Ask any Indian household where its first savings went and the answer is usually the same: a fixed deposit at the neighbourhood bank. You hand over a lump sum, the bank promises a fixed rate for a fixed period, and you know exactly what you will get back. Decades later, the FD is still the default home for emergency money, retirement savings and the down payment you are building up.
But a fixed deposit has more choices and more rules than the receipt suggests. Should interest be paid out or added back? What do you lose if you break it early? When does the bank cut tax, and how do you stop it? How much of your money is actually insured? This guide answers each of these, using the rules set by the Reserve Bank of India, the deposit insurer DICGC and the Income Tax Department.
How a fixed deposit works
A fixed deposit, or term deposit, locks a sum with a bank for a chosen period at a rate fixed on the day you book it. RBI rules say the minimum tenor a bank can offer is seven days; the longest tenor depends on what each bank offers. The rate depends on the tenor and, for very large deposits, on the size. RBI treats a single deposit of ₹3 crore or more at a commercial bank as a bulk deposit, which can carry a different rate.
Banks must keep rates uniform across branches and customers, with no discrimination between similar deposits accepted on the same day. Rates still differ from bank to bank and change whenever a bank revises its card rates.
Cumulative and non-cumulative deposits
In a cumulative FD, interest is added to your principal every quarter and you get the whole amount on maturity. In a non-cumulative FD, interest is paid out to your savings account monthly or quarterly, and your principal stays the same.
| ₹5 lakh for 5 years, assume 7% a year for illustration | Cumulative | Non-cumulative (quarterly payout) |
|---|---|---|
| Interest paid during the term | Nil | ₹8,750 every quarter |
| Amount on maturity | about ₹7.07 lakh | ₹5 lakh |
| Total interest earned | about ₹2.07 lakh | ₹1.75 lakh |
| Suits | Goals years away | Monthly or quarterly income |
The cumulative option earns more because each quarter’s interest itself earns interest. Retirees who need income pick the payout version. You can try different amounts and rates in our FD calculator or see the effect of compounding in the compound interest calculator.
Types of fixed deposit you will be offered
Regular term deposit
The standard FD, for any tenor the bank offers, with the option of breaking it early. Most savers start here.
Tax-saver fixed deposit
This is a five-year deposit made under the Bank Term Deposit Scheme, 2006. Under the old tax regime, the amount you deposit counts towards the deduction that used to be section 80C and is now section 123 of the Income-tax Act, 2025 as published by the Income Tax Department, within the overall ₹1.5 lakh a year limit. The trade-off is strict: the money is locked for five years, you cannot break the deposit early, and you cannot take a loan against it or pledge it. For a joint deposit, only the first holder gets the deduction, and the interest is fully taxable. If you are on the new tax regime, which is the default, there is no deduction, so a tax-saver fixed deposit is just a locked FD.
Senior citizen deposits
RBI allows banks to design term deposit schemes for resident Indian senior citizens with higher fixed rates than normal deposits. Many banks add an extra margin for older depositors, so it is worth asking. This benefit is not available on deposits held in the name of an HUF, even if the Karta is a senior citizen, and it does not apply to NRE or NRO deposits.
Deposits without premature withdrawal
Some banks offer non-callable deposits at a slightly higher rate in return for giving up the right to withdraw early. RBI rules say every term deposit from an individual, held singly or jointly, of ₹1 crore or less must allow premature withdrawal. So the no-exit version is only offered above that size.
Premature withdrawal: what breaking an FD costs
When you close a fixed deposit before maturity, RBI rules decide how the interest is worked out. You get the rate that applied to the period the money actually stayed with the bank, not the rate you were promised. If you withdraw before the minimum period of seven days, no interest is paid at all.
On top of that, banks may charge a penalty. Each bank must have a board-approved policy on premature withdrawal penalties, and the penalty must be explained to you when you open the deposit. If the bank did not tell you about it at the time, it cannot levy one. No penalty applies when the claimants of a deceased depositor ask for early closure.
As an illustration, say you booked a three-year FD of ₹2 lakh at 7%, and the bank’s one-year rate at the time was 6.5%. You break it after one year. The bank recalculates interest at 6.5% for one year and then deducts its penalty, say one percentage point, as per its policy. You end up with roughly 5.5% instead of 7%, and any interest already paid out at the higher rate is recovered from the payout.
Before breaking an FD for a short-term need, ask about a loan or overdraft against the deposit. It often costs less than losing interest on the whole amount.
How FD interest is taxed, and when TDS is deducted
FD interest is taxed as income from other sources at your slab rate. Banks work out TDS on the interest that accrues each year, even in a cumulative FD where you receive nothing until maturity. The safest course is to declare the interest every year as it accrues. Leaving it all for the maturity year creates a mismatch with the TDS shown in your tax records and can lead to a notice.
TDS thresholds
Banks deduct tax at source when the interest you earn from that bank in a year crosses a limit. The limit is ₹1 lakh for senior citizens and ₹50,000 for others, after the increase announced in the Union Budget 2025-26. From the 2026-27 tax year, these rules are reported to sit in section 393 of the Income-tax Act, 2025, with the same thresholds. The usual rate is 10% if the bank has your PAN; without a PAN, a higher rate applies. Your bank can confirm what it deducts.
TDS is not a final tax. If your slab is 20% or 30%, you pay the balance when you file your return. If your slab is lower, you claim a refund.
Form 121, which replaced Forms 15G and 15H
If your total income for the year will be below the taxable limit, you can ask the bank not to deduct TDS at all. Under the Income Tax Rules, 2026, this is done with Form No. 121, a declaration that your tax liability on your estimated total income for the year is nil. It took the place of Form 15G (for people under 60) and Form 15H (for senior citizens). Give it to each bank at the start of the tax year, before interest is credited. A false declaration can lead to prosecution, so use it only if your income genuinely carries no tax.
Check your expected liability first with our income tax calculator.
DICGC insurance: up to ₹5 lakh per depositor per bank
Bank deposits in India are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Each depositor is covered up to ₹5 lakh, principal and interest together, in each insured bank. Commercial banks, including branches of foreign banks in India, local area banks, regional rural banks and co-operative banks are all covered. The bank pays the premium, not you.
The rules on how the ₹5 lakh is counted matter more than the number:
- All your accounts in one bank, across all its branches, are added together. Savings, current, FDs and RDs in your own name share one ₹5 lakh cover.
- Deposits in different banks are insured separately, so ₹5 lakh in each of two banks gives ₹10 lakh of cover.
- Joint accounts with names in a different order, or with different people, count as separate. Accounts of A and B, and of B and A, each get their own cover.
- If you owe the bank money, the bank can set off your dues before the insured amount is worked out.
DICGC’s own example: if your FD has ₹4,95,000 of principal and ₹4,000 of accrued interest, the insured amount is ₹4,99,000. If the principal alone is ₹5 lakh, the interest is not covered because the cap has been reached.
When RBI imposes all-inclusive directions on a bank and restricts withdrawals, DICGC aims to pay insured depositors within 90 days. If a bank is liquidated, DICGC pays the liquidator within two months of receiving the claim list. Either way, spreading large savings across banks keeps every rupee inside the cover.
FD laddering: steady access without breaking deposits
Laddering means splitting one big deposit into several smaller ones that mature at different times. As an illustration, instead of putting ₹5 lakh into a single five-year FD, you book five deposits of ₹1 lakh each for one, two, three, four and five years. Every year one deposit matures. If you do not need the money, you renew it for five years, so after a few years every deposit is earning the five-year rate while one still matures each year.
Why it helps:
- Liquidity: a part of your money is always within a year of maturity, so you rarely pay a premature withdrawal penalty.
- Rate risk: if rates rise, the maturing deposit gets the new rate; if they fall, the longer deposits keep the old rate.
- Insurance spread: the deposits can be booked with different banks to keep each bank within the ₹5 lakh DICGC cover.
A ladder works with cumulative or payout deposits. Retirees often combine a ladder with a payout FD for monthly income.
A quick checklist before you book a fixed deposit
- Choose the tenor from your goal date, not just the highest rate on the board.
- Pick cumulative for growth and non-cumulative for income.
- Ask for the senior citizen rate if you or your parent qualify.
- Read the premature withdrawal penalty on the receipt or account opening form.
- Add a nominee so your family can claim easily.
- Give the bank your PAN, and file Form 121 only if your income is genuinely below the taxable limit.
- Keep the total in any one bank within ₹5 lakh if you want every rupee insured.
Key takeaways
- Every individual fixed deposit of ₹1 crore or less must allow premature withdrawal; you get the rate for the period actually held, minus any disclosed penalty.
- Tax-saver FDs lock money for five years and give a deduction only under the old tax regime.
- FD interest is taxable each year at your slab rate; banks deduct TDS above ₹50,000 a year, or ₹1 lakh for senior citizens.
- Form 121 is now the declaration to stop TDS when your income carries no tax.
- DICGC insures up to ₹5 lakh per depositor per bank, including interest.
- A ladder of deposits gives you yearly access and smooths out rate changes.
This is general information, not personal advice. Bank rates and penalty policies differ, so read the terms of your own deposit before you sign.
