Cumulative vs payout — the choice that changes everything
A fixed deposit comes in two shapes, and they behave nothing alike.
Cumulative reinvests the interest. It compounds quarterly, the Indian bank convention: every three months the interest is added to the principal and starts earning itself. A 7% headline rate becomes an effective 7.19% a year through that mechanism alone.
Payout FDs send the interest to your bank account monthly or quarterly. Nothing compounds — your principal comes back at maturity exactly as it went in. That is not a flaw; it is the point, for someone living off the income. But it means a payout FD's return is simply its rate, with no compounding uplift.
Banks often quote a slightly lower rate on monthly-payout schemes. Compare the two rates you are actually offered rather than assuming they match.
Post office time deposit rates
A bank FD rate is set by the bank and changes whenever it likes. The post office equivalent, the Time Deposit, is notified by the Ministry of Finance every quarter and is the same at every post office in the country.
| Term | Rate |
|---|---|
| 1 year | 6.9% |
| 2 years | 7% |
| 3 years | 7.1% |
| 5 years | 7.5% |
7.5% per annum (1 July 2026 to 30 September 2026) for the 5-year term, which is the only one that qualifies for a Section 80C deduction. Two differences from a bank FD are worth knowing: the money is government-backed rather than covered by the ₹5 lakh DICGC insurance, and a post office TD cannot be broken in the first six months at all.
What an FD really returns, after tax
This is the number that decides whether an FD is doing its job.
FD interest is taxed at your income-tax slab — no exemption, no indexation, no concessional rate. So:
| Your slab | 7% FD returns |
|---|---|
| 0% | 7.19% |
| 20% | ~5.7% |
| 30% | ~5.0% |
Set that last figure against inflation. An FD in the 30% bracket protects the number in your account and quietly loses purchasing power. That is the honest trade, and it is fine for money you need in two years — it is expensive for money you need in twenty.
TDS: banks deduct 10% once interest crosses ₹50,000 in a financial year (₹1 lakh for senior citizens). TDS is a prepayment adjusted when you file, not an extra tax. Submitting Form 15G/15H when your income is below the taxable limit stops the deduction, but does not change what is owed.
The ₹5 lakh insurance limit
Deposits are insured by DICGC up to ₹5 lakh per depositor per bank — principal and interest combined, across all your accounts at that bank.
Above that, you are an unsecured creditor. This is why large savers spread deposits across several banks rather than chase the last 0.25% at one. Co-operative banks offering notably higher rates are precisely where that ₹5 lakh ceiling deserves respect.
Where an FD is the right answer
- Money needed in 1–3 years. Certainty beats expected return when the date is fixed.
- An emergency fund, laddered so something matures regularly.
- Retirement income, via monthly payout, where the predictability is the product.
- Senior citizens, who get 0.25–0.75% extra at most banks plus a higher TDS threshold.
Where it is the wrong answer is long-horizon money. At a 5% post-tax return against 5–6% inflation, a decade in an FD is a slow, guaranteed erosion — safe in name, not in purchasing power.