See what each actually earns after tax and inflation.
Nifty 50 delivered ~13% CAGR over 20 years
Fisher Equation · FD/RD taxed at slab rate · MF: 12.5% LTCG above ₹1.25L (Budget 2024) · Not investment advice
The comparison between Fixed Deposits, Recurring Deposits, and Mutual Funds is one of the most common questions Indian investors ask — and the answer is rarely straightforward. The key variable that most calculators ignore is the real return: what you actually earn after paying income tax and adjusting for inflation.
A 7% FD looks attractive. But for a salaried investor in the 30% tax slab, the post-tax return drops to 4.9%. After adjusting for 6% inflation using the Fisher Equation, the real return is approximately −1.04% per year. The bank balance grows, but the purchasing power of that money shrinks every year.
Mutual funds, specifically equity funds held for over one year, benefit from a significantly more favourable tax structure. Under the Union Budget 2024, Long Term Capital Gains (LTCG) above ₹1.25 lakh per year are taxed at just 12.5%. A 12% CAGR equity fund after this tax and 6% inflation delivers approximately +5.66% real return per year.
FDs are not always the wrong choice. For short-term goals under 3 years, emergency funds, or investors who cannot tolerate any volatility, FDs provide guaranteed capital protection that mutual funds cannot match.
The RD is best suited for building a disciplined savings habit with a 1–3 year horizon where capital safety is essential. For anything beyond 3–5 years, a SIP in equity mutual funds typically delivers better real returns.
Nominal return is the interest rate your bank or fund advertises — 7% FD, 12% CAGR. Real return is what you actually keep after paying tax on the gains and adjusting for inflation. A 7% FD at 30% tax slab gives a 4.9% post-tax return. After 6% inflation, the real return is −1.04%. This is calculated using the Fisher Equation: Real Return = ((1 + Post-Tax Return) / (1 + Inflation)) − 1.
As per Union Budget 2024, equity mutual fund gains held for more than 12 months are classified as Long Term Capital Gains (LTCG). The tax rate is 12.5% on gains above ₹1.25 lakh per financial year. This makes equity mutual funds significantly more tax-efficient than FDs for investors in the 20% or 30% slab.
For monthly savings, RD is a better structure than FD because it is designed for monthly contributions and compounds quarterly (standard Indian bank formula). However, both are taxed at your income slab rate on the interest earned, so the net tax drag is similar.
For an investor in the 30% tax slab with 6% inflation, an FD would need to offer approximately 8.6% interest to deliver a zero real return. Most Indian banks offer 6.5–7.5%, which means FD investors in the highest tax bracket are consistently losing purchasing power.
Equity mutual funds typically begin outperforming FDs in real terms from Year 3–5 onwards. Over 10–15 year periods, the combination of higher CAGR and lower LTCG tax makes equity mutual funds significantly superior to FDs for long-term wealth creation.
Not investment advice · Returns are illustrative · Consult a SEBI-registered advisor · LTCG rates as per Union Budget 2024