Fixed Deposit (FD) continues to be the most reliable option for middle-class families looking for safe investment and assured returns. Investors who want to grow their capital without any risk, away from the ups and downs of the stock market and mutual funds, prefer long-term FDs of banks. If you are planning to make a lump sum FD of ₹ 1,00,000 for 10 years in the bank, then the total amount received on maturity depends on what interest rate the concerned bank is offering you annually and on what basis the interest is being compounded. Most Indian banks add interest on FD on a quarterly basis (Quarterly Compounding), which increases the return effect manifold in the long run. Maturity value of ₹ 1 lakh after 10 years at various interest rates According to current banking rates, on an average, general citizens are getting 6.50% to 7.25% interest on FD of 5 to 10 years and senior citizens are getting 7.00% to 7.75% interest. The details of the expected amount to be received after 10 years under quarterly compounding are as follows: Interest Rate (Annual) Total Deposit Amount Total Interest Earned in 10 Years Maturity Amount after 10 Years 6.50% pa ₹1,00,000 ₹90,556 ₹1,90,556 7.00% pa ₹1,00,000 ₹1,00,160 ₹2,00,160 7.50% pa ₹1,00,000 ₹1,10,235 ₹2,10,235 8.00% pa ₹1,00,000 ₹1,20,804 ₹2,20,804 It is clear from this calculation that at an annual interest rate of 7% or more, your principal amount more than doubles in a period of 10 years. Power of Compounding: Simple Interest vs Compound Interest The real power of FD lies in its compounding rule. In simple interest, interest is paid only on the principal amount, whereas in bank FD, the interest earned every quarter is added to the principal amount. New interest is earned on this increased amount in the next three months. Compound Interest Formula: A = The interest received on interest between 6th to 10th year increases the capital rapidly. Senior citizens get additional benefit: Under the guidelines of Reserve Bank of India (RBI), all commercial and private banks give 0.50% additional interest as compared to normal rates to senior citizens aged 60 years and above. Some banks offer additional interest up to 0.75% to super senior citizens (above 80 years). If a senior citizen makes an FD of ₹1 lakh for 10 years at 7.50%, he will get more than ₹1.10 lakh only as interest, taking his total maturity amount to cross ₹2.10 lakh. Tax on FD interest (TDS) and income tax slab rules: Earnings from fixed deposits are not completely tax-free. As per Income Tax rules, interest earned from FD is considered as 'Income from Other Sources' and is taxable as per the respective income tax slab of the investor. TDS Deduction Limit: For general citizens, banks deduct TDS at the rate of 10% if the total FD interest earned across all bank branches in a financial year exceeds ₹40,000. This exemption limit for senior citizens is ₹50,000 per year. Form 15G and 15H: If your total annual income is less than the basic exemption limit and your tax liability becomes zero, you can avoid TDS deduction by submitting Form 15G (for general citizens) or Form 15H (for senior citizens) to the bank at the beginning of the financial year. Things to keep in mind before getting a 10 year FD: It is important to assess liquidity and financial goals before locking money for a long term. If you suddenly need money in between and you withdraw your FD prematurely (Premature Withdrawal), banks usually deduct a penalty of 0.5% to 1% on the applicable interest rate. So instead of putting the entire capital in a single FD, adopt the 'FD Laddering' strategy, in which ₹1 lakh can be divided into 4 FDs of ₹25,000 each with different tenures. Due to this, only one FD has to be broken when required and the benefit of compounding continues uninterrupted on the remaining deposits.
