You are actually losing money on FDs

Do you know that most of the Fixed Deposits (FDs) from the banks have a negative return? Don’t be surprised it is true. The real return is after adjusting tax and inflation.

I believe everybody knows about the tax and it need not be explained. But most of the people don’t take into account the impact of inflation on the return. Let me explain what is inflation.

Inflation is a decline in the value of currency from last year. Every year the currency loses its value e.g next year you will be able to buy less quantity of a thing with the same amount of money than you can buy today. The prices of everything are increasing and you need more money to buy the same car next year, you need more money to buy the same shirt, also you need to pay a higher bill on your favourite restaurant and you will pay higher school fees for your kids. Let me explain it with an example… instead of buying a shirt which cost Rs2,000 today, you invest the money in FDs, after one year you will have Rs2,096 (after paying tax). If inflation is 5%, then the shirt will cost 2,100 and you will have to pay Rs4 out of your pocket to buy the same shirt.

You are actually losing money on your bank FDs. Calculation of the real return on FD is as follows

In India, the marginal interest rate is 30.9% and it is 34.0% if you earn more than 50 lakhs. Inflation is around 5% in India. Most of the banks currently pay 7% on FDs. Post-tax return on FD is 4.8% (4.6% if you ear more than 50 lakhs) and if we adjust for inflation which is currently around 5% in India, the return becomes negative (-0.2% or -0.4%).

Do you still think that you should invest money in FD? Definitely, I will not suggest that.

Thanks/Vipul

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