Beware! Inflation is eating away your Fixed Deposits

Inflation has mastered the art of drilling a hole in your pocket by giving you repeated shocks in terms of sky rocketing bills. However, now this devilish phenomenon is targeting your fixed deposits. It's eating away the money which you have safely kept in the FDs, the investment you hope to reap profitable returns from in later stages.

The astronomical inflation rate, hovering at 7.61%, does not seem to show any signs of lowering in the near future. The current rates are sufficient to flip your interest earnings and result in some negative real returns. Presently, most of the banks are offering an interest rate in the domain of 8% to 8.75% on their fixed deposits. These fixed deposits are available in the time span of one to ten years. Even the country's largest bank, The State Bank of India, is offering interest at the rate of 8.5% whose tenure is around two years and for a comparatively shorter duration, it can increase to 8.75% also.

With the seemingly high return rate, it appears as if your fixed deposit is bound to yield some positive returns, but this feel good factor is nothing but a delusion. Even though the interest rates are guarded by Section 80C of the Income Tax Act, they are reduced significantly owing to the taxation policy.

In case your annual income is higher than Rs 5 Lacs, then the estimated tax deduction can range somewhere around 30.9% (including the education cess). Due to such deductions, the effective interest rate decreases to 6.05% if the nominal rate is at 8.75% and to 5.87% if the rate is at 8.5%. No matter what the case be, but in both the episodes, the existing inflation level washes away most of your returns.

Even if your income level is out of the above mentioned bracket, you would not be able to escape this vicious circle. The effective interest rate for people belonging to the income bracket between Rs 2.5 Lakh to Rs 5 Lakh has the effective interest rate between 6.75% to 6.95%, which is far from sufficient to yield any positive returns.

Hence, under the present circumstances, the better investment options are surely real estate and gold, two instruments that have seen a phenomenal rise in the present time. Equity can also prove to be a good option but for that you need to have a better understanding of the financial matrix and in case you are a novice, then you are clearly better off avoiding them.