Real return on FDs: why 7% interest may not beat inflation
A 7% FD isn't always 7% richer. Learn real return: interest minus inflation and tax, with simple rupee examples and a 5-step check for your savings.
When a bank advertises a fixed deposit at 7%, it feels like your money is growing by 7% a year. But what matters is what that money can buy later. That is the idea of the real return: your interest rate minus inflation, and minus tax. Understanding it takes ten minutes and changes how you look at savings.
Nominal vs real: a simple example
Say you put ₹1,00,000 in a one-year FD at 7%. After a year you have ₹1,07,000. That 7% is the nominal return.
Now suppose prices rose 5% over that year. Something that cost ₹1,00,000 now costs ₹1,05,000. Your ₹1,07,000 can buy only about 2% more than before. That ~2% is the real return.
A rough rule: real return ≈ interest rate − inflation rate.
Don't forget tax
Interest from FDs is added to your income and taxed at your slab rate. Here is how the same 7% looks for different people:
- No tax payable on that income: about 7% nominal, around 2% real if inflation is 5%.
- 30% slab (before cess): after tax, roughly 4.9% nominal, which is below a 5% inflation rate. Your purchasing power quietly shrinks.
This does not mean FDs are bad. They are stable, simple and good for money you need soon. It means you should know what job each rupee is doing.
Why this matters for everyday planning
1. Emergency fund: safety first
Your emergency fund is for stability, not growth. A slightly negative real return on 6 months of expenses is the price of having cash ready. Keep it in a savings account or short-term FD, and don't chase higher returns with it.
2. Goals more than 3 to 5 years away
For long goals like a child's education or retirement, inflation does the most damage. Costs like school fees and healthcare often rise faster than the headline inflation number. Speak to a SEBI-registered adviser about suitable options; this post does not recommend any product.
3. Your own inflation is not the national number
The official number is an average. Your personal inflation depends on what you buy: rent, school fees, groceries, fuel, food delivery. If you track spending, you can see your own rate. Compare this March's grocery bill with last March's.
A 5-step check you can do today
- List your savings and where each sits (savings account, FD, other).
- Note the interest rate on each.
- Subtract an inflation estimate (use a cautious figure, like 5-6%).
- Subtract tax on the interest if it applies to you.
- For each result, ask: is this money for safety, for a near goal, or for the long term? Does the place it sits match that job?
Practical takeaways
- Real return = interest − inflation − tax. Nominal rates can mislead.
- Keep emergency money safe and liquid; judge it on safety, not yield.
- Review your savings once or twice a year, not daily.
- Track your own spending, since your inflation is what really hits you.
- Don't move money based on a single headline; rates and rules change.
This is general information, not financial advice.
How Dhuddu helps
To know your personal inflation you need records. Dhuddu is a free expense tracker that picks up your bank alerts and lets you compare category spending month to month, so you can see where costs are really rising. You can also get it on Google Play.