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Bank FDs earn negative returns - Know How?

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Holders of fixed deposits have been earning a negative return in real terms for most of the preceding five years, thanks to inflation outstripping interest rates. To make matters worse, depositors continue to be taxed on this nominal income.


Although bank fixed deposits have never been tax friendly, the level of compliance has been sketchy. But compliance is slowly getting stricter. In the past, RBI norms required banks to take into account deposits in one branch for the purpose of tax deduction at source—a rule which allowed depositors to break up FDs across branches to avoid TDS. Also, several private banks allowed customers to break up FDs and route them into multiple branches to avoid TDS. But after recent sting operations banks are getting tough and taking into account interest income from all branches for the purpose of TDS.


A study conducted by Ashish Das, professor, IIT Mumbai's department of mathematics, shows that for most of the five years since 2008-09 real returns on bank fixed deposits have been negative.


The lowest real return was -5.4% in 2009-10 when consumer price index for industrial workers CPI-IW rose by 12.4% and the weighted average deposit rate on term deposits was 6.97%. The weighted average return takes into account the average cost of deposits for banks after factoring in the extent in each maturity basket. Although bankers offer the highest return on deposits of 3-years and above, bulk of bank deposits are around the one-year category.


RBI's weighted average deposit rates are available only up to March 2011. However, given that long-term deposit rates have not crossed 10% and that most deposits are in the one-year basket, it can be safely assumed that the weighted average deposit rates are not above 8.5% for the last two years. The highest real return in recent years has been 2011-12 when the return after being adjusted for inflation stood at 0.2%.

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