What is a Fixed Deposit (FD)?
A Fixed Deposit (FD) is one of the safest and most popular investment instruments in India, offered by banks and Non-Banking Financial Companies (NBFCs). You deposit a lump sum amount for a fixed tenure at a predetermined interest rate. Because the rate is locked in at the time of opening, your returns are guaranteed and immune to market volatility.
How FD Interest is Calculated
In India, most banks compound FD interest on a quarterly basis. The formula for quarterly compound interest is:
- A = P x (1 + r/n)^(n*t)
- A: Maturity Amount
- P: Principal Amount
- r: Annual interest rate (in decimals)
- n: Number of times interest is compounded per year (4 for quarterly)
- t: Tenure in years
For example, if you invest ₹1,00,000 at 7% p.a. for 5 years, the maturity amount will be approximately ₹1,41,477. The total interest earned is ₹41,477.
Taxation on Fixed Deposits
Interest earned on FDs is fully taxable based on your income tax slab. Additionally, banks deduct TDS (Tax Deducted at Source) at 10% if the annual interest exceeds ₹40,000 (or ₹50,000 for senior citizens). If your total income is below the taxable limit, you can submit Form 15G (or Form 15H for senior citizens) to the bank to prevent TDS deduction.
Tax-Saving FDs (Section 80C)
You can claim a tax deduction of up to ₹1.5 lakh per financial year under Section 80C of the Income Tax Act by investing in a 5-Year Tax-Saving FD. However, keep in mind that these FDs come with a mandatory 5-year lock-in period, meaning premature withdrawals are not allowed, and the interest earned is still taxable.