Question 1

How is FD interest calculated?

Accepted Answer

FD interest is calculated using the compound interest formula: A = P x (1 + r/n)^(n*t), where P is the principal, r is the annual interest rate, n is the compounding frequency per year, and t is the tenure in years. Most banks compound interest quarterly.

Question 2

Is FD interest taxable in India?

Accepted Answer

Yes, interest earned on fixed deposits is fully taxable as 'Income from Other Sources'. It is added to your total income and taxed at your applicable slab rate. Banks deduct TDS at 10% if interest exceeds Rs 40,000 per year (Rs 50,000 for senior citizens).

Question 3

What is the difference between cumulative and non-cumulative FD?

Accepted Answer

In a cumulative FD, interest is compounded and paid at maturity along with the principal, giving you higher effective returns. In a non-cumulative FD, interest is paid out periodically (monthly, quarterly, etc.), which is useful for regular income needs.

Question 4

Which compounding frequency gives the best returns?

Accepted Answer

Monthly compounding gives the highest returns, followed by quarterly, half-yearly, and yearly. However, the difference is marginal. Most banks offer quarterly compounding by default. For example, on a Rs 10 lakh FD at 7% for 5 years, monthly compounding yields about Rs 800 more than yearly.

Question 5

What is the effective rate after tax?

Accepted Answer

The effective rate is the actual annual return you earn after accounting for taxes on interest. For example, if your FD earns 7% and you are in the 30% tax bracket, your effective post-tax rate is approximately 4.9%. This is a more accurate measure of your real returns.

FD (Fixed Deposit) Calculator

Frequently Asked Questions