A fixed deposit (FD) is a deposit where you lock a lump sum with a bank or NBFC for a fixed tenure at a fixed interest rate, and get back your principal plus interest at maturity. It is one of India's safest savings options — your return is guaranteed and known in advance, unlike market-linked products. The big 2026 change to know: from FY 2025-26, banks only deduct TDS once your annual FD interest crosses ₹50,000 (₹1,00,000 for senior citizens), up from the old ₹40,000/₹50,000 limits.
This guide covers how FDs work, every type, taxation, premature withdrawal, laddering and deposit insurance — so you can use a fixed deposit well in 2026.
How a fixed deposit works
You deposit a one-time amount (the principal) for a chosen tenure — anywhere from 7 days to 10 years. The bank pays a fixed interest rate that is locked for the whole term, so a rate cut later does not affect an FD you have already booked. Interest is usually compounded quarterly (the most common default in India), meaning each quarter's interest is added to your balance and itself earns interest.
The maturity amount on a cumulative FD follows the standard compound-interest formula:
Maturity = P × (1 + r/n)^(n×t)
where P is your deposit, r the annual rate, n how many times interest compounds per year (4 for quarterly), and t the tenure in years. More frequent compounding earns slightly more at the same rate. Rather than work this by hand, use the FD calculator to see your maturity value and total interest for any amount, rate and tenure.
Types of fixed deposits in India
FDs come in several variants. The right one depends on whether you need regular payouts, a tax break, or a higher rate.
- Cumulative FD: Interest is reinvested and paid as a lump sum at maturity. Best for growing a corpus you don't need to touch.
- Non-cumulative FD: Interest is paid out monthly, quarterly, half-yearly or yearly. Suits retirees and anyone wanting a regular income stream.
- Tax-saver 5-year FD: Qualifies for a deduction up to ₹1.5 lakh under Section 80C (old tax regime only). Comes with a mandatory 5-year lock-in and cannot be broken early or pledged for a loan.
- Senior-citizen FD: Investors aged 60+ usually get an extra 0.25%–0.75% interest, plus the higher ₹1,00,000 TDS threshold.
- Bank FD vs NBFC/corporate FD: NBFC and corporate (company) FDs often offer higher rates, but they are not covered by deposit insurance and carry the credit risk of the issuer. Check the company's credit rating (AAA is safest) before chasing a higher rate.
- Flexi / sweep-in FD: Linked to your savings account so surplus balance automatically earns FD-level interest while staying accessible.
FD interest and the 2025-26 TDS rules
FD interest is fully taxable as "income from other sources" at your income-tax slab rate — there is no special lower rate. You must declare the interest in your return for the year it accrues, even if you have not withdrawn it.
Separately, the bank deducts TDS (tax deducted at source) on the interest once it crosses a yearly threshold. Under the rules effective 1 April 2025 (Budget 2025 / Finance Act 2025):
| Item | Non-senior individual | Senior citizen (60+) |
|---|---|---|
| TDS threshold (per bank, per year) | ₹50,000 | ₹1,00,000 |
| Earlier threshold (pre-FY 2025-26) | ₹40,000 | ₹50,000 |
| TDS rate (PAN on record) | 10% | 10% |
| TDS rate (no PAN) | 20% | 20% |
Two points trip people up:
- The whole interest is taxed once you cross the limit — not just the excess above ₹50,000.
- TDS is not your final tax. It is only an advance deduction; you still owe slab tax on the full interest and can claim the TDS as credit when you file.
If your total income is below the taxable limit, submit Form 15G (under 60) or Form 15H (senior citizen) at the start of the financial year so the bank does not deduct TDS at all.
Premature withdrawal and penalties
Most FDs let you break the deposit before maturity if you need the cash, but two things happen:
- You earn interest only at the rate applicable for the period the money actually stayed, not the rate you originally booked.
- The bank usually charges a premature-withdrawal penalty of about 0.5%–1% on that applicable rate.
For example, if you booked a 3-year FD at 7% but break it after 1 year, you'll earn the bank's 1-year rate (say 6.5%) minus the penalty — well below 7%. Tax-saver 5-year FDs cannot be broken at all during the lock-in.
FD laddering: a smarter way to deposit
Instead of putting one large sum into a single FD, laddering splits it across deposits maturing at different times. Suppose you have ₹5 lakh:
- Open five FDs of ₹1 lakh each, maturing in 1, 2, 3, 4 and 5 years.
- Each year one FD matures, giving you regular liquidity without breaking anything early.
- As each one matures, renew it for 5 years — so you keep capturing longer-tenure (often higher) rates.
Laddering balances liquidity and returns, and protects you from locking your entire corpus at a single point in the rate cycle.
DICGC deposit insurance
Bank deposits in India are insured by the DICGC (Deposit Insurance and Credit Guarantee Corporation) up to ₹5 lakh per depositor, per bank — this cover combines your savings, current, FD and RD balances at that bank. If a bank fails, you are protected up to ₹5 lakh.
Practical takeaways:
- To insure more than ₹5 lakh, spread deposits across different banks, since the ₹5 lakh limit is per bank (across all branches of that bank).
- NBFC and corporate FDs are NOT covered by DICGC — only scheduled bank deposits are.
FD vs RD vs market-linked options
A fixed deposit suits one lump sum; a recurring deposit builds the same kind of guaranteed return from fixed monthly instalments — compare both with the RD calculator. Both protect your capital. Market-linked products such as mutual funds may earn more over the long run, but those returns are not guaranteed and can fall. If safety and certainty matter most, an FD wins.
To see where FDs fit alongside your goals, emergency fund and net worth, map everything in the free financial planner. Whether you are parking savings or planning a big purchase, the planner helps you decide how much to keep liquid versus locked.
Frequently Asked Questions
1. Is FD interest taxable even if I don't withdraw it? Yes. FD interest is taxable at your income-tax slab rate in the year it accrues, even on a cumulative FD where you receive nothing until maturity. The bank also deducts TDS once annual interest crosses ₹50,000 (₹1,00,000 for senior citizens).
2. Does TDS mean I've paid all my tax on FD interest? No. TDS is only a 10% advance deduction. FD interest is taxed at your full slab rate, so if you are in a higher bracket you may owe more when filing; if you are in a lower bracket or below the taxable limit, you can claim a refund or submit Form 15G/15H to avoid TDS.
3. Can I break a fixed deposit before maturity? Most FDs allow premature withdrawal, but you earn interest only for the period the money stayed, minus a penalty of roughly 0.5%–1%. Tax-saver 5-year FDs have a mandatory lock-in and cannot be broken early.
4. How much of my FD is protected if the bank fails? DICGC insures bank deposits up to ₹5 lakh per depositor per bank, covering your savings, FD and RD balances combined at that bank. NBFC and corporate FDs are not covered, so spread large amounts across banks for full protection.
This article is general information, not financial advice. Mutual fund and market-linked returns are not guaranteed. Consult a SEBI-registered advisor for decisions specific to you.
