How is Fixed Deposit (FD) Interest Calculated in India?
Quick Answer
Most Indian banks calculate FD interest using quarterly compounding. The formula is A = P(1 + r/n)^(n*t), where n is 4 for quarterly compounding. Interest earned over ₹40,000 (₹50,000 for senior citizens) is subject to 10% TDS.
Quarterly Compounding: The Industry Standard
In India, interest on Fixed Deposits is typically compounded every quarter (every 3 months). This means you earn interest on your interest four times a year, which results in an "effective yield" higher than the quoted annual interest rate.
The standard formula used is: A = P [1 + r/4]^(4n), where A is the maturity amount, P is the principal, r is the annual interest rate, and n is the number of years.
TDS on FD Interest
Banks are required to deduct Tax Deducted at Source (TDS) if your total interest income across all branches of a bank exceeds:
- ₹40,000 for individuals below 60 years.
- ₹50,000 for senior citizens (above 60 years).
The standard TDS rate is 10%. However, if you do not provide your PAN, the bank will deduct TDS at 20%. You can submit Form 15G/15H if your total income is below the taxable limit to avoid TDS.
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