Got a festive bonus or some savings sitting idle and thinking of a fixed deposit? Before you sign the form, it helps to know exactly what ₹1 lakh will turn into, why the payout option you tick changes the final number, and what breaking the deposit early really costs you.
What a fixed deposit actually is
A fixed deposit (FD) is money you lend to a bank for a set period in exchange for a higher interest rate than a regular savings account. The catch is in the name: the money is meant to stay put until the maturity date. Terms can be as short as 7 days or as long as 10 years, and in India deposits are covered by the DICGC up to ₹5,00,000 per depositor, per bank.
Banks usually calculate and pay FD interest every three months from the date you open it. If you open an FD on 15 February, the first interest instalment arrives on 15 May. What happens to that quarterly interest is the first choice you make.
Cumulative vs non-cumulative: the choice that changes your total
With a non-cumulative FD, the quarterly interest is paid out to your savings account. With a cumulative FD, it is added back to the deposit, so the next quarter’s interest is calculated on a slightly bigger amount. That is compound interest, and the formula is:
Maturity amount = deposit × (1 + yearly rate ÷ 4) raised to the power of (4 × years)
In plain words: divide the yearly rate by 4 to get the quarterly rate, then grow the money by that rate once for every quarter the FD runs.
A real example with ₹1 lakh
Say you put ₹1,00,000 in a 5-year FD at 7% a year (an illustrative rate, check your bank’s current card).
- Quarterly rate: 7% ÷ 4 = 1.75%
- Number of quarters: 4 × 5 = 20
- Cumulative maturity: 1,00,000 × 1.017520 = ₹1,41,478, so ₹41,478 of interest
- Non-cumulative: 1,00,000 × 1.75% = ₹1,750 every quarter, or ₹35,000 over 5 years
Same bank, same rate, same 5 years, and the cumulative option earns ₹6,478 more, simply because interest keeps earning interest. That also means a 7% FD compounded quarterly actually yields about 7.19% a year.
Want to see how fast this snowballs over longer periods? Our guide to how long your money takes to double gives you a shortcut.
What breaking an FD early really costs
Banks generally allow early withdrawal, but you do not keep the rate you signed up for. You are paid the rate that applied, on the day you opened the FD, to the period you actually stayed. A bank can charge a penalty on top.
Take a 5-year FD at 8% that you break after 2 years, when the 2-year rate on your deposit date was 5%:
- 2 years at 8% would have given ₹17,166 on ₹1 lakh
- 2 years at 5% gives ₹10,449
That is about ₹6,717 lost before any penalty. If you only need cash for a short while, a loan against your FD is often cheaper: banks typically lend 80 to 90% of the deposit value (up to ₹90,000 on ₹1 lakh) at 1 to 2 percentage points above your FD rate, and your deposit keeps growing.
Common mistakes with FD math
Treating TDS as your final tax
Once your FD interest crosses a yearly threshold, the bank deducts 10% as TDS. On the example above, that is roughly ₹830 a year. But FD interest is taxed at your own income tax slab, so if you are in a higher slab you still owe the difference in your return. If your total income is below the taxable limit, Form 15G (under 60) or Form 15H (60 and above) can stop the deduction.
Assuming longer always pays more
Longer terms usually carry higher rates, but not always. If a bank expects the repo rate to fall, it may offer less on a 5-year FD than on a shorter one. Compare the rate card term by term.
Forgetting about auto-renewal
Many FDs renew automatically at maturity, at whatever rate is on offer that day, not your old one. Check the new rate before letting it roll over.
Comparing headline rates only
Two FDs at the same rate can pay different amounts depending on how often interest is compounded. Our explainer on the numbers to check before trusting any savings interest rate walks through why.
The quick checklist before you lock in
Pick cumulative unless you need regular income, match the term to when you will need the money, keep each bank’s total under the ₹5 lakh cover, and remember the rate you see is before tax.
