Understanding Indian Bank Fixed & Recurring Deposit Compounding
Unlike simple interest or monthly compounding, Indian commercial banks (including SBI, HDFC, ICICI, and Axis Bank) compound term deposit interest on a quarterly basis (every 90 days), adhering to Reserve Bank of India (RBI) master directives.
This means a 1-year Fixed Deposit at 7.00% nominal interest actually yields an Effective Annual Rate (AER) of 7.19% because interest credited in Q1 compounds in Q2, Q3, and Q4.
Formulas for Bank Term Deposits
1. Fixed Deposit (FD) Lump Sum:
A = P × (1 + r / n)^(n × t)
2. Recurring Deposit (RD) Monthly Auto-Debit:
M = Sum over each monthly installment (P) compounded quarterly for its remaining tenure: M_i = P × (1 + r / 4)^(4 × (n - i + 1) / 12)
Where P is deposit amount, r is nominal annual interest rate as a decimal, n is compounding frequency per year (4 for Indian banks), and t is tenure in years.
Fixed Deposit vs. Recurring Deposit: Side-by-Side Comparison
| Parameter | Fixed Deposit (FD) | Recurring Deposit (RD) |
|---|---|---|
| Deposit Mechanism | Lump-sum upfront investment | Equal monthly installments |
| Ideal Investor | Individuals with idle cash (bonus, proceeds) | Salaried professionals saving monthly surplus |
| Interest Rate Guarantee | Locked for entire tenure at booking | Locked for entire tenure from 1st installment |
| Premature Withdrawal | Allowed with 0.5% - 1.0% penal interest cut | Allowed with interest reduction |
| Senior Citizen Bonus | Additional 0.50% to 0.75% p.a. | Additional 0.50% to 0.75% p.a. |
Tax Deducted at Source (TDS) under Section 194A
Interest earned on bank deposits is fully taxable under Income from Other Sources at your applicable slab rate. Banks deduct 10% TDS (or 20% if PAN is not linked) under the following thresholds:
- Non-Senior Citizens: TDS applies if total annual deposit interest across all branches exceeds ₹40,000.
- Senior Citizens (60+ years): TDS exemption limit is ₹50,000 under Section 80TTB.
- Tax Avoidance via Form 15G/15H: If your total estimated taxable annual income is below the basic exemption limit, you can submit Form 15G (below 60) or Form 15H (senior citizens) to prevent TDS deduction.