FD vs Debt Fund, After Tax
The same money in a fixed deposit and in a debt mutual fund, after tax, over the same years.
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After tax, the debt fund ends ₹5,465 ahead over 3 years, if the fund returns 7.5% a year.
- FD after tax₹5,77,885
- Debt fund after tax₹5,83,350
- FD yearly yield with quarterly compounding7.19%
How this is worked out
- FD: interest compounds quarterly and is taxed each year, so each year it grows by the yearly yield × (1 − tax rate).
- Debt fund: grows at the assumed return; the gain is taxed once, at your slab rate, when you sell.
Assumptions
- A debt fund's return is not fixed and can be lower than the FD rate; the FD rate is fixed for its term.
- DICGC insures bank deposits up to 5 lakh per bank; a debt fund has no such cover.
- Exit loads and TDS timing are left out.
Debt mutual fund gains
Gains on mutual funds that invest mostly in debt, bought on or after 1 April 2023, are taxed at your slab rate however long you hold them, and only when you sell. Fixed deposit interest is taxed every year as it is earned.
In force from 1 April 2023 · checked by Savingy on 1 November 2026
The formula
FD after tax = amount × (1 + yearly yield × (1 − tax rate))^years
Debt fund after tax = amount + (amount × (1 + return)^years − amount) × (1 − tax rate)
- Yearly yield: the FD rate compounded quarterly: (1 + rate ÷ 4)^4 − 1
- Tax rate: your slab rate including cess
FD interest is taxed every year as it is earned; debt fund gains are taxed once, when you sell.
A worked example
₹5,00,000 for 3 years at a 31.2% tax rate: an FD at 7% ends at ₹5,77,885 after tax, a debt fund returning 7.5% at ₹5,83,350.
Questions people ask
How are debt mutual funds taxed now?
Gains on funds that invest mostly in debt, bought on or after 1 April 2023, are taxed at your slab rate however long you hold them. The difference from an FD is timing: the tax is paid when you sell, not every year.
Is a debt fund better than an FD?
Not always. An FD rate is fixed for its term and bank deposits are insured up to five lakh per bank; a debt fund's return moves with interest rates and credit quality. The calculator shows the after-tax gap at the return you assume.
Why can an FD come out ahead at the same rate?
Banks compound most FDs quarterly, so a 7% FD yields a little more than 7% a year. With low or no tax, that can outweigh the debt fund's advantage of paying tax only at the end.
From the Savingy Guide
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Sources
Estimates are for illustration only and assume constant returns. Actual returns vary with market conditions. This is not investment advice.