SIP vs FD
A fixed deposit at 7% taxed at a 30% slab returns 4.90%, which against 6% inflation is -1.04% in real terms. Your capital is safe in rupees and shrinking in what it can buy. That is a fair price for certainty over two years, and an expensive one over twenty.
The three numbers a deposit certificate does not print
Every FD has a headline rate and two deductions applied to it before you see any benefit.
| Stage | Rate | What happened |
|---|---|---|
| Headline | 7% | What the bank advertises |
| After tax at 30% | 4.90% | Interest is added to income and taxed at your slab, on accrual, every year |
| After 6% inflation | -1.04% | What your purchasing power actually did |
A negative real return means the deposit is a slow, contractual loss of buying power. Not a dramatic one — but guaranteed, which is the opposite of how deposits are usually described.
Note also the accrual point. In a five-year cumulative FD you owe tax on interest each year even though you receive nothing until maturity. Equity gains are taxed only when you sell, and that deferral is itself worth something.
What the gap looks like on real money
₹10,000 a month, before tax on either side. A recurring deposit is used here rather than a lump-sum FD so the monthly rhythm matches the SIP — the closest like-for-like available.
| Term | Deposited | Deposit maturity | SIP projection | Gap |
|---|---|---|---|---|
| 3 years | ₹3.6 L | ₹4,01,373 | ₹4,35,076 | ₹33.7K |
| 5 years | ₹6 L | ₹7,19,328 | ₹8,24,864 | ₹1.06 L |
| 10 years | ₹12 L | ₹17,37,017 | ₹23,23,391 | ₹5.86 L |
| 20 years | ₹24 L | ₹52,13,827 | ₹99,91,479 | ₹47.78 L |
Over three years the gap is modest and the deposit's certainty is worth more than the difference. Over twenty it is ₹47.78 L, and the tax treatment widens it further — deposit interest at slab rate every year against 12.5% on long-term equity gains above the ₹1.25 lakh annual exemption.
Where an FD is unambiguously the right answer
Being fair to the instrument, because this comparison is often made unfairly:
- Money you need on a known date within about three years. A house deposit next year, school fees in eighteen months. Capital certainty is the actual requirement, and equity cannot provide it.
- An emergency fund. Availability matters more than return. A sweep FD is ideal.
- Retirees who need predictable income and cannot tolerate a drawdown, particularly where the senior-citizen rate premium applies.
- Anyone whose slab is low or nil. Without the 30% tax drag the real return is much less bad, and for someone below the taxable threshold an FD is a genuinely reasonable instrument.
Deposits are also covered by DICGC insurance up to ₹5 lakh per depositor per bank, which is a real protection with no mutual fund equivalent.
The rule that falls out of this
Match the instrument to the deadline
Under 3 years: deposits or short-duration debt. Do not put a near-term goal in equity.
3 to 7 years: a mix. Hybrid funds exist for this range.
Over 7 years: equity does its job, and choosing a deposit instead is choosing a near-certain real loss over an uncertain real gain.
The mistake is not using FDs. It is using them for horizons where inflation, not volatility, is the dominant risk — and calling that choice safe.
Questions people actually ask
Is a SIP safer than an FD?
No. An FD is contractually safer — the bank owes you a stated amount, insured to ₹5 lakh. An equity SIP can lose money, including over multi-year periods.
What an FD is not safe from is inflation. Over twenty years that is the larger risk, which is why "safe" needs the question "safe from what?" attached.
How much tax do I pay on FD interest?
It is added to your total income and taxed at your slab rate, on accrual rather than receipt. Banks deduct TDS once annual interest crosses the threshold, but TDS is not the final liability.
There is no indexation and no concessional rate, which is what makes deposits inefficient for higher-rate taxpayers over long periods.
What about senior citizen FD rates?
Usually about 0.5 percentage points higher, and there are dedicated small-savings schemes for seniors too. That improves the arithmetic meaningfully, particularly for someone in a lower slab.
Even then, at 7.5% against 6% inflation the real return before tax is only about 1.42%.
Should retirees avoid equity entirely?
Generally not. A retirement can last twenty-five years or more, which is a long enough horizon that an all-deposit portfolio faces serious inflation risk on the far end.
The usual approach keeps two to three years of spending in deposits so you are never forced to sell equity in a bad year, with the rest in a mix. See the SWP calculator and its note on sequence risk.
Where these numbers come from
- Reserve Bank of India — inflation targeting and deposit data
- Income Tax Department — capital gains and interest taxation
- DICGC — bank deposit insurance limits
- MoSPI — Consumer Price Index series