Compound interest is an interesting and one of the most powerful tools in the world of investment. In fact, one of the founding fathers of the United States of America, Benjamin Franklin explained compound interest in a simple manner by saying, “Money makes money. And the money that money makes, makes money”.
To put it plainly, compounding interest is the interest that is calculated on the original amount as well as the interest obtained during previous periods.
In today’s blog, we will be discussing how compound interest impacts your FD returns, types of FD compounding frequency, and how you can choose the FD as per your goals.
What is Compounding Frequency in FD?
Compounding frequency in an FD refers to how often the interest earned is added back (compounded) to the principal amount during the tenure. The more frequently the compounding occurs, the faster the principal grows, resulting in higher overall interest earned and a larger maturity amount.
This is because interest in subsequent periods is calculated on the increased principal that includes interest earned earlier. Here is how the compounding frequency affects your overall FD returns.
How Compounding Frequency Affects FD Returns?
Let’s look at the formula and see how you can calculate your FD maturity calculation.
P.S.: You can use Jiraaf’s FD calculator quickly doing complex calculations.
A=P×(1+r/n )t×n, where
- A = Maturity amount
- P = Principal (initial investment)
- r = Annual interest rate (in decimal)
- n = Number of compounding periods in a year
- t = Time in years
The n—whether annual, half-yearly, quarterly, or monthly, directly affects how often interest is added back to your principal. The more frequently this happens, the faster your money grows.
While the difference between monthly and annual compounding may seem marginal over short tenures, it becomes increasingly meaningful as the investment period extends.
To understand how this works in practice, let’s look at the different compounding frequencies offered in fixed deposits and how each one impacts returns.
Types of FD Compounding Frequency; Monthly, Quarterly, Half-yearly & Yearly
The frequency with which interest is compounded in an FD determines how often the interest earned is added back to the principal. There are four main types of compounding frequency in FDs:
- Monthly: Interest is compounded monthly and added to the principal. For example, Ujjivan Small Finance Bank offers FDs with monthly compounding, which allows the interest to be reinvested monthly.
- Quarterly: Interest is compounded every three months. These type of FDs compound the interest every quarter and add it to the principal for the next quarter’s interest calculation.
- Half-Yearly: Interest is compounded every six months. This is commonly seen in government’s small savings schemes and some bank FDs, where the interest for six months is added back to the principal. It helps the investment grow steadily.
- Yearly: The most common compounding frequency where interest is compounded once at the end of every year.
Now let’s see these compounding frequencies in action through examples to truly understand how powerful they are in multiplying your money.
Calculation Examples for Different FD Compounding Frequencies
Let’s assume you have created an FD of ₹10,00,000 at an interest of 7% for 10 years. Now we will look at how different compounding frequencies work and how it can help you generate meaningful returns.
- Annual Compounding
With annual compounding, interest is calculated once a year and added to the principal, so the next year’s interest is earned on the updated amount.
The formula is:
A = P × (1 + (r/n))(n × t)
For annual compounding:
A = 10,00,000 × (1 + 0.07/1)(1 × 10)
A = 10,00,000 × (1.07)10
A = 10,00,000 × 1.967151 = ₹19,67,151
The total amount after ten years is ₹19,67,151
The interest earned is ₹19,67,151 – ₹10,00,000 = ₹9,67,151
This is slightly more than simple interest because the interest earned in the first year generates additional interest in the subsequent years.
- Half yearly Compounding
For half-yearly compounding, interest is calculated and added to the principal twice a year (every six months),
Here n = 2,
The formula becomes:
A = 10,00,000 × (1 + 0.07/2)(2 × 10)
A = 10,00,000 × (1 + 0.035)20
A = 10,00,000 × (1.035)20
Now, calculate (1.035)20 ≈ 1.989789
So: A = 10,00,000 × 1.989789 ≈ ₹19,89,789
The total amount after ten years is ₹19,89,789
The interest earned is ₹19,89,789 – ₹10,00,000 = ₹9,89,789
- Quarterly Compounding
With quarterly compounding, interest is calculated and added to the principal four times a year (every three months).
Here, n = 4 (four quarters in a year)
The formula becomes:
A = 10,00,000 × (1 + 0.07/4)(4 × 10)
A = 10,00,000 × (1 + 0.0175)40
A = 10,00,000 × (1.0175)40
Calculating (1.0175)40 ≈ 2.001597,
So: A = 10,00,000 × 2.001597 ≈ ₹20,01,597
The total amount after ten years is ₹20,01,597
The interest earned is ₹20,01,597 – ₹10,00,000 = ₹10,01,597
- Monthly Compounding
With monthly compounding, interest is calculated and added to the principal twelve times a year (every month).
Here, n = 12
The formula is:
A = 10,00,000 × (1 + 0.07/12)(12 × 10)
A = 10,00,000 × (1 + 0.005833)120
A = 10,00,000 × (1.005833)120
Calculating (1.005833)120 ≈ 2.009661,
so: A = 10,00,000 × 2.009661 ≈ ₹20,09,661
The total amount after ten years is ₹20,09,661
The interest earned is ₹20,09,661 – ₹10,00,000 = ₹10,09,661
So, to sum it up,
| Compounding Frequency | Maturity Value (₹) | Interest Earned (₹) |
| Annual | 19,67,151.00 | 9,67,151.00 |
| Half-Yearly | 19,89,789.00 | 9,89,789.00 |
| Quarterly | 20,01,597.00 | 10,01,597.00 |
| Monthly | 20,09,661.00 | 10,09,661.00 |
As you can see in the table above, the more frequently your money gets compounded, the bigger your corpus becomes.
More frequent compounding increases returns because interest gets added back to the principal sooner and starts earning interest itself. Over the short term (two years), the differences are modest; over longer horizons, the gap widens substantially.
With the impact of compounding frequency now clear, the next practical question is how banks actually apply these options in real-world FDs.
Bank-wise FD Compounding Options
| Compounding Frequency | Bank | Tenure | Interest Rate (p.a.) |
| Yearly | Bandhan Bank | 1 Year | 7.% |
| RBL Bank | 1 Year | 7% | |
| IndusInd Bank | 1 Year | 6.75% | |
| Quarterly | YES Bank | Up to 90 days | 4.5% |
| IndusInd Bank | Up to 90 days | 4.75% | |
| IDFC FIRST Bank | Up to 90 days | 4% | |
| Half-Yearly | SBI | Up to 180 days | 4.9% |
| Monthly | Ujjivan SFB | Up to 30 days | 3.5% |
(As of 23rd January 2026)
Choosing the Best FD Compounding Frequency for Your Goals
Here is a question for you: If two banks offer the same FD interest rate of 8% per annum, but one compounds the interest annually while the other compounds it quarterly, which option do you think will generate higher returns? Of copurse the FD compounding every quarter will offer higher returns.
This highlights an important point about fixed deposits: the smartest choice isn’t always the one with the headline interest rate. When choosing an FD, you should look for factors including compounding frequency, duration, and even the bank’s reputation. Here are some of the factors to consider that will help you choose the best FD compounding frequency according to your goals.
1. Interest rate vs compounding frequency
- A higher rate may look attractive at first glance, but the compounding frequency (monthly, quarterly, or yearly) can alter your actual maturity value.
- Example: 7.9% quarterly compounding can sometimes beat 8% yearly compounding.
2. Tenure & liquidity needs
- Long-term FDs usually offer higher rates but lock in your money.
- If you may need funds earlier, consider a shorter tenure or an FD with a premature withdrawal option (although it reduces returns).
3. Bank safety & credit rating
- Safety matters as much as returns. Scheduled commercial banks, regulated by the RBI, are considered safer than other options.
- Small finance banks & NBFCs may offer higher rates but check credit rating and deposit insurance (DICGC covers up to ₹5 lakh).
4. Taxation
- FD interest is fully taxable as per your slab.
- If you are in a higher tax bracket, post-tax returns may be lower.
- Consider 5-year tax-saving FDs (eligible under Section 80C, but a lock-in period applies).
5. Special Features
- Some banks and NBFCs offer both cumulative and non-cumulative fixed deposits. You can choose between them based on whether your priority is regular cash flow or long-term growth of your investment.
Ultimately, the best FD compounding frequency is the one that aligns your return expectations with your time horizon, liquidity needs, and comfort with risk.
Conclusion
The compounding frequency of your investments directly impacts the size of your returns. As the examples show, even when interest rates look identical, how often interest from your investment is reinvested can change outcomes over longer tenures.
Paying attention to this detail allows you to extract more value from the same capital, especially when FDs form a long-term stability layer in your portfolio.
