Inflation cuts into fixed deposits too

Inflation is eroding the money in a fixed deposit in the bank because at 7.61%, it is more than enough to offset the interest earnings, giving negative real returns.

The State Bank of India offers 8.5% on deposits of two years or more, while for shorter duration deposits, it gives 8.75%. That may seem like it still gives positive real return after accounting for inflation, but that’s an illusion for most, because the interest on fixed deposits is taxable.

If the annual income is above Rs 5 lakh, the tax deduction would be at 30.9% (including education cess), which means the effective interest income comes down to 6.05% if the nominal rate is 8.75% and to 5.87% if the rate is 8.5%. In either case, the current level of inflation more than wipes out this return.