Three-year fixed deposits are currently yielding interest rates that most banks have set between 6% and 6.75% per annum. For savers who prefer low-risk, predictable returns, this range defines the short-to-medium term opportunity cost of parking funds in bank FDs.
What the 3-year FD rate range means
When banks quote 6–6.75% p.a. for a three-year tenor, they are signalling a modest pick-up over short-term savings instruments while staying below long-term market-linked returns. These rates are attractive to conservative investors who prioritise capital protection and a known stream of interest payments.
Typical investor profile
- Risk-averse savers who want guaranteed returns.
- People saving for medium-term goals such as a home down payment or a child’s education fund over a few years.
- Those seeking stable income without exposure to market volatility.
How much can you expect to earn?
Interest calculation depends on the bank’s compounding frequency (annual, quarterly, or monthly) and whether interest is paid out periodically or reinvested. As a simple example, a principal of ₹100,000 invested for three years at an annual rate of 6.5% compounded yearly would grow to about ₹120,845 at maturity. That means roughly ₹20,845 in gross interest over three years.
Keep in mind that actual payouts will vary if your bank compounds interest more frequently or pays it out periodically rather than reinvesting it.
Factor in inflation and taxes
Nominal FD rates don’t tell the whole story. Two adjustments matter for real returns:
- Inflation: If inflation runs near or above the FD rate, the purchasing power of your returns will be eroded. A 6–6.75% nominal return could translate into a much smaller real gain after inflation.
- Taxes: Interest from FDs is typically taxable as per your income tax slab. Tax and any applicable withholding (TDS) reduce your net return, especially for higher-rate taxpayers.
How to approach a 3-year FD decision
Before locking in funds, consider these practical steps:
- Compare effective yields: Look beyond the headline rate. Check compounding frequency and whether interest is compounded or paid out.
- Check liquidity terms: Premature withdrawal penalties can cut returns. Confirm the penalty structure and any lock-in periods.
- Assess credit risk and safety: Evaluate the bank’s credibility and the deposit insurance rules in your country so you know how much of your deposit is protected.
- Consider tax implications: Calculate post-tax return based on your marginal tax rate. For some investors, tax-saving fixed-income products may be worth exploring.
- Match tenor to goals: Use a three-year FD if your objectives align with that timeframe. For different horizons, compare shorter or longer tenors for rate changes.
Strategies to make the most of FD investments
- Laddering: Stagger deposits across multiple maturities to balance liquidity and returns. This reduces reinvestment risk if rates move.
- Split between banks: Diversifying across institutions can help manage counterparty risk and take advantage of promotional or higher rates.
- Consider partial payout: If you need periodic income, choose payout options that suit cash-flow needs rather than reinvesting all interest.
Alternatives to consider
While three-year FDs offer capital protection and predictable returns, other options may better match some investors’ goals:
- Government bonds or short-duration debt funds for slightly higher potential yields with varying risk.
- Tax-advantaged products for those looking to reduce the tax drag on interest income.
- Structured bank products or corporate deposits for higher rates—though these often carry higher risk and lower liquidity.
Bottom line
Fixed deposits with a three-year tenor currently sit in a band of about 6%–6.75% per annum across most banks. They remain a sensible choice for conservative savers seeking guaranteed returns, but it’s important to factor in inflation, taxes, compounding, and liquidity needs before locking in funds. Comparing effective yields, spreading deposits thoughtfully, and aligning the tenor with your financial goals will help you get the most from a 3-year FD.