How to calculate fixed deposit interest:
the formula behind every FD

How fixed deposit interest is calculated

Fixed deposit interest is the principal multiplied by the rate and the time. What separates one FD from another is whether the interest is paid out or added back to the deposit.

In a payout FD, the bank pays interest into your account monthly, quarterly or yearly, and the principal never changes. You earn simple interest. In a cumulative FD, interest is added to the deposit at each compounding date and starts earning interest itself. You receive principal and interest together at maturity.

The rate card quotes a nominal annual rate. How often the bank compounds it decides what a cumulative FD actually earns. Many banks compound quarterly, but your deposit terms are the final word.

So before you calculate anything, find three facts in your deposit terms: the rate, the tenure and whether interest is paid out or accumulated. Those three decide which formula applies and what the answer means.

FD interest formula: simple and compound

Use the first formula when interest leaves the deposit as it is paid, and the second when it stays in and compounds.

Work through the cumulative formula in five steps.

1. 1Turn the quoted rate into a decimal: 6% becomes 0.06.
2. 2Express the tenure in years: 18 months is 1.5 years and 90 days is 90 ÷ 365 years.
3. 3Find the compounding frequency m in your deposit terms.
4. 4Work out (1 + r ÷ m), then raise it to the power m × t.
5. 5Multiply by the principal for the maturity amount, and subtract the principal to get the interest.

Round only at the end. Banks may round each interest credit, so your statement can differ from a calculator by a few rupees.

A quick sanity check: the compound answer must always be larger than the simple answer for the same rate and tenure. If it is not, one of your inputs is wrong.

The same steps work for a senior-citizen rate, a special-tenure rate or a tax-saver deposit. Only the rate and the tenure change; the arithmetic does not.

Worked example: ₹50,000 for 3 years at an assumed 6%

Take a cumulative FD of ₹50,000 for 3 years. Assume a nominal rate of 6% compounded quarterly. The rate per quarter is 6% ÷ 4 = 1.5%, and there are 3 × 4 = 12 quarters.

The working is ₹50,000 × 1.015¹², and 1.015¹² ≈ 1.19562, which gives about ₹59,781.

Now see what a payout FD does with the same inputs. At 6% simple interest the bank pays ₹50,000 × 0.06 ÷ 4 = ₹750 every quarter. Over three years that is twelve payments and ₹9,000 in total, and your ₹50,000 is returned in full at the end.

The payout option gives you cash flow; the cumulative option gives you a larger lump sum. If you spent the ₹750 payments, the gap of ₹781 is what you gave up for the income.

Compounding frequency: how much difference does it make?

The effective annual yield is (1 + r ÷ m)^m − 1. It is the number to compare when two banks compound at different frequencies.

Moving from annual to monthly compounding adds only ₹283 here. A quarter-point higher rate (6.25% instead of 6%, compounded annually) adds about ₹422, so the headline rate matters more than the frequency.

FD interest for days, months and part-years

Short deposits need the tenure as a fraction of a year. A 200-day deposit uses t = 200 ÷ 365 ≈ 0.548. On ₹50,000 at an assumed 6%, simple interest is ₹50,000 × 0.06 × 200 ÷ 365 ≈ ₹1,644.

Banks differ on day-count and on how they compound a part-quarter, so a quote for an odd tenure can sit slightly above or below your calculation.

Months work the same way. A 15-month FD has t = 15 ÷ 12 = 1.25 years. If it compounds quarterly, that is exactly five quarters, so the compound formula uses m × t = 5.

Comparing two FD offers fairly

A higher headline rate does not always win. Suppose Bank A quotes 6.10% compounded annually and Bank B quotes 6.00% compounded quarterly. Bank A's effective yield is 6.10%. Bank B's is (1 + 0.06 ÷ 4)⁴ − 1 ≈ 6.14%, so Bank B pays slightly more even though its rate card number is lower.

Put each offer through the same three checks and you will rarely be misled.

• Convert every offer to an effective annual yield so compounding frequency is built in.
• Compare the same tenure; a 400-day special deposit and a 5-year deposit are different products.
• Check whether the rate is for a cumulative or a payout option, because a payout option may be quoted at a lower rate than the cumulative one.
• Note any lock-in or premature-withdrawal terms, which a yield figure does not show.

Mistakes that make FD calculations wrong

Most wrong answers come from a handful of slips, and each is easy to avoid once you know it.

• Using the simple formula for a cumulative FD, which understates maturity, or the compound formula for a payout FD, which overstates what you actually receive.
• Entering months as years: a 36-month FD is t = 3, not t = 36.
• Raising (1 + r) to the power t without dividing r by m and multiplying t by m.
• Comparing nominal rates from banks that compound at different frequencies instead of comparing effective yields.
• Forgetting tax: FD interest is generally taxable and banks may deduct TDS above a threshold, so check the current rules before counting the full amount as income you keep.
• Assuming a premature withdrawal pays the full rate; banks usually apply a lower rate or a penalty, so confirm before breaking an FD.