In this article
Fixed deposits are famous for one thing: you know exactly what number you will get. What the number will buy is a different question. Three steps stand between the bank's headline rate and your real gain.
Step 1: the headline
Compounded yearly, ₹10 lakh at 7 percent grows to ₹14.03 lakh in five years. That is the number the bank puts on the brochure and the one the FD calculator shows first.
Step 2: tax on the interest
FD interest is added to your income and taxed at your slab rate. For someone in the 30 percent slab, 30 percent of each year's interest goes in tax, so the 7 percent behaves like 4.9 percent (7 × 0.7). The lower your slab, the smaller the loss.
Step 3: inflation
If prices rise 6 percent a year, ₹100 today needs ₹133.80 in five years to buy the same things. Dividing the after-tax balance by 1.338 gives its value in today's rupees.
- On the bank statement
- After 30% tax on interest
- In today's buying power (6% inflation)
The last bar is below the ₹10 lakh you started with. The balance grew; what it buys shrank.
The red line slopes gently down. Nothing visible happens. That is what makes it easy to miss.
The same FD for different people
| Tax slab | Effective rate on a 7% FD | Real rate at 6% inflation |
|---|---|---|
| No tax (income below limits) | 7.0% | about +0.9% |
| 20% slab | 5.6% | about −0.4% |
| 30% slab | 4.9% | about −1.0% |
Real rate = (1 + effective rate) ÷ (1 + inflation) − 1. Slab names are simplified; the new and old regimes differ.
So are FDs bad?
No. They are the right tool for money you cannot afford to lose or will need soon: an emergency fund, a down payment due next year, fees due in two years. The mistake is using them for money you will not touch for 15 years and calling it safe.
- Certainty matters more than growth
- Inflation barely has time to bite
- Tax and inflation compound against you
- Consider growth assets for part of it
See how big an emergency fund should be for the case where FDs shine.
Questions people ask
Is FD interest taxable?
Yes. FD interest is added to your income and taxed at your slab rate, and banks may deduct TDS above certain limits.
What is the real return on a 7% FD?
After 30 percent tax the effective rate is 4.9 percent. With 6 percent inflation, the real return is about −1 percent. For someone paying no tax it is about +0.9 percent.
How much will ₹10 lakh become in a 7% FD in 5 years?
About ₹14.03 lakh with yearly compounding, before tax.
Are FDs a bad investment?
They are good for short-term goals and emergency money, where safety matters most. For long goals, tax and inflation can leave little or no real gain.
How do I calculate the real rate of return?
Divide one plus your after-tax rate by one plus the inflation rate, then subtract one. For 4.9 percent and 6 percent that gives about −1 percent.