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Compound Interest on a Fixed Deposit: Why Quarterly Compounding Earns More
Quick Work Studio · 2026-10-01
Two fixed deposits can carry the same 7% interest rate and still pay you different amounts. The difference comes down to one word in the small print: compounding. Here's how it works, with real numbers.
Simple interest vs compound interest
With simple interest, you earn interest only on the money you put in. ₹1,00,000 at 7% for 5 years earns ₹7,000 a year, or ₹35,000 in total.
With compound interest, the interest you've already earned is added to your balance, and the next round of interest is calculated on that bigger amount. You earn interest on your interest. The formula is A = P × (1 + r/n)n×t, where P is the deposit, r the annual rate, n the number of times interest is added per year, and t the number of years.
Same rate, four different results
Here's ₹1,00,000 at 7% for 5 years, calculated four ways:
- Simple interest: ₹35,000 interest (maturity ₹1,35,000)
- Compounded yearly: about ₹40,255 interest
- Compounded quarterly: about ₹41,478 interest
- Compounded monthly: about ₹41,763 interest
Most Indian banks compound cumulative FDs quarterly. That's why a 7% quarterly FD actually behaves like about 7.19% a year, the figure banks sometimes show as the "effective yield" or "annualised yield".
Cumulative vs non-cumulative FDs
Compounding only helps if the interest stays in the deposit. In a cumulative FD, interest is reinvested and paid at maturity. In a non-cumulative FD, interest is paid out to your account monthly or quarterly, so it doesn't compound, you effectively get simple interest, in exchange for regular income.
The Rule of 72
To estimate how long it takes money to double, divide 72 by the interest rate. At 7%, 72 ÷ 7 ≈ 10.3 years. The exact answer for quarterly compounding is about 10 years: ₹1,00,000 grows to roughly ₹2,00,160 in 10 years. The rule works well for rates between about 4% and 12%.
Don't forget tax and inflation
FD interest is added to your income and taxed at your slab rate, and banks may deduct TDS once your interest crosses the yearly threshold. Inflation also eats into returns: if prices rise 5% a year, a 7% FD grows your real purchasing power by only about 2% a year before tax.
Try it: the Compound Interest Calculator lets you change the compounding frequency and see the difference, and the Simple Interest Calculator shows the non-compounding version for comparison.