjustable against your total tax, not an extra cost.
- Consider ladderingSplitting one large deposit across several maturities keeps part of the money accessible without breaking the whole thing.
A worked example
A ₹5,00,000 deposit at 7% compounded quarterly matures at about ₹7,07,389 after five years — ₹2,07,389 of interest. The effective annual yield is 7.19%, slightly above the headline 7% because of the quarterly compounding.
Interest works out to roughly ₹41,478 a year, below the ₹50,000 TDS threshold, so no tax is deducted at source. The interest is still fully taxable as income from other sources at your slab rate — TDS not being deducted is not the same as the income being exempt.
Common mistakes
- Comparing FDs on headline rates while ignoring compounding frequency
- Assuming no TDS means no tax — FD interest is taxable at your slab rate regardless
- Locking an emergency fund into a term deposit with a premature-withdrawal penalty
- Using FDs for twenty-year goals, where 7% barely beats inflation after tax
- Missing the senior citizen rate for eligible family members
Fixed deposit against the alternatives
| Option | Typical return | Risk | Liquidity |
|---|---|---|---|
| Fixed deposit | 6.5–7.5% | Very low; insured to ₹5 lakh per bank | Same day, with a penalty |
| Recurring deposit | 6.5–7.5% | Very low | Same day, with a penalty |
| Liquid fund | 5–7% | Low | Next working day |
| PPF | 7–7.5%, tax-free | Sovereign | 15-year lock-in |
| Equity mutual fund | 11–13% long run | High, volatile | 1–3 working days |
Frequently asked questions
M = P × (1 + r/n)^(n×t). Indian banks compound cumulative FDs quarterly, so n is 4. A ₹1,00,000 deposit at 7% for five years matures at ₹1,41,478.
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How BudgetAnalyzer helps
FDs are easy to open and easy to lose track of, especially across several banks. BudgetAnalyzer’s Bank Balances section keeps every deposit and account in one place, so your FDs count towards your net worth instead of sitting forgotten in a maturity email.