FD Interest Is Taxed Every Year
FD interest is added to your income and taxed every year, not at maturity. At the 30% slab, a 6.5% FD really pays 4.55%. See what that does over ten years.
Many people think the interest on a fixed deposit is good enough. That is not always true, and there are several reasons why.
FD interest is taxed at your income slab
In India, fixed deposit interest is taxed at your income slab rate. Suppose you have a well-paid job at an MNC and fall in the 30% slab. The interest your FD earns is added to your total income, and because your salary already places you in the 30% bracket, that interest is taxed at 30% as well.
So if the bank's FD rate is 6.5%, you are effectively earning only 4.55%.
Post-tax return = 6.5% × (1 − 0.30) = 4.55%
Add the 4% health and education cess and the effective tax rate becomes 31.2%, which brings the real return closer to 4.47%. Either way, a fixed deposit does little for someone already earning a decent salary.
Who it still suits
Two groups get a very different answer.
Senior citizens, meaning people above 60, are treated far more generously, although the interest is not tax free. Section 80TTB allows a deduction of up to ₹50,000 a year on interest from deposits and savings accounts, available only under the old regime. The TDS threshold is higher too: since 1 April 2025 a bank deducts TDS only once interest crosses ₹1,00,000 for a senior citizen, against ₹50,000 for everyone else. And a senior citizen whose total income falls below the taxable limit can file Form 15H so the bank does not deduct TDS at all.
People earning less than ₹12 lakh a year pay very little, because the rebate under the new regime leaves no tax up to that level of income. For them the interest is taxed minimally or not at all, and a fixed deposit is a sound choice.
The tax is annual, not at the end of the tenure
Many people assume that on a three or five year deposit, the tax on the interest falls due only when the deposit matures. That is wrong. You pay tax on the interest every year, and the bank deducts TDS annually once the interest crosses the threshold.
Even on a cumulative FD, where you receive nothing until maturity, the bank credits the interest each year and reports it in your Form 26AS. You owe the tax in that year whether or not you have touched the money.
This matters more than it sounds, because the tax paid each year leaves the deposit and never compounds. The example below shows how much that costs.
The example
₹1,00,000 for ten years at the 30% slab, compounded quarterly:
| Rate | Calculator shows | Actually becomes | Overstated by |
|---|---|---|---|
| 7.00% | ₹1,68,910 | ₹1,62,021 | ₹6,889 |
| 7.25% | ₹1,72,334 | ₹1,64,843 | ₹7,491 |
| 7.50% | ₹1,75,842 | ₹1,67,714 | ₹8,127 |
A deposit at 7% compounded quarterly grows at an effective 7.186% a year. Once 31.2% of that is paid out annually, the balance grows at 4.944%, and it is that lower figure which compounds for ten years.
On ₹10 lakh, the 7% row becomes a gap of roughly ₹68,900. The error grows with three things: the size of the deposit, the length of the tenure, and your tax slab.
FD rates across Indian banks today
Highest advertised rates for general citizens on deposits below ₹3 crore:
| Small finance banks | Peak rate | Public sector banks | Peak rate | Private banks | Peak rate |
|---|---|---|---|---|---|
| Suryoday | 8.25% | Punjab & Sind | 6.85% | Bandhan | 7.45% |
| Utkarsh | 8.10% | Bank of Baroda | 6.75% | City Union | 7.25% |
| Jana | 8.00% | Indian Bank | 6.75% | Dhanlaxmi | 7.25% |
| Equitas | 8.00% | Bank of India | 6.70% | CSB Bank | 7.10% |
| ESAF | 8.00% | Canara Bank | 6.60% | Axis Bank | 6.50% |
| Shivalik | 8.00% | Indian Overseas | 6.60% | HDFC Bank | 6.50% |
| Ujjivan | 7.80% | Bank of Maharashtra | 6.40% | ICICI Bank | 6.50% |
SBI's own card rates, effective 15 December 2025:
| Tenure | General public | Senior citizen |
|---|---|---|
| 7 days – 45 days | 3.05% | 3.55% |
| 46 days – 179 days | 4.90% | 5.40% |
| 180 days – 210 days | 5.65% | 6.15% |
| 211 days – less than 1 year | 5.90% | 6.40% |
| 1 year – less than 2 years | 6.25% | 6.75% |
| 2 years – less than 3 years | 6.40% | 6.90% |
| 3 years – less than 5 years | 6.30% | 6.80% |
| 5 years – up to 10 years | 6.05% | 7.05% |
Two things are worth knowing before chasing the top of that first table. Deposit insurance under DICGC covers ₹5 lakh per depositor per bank, principal and interest together, so the extra 2% at a small finance bank only applies up to that limit — beyond it you are taking uninsured credit risk for the extra yield. And the annual tax drag described above applies to every rate in every column.
₹1 lakh over ten years: an SBI FD against the Nifty 50
The Nifty 50 closed at 8,952.50 on 8 September 2016 and at 23,635.10 on 8 September 2026 — a multiple of 2.64, or 10.19% a year.
| ₹1,00,000 invested Sept 2016 | Value Sept 2026 | Post-tax CAGR |
|---|---|---|
| Nifty 50, before tax | ₹2,64,006 | 10.19% |
| Nifty 50, after LTCG | ₹2,58,935 | 9.98% |
| SBI FD at 7%, as calculators show it | ₹1,68,910 | 5.38% |
| SBI FD at 7%, as it actually works | ₹1,62,021 | 4.94% |
The equity figure is a price return and excludes dividends, so the index side is understated by roughly 1.3% a year. Its tax is a single LTCG event at 12.5% plus cess, with ₹1.25 lakh of the gain exempt.
The FD side here is deliberately the best case. A ten-year deposit booked in 2016 locks that rate in for the full tenure, and rates fell afterwards — SBI's five-to-ten-year bucket pays 6.05% today. Anyone rolling one-year or three-year deposits across the same decade would have reinvested into that decline and finished lower still.
Options that are tax free and compound every year
1. PPF, the Public Provident Fund. An old and well-known scheme for people who want tax-free returns compounded every year. The lock-in is a minimum of 15 years, extendable in blocks of 5 years.
2. EPF, the Employees' Provident Fund. Also tax free on withdrawal, but only after five years of continuous service under Section 10(12). Withdraw earlier and the amount becomes taxable, with 10% TDS if it exceeds ₹50,000. Service with more than one employer still counts as continuous, provided the account was transferred rather than withdrawn. Interest on employee contributions above ₹2.5 lakh a year is taxable as well.
Both schemes deliver tax-free income, but each comes with limits on when you can withdraw and how long your money is locked away.
Run your own numbers
The calculator below models a deposit on annual accrual, the way it is actually taxed, and sets it beside equity, gold and crypto over the same amount and the same holding period.
Post-Tax Return Calculator
Open full tool →What you hold
Also index funds, ELSS and arbitrage funds — anything at least 65% equity
More than 12 months — long term, LTCG at 12.5%
₹11.85 L
Not used here — listed shares & equity mutual funds pays a flat statutory rate.
The ₹1.25 lakh exemption is shared across all your equity long-term gains.
Of your ₹1.85 L gain
you keep ₹1.77 L
tax of ₹7,839 — 4.2% of the gain
How this is worked out. ₹10.00 L growing at 12.0% for 18 months reaches ₹11.85 L. Tax falls once, on sale: LTCG at 12.5% under section 112A. What is left is what you keep.
Return before tax
12.0%
Return after tax
11.5%
a year
Tax paid
₹7,839
The same ₹10.00 L for 18 months, held as
Bar length = what you keep after tax.
Same amount, same return, same months — every difference below is tax alone.
How this is calculated
The rate here is statutory, so it does not move with your income. What moves the outcome is the holding period and, for equity, how much of the ₹1.25 lakh exemption you have already used elsewhere this year.
Estimates for FY 2026-27 under the rules as they stand after the 23 July 2024 changes. Returns you enter are assumptions, not forecasts. Surcharge above ₹50 lakh of total income is not applied, indexation is not modelled (it no longer applies to these assets), and exit loads, expense ratios, brokerage, STT and GST are excluded. Physical gold carries 3% GST on purchase, which is not counted here. Debt funds, property, ULIPs, ESOPs and unlisted shares are deliberately not covered — their rules turn on acquisition dates this tool does not ask for. Confirm your own position before acting.
Sources and references
Deposit rates
- SBI — retail domestic term deposits — the full card-rate ladder used above, effective 15 December 2025
- ICICI Bank — FD interest rates — 6.50% peak rate, checked against the bank's own page
- Policybazaar — FD interest rates — cross-bank comparison, rates as last verified August 2026
- DICGC — the ₹5 lakh per depositor per bank insurance limit
Tax
- Income Tax Department — Section 80TTB, Section 194A TDS thresholds and Section 10(12)
- EPFO — Employees' Provident Fund scheme rules and withdrawal conditions
- National Savings Institute — Public Provident Fund tenure, extension and tax treatment
Index levels
- NSE — historical index data — Nifty 50 closing levels
- Business Standard, 8 September 2016 — Nifty 50 close of 8,952.50
- Business Standard, 8 September 2026 — Nifty 50 close of 23,635.10
Bank rates change without notice — confirm with the bank before depositing. TDS thresholds under Section 194A are as revised with effect from 1 April 2025. Tax rates are for FY 2026-27 and exclude surcharge on total income above ₹50 lakh. The FD rate used in the ten-year comparison is an assumption, not a quoted historical rate.
This analysis is for educational purposes only and does not constitute investment advice.
Frequently asked questions
Is FD interest taxed every year or only at maturity?+
Every year, as it accrues. Interest on a cumulative fixed deposit is added to your income in the year the bank credits it, even though you receive nothing until maturity. The bank reports it annually in Form 26AS and deducts TDS once the interest crosses the threshold. Waiting until the end of a three or five year tenure to pay the tax is not an option.
What does a 6.5% FD actually pay at the 30% slab?+
About 4.55%. FD interest is added to your total income, so someone already in the 30% bracket pays 30% on that interest as well. Adding the 4% health and education cess takes the effective tax to 31.2%, which brings the return closer to 4.47%.
Is FD interest tax free for senior citizens?+
No, but the treatment is more generous. Interest is still taxable at slab rates. Section 80TTB allows a deduction of up to Rs 50,000 a year on interest from deposits and savings accounts, and that deduction is available only under the old regime. The TDS threshold is also higher: since 1 April 2025 a bank deducts TDS only once interest crosses Rs 1,00,000 for a senior citizen, against Rs 50,000 for everyone else. A senior citizen whose total income is below the taxable limit can file Form 15H so the bank does not deduct TDS at all.
Why does annual taxation reduce the final amount?+
Because the money paid in tax leaves the deposit and never compounds. A deposit at 7% with quarterly compounding grows at an effective 7.19% a year. At the 30% slab plus cess, 31.2% of that is paid out annually, so the balance actually grows at about 4.94% a year. Over ten years the gap is worth several thousand rupees on every lakh.
Does TDS mean my FD tax is fully paid?+
No. TDS is deducted at 10% once interest crosses the threshold, but your final liability is at your own slab rate. If you are in the 30% bracket you owe the balance when you file. TDS is a payment on account, not a final tax.
Is EPF withdrawal completely tax free?+
Only after five years of continuous service, under Section 10(12). Withdraw earlier and the amount is taxable, with 10% TDS if it exceeds Rs 50,000. Service with more than one employer counts as continuous, provided the account was transferred rather than withdrawn. Separately, interest on employee contributions above Rs 2.5 lakh in a financial year is taxable.
Is an FD still worth holding?+
For money you may need within a few years, yes. The point is not that fixed deposits are bad but that their returns are quoted before the annual tax drag, so they end up being compared against other options on an unfair basis.
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