What does a fixed deposit actually pay?

Worked through on the default figures: ₹5,00,000 at 7% for five years, compounded quarterly. The quarterly rate is 0.0175, there are 20 quarters, and (1.0175) raised to 20 is 1.4148. Multiply by ₹5,00,000 and the deposit matures at ₹7.07 lakh, of which ₹2.07 lakh is interest.

The same deposit compounded once a year matures at ₹7.01 lakh. The ₹6,000 difference is what the compounding frequency is worth, and it is why the frequency belongs on the certificate rather than in an assumption.

The quoted rate is the annual rate before compounding is counted. The effective annual rate is what the deposit actually earns once it is. A 7% deposit compounded quarterly has an effective rate of 7.19%; half-yearly, 7.12%; monthly, 7.23%. Banks advertise the quoted number, which is why two deposits at the same headline rate can pay different amounts.

As ordinary income, at your marginal slab rate, in the year it accrues rather than the year you receive it. There is no special rate, no indexation and no long-term concession, whatever the tenure. For a depositor in the 30% bracket, a 7% deposit is a 4.99% deposit.

Banks also deduct tax at source on interest above a threshold and issue a certificate for it. That is a timing mechanism rather than an additional tax: it is credited against your total liability when you file, and it does not change the amount owed.

Often not, once tax is counted. On the default figures the arithmetic is stark: 7% quoted becomes 7.19% effective, becomes 4.99% after a 30% slab, becomes minus 0.95%after 6% inflation. The ₹5 lakh deposit grows to ₹6.38 lakh after tax and buys ₹4.77 lakh of today’s goods.

The capital is safe and the purchasing power is not, and those are two different kinds of safety. In the 20% bracket the same deposit is roughly flat in real terms, and for someone with no taxable income it keeps about 1.12% a year. The slab changes the answer more than the rate does.

For money you will need within a year or two, or for the reserve you cannot afford to see fall, the real return is not the point: a deposit is being paid for certainty and liquidity rather than for growth, and nothing else does that job as simply. The arithmetic above matters when a deposit is doing a job it was not built for, which is holding money for ten or fifteen years. Which part of your money is which is a question about your own situation rather than about the instrument.

A cumulative deposit reinvests the interest and pays everything at maturity, which is what this page models. A non-cumulative deposit pays interest out monthly, quarterly or annually and returns only the principal at the end. The cumulative version earns more, because the interest compounds rather than leaving. The non-cumulative version exists because some depositors need the income, which is a different requirement rather than a worse deal.

Deposits at any bank licensed in India are insured up to ₹5 lakh per depositor per bank, principal and interest together, through the Deposit Insurance and Credit Guarantee Corporation. That cover is the reason a small finance bank can quote a rate a large bank does not, and it is also why the amount held at any one bank is worth watching. Above ₹5 lakh you are an unsecured creditor of that bank.

Press Start from a maturity amount instead and this runs the other way. To have ₹10 lakh in five years at 7% compounded quarterly you would need to deposit ₹7.07 lakh today. Bear in mind the target is a pre-tax figure: aiming at a number you will actually keep means solving on the after-tax rate instead.