Is the interest rate on an FD the rate I earn?

Not exactly. Compounding makes the yearly yield a little higher than the quoted rate, but tax on the interest and inflation reduce what you actually keep and what it can buy.

Is FD interest taxed every year?

Interest on a cumulative deposit is generally taxable each year as it accrues, even though you get it only at maturity. It is added to your income and taxed at your slab rate. Banks may deduct tax at source above a limit.

What is a real return?

The return after tax and after inflation. It shows how fast your buying power grows. A negative real return means the money buys less at the end even though the amount is larger.

Should I avoid fixed deposits then?

Not necessarily. They are safe, predictable and useful for money you will need soon. The point is to know what they earn after tax and inflation, and not to expect them to build wealth over long periods on their own.

Fixed deposit returns after tax and inflation: what you really earn

Written and reviewed by Omm · Last reviewed 14 October 2026 · General information, not investment advice

A fixed deposit looks simple: a rate, a term, a maturity amount. But the number on the board is the beginning of the story, not the end. Three things change what you really end up with.

1. Compounding

Banks commonly add interest to a cumulative deposit every quarter, and that interest then earns interest. A 7% quoted rate with quarterly compounding gives a yearly yield of about 7.19%. The more often interest is added, the higher the yield, though the differences between quarterly and monthly are small.

2. Tax on the interest

FD interest is added to your income and taxed at your slab rate, whether or not you need the money now. If you are in the 30% slab, nearly a third of the interest goes to tax, so a 7.19% yield becomes roughly 5% after tax. If your income is low enough to pay no tax, you keep it all. This is why the right comparison is always after tax: two products with the same rate can leave you with very different amounts if one is taxed and the other is not. See PPF vs mutual funds for a comparison that includes tax.

Banks may also deduct tax at source when interest crosses a limit. That is a collection method, not necessarily your final tax: what you owe depends on your total income.

3. Inflation

Prices rise, so the same money buys less every year. If inflation is 5% and your after-tax return is 5%, your buying power does not grow at all. If inflation is higher than your after-tax return, your money buys less at the end, even though the rupee amount has grown. That is a negative real return.

The FD calculator shows each step: the maturity amount, the tax, the after-tax return, the real return, and the maturity amount in today’s money. The inflation calculator shows what any amount will cost or buy in the future.

A worked example

₹1,00,000 in a 5-year deposit at 7%, compounded quarterly, grows to about ₹1,41,478. The interest is ₹41,478. At a 30% tax rate you keep about ₹29,000 of it, a return of about 5.2% a year. With 5% inflation the real return is close to zero, and the ₹1,29,000 or so you end up with is worth about ₹1,01,000 in today’s money.

What this means

Fixed deposits suit money you need soon or money you cannot risk. They do their job well there.
For long goals, a return that barely matches inflation after tax will not grow your buying power. Other options carry risk but have beaten inflation over long periods; they can also fall. See what is a mutual fund.
Use the numbers for your own case: your tax rate, your inflation expectation and your term.

This guide is general information, not financial advice. Rates, tax rules and inflation change; check the current position for your case.