What is a Fixed Deposit? FD Basics Explained

Fixed Deposits are one of the most widely used savings instruments in India — trusted for their simplicity and safety. Here's how they actually work.

Fixed Deposit, defined

A Fixed Deposit (FD) is a savings product where you deposit a lump sum with a bank or NBFC for a fixed period, at a fixed interest rate agreed upfront. In exchange for locking in your money, you earn a higher interest rate than a regular savings account — and you know exactly what you'll get at maturity.

How interest is calculated

FD interest compounds — typically quarterly at most Indian banks, though some offer monthly or other frequencies. The formula is:

Maturity Amount = P × (1 + r/n)^(n×t)

Where P is your principal, r is the annual interest rate, n is compounding frequency per year, and t is tenure in years.

Cumulative vs non-cumulative FDs

• Cumulative FD — interest is reinvested and paid out entirely at maturity, along with the principal. This maximises compounding.
• Non-cumulative FD — interest is paid out periodically (monthly, quarterly, annually) as income, rather than reinvested. Useful if you need regular payouts, like for living expenses.

Premature withdrawal

Most FDs allow breaking the deposit before maturity, but usually with a penalty — often a reduction of 0.5–1% from the applicable rate. Some banks also offer "sweep-in" or partial-withdrawal FDs that offer more flexibility, at a potential trade-off in rate.

Is FD interest taxable?

Yes. FD interest is added to your taxable income and taxed as per your income tax slab. Banks deduct TDS (Tax Deducted at Source) if interest income crosses a specified threshold in a financial year — check current thresholds, as they can change.

Why people still choose FDs

• Predictability — you know the exact maturity amount from day one, unlike market-linked investments
• Safety — bank FDs in India are insured up to a specified limit per depositor per bank under deposit insurance rules
• Simplicity — no market tracking or active management required

The trade-off is that FD returns are generally lower than long-term equity market returns, and don't always outpace inflation — which is why many people use FDs alongside, not instead of, other investments like SIP.

Calculate your FD maturity amount

See exactly how much your deposit will be worth at maturity based on amount, rate, tenure, and compounding frequency.