“7% FD” paid 6.3% after TDS, minus a premature-withdrawal penalty nobody mentioned at booking. The headline rate is advertising; quarterly compounding, TDS thresholds and penalty clauses are the product. This guide dissects all three with SBI/HDFC-style 2026 terms, payout-vs-cumulative math, and the premature-exit arithmetic to run before breaking any deposit.
Part of the India wealth & tax guide. Model rates and tenures in the FD calculator; compare compounding in frequency guide.
Quarterly compounding: 7% means 7.19%
Most Indian FDs compound quarterly: 7%/4 per quarter, reinvested. Effective annual yield ≈ 7.19% — the number that actually credits. Monthly-payout variants pay exactly 7% as cash flow (no compounding). So the first question at booking is never “what rate?” but “cumulative or payout, and at what rest?” — answered in the sanction letter, confirmed in the calculator with payout-vs-cumulative comparison.
TDS thresholds and premature penalties
| Event | Rule of thumb | Action |
|---|---|---|
| TDS on interest | Deducted above threshold per FY | Submit 15G/15H if eligible; track across branches |
| Premature exit | ~1% penalty + lower slab rate | Compute break cost before breaking |
| Senior citizens | Higher thresholds + rates | Confirm age-based slabs at booking |
Breaking a 5-year FD in year 2 typically reprices interest to the 2-year slab minus penalty — sometimes below savings-account returns. Ladder maturities (1/2/3/5 years) instead of one mega-deposit so emergencies tap the nearest rung, not the whole ladder. RDs follow identical compounding with monthly deposits; compare both before committing salary flows.
FD vs RD vs savings: where each wins
FDs win for parked goals with known dates (fees, admissions, down payments). RDs win for building from salary (forced monthly discipline, same compounding). Savings accounts win for emergencies (instant access beats 50bps). None beat inflation-adjusted equity over decades — but none crash 20% the year fees are due, either. Match instrument to horizon: under 3 years, certainty dominates; over 7, growth dominates; between, split. Rate-check quarterly against repo moves — 2026's trajectory reprices both directions.
Informational purposes only — not financial advice. Bank terms vary by institution and change; verify current slabs before booking. See /terms.