Myth : Fixed Deposits are the safest way to save

For decades, fixed deposits (FDs) have been the default choice for “safe” savings. FDs offer certainty. You know how much you get and when. There’s no market volatility, no daily tracking, no scary headlines. Once an FD is booked, there’s nothing more to think about. 

But financial safety isn’t the absence of volatility, it’s the ability to maintain and grow purchasing power over time.

FDs are widely perceived as extremely safe as they offer guaranteed return.  In addition, deposits of up to ₹5 lakh per depositor per bank are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). 

However, this level of safety has limitations:

1. The Inflation Impact

Inflation erodes the real value of Fixed Deposits (FDs) by reducing the purchasing power. If inflation (e.g., 6%) is higher than your FD's interest rate (e.g., 4%), your money loses value despite earning interest, leading to negative real returns. 

Even when nominal returns appear stable, rising living costs mean the money earned from FDs doesn’t stretch as far as expected. For long-term goals, this erosion compounds quietly over time.

2. Lock-In Lag

   
   

High inflation often pushes banks to offer higher interest rates on new deposits. Older FDs, locked in at lower rates, quickly become unattractive. 

Breaking them early may lead to penalties, making this rate mismatch both frustrating and costly.

3. Principal Security Failure Risk

   
   

While deposits up to ₹5 lakh are insured, this protection is per depositor per bank. Large, well-capitalised banks are generally stable, but smaller cooperative banks can and do fail, exposing investors who assume all FDs carry the same level of safety.

A Real-World Reminder

India has seen multiple instances where depositors in cooperative banks faced severe restrictions despite FDs being considered “safe”. The Punjab & Maharashtra Co-operative (PMC) Bank crisis is a notable example, where depositors were unable to access their savings for extended periods due to governance failures and hidden bad loans. While deposit insurance eventually provided relief up to the insured limit, access to funds was frozen for months — and amounts beyond the insured cap were at risk.

More recently, several urban and cooperative banks have faced RBI intervention, license cancellations, or forced mergers, reinforcing that FD safety depends not just on the product, but on the institution behind it.

4. Fully Taxable Investment

   
   

FD interest is fully taxable at your applicable income tax slab. There’s no long-term capital gains benefit or preferential tax treatment. As a result, a 6% FD return can fall to 4–4.5% after tax for many investors.

Even when Form 15G or 15H is submitted, it only prevents TDS, not the tax itself. If your total income exceeds the exemption limit, the interest is still taxable.

This tax drag further reduces real returns and makes it even harder for FDs to beat inflation over long time horizons.

Scenario	FD Interest Rate	Inflation Rate	Tax (30% Slab)	Real Outcome
Low inflation, low tax	6.5%	4%	10%	Slight real gain
Moderate Inflation	6%	6%	20%	Near zero real return
High Inflation	6%	7%	30%	Negative real return
Post tax reality	6%	6%-7%	30%	Purchasing power erodes

The Takeaway

FDs are effective tools for capital preservation and short-term needs. But when used for long-term goals, they often fail to protect wealth from inflation and taxes.