Asia's First Hybrid Neo Bank
A fixed deposit's advertised rate is only half the story — how often that interest compounds changes what you actually receive at maturity. Two FDs quoting the same headline rate can mature to slightly different amounts depending on this one detail.
With simple interest, you earn a percentage of your original deposit each year, and that's it. With compound interest, the interest earned in one period gets added to the principal, so the next period earns interest on a slightly larger amount. Most bank and NBFC fixed deposits in India compound quarterly, which is why the effective return ends up a little higher than the flat headline rate suggests.
Think of a deposit that compounds every three months. At the end of the first quarter, the interest earned so far gets folded into the principal. The next quarter's interest is then calculated on that slightly larger number. Over a multi-year tenure, this compounding effect adds up to more than simple interest would have.
Longer tenures usually — though not always — come with a better rate, because the institution has use of your money for longer. But locking in for longer also means less flexibility, so it's worth weighing the rate difference against how likely you are to need that money before maturity.
Breaking a fixed deposit before maturity typically comes with a penalty — often a reduction in the interest rate applied, rather than a flat fee. This is exactly why many people prefer to split a large sum across a few smaller deposits with staggered maturity dates — sometimes called laddering — instead of locking everything into one FD. It keeps some money accessible without breaking the whole deposit if you need funds early.
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See fixed and recurring deposit terms side by side.