How fixed deposit interest is calculated with quarterly compounding
Why a 7% fixed deposit pays more than 7% a year, a worked example for 1,00,000 over five years, and how payout options and tax change what you receive.
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Tool for this job: Compound Interest Calculator
Banks quote fixed deposit rates per year, but many, including most banks in India, compound the interest every quarter. Interest earned in one quarter starts earning interest in the next, so the amount at maturity is higher than the headline rate suggests.
Worked example: 1,00,000 at 7% for 5 years
| Method | Maturity | Interest |
|---|---|---|
| Simple interest | 1,35,000 | 35,000 |
| Compounded yearly | 1,40,255 | 40,255 |
| Compounded quarterly | 1,41,478 | 41,478 |
| Compounded monthly | 1,41,763 | 41,763 |
The formula
Maturity amount = principal × (1 + rate ÷ n)^(n × years)
Here n is the number of compounding periods per year: 4 for quarterly. For the example: 1,00,000 × (1 + 0.07 ÷ 4)^20 = 1,00,000 × 1.0175^20 = 1,41,478.
The Compound Interest Calculator does this for you: enter the deposit as the starting balance, choose no regular contributions, set the rate and term, and pick quarterly compounding. It also shows the effective annual rate, which for 7% compounded quarterly is about 7.19%.
Effective annual rate
The effective annual rate, sometimes called the annualised yield, is the simple yearly rate that would give the same result. It is the fair way to compare deposits that compound differently: a 7% deposit compounded quarterly (7.19% effective) beats a 7.1% deposit compounded yearly (7.1% effective).
Cumulative versus payout deposits
- Cumulative: interest is added to the deposit and paid at maturity. This is the option that compounds.
- Quarterly or monthly payout: interest is paid out to your account as it is earned. It does not compound inside the deposit, so the total interest is the simple-interest figure. Banks sometimes pay a slightly lower rate on monthly payout to reflect that you receive the money sooner.
Choose payout if you need the income; choose cumulative if you do not.
Short deposits
Deposits of less than a few months are often paid as simple interest at maturity, because there are not enough quarters to compound. Check the bank's terms for the tenure you choose.
Tax and inflation
- Tax: fixed deposit interest is usually taxable as income in the year it is earned, even on a cumulative deposit where you have not received it yet. Banks may deduct tax at source above a threshold.
- Inflation: a 7% deposit when prices rise 5% a year grows your buying power by only about 2% a year, before tax.
Senior citizen rates
Many banks add a small extra rate for depositors over 60, often a quarter to half a percentage point. On a five-year deposit that compounds quarterly, half a point adds noticeably to the maturity amount. If a parent is investing, check whether the deposit should be in their name to get the higher rate.
Breaking a deposit early
Premature withdrawal usually means the bank recalculates interest at the rate for the period you actually stayed, often minus a penalty. If you might need part of the money, splitting it into several smaller deposits with different maturities lets you break only one.
For regular monthly deposits rather than a lump sum, see how much a monthly investment grows to.