FDs Feel Safe. But Are They Costing You More Than You Think?

FDs Feel Safe: When planning for retirement, many investors still rely heavily on Fixed Deposits (FDs). They’re familiar, seem risk-free, and offer steady interest payouts. However, recent changes to FD interest rates and tax rules mean that FDs may no longer be the best way to preserve—and grow—your income. In contrast, debt mutual funds could deliver higher post-tax returns while still offering relative stability.

1. The Current State of FD Interest Rates

Despite the Reserve Bank’s repo rate cuts in early 2025, many banks still offer attractive FD rates:

• As of June 2025, top banks offer between 8.2%–9%, especially through small finance banksSenior citizens can secure up to 8.25% on 1-year FDs

But high nominal rates don’t guarantee strong after-tax returns.

2. Taxation of FD Interest in FY 2025–26

🧾 TDS Thresholds & Slabs

• TDS is deducted at 10% if FD interest exceeds ₹50,000/year for non-seniors, and ₹1 lakh/year for senior citizens
• Even after TDS, the full interest must be declared under “Income from Other Sources” and taxed as per your applicable slab
• Income up to ₹12 lakh is tax-free under the new regime due to exemption and rebate provisions—but only if you have no other income sources

Example:

A non-senior citizen earning ₹80,000 in FD interest:

• Bank deducts ₹8,000 TDS
• You report ₹80,000 interest; final tax depends on slab—could owe ₹12,000 if in 20% bracket
• Additional tax may be due at filing.

So, while FDs offer stability and current high rates, after-tax outcomes depend heavily on your slab and total income.

3. Debt Mutual Fund Taxation (FY 2025–26 onwards)

Tax rules have shifted significantly in recent years:

📌 Post-April 1, 2023 investments:

• All gains (long or short term) are taxed at your slab rate, with no indexation
• Regardless of holding period, returns from debt funds count as short-term capital gains (STCG)

📌 Pre-April 1, 2023 investments:

• Held over 24 months → Taxed as LTCG at 12.5%, without indexation (reduced from 20%)
• Held shorter → Taxed at slab rate.

💡 Additional Benefits:

• LTCG up to ₹4 lakh is exempt annually—notably under the 2025 Budget
• No TDS on debt fund capital gains, easing liquidity.

4. Comparing After‑Tax Returns: FD vs. Debt Funds

Let’s benchmark both options for a retiree in the 30% tax slab:

Scenario: ₹10 lakh investment over 5 years

Debt funds often outpace FDs once you factor in taxes, especially for younger debt fund holdings or pre-2023 ticks enjoying the LTCG exemption.

5. Practical Retirement Strategies

a. Combine FDs & Debt Funds:

• Use FDs for the emergency corpus due to guaranteed returns.
• Allocate to debt funds for regular withdrawals via SWP (Systematic Withdrawal Plans).

b. Leverage Tax Benefits:

• Shift older debt fund investments to enjoy 12.5% flat LTCG tax, with up to ₹4 lakh yearly tax-free.
• Newer investments will be slab taxed—plan allocation accordingly.

c. Ladder Your Debt Allocation:

• Use liquid/ultrashort funds for near-term expenses.
• Use short/medium funds for stable income.
• Consider dynamic or corporate bond funds to boost yield, with careful risk checks.

d. Monitor & Rebalance:

• Review your portfolio annually or when interest rates shift.
• Consider switching older pre-2023 holdings into newer structures to optimize taxes.

6. Risks & Considerations

• FD interest is guaranteed but eroded by inflation and slab taxes.
• Debt funds carry credit and rate risks, though lower in quality funds.
• Understand underlying credit quality, duration, and fund exits when choosing your debt fund.

Consult a financial advisor or your fund’s factsheet to ensure your selections align with your risk threshold.

📌 Final Takeaway

• FDs: Safe and simple, but with slab-based taxation and inflation erosion.
• Debt Funds: With smart planning, they often outperform post-tax returns, provide liquidity, and offer structure.

In retirement, it’s not about choosing absolute safety—it’s about balancing security with smarter tax efficiency. Debt funds can deliver that balance, helping you maximize income and preserve purchasing power.

Bank FDs Rate

Home