1. An FD fixes an amount for an agreed period
Suppose you have ₹1 lakh that you do not expect to need immediately. A bank may offer to accept it as a fixed deposit for a chosen tenure at the interest rate applicable when you book it.
Unlike a savings account, the money is not designed for continuous daily spending. You agree to leave the deposit for a defined period, and the bank agrees to pay interest according to the deposit terms.
The rate can vary by bank, deposit size, tenure and deposit category. “FD rate” is therefore not one universal number.
2. FD interest can accumulate or be paid out
In a cumulative FD, interest stays with the deposit and is added according to the product's compounding terms. You receive the maturity proceeds at the end.
Some deposits instead pay interest periodically. This may suit someone who wants cash flow, but because the interest is being paid out rather than remaining invested, the maturity structure is different.
Always compare the actual maturity value or payout schedule rather than looking only at a headline annual interest rate.
Interest remains in the deposit according to the product terms until maturity.
Interest is paid out at specified intervals instead of all remaining invested.
3. Breaking an FD early can reduce what you earn
Many FDs allow premature withdrawal, but that does not necessarily mean you receive the original booked rate for the full intended tenure.
The bank may apply the rate relevant to the period the money was actually kept and may apply a premature-withdrawal penalty according to the deposit terms.
Some deposit products can also have restrictions on early withdrawal. That is why liquidity matters before choosing a tenure.
4. Maturity ends one FD and creates a new decision
When the agreed tenure ends, the FD matures. Depending on your instructions and the product, proceeds may be paid to your linked account or the deposit may be renewed.
If it is renewed, the new deposit generally uses the applicable rate and terms at renewal rather than automatically preserving the old rate forever.
This creates reinvestment risk: the rate available when your FD matures may be higher or lower than the rate you previously received.
5. Quick check
You book a two-year FD but withdraw it after ten months. Which assumption is safest?