Understanding real return on FDs

Not all can comprehend the tricky relationship between the investment made and rate of return earned on the amount. This is not because the formula is complex, the gap between reality and perception is a big one to be filled easily.Understanding real return on FDs

Understanding real return on FDs

An average person expecting Rs 50,000 in investment is sure to be shocked on leaning that he receives Rs 40,000 in hands. And, this problem exists all across the globe. People generally forget to factor in inflation when counting returns on investment made.

Real returns = rate of return – inflation rate

So, one must look at investing in financial products which give returns higher than the existing inflation rate.

One must always understand that for the investments must be able to keep pace with inflation in order to get positive returns.

For instance, a product that cost Rs 100 presently will cost Rs 109 after na year if inflation grows at 9 per cent.

Scenario with FDs

Fixed Deposits (FDs) are termed as one of the most popular investment products in India for the reason they offer high rate of interest in the range of 8.50 per cent to 9.25 per cent and are very secure in nature. However, they do attract income tax on returns made.

An individual receiving 8.50 per cent return from an FD would get a net return of 5.87 per cent, if he qualifies in 30.9 per cent tax slab.

Calculation:

Rate of return x (1-tax rate) x 100

8.5% x (1-30.9%) x 100 = 5.87%

Now, factoring in inflation of about 8% we get = Inflation – rate of return = 5.87% – 8% = -2.13%

Therefore, while making investment into FDs, you must factor in the existing inflation rate and taxation rate, so as to get worthwhile rate of return.

Ashish Pandey

I am a business and finance journalist who is currently employed at Financial Express and previously at Zee News. My areas of interest include business and foreign policy. You can reach me on Twitter at @ashuvirgo1984 or @eFundsPlus.

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