Guide · India · Fixed deposits
Why Your FD Headline Rate Is Not Your Real Return (Tax + Inflation)
Banks advertise 7%, 7.5%, or 8% on fixed deposits. But FD interest is taxable at your income slab, and inflation erodes purchasing power. Here is how to calculate your true post-tax, post-inflation FD return in India.
Model your scenario: FD calculator (post-tax and inflation-adjusted) · RD calculator for monthly savers · RD tax guide
Disclaimer: Illustrations use assumptions you choose. Not predictions of future inflation or tax law. Verify TDS thresholds on official sources.
Quick answer: headline rate vs real return
Your real FD return = headline rate minus income tax minus inflation. A 7% FD in the 30% slab yields ~4.9% after tax. If inflation runs at 6%, your purchasing power barely grows — or shrinks.
Why FD interest is taxed as income
Unlike PPF or SSY, typical bank FD interest is added to your total income under "Income from Other Sources" and taxed at your marginal slab — 5%, 20%, or 30% (plus cess). A "7%" headline rate can look materially smaller after tax.
| Headline FD rate | After 20% tax | After 30% tax (+ cess, ~31.2%) |
|---|---|---|
| 6.5% | 5.2% | ~4.5% |
| 7.0% | 5.6% | ~4.8% |
| 7.5% | 6.0% | ~5.2% |
| 8.0% | 6.4% | ~5.5% |
TDS is not final tax
Banks deduct TDS when interest crosses thresholds (₹40,000 for non-seniors; ₹50,000 for seniors in a financial year — verify current limits). TDS is withholding, not your final liability. If TDS is lower than your true tax, you owe the balance; if higher, claim a refund in your ITR.
Tip: Submit Form 15G/15H if eligible to avoid premature TDS — but you still owe tax if total income exceeds the exemption limit.
Inflation and purchasing power
Even if rupees grow on paper, what matters is whether those rupees buy more goods and services. If CPI inflation runs near or above your after-tax yield, real wealth may barely grow or shrink.
Approximate real return = after-tax return minus inflation rate. Example: 4.8% after tax minus 6% inflation = -1.2% real return.
Real-world example: ₹10 lakh FD for 5 years at 7%
At 7% compounded quarterly, nominal maturity ≈ ₹14.1 lakh. Interest earned ≈ ₹4.1 lakh.
- 30% slab: Tax ≈ ₹1.28 lakh — net gain ≈ ₹2.82 lakh (~4.8% effective).
- At 6% inflation: ₹14.1 lakh in 5 years buys what ~₹10.5 lakh buys today — modest real gain at best.
Run your exact dates and slab in the FD calculator.
When FDs still make sense
- Emergency fund parking (liquidity + capital safety).
- Known expenses within 1–3 years (school fees, down payment timeline).
- Senior citizens needing predictable income (higher quoted rates + 80TTB benefit up to ₹50,000 on interest — verify eligibility).
Common mistakes
- Comparing FD headline rate directly to PPF or equity CAGR without tax adjustment.
- Assuming TDS paid means no further tax due.
- Ignoring inflation when sizing long-term wealth goals.
- Breaking FDs early and losing penalty interest without recalculating net yield.
Frequently asked questions
Is FD interest taxable in India?
Yes, at your income-tax slab for regular bank FDs.
What is the real return on a 7% FD?
~4.8% after 30% tax; lower still after inflation. Use our calculator for precision.
Is TDS the final tax on FD?
No — reconcile in your ITR based on total income.