Mastering the Math: How Compounding Affects Your Payout
Most depositors look at the "Annual Interest Rate," but in the world of Fixed Deposits, Yield is king. Yield is the result of compounding—the magic of earning interest on your interest.
Quarterly Compounding: The Indian Standard
In India, the Reserve Bank of India (RBI) allows banks to compound interest every quarter (90 days). This means your money grows in "steps":
- Quarter 1: You earn interest on your principal.
- Quarter 2: You earn interest on (Principal + Q1 Interest).
- Quarter 3: You earn interest on (Principal + Q1 + Q2 Interest).
The Leap Year & 366-Day Logic
Few people realize that banks calculate daily interest using a specific denominator. In a standard year, they use 365. In a leap year, many banks switch to 366. While it seems small, on an FD of ₹50 Lakhs, this "one day difference" can alter your payout by hundreds of rupees.
The TDS Factor (The Hidden Leak)
Banks are required to deduct 10% TDS (Tax Deducted at Source) if your annual interest exceeds ₹40,000 (₹50,000 for seniors). This tax is deducted annually, even if you haven't withdrawn the money. This slows down your compounding because there is less "interest" left to earn more interest!
Pro-Tip: Submit Form 15G/15H to your bank to stop this deduction if your total income is below the taxable limit.
Summary
When using our FD Calculator, we factor in these compounding frequencies to give you an estimate that matches your bank statement as closely as possible.