How Banks Calculate Fixed Deposit Interest in India
Under Reserve Bank of India (RBI) guidelines, interest on cumulative fixed deposits is compounded every quarter (4 times a year). The standard compounding formula is: A = P × (1 + r/4)^(4 × t), where P is the principal, r is the annual interest rate in decimals, and t is the duration in years. Because interest is reinvested every 3 months, the Effective Annual Yield is always higher than the nominal rate quoted by the bank.
TDS Thresholds on Fixed Deposit Interest (Section 194A)
Banks are mandated to deduct Tax Deducted at Source (TDS) at 10% under Section 194A if total interest from all bank deposits crosses:
- ₹40,000 per financial year: For regular individuals below 60 years of age.
- ₹50,000 per financial year: For senior citizens (aged 60 years and above).
If your total annual income is below the taxable threshold, you can submit Form 15G (for regular depositors) or Form 15H (for senior citizens) at the beginning of the financial year to request non-deduction of TDS.
Frequently Asked Questions
Are fixed deposits insured in Indian banks?
Yes. Under the Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned subsidiary of the RBI, each depositor is insured up to a maximum of ₹5,00,000 (including principal and interest) across all accounts in a bank.
What happens if I break an FD before maturity?
Premature withdrawal is permitted in most standard FDs, but banks typically levy a penalty of 0.5% to 1.0% on the applicable interest rate for the actual duration the deposit remained with the bank.
What is a 5-Year Tax-Saving Fixed Deposit?
Tax-saving FDs carry a mandatory lock-in period of 5 years and qualify for tax deduction under Section 80C up to ₹1,50,000 under the Old Tax Regime. Premature withdrawal or loans against tax-saving FDs are strictly prohibited.