Fixed Deposits

How Fixed Deposit Interest is Calculated

When you book a fixed deposit, the interest rate is fixed throughout its entire tenure, contrary to the savings account rate, which the bank can change at any time. The FD interest rates are primarily based on the tenure you select, whether you are a senior citizen and the issuer you are investing with. Banks and NBFCs usually give their best rates on a two to five years tenure and seniors generally receive an additional rate benefit on top of the standard rate.

There are two payout structures to choose from: Cumulative and Non-cumulative FDs. A cumulative FD accumulates interest, typically quarterly and disburses the principal and accumulated interest when it reaches maturity. Non-cumulative FD involves payment of interest at periodic or regular intervals, monthly, quarterly, half-yearly or annually and suits anyone who wants a steady income stream instead. 

For example, on a ₹1 lakh deposit at 7% p.a. over a period of three years, a cumulative FD with a quarterly compounding will increase to around ₹1.23 lakh at maturity. If it is a non-cumulative FD, then at the same rate and tenure, you would get about ₹1,750 as interest per quarter and the initial ₹1 lakh would be refunded at the end of the tenure.

Key Features of Fixed Deposits

A fixed deposit is one of the most popular choices for investment to enhance savings with its security, stable returns, and flexibility. Some of its main features and advantages are as follows: 

• Guaranteed Returns: Returns of the FDs are fixed and assured because rate is fixed for the specific tenure. 
• Flexible Tenure: Tenure usually ranges from 7 days to 10 years. One can select the flexible tenure as per their needs. 
• Higher Interest for Senior Citizens: Senior citizens are usually given an additional 0.25%-0.75% over normal FD rates. But there are some Small Finance Banks and NBFCs that are offering a premium of up to 1.25% for chosen tenures. 
• Loan or Overdraft Against FD: If the need for funds is temporary, a loan against FD is usually the better route. Banks and NBFCs usually lend up to 75-90% of the deposit value at a rate just a little higher than the FD’s own rate. The initial deposit continues to earn interest until the loan is repaid.
• Premature Withdrawal of FD: Banks generally allow FD premature withdrawal, usually at a reduced interest rate and sometimes only after a minimum holding period, often around three months from the start date.

Why FDs Are Still So Popular?

Unlike stocks, mutual funds and other market linked instruments, the rate of FD is fixed once your deposit is booked. For a low-risk appetite, or for money kept for a short-term goal, that certainty has real value. On top of that, these are easy-to-understand financial instruments.

There's no portfolio to rebalance and no ongoing decisions to make, just the amount, tenure, and payout option chosen upfront.

Most banks and NBFCs allow premature withdrawal, typically at a reduced interest rate, and several let you take a loan against the FD instead of prematurely closing it, so short-term cash needs don't have to disturb the original deposit.

FDs also work well for goal-based saving. Locking money away for a fixed period creates hesitation against spending it, which is why many households use FDs to build an emergency fund or save toward a specific milestone like a down payment.

Types of Fixed Deposits Available in India

Different types of fixed deposits are available from Banks or NBFCs to meet different financial needs. Some of the popular types of FDs available in India are:

Regular Fixed Deposit

This is a very common form of the FD. In this investors deposit a fixed amount for a fixed tenure. Which usually range from 7 days to 10 years. Investors can select the payout option, either cumulative at maturity or through periodic intervals.  

Tax-Saving Fixed Deposit

Tax-saving FD carries a mandatory five-year lock-in and qualifies for a deduction under Section 123 of the Income-tax Act, 2025 (earlier Section 80C), up to the prescribed limit. Premature withdrawal isn't allowed, since the tax benefit depends on holding the deposit for the full term or the lock-in period of five years.

Senior Citizen Fixed Deposit

It is a rate variant rather than a separate product, offering an additional rate on top of the standard FD rate for depositors above 60. Several banks also structure a monthly or periodic payout specifically for senior citizens.

Flexi Fixed Deposit

Flexi Fixed Deposit links your FD to your savings account. When the savings balance falls below a set threshold, funds move automatically from the FD to cover it, so you keep liquidity without manually closing the deposit.

Corporate or NBFC Fixed Deposit

NBFCs offer Corporate FDs alongside banks, sometimes at slightly higher rates to offset a different risk profile. Check the credit rating from CRISIL or ICRA before investing, since NBFC deposits aren't covered by the deposit insurance that applies to bank FDs.

How the FD Investment Process Typically Works

Booking an FD is largely digital now. Log in to your bank’s net banking portal/app or the investment platform of the NBFC and go to the deposits section. Simply enter the amount, tenure and your payout preference, validate your KYC credentials and authorise the transaction with an OTP. The deposit usually takes minutes to a few hours to process and then they send you a receipt or confirmation. 

A branch visit still works for those who prefer it, and it's often necessary for new customers who haven't completed KYC or for larger deposits where discussing options with a bank representative helps.

What Happens Once FD Matures

You typically have three choices at maturity: take the full payout, credited to your linked savings account; renew the deposit at the rate applicable on the renewal date; or do a partial renewal, reinvesting part of the amount while withdrawing the rest.

Many banks default to auto-renewal if you take no action, which renews the FD for the same tenure at the rate that applies on that date, not the rate you originally locked in. If rates have fallen since you booked the original deposit, an unreviewed auto-renewal can lock your deposits into a noticeably lower return for the next term. 

It's worth reviewing your maturity instructions periodically rather than leaving them on auto-renewal, particularly for larger deposits where a small difference in rate translates into a meaningful sum over a multi-year tenure.

Eligibility and Documents Required

FDs can be availed by a variety of depositors which include resident individuals, Hindu Undivided Families, sole proprietorships, partnership firms, limited companies, trusts, clubs, and societies. NRIs can also invest using a separate NRI deposit scheme and a parent or legal guardian can open an account on behalf of a minor.

The documentation is limited to a PAN card and Aadhaar card, passport, voter ID or driving licence as proof of identity and address. 

Most of the NRIs may have to transfer their money through an NRE or NRO account and fill out further KYC forms applicable to non-resident NRIs. 

If one already has a KYC-verified savings account with the bank, the procedure for opening an FD is generally a few clicks through the net banking or mobile application. The KYC information is directly extracted from the previous account using CKYC or e-KYC. 

Tax Treatment of Fixed Deposit Interest

Interest earned on a Fixed Deposit is taxable under "Income from Other Sources" and is taxed according to your applicable income tax slab. Banks deduct Tax Deducted at Source (TDS) if the total FD interest earned in a financial year exceeds ₹50,000 for general depositors and ₹1,00,000 for senior citizens.

In case your estimated tax liability for the tax year is zero and you meet the prescribed eligibility conditions, you may request the bank or other payer not to deduct TDS by filing Form 121 (earlier Form 15G and Form 15H) under the Income-tax Act, 2025.

Points to Consider Before Investing in FDs

While investing in FDs, you may find these practical strategies helpful:

• Check the credit rating of the institution before investing, particularly for NBFC deposits. 
• Compare tenures carefully, since the highest rate isn't always on the longest tenure. Banks often price their two- to five-year buckets more competitively than the very short or very long tenures to attract stable, medium-term deposits. 
• Splitting a large sum across multiple tenures, a practice sometimes called laddering, can also help balance liquidity against locking in a favourable rate. 
• And decide on a payout preference upfront: a cumulative option maximises the maturity amount, while a periodic payout gives regular income, and switching between the two after booking is not always easy.

Key Takeaways

Unlike mutual funds or stocks, the rate of interest for fixed deposits is fixed for the period of the investment, regardless of market fluctuations. Bank FDs are one of the safest savings options, as they are insured up to ₹5 lakh per depositor under the DICGC. Investors may opt for cumulative payouts at maturity or periodic income and most deposits can be withdrawn before the maturity date or borrowed against the FD if money is needed prior. Applicable penalty charges may need to be paid depending on the financial institution.