How Fixed Deposits Work: Interest, Tenure, Maturity Explained

You’ve probably heard people talk about fixed deposits like they’re the safest place to park your money. They aren’t wrong. They’ve been around for decades, and for good reason. They’re simple, predictable, and easy to understand. You set aside a lump sum for a fixed time, and the bank promises to pay you a fixed interest rate on it. But how do they actually work? Let’s break it down, step by step, without the jargon.

What Happens When You Open an FD

You can think of an FD like an agreement between you and the bank. You give the bank your money for a specific period, say, one year or five years, and in return, they pay you a fixed interest rate on it.

That fixed rate is key. It doesn’t change even if general interest rates in the market go up or down during your FD’s term. So right at the start, you know how much you’ll earn. That’s what makes FDs feel so safe, i.e. there are no surprises.

Tenure: Choosing How Long to Lock in Your Money

When you open an FD, you also choose its tenure, which is the length of time you want to keep the money locked in. Many banks offer short-term fixed deposits (like 7 days or months) and long-term fixed deposits (like multiple years).

Your choice here depends on your goal:

• Short-term FDs work well if you need the money soon but want to earn more than a savings account.
• Medium or long-term FDs are better if you don’t need the funds immediately and want to lock in a higher interest rate.

Usually, banks offer better rates for longer tenures. But there’s a catch – you can’t freely withdraw the money before the term ends. If you break your FD early, the bank will charge a penalty and reduce the interest. So, only lock in money that you won’t need for daily expenses or emergencies.

Why it matters: Picking the right tenure ensures you don’t get stuck. An FD should fit into your financial plans and not restrict them. If you might need the money soon, you should go short-term. If you’re sure you won’t need the money anytime soon, go long-term to get better returns.

Interest: Where Your Returns Come From

The interest on FD that you get is what helps your money grow, and it can be calculated in two ways – simple interest and compound interest.

• Simple interest means the bank calculates interest only on your original amount. If you deposit ₹1,00,000 at 6% for one year, you get ₹6,000 as interest. Next year, it’s again 6% on the same ₹1,00,000 and not on the extra ₹6,000 you earned earlier. Here is an example of the same: 

Example:

• Principal (P): ₹1,50,000
• Interest Rate (R): 7% p.a.
• Tenure (T): 3 years

Formula:
SI = (P × R × T) / 100
= (1,50,000 × 7 × 3) / 100
= ₹31,500

So, for a ₹1.5 lakh deposit at 7% p.a. for 3 years, you earn ₹31,500 in interest.

• Compound interest works differently. Here, the interest you earn gets added back to your deposit at regular intervals, i.e. monthly, quarterly, half-yearly, or yearly, and from then on, you start earning interest on that bigger amount. So if your ₹1,00,000 grows to ₹1,06,000 in the first year, the next year’s interest is calculated on ₹1,06,000, not just the original amount.

Example:

• Principal (P): ₹1,50,000
• Interest Rate (R): 7% p.a. (compounded annually)
• Tenure (T): 3 years

Formula:
A = P (1 + R/N) ^ (N×T)
A = 1,50,000 × (1.07)³
A ≈ ₹1,83,756

Compound Interest Earned = ₹33,756

This might sound like a small difference, but over time it adds up. Compounding has a snowball effect on your returns. 

Why it matters: Understanding FD interest calculation helps you choose the right type of FD. If you’re saving for something far in the future, picking an FD with compound interest can give your savings a meaningful boost without extra effort from your side.

Maturity: What Happens at the End

Maturity is simply the point when your FD completes its tenure. On that date, the bank pays you back your original amount plus all the interest you’ve earned.

At maturity, you have options:

• Withdraw the amount if you need it.
• Reinvest it in a new FD. Compare today’s fixed deposit interest rates before renewing.
• Let it auto-renew if your bank offers that (though it’s better to review the current rates and renew it yourself).

Why it matters: Many people forget about their FDs once they open them. But interest rates change, and your financial goals might too. Keeping an eye on the maturity date lets you decide what to do next based on where you are financially at that time.

Putting It All Together

Here’s the whole journey of an FD in simple terms:

1. You deposit a lump sum in the bank.
2. The bank locks in an interest rate and tenure.
3. Your money earns interest (ideally with compounding) during the tenure.
4. When the tenure ends, the FD matures.
5. You get back your deposit plus the interest.

That’s it. You take no market risk, and there is no guesswork involved. Your money grows while you go about your life.

Conclusion

Fixed deposits won’t double your money overnight because they’re not meant to. They’re meant to give you something just as valuable, though, which is clarity and safety.

You know exactly what you’ll earn, and you know exactly when you’ll get it. That predictability makes FDs especially very practical for short- to medium-term goals or as a safe part of your overall portfolio.

And once you understand how interest, tenure, and maturity work together, you can make smarter choices – whether that’s picking a longer term to benefit from compounding, or keeping your tenure short so that you can access your money whenever.

In the end, an FD is simply a quiet, dependable way to let your savings grow while you focus on everything else in life.