What are FD Interest Rates & How is Fixed Deposit Interest Calculated?

Investing in fixed deposits (FDs) is a reliable way to save money and earn interest. With competitive bank FD interest rates, investors can achieve a good return on investment over a set period. FD interest rates are influenced by the type of financial institution, the deposit amount, and the duration.

A notable benefit of FDs is their fixed interest rates. These rates remain unaffected by market fluctuations. This ensures guaranteed returns at maturity. This article will further explore FD interest rates and how to calculate the interest payout for these FDs. 

What are Fixed Deposit Interest Rates? 

The FD interest rate represents the percentage of interest earned on the principal amount over the fixed deposit (FD) tenure. These rates can vary depending on different tenures. They are influenced by factors such as the Reserve Bank of India’s (RBI) monetary policy, inflation rates, and the overall economic scenario.

Fixed deposits generally offer higher interest rates than standard savings accounts. They are a popular choice for investors seeking guaranteed returns with minimal risk. Interest on FDs accumulates over a set period, which can be monthly, quarterly, or yearly, with rates ranging from 3% to 9% per annum in India. The FD interest rate depends on the tenure and the type of financial institution, whether public sector, private sector, or small finance bank. 

Features of Bank Fixed Deposit Interest Rates

Here are a few features that fixed deposit interest rates may have:

• Higher Rates Compared to Savings Accounts: Fixed deposits typically offer higher interest rates than regular savings accounts. This can make them a more lucrative option for earning interest on your savings.
• Fixed Rates for the Deposit Term: The interest rate on a fixed deposit remains constant throughout the term. This can provide predictable returns and help with financial planning.
• Compounding Interest: Many banks offer interest compounding options for FDs, where the interest earned is reinvested, leading to higher returns over time. All FDs offered on smallcase have interest compounded quarterly. This provides better interest rates than semi-annual or annually compounded FDs. You can read more about this here. 
• Penalty for Early Withdrawal: If you need to withdraw your FD before maturity, a penalty may apply, which may affect the effective interest rate. 
• Sweep-In Facility Benefits: With the sweep-in facility, excess funds from your savings account can be automatically transferred to the FD. This can allow you to earn higher interest rates on surplus amounts without manual intervention.
• Loan Against FD: The interest rate on loans taken against fixed deposits is usually 1%-1.5% higher than the FD rate. This can provide a relatively low-cost borrowing option while still benefiting from the fixed deposit’s interest earnings.

Important Terminology Surrounding FD Interest Rates

Here are a few terms related to FD interest rates that may come in handy when investing in fixed deposits:

• Tenure: The period for which you invest in an FD, sometimes called ‘tenor’ by banks/NBFCs.
• Maturity: The date when you receive your principal and the interest agreed upon at the start of your FD.
• Premature Closure: Closing your FD before its maturity date, often resulting in a lower interest payout. If your FD has a lock-in period, premature closure isn’t an option.
• Annual Yield: The effective annual return on your FD, accounting for the compounding frequency (quarterly or annually). It helps compare different investment options.
• Interest Payout: The frequency at which you receive interest from your FD, which can be monthly, quarterly, half-yearly, yearly, or at maturity. For short-term FDs, monthly payouts might not be available.
• Timely Closure: Closing your FD at maturity, ensuring you receive the principal plus accrued interest for the chosen tenure.
• Breaking FD Account: Withdrawing your FD funds before maturity is usually not permitted and subject to penalties. Some banks can waive the penalty in emergencies.
• Partial Withdrawal: Taking out part of your FD funds, often in Rs. 1000 units, with a 1% penalty. The remaining balance continues to earn interest at the original rate. This can be useful in emergencies or to reinvest at better rates elsewhere.

How are Returns Calculated for Different FD Schemes?

Since smallcase’s cumulative fixed deposits compound quarterly, interest is calculated every three months and added to the principal. This new total then earns interest in the next period. Here is the formula that is used to calculate this interest amount of the best bank fixed deposit rates:

A=P(1+r/n)^nt

Here, 

• A: Maturity amount
• P: Principal amount
• r: Annual interest rate
• n: The number of times interest is compounded per year (for quarterly, n=4) 
• t: Tenure in years

Fixed Deposit Interest Rates

Here is a list of the best FD rates by banks, including the highest FD rates in banks based on their tenure. 

Private Sector Bank FD Interest Rates

Here are some of the best FD interest rates in the private sector:

Name of the Bank	FD Interest Rates (1-year Tenure)	FD Interest Rates (3-year Tenure)	FD Interest Rates (5-year Tenure)
Axis Bank	6.7%	7.1%	7%
Bandhan Bank	7.85%	7.25%	5.85%
City Union Bank	7%	6.5%	6.25%
CSB Bank	5%	5.75%	5.75%
DBS Bank	7%	6.5%	6.5%
DCB Bank	7.1%	7.55%	7.4%
Dhanlaxmi Bank	6.75%	6.5%	7.25%
Federal Bank	6.8%	7%	6.6%
HDFC Bank	6.6%	7.15%	7.2%
ICICI Bank	6.7%	7%	7%
IDBI Bank	6.8%	6.5%	6.5%
IDFC First Bank	6.5%	7.25%	7%
IndusInd Bank	7.75%	7.25%	7.25%
Jammu & Kashmir Bank	7.05%	6.5%	6.5%
Karnataka Bank	7.1%	6.5%	6.5%
Karur Vysya Bank	7%	7%	6.5%
Kotak Mahindra Bank	7.1%	7%	6.2%
Nainital Bank	6.7%	6.25%	5.75%
RBL Bank	7.5%	7.5%	7.1%
SBM Bank India	7.05%	7.3%	7.75%
South Indian Bank	6.7%	6.7%	6%
Tamilnad Mercantile Bank	7%	6.5%	6.5%
Yes Bank	7.25%	7.25%	7.25%

Public Sector Bank FD Interest Rates

Here are some of the best fd interest rates in the public sector:

Name of the Bank	FD Interest Rates (1-year Tenure)	FD Interest Rates (3-year Tenure)	FD Interest Rates (5-year Tenure)
Bank of Baroda	6.85%	7.25%	6.5%
Bank of India	6.8%	6.5%	6%
Bank of Maharashtra	6.75%	6.5%	6.5%
Canara Bank	6.85%	6.8%	6.7%
Central Bank of India	6.85%	6.5%	6.5%
Indian Bank	6.1%	6.25%	6.25%
Indian Overseas Bank	6.9%	6.5%	6.5%
Punjab & Sind Bank	6.3%	6%	6%
Punjab National Bank	6.75%	7%	6.5%
State Bank of India	6.8%	6.75%	6.5%
UCO Bank	6.5%	6.3%	6.2%
Union Bank of India	6.75%	6.5%	6.5%

Small Finance Bank FD Interest Rates

These small finance banks can offer some of the highest FD rates in banks:

Name of the Bank	FD Interest Rates (1-year Tenure)	FD Interest Rates (3-year Tenure)	FD Interest Rates (5-year Tenure)
AU Small Finance Bank	7.25%	7.5%	7.25%
Capital Small Finance Bank Limited	7.5%	7.15%	7.1%
Equitas Small Finance Bank	8.2%	8%	7.25%
ESAF Small Finance Bank	6%	6.75%	6.25%
Jana Small Finance Bank	8.25%	8.25%	7.25%
North East Small Finance Bank	9%	8%	8%
Shivalik Small Finance Bank Limited	6%	7.5%	6.25%
Suryoday Small Finance Bank	6.85%	8.6%	8.25%
Ujjivan Small Finance Bank	8.25%	7.2%	7.2%
Unity Small Finance Bank	7.85%	8.15	8.15
Utkarsh Small Finance Bank	8%	8.5%	7.75%

Note: The data on the lists of FD Bank interest rates has been taken on 29th July, 2024.

How to Calculate the Interest Payout of Different FD Schemes?

​​Fixed deposits can offer higher returns when interest is compounded periodically rather than paid out at maturity. The compounding frequency—quarterly, semi-annually, or annually—determines the overall return. Generally, FDs with quarterly compounding yield higher returns than those with semi-annual or annual compounding. As of now, smallcase only offers FDs with quarterly compounding. Here is a comparison of a case of quarterly compounding and a case of annual compounding:

Case 1: Quarterly Compounding

John invests Rs. 30,000 in a cumulative FD with quarterly compounding at an annual interest rate of 6%. The interest compounds every three months.

Year 1:

• Quarter 1:
  • Principal: Rs. 30,000
  • Interest: Rs. 30,000 * (6% / 4) = Rs. 450
  • New Principal: Rs. 30,000 + Rs. 450 = Rs. 30,450
• Quarter 2:
  • Principal: Rs. 30,450
  • Interest: Rs. 30,450 * (6% / 4) = Rs. 456.75
  • New Principal: Rs. 30,450 + Rs. 456.75 = Rs. 30,906.75
• Quarter 3:
  • Principal: Rs. 30,906.75
  • Interest: Rs. 30,906.75 * (6% / 4) = Rs. 463.60
  • New Principal: Rs. 30,906.75 + Rs. 463.60 = Rs. 31,370.35
• Quarter 4:
  • Principal: Rs. 31,370.35
  • Interest: Rs. 31,370.35 * (6% / 4) = Rs. 470.56
  • New Principal: Rs. 31,370.35 + Rs. 470.56 = Rs. 31,840.91

Year 2:

• Follow the same calculation method for each quarter using the new principal.
• By the end of Year 2, the principal will be approximately Rs. 33,775.27.

Year 3:

• Continue the quarterly compounding process.
• By the end of Year 3, the FD will mature to Rs. 35,947.

Case 2: Annual Compounding

John invests Rs. 30,000 in a cumulative FD with annual compounding at the same interest rate of 6%. The interest compounds once a year.

Year 1:

• Principal: Rs. 30,000
• Interest: Rs. 30,000 * 6% = Rs. 1,800
• New Principal: Rs. 30,000 + Rs. 1,800 = Rs. 31,800

Year 2:

• Principal: Rs. 31,800
• Interest: Rs. 31,800 * 6% = Rs. 1,908
• New Principal: Rs. 31,800 + Rs. 1,908 = Rs. 33,708

Year 3:

• Principal: Rs. 33,708
• Interest: Rs. 33,708 * 6% = Rs. 2,022
• New Principal: Rs. 33,708 + Rs. 2,022 = Rs. 35,730

This comparison shows that quarterly compounding yields a higher maturity value than annual compounding due to more frequent interest calculations, resulting in higher overall returns​. When comparing fixed deposit (FD) schemes with identical tenure, investment amount, and interest rate, the scheme with more frequent compounding will offer a higher annualised yield, as seen in the example above. Therefore, FDs that compound quarterly can yield more interest than those that compound semi-annually or annually. Investors can keep this in mind when selecting the best FD rates by banks. 

Taxation on Fixed Deposit Interest Rates

In India, interest earned on fixed deposits (FDs) is taxable under the Income Tax Act of 1961. It is classified as “income from other sources” and added to your total income for the year, with the tax rate depending on your overall income.

TDS Exemption Limits

Banks deduct Tax Deducted at Source (TDS) on interest annually, not just when the FD matures. Here are the TDS exemption limits:

• General: Rs. 40,000 interest per year.
• Senior citizens (above 60 years): Rs. 50,000 interest per year.
• If your interest income exceeds these limits, the bank will deduct TDS. If it is below these limits, no TDS will be deducted. However, TDS is not your total tax liability; your actual tax depends on your total income and tax bracket. You may need to pay additional tax if you fall into a higher bracket, or you might get a refund if you are in a lower bracket.
• If your total income for the year is less than Rs. 2,50,000, you do not need to pay tax, and no TDS will be deducted. 

TDS Rates Based on Income

For interest earnings over Rs. 40,000 in a financial year, TDS fixed deposit rates are:

• 10% for PAN holders.
• 20% for non-PAN holders.

For example, if you earn Rs. 50,000 in interest from your FD in a year:

• With PAN: The bank deducts Rs. 1,000 (10% of Rs. 10,000, the excess over Rs. 40,000).
• Without PAN: The bank deducts Rs. 2,000 (20% of Rs. 10,000).

Forms Related to TDS

• To avoid TDS deduction, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) at the start of the financial year.
• Form 26AS is a consolidated tax statement on the Income Tax Department’s website. It will reflect the TDS deducted by the bank. 

At maturity, you receive the total principal amount plus net interest after the TDS deduction. When filing your tax return, you can report the interest income earned each year and claim credit for the TDS deducted.

How to Book an FD at smallcase?

Here is how you can book an FD at smallcase:

• Select a Bank: Interested candidates can compare fixed deposit interest rates from various partner banks and select one.
• Choose a Scheme: Then, they can pick an FD scheme based on the tenure—short-term, medium-term, or long-term.
• Verify Your Identity: One would then need to digitally verify their PAN and Aadhaar.
• Complete Additional KYC: Provide any necessary additional KYC details, such as address, personal/professional information, and nominee selections.
• Make Payment: You can then pay for your FD using net banking or UPI.
• Video KYC (if required): Some banks may require an additional video KYC based on the deposit amount.

You can learn more about smallcase fixed deposits here.

Benefits of Investing in FD Schemes on smallcase

Here are a few benefits of investing in FD schemes on smallcase:

• High-Interest Bank Fixed Deposits: Banks on smallcase offer top interest rates. This can ensure competitive returns on investments.
• Investment Insurance up to Rs. 5 Lakh: All fixed deposits on smallcase are regulated by the RBI and insured by the DICGC. This covers amounts up to Rs. 5 lakh per bank.
• Easy Digital Transactions: The entire fixed deposit process, from booking to withdrawal, is digital, eliminating the need for paperwork or bank visits.

Taxation of smallcase FDs

All FDs available on smallcase are cumulative. This means that interest is paid at maturity. Despite this, TDS is deducted each year on the interest earned. You can include the interest earned each year in your annual income tax return, even if you haven’t received the payment yet.

To Wrap It Up…

It is important for fixed deposit investors to do their research on the relevant FD rates and factors that may affect them. Fixed interest rates are what make FDs investment vehicles with assured returns. These rates differ from bank to bank and the eligibility for higher interest rates depends on the investor profile. Interested candidates can now explore the banks that are available on smallcase. They typically compound interest quarterly, resulting in fixed deposits with high interest rates. These interest rates can be higher than FDs compounded annually or semi-annually. 

Frequently Asked Questions About FD Interest Rates