₹1 lakh FD, 7% a year, quarterly compounding, 5 years: ₹1,41,478 at maturity. That is the number on the bank receipt. Now take out tax and inflation:
| Your tax slab (incl. cess) | Amount after tax | Annual return after tax | Today's value after 6% inflation |
|---|---|---|---|
| 0% (no tax) | ₹1,41,478 | 7.19% | ₹1,05,720 |
| 5.2% | ₹1,39,321 | 6.86% | ₹1,04,109 |
| 10.4% | ₹1,37,164 | 6.52% | ₹1,02,497 |
| 20.8% | ₹1,32,850 | 5.85% | ₹99,274 |
| 31.2% | ₹1,28,537 | 5.15% | ₹96,050 |
What it means
For someone in the 30% slab, a 7% FD returns about 5.15% after tax. If inflation stays at 6%, the real buying power of the money after 5 years is about 4% lower than today.
Why use an FD at all?
- An emergency fund and goals 1-3 years away need a safe place with a fixed return, like an FD.
- DICGC insures deposits of up to ₹5 lakh per person in each bank.
- For long goals (over 7 years), relying only on FDs can lose to inflation.
Working: tax on each year's interest in that year (estimate), 6% annual inflation assumed. Your real tax depends on your total income.
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Frequently asked questions
When is FD interest taxable?
Interest is generally treated as income every year, even if you get the money at maturity. Show it under 'income from other sources' in your return.
What is different for senior citizens?
Most banks pay people over 60 slightly higher interest, and some tax rules give them extra relief. Confirm with your bank and tax adviser.