To know the banks offering more than 9 percent on fixed deposits click here.
However, the returns you get at the end of maturity period is not as high as you may think. Factors like inflation and tax may reap off the returns as your fixed deposit matures after a certain period of time. We look deeper into the reasons why returns from our fixed deposits are not higher than we think.
Inflation rate is higher than interest rates offered
The average rate of consumer price inflation in India until a year back was roughly around 9.76 per cent. So, all your returns are being eroded by inflation as interests from fixed deposits are not at par with the inflation rate. There is actually a term called "real rate of return". Let's cite an example to see what real rate of return is. The value of money does not remain the same after one year. In fact, Rs 100 today with inflation at 10 per cent, means it would be just Rs 90 next year.
So, if inflation is at 9.76 per cent and the bank gives you an interest rate of 9 per cent, your real rate of return is negative. You have not generated, but eroded your money by placing them in a fixed deposit. You have actually lost 0.76 per cent and your real rate of return after inflation is negative, even without considering tax liability.
This is why fixed deposits in India cannot make you rich unless you have inflation under 2 per cent like in the United States. Of course, if inflation is lower than the RBI would reduce interest rates and interest rates would also be at 2 per cent, which is why you can never make money from fixed deposits. No wonder people find shelter in other asset classes like real estate, gold and shares. Here are the other hazards of investing in fixed deposits, which, if applicable would reduce your returns even further.
Tax is applicable on interest rates
Tax Deducted at source (TDS) is applicable on interest earned from fixed deposits. Higher your income lower will be your returns as you have to pay higher taxes. To understand more on tax implications on fixed deposits click here.
Penalty on breaking before maturity
In some cases, you may require to break your fixed deposits before the maturity period. In such cases you will have to pay a penalty which is 1 per cent in most of the banks. To know more on how you lose money each time you break your fixed deposits click here.
However, there are certain banks which offers fixed deposits with no penalty if you break them prior to their maturity. Click here to find them.
It is true that fixed deposits help you to build a lump sum corpus for yourself and your family. But if you invest only in fixed deposits then it wont make you any richer as the returns are not as high as you think.