SIP vs FD: what actually differs after tax and inflation

SIPs and FDs get compared as if they were two flavours of the same thing. They aren't. An FD is a contract: the bank promises a rate and, short of the bank failing, you get exactly that. A SIP into an equity fund is a habit of buying units every month at whatever price the market sets. Nobody promises you anything. Putting 7% next to "12% historically" misses most of what decides the outcome: when tax is charged and at what rate, what inflation does to the result, and whether the money is there at full value when you need it.

Certainty versus a range of outcomes

With an FD, the number on the receipt is the number. Put ₹5,00,000 in a one-year FD at 7% compounded quarterly and it matures at ₹5,35,930. That certainty has real value, especially when the money has a date attached to it.

A SIP gives you a spread of possible results instead of a number. Equity has historically returned more than deposits over long periods in India, but the path is uneven, and a three-year window can easily include a stretch where the portfolio is worth less than what you put in. The 12% you see in most SIP illustrations is an assumption, not a forecast. Whenever I use the SIP calculator, I run it a second time at 9 or 10% and check whether the plan still works.

How each one is taxed

FD interest is added to your income and taxed at your slab rate. Banks deduct TDS at 10% once your interest from that bank crosses ₹50,000 in a year (₹1,00,000 for senior citizens), but TDS is only an advance. If you're in the 30% slab, you owe the rest when you file. The interest also counts year by year as it accrues, even on a cumulative FD that pays nothing until maturity, because that's how banks report it for TDS.

Equity mutual fund units are taxed only when you sell them. Units held for more than 12 months are long-term: the gain is taxed at 12.5%, and the first ₹1,25,000 of long-term equity gains in a financial year is exempt. Units held for 12 months or less are short-term and taxed at 20%. Cess of 4% applies on top in both cases. In a SIP each instalment has its own holding period, so if you redeem everything at once, the last year's instalments are short-term even if the SIP has run for a decade.

Run an FD rate through different slabs and the gap is stark. For someone in the 30% slab, tax plus cess takes 30% × 1.04 = 31.2% of the interest. A 7% FD loses 7% × 31.2% = 2.184% and keeps 4.816%. In the 5% slab, tax plus cess is 5.2%, and the same FD keeps 7% × 0.948 = 6.636%. Same deposit, very different product depending on who holds it.

Inflation is the part people skip

A return only means something after inflation. If prices rise 6% a year, a post-tax return of 4.816% buys a little less every year: 1.04816 ÷ 1.06 is about 0.9888, a real loss of roughly 1.1% a year. Your balance grows while your purchasing power shrinks. The inflation calculator makes this concrete. At 6%, prices rise by a factor of about 1.79 over ten years, so ₹20 lakh ten years from now buys roughly what ₹11.2 lakh buys today.

A ten-year worked example

Here's one run of the SIP vs FD calculator. Total money: ₹12,00,000. The SIP side invests ₹10,000 at the start of each month for 120 months at an assumed 12% a year, which the calculator treats as 1% a month (12% ÷ 12), the method most Indian SIP calculators use. The FD side puts the full ₹12,00,000 in on day one at 7%, compounded quarterly. Tax slab 30%, inflation 6%, and everything is withdrawn at the end of year ten.

The first row surprises people: the FD is ahead before tax. That's not an error. The FD has the whole ₹12 lakh working from the first day, while the SIP only reaches ₹12 lakh invested in its final month, so its later instalments barely have time to grow. If you genuinely have the lump sum today, a fairer comparison is a lump sum in equity. At the same assumed 12%, ₹12,00,000 grows to ₹37,27,018. Long-term tax on the ₹25,27,018 gain, after the ₹1,25,000 exemption, is ₹24,02,018 × 12.5% × 1.04 = ₹3,12,262, leaving ₹34,14,756. That's a different risk too, since all of it is exposed to the market from day one.

Back to the table. Tax does most of the work. The FD's ₹12,01,917 of interest is taxed at 31.2%, while the SIP's gains are taxed mostly at 12.5% after the exemption. After tax the SIP is ahead by ₹1,66,050, and in today's money by ₹92,721. For ten years of market risk, that's a thin margin. Change one assumption at a time and it disappears:

• If the SIP earns 10% instead of 12%, it ends at ₹19,68,730 after tax, or ₹10,99,328 in today's money. The FD now wins by ₹32,492 in real terms.
• If the investor is in the 5% slab instead of 30%, FD tax drops to ₹62,500 and the FD ends at ₹23,39,417, or ₹13,06,318 in today's money. That's ₹81,776 ahead of the SIP.

I don't read this as "FDs are better". I read it as: the comparison depends heavily on assumptions, and your slab rate matters about as much as the return. One more thing in the FD's favour that isn't real: the calculator taxes FD interest at maturity to keep the comparison simple. In practice it's taxed every year, and tax paid earlier is money that stops compounding, so the real FD result is slightly worse than shown.

Liquidity and the cost of getting out

Most bank FDs can be broken early with a penalty, typically 0.5 to 1 percentage point off the rate. Tax-saver FDs can't be broken for five years. Bank deposits are insured by DICGC up to ₹5 lakh per depositor per bank, principal and interest together. Corporate and NBFC deposits aren't covered and carry the issuer's credit risk.

Equity funds can be redeemed on any business day and the money usually arrives within a few working days, but at that day's price. That's the real liquidity risk with equity. Access isn't the problem; being forced to sell after a 25% fall because the money was earmarked for something with a fixed date is. Some funds also charge an exit load if you redeem within a set period, often the first year, so check the scheme document.

When an FD is simply the right tool

I'd use an FD, without much agonising, for money needed within about three years: a down payment, next year's school fees, a wedding, a car. Over that horizon equity's spread of outcomes is too wide, and a bad year can't be waited out. The same goes for your emergency fund, or the part of it beyond what sits in a savings account; how big your emergency fund should be covers how to layer it. An FD also makes plenty of sense for someone in a nil or 5% slab, such as a retired parent with modest income, because the post-tax rate stays close to the headline rate.

Equity SIPs make more sense for goals more than seven or eight years away, where you can sit through a bad patch and the tax deferral has time to add up. Between three and seven years is a grey zone, and a mix is reasonable. Debt mutual funds don't solve the FD tax problem for long holding periods either: units bought on or after 1 April 2023 are taxed at your slab rate, just like FD interest. The main differences are liquidity and the fact that tax is charged on redemption rather than every year.

If you're also weighing whether spare money should go into investments at all or into a loan, prepaying a home loan compares that guaranteed saving against both options.

For your next step, open the SIP vs FD calculator, enter your real slab rate and a return you'd be comfortable defending as conservative, then drop the SIP return by two percentage points and see whether the answer changes. If it flips, your horizon is probably too short for equity to be the obvious choice. To check the FD side against a particular bank's rate and compounding, the FD calculator does that in a few seconds.