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GlossaryFixed income

Fixed deposit

A deposit with a bank or finance company that earns a fixed interest rate for a chosen term, with principal and interest due at maturity.

A fixed deposit (FD) is money placed with a bank, small finance bank or deposit-taking company for a fixed term — from a few days to several years — at an interest rate agreed on the day you invest. The rate does not change during the term, whatever happens to market rates.

Why it matters

FDs offer predictability: you know the rate, the term and the maturity amount from the start. That makes them a natural fit for near-term goals, emergency reserves and the stable part of a portfolio.

How to read it

  • The issuer matters. Bank FDs are covered by deposit insurance up to a limit. Corporate and NBFC deposits are outside that scheme and depend on the issuer’s credit quality — check the deposit’s credit rating.
  • Payout choice. Cumulative FDs reinvest interest until maturity; non-cumulative FDs pay it out monthly, quarterly or yearly.
  • Compounding frequency affects the effective annual yield; quarterly compounding is common at banks.
  • Premature withdrawal is usually allowed with a penalty, often a lower interest rate. Some deposits cannot be withdrawn early at all.
  • Senior citizen rates. Many banks offer a higher rate to depositors aged 60 and above; terms vary by bank.

Common misconceptions

  • “FDs carry no risk.” They have low volatility, but carry issuer risk above insured limits, reinvestment risk at maturity and inflation risk.
  • “FD interest is tax-free until maturity.” Interest is generally taxable year by year, even in a cumulative FD that pays it only at maturity.

In India: FD interest is generally taxed at your slab rate, and banks deduct TDS once annual interest crosses a threshold — see TDS. CompoundX does not display live FD rates.

Formula

Maturity amount (cumulative) = Principal × (1 + r ÷ n)^(n × t), where r is the annual rate, n the compounding periods a year and t the term in years

Worked example

For illustration, assume ₹5,00,000 in a 3-year cumulative FD at a hypothetical 7% a year, compounded quarterly. Maturity amount ≈ 5,00,000 × (1 + 0.07 ÷ 4)^12 ≈ ₹6,15,720, so interest earned is about ₹1,15,720 before tax.

Figures are for illustration only — not a forecast or a recommendation.

Related terms

  • Cumulative FD

    A fixed deposit that reinvests interest within the deposit and pays principal plus all accumulated interest together at maturity.

  • Non-cumulative FD

    A fixed deposit that pays interest out at regular intervals — monthly, quarterly, half-yearly or yearly — and returns the principal at maturity.

  • Deposit insurance

    Cover from DICGC, an RBI subsidiary, that protects bank deposits up to ₹5 lakh per depositor per bank if an insured bank fails.

  • TDS

    Tax Deducted at Source

    Tax withheld by the payer — an employer, bank or fund house — before paying you, and credited against your final tax for the year.

  • Credit rating

    A rating agency’s opinion of how likely a borrower is to pay interest and principal on time, on a scale running from AAA down to D.

  • Real return

    Your return after accounting for inflation — the growth in what your money can actually buy.