How Fixed Deposit Compounding Works
A Fixed Deposit (FD) is one of the most reliable investment instruments. Interest is guaranteed upon deposit and is compounded quarterly by default in major commercial banks like SBI, HDFC, and ICICI.
The Compound Interest Formula for FDs
A = P x (1 + r / n)^(n x t)- A = Maturity Amount
- P = Principal Deposit Amount
- r = Annual Interest Rate (in decimal, e.g., 7% = 0.07)
- n = Compounding frequency per year (n = 4 for Quarterly)
- t = Deposit Tenure in years
Frequently Asked Questions (FAQ)
How is Fixed Deposit interest calculated?
Most Indian banks compound FD interest on a quarterly basis using the formula A = P(1 + r/n)^(nt), where n = 4 for quarterly compounding.
Are Fixed Deposit returns tax-free?
No, FD interest is fully taxable according to your income tax slab slab rate. Banks deduct TDS (Tax Deducted at Source) if total interest exceeds ₹40,000 in a financial year (₹50,000 for senior citizens).
Is FD safe for capital preservation?
Yes, commercial bank FDs in India are insured up to ₹5 Lakhs per bank per depositor by DICGC (a subsidiary of RBI).