Two numbers for the same return
A bank statement shows the nominal return: the rupees you earned. The real return asks what those rupees can buy compared with a year ago. The two differ by inflation, and for money held in an FD, tax as well.
The exact formula is:
real return = (1 + nominal return) ÷ (1 + inflation) − 1
Take a 7% FD with 6% inflation. 1.07 ÷ 1.06 = 1.0094, so the real return is 0.94%, not the 1% that simple subtraction suggests. At low rates the two are close; at higher rates the gap grows.
Add tax and the sign can flip
FD interest is taxed at your slab rate every year. At the 30% slab (ignoring cess), a 7% FD keeps 4.9% after tax. Against 6% inflation:
1.049 ÷ 1.06 = 0.9896, a real return of about −1.04%.
The balance still rises each year, but what it buys falls. Our post on how inflation eats your savings shows the same idea from the price side, and FD or debt fund, which leaves more after tax compares the tax treatment.
What ₹1 lakh becomes, in today's money
The table puts each return on one yardstick: how much ₹1 lakh grows to after 10 and 20 years, measured in today's purchasing power. All rates are assumptions for illustration.
| Case | Real return a year | After 10 years | After 20 years |
|---|---|---|---|
| 7% FD, 30% tax, 6% inflation | −1.04% | ₹90,094 | ₹81,169 |
| 7% FD, no tax, 6% inflation | 0.94% | ₹1,09,845 | ₹1,20,659 |
| 12% equity, 6% inflation (before tax) | 5.66% | ₹1,73,429 | ₹3,00,776 |
Read the first row this way: after tax the FD's rupee balance is ₹1,61,345 after 10 years, but at 6% inflation that buys what ₹90,094 buys today. The equity row's rupee balance is ₹3,10,585, worth ₹1,73,429 in today's money.
What to take from it
- Judge a return by what is left. A rate that looks safe can be a slow loss of purchasing power once inflation and tax are counted.
- Equity is not "risk-free" either. The 12% above is an assumption, not a promise, and equity can lose money for years. The point is only that the arithmetic of safe-but-low returns is also a risk.
- Match the tool to the horizon. Money needed within a year or two belongs in safe instruments even at a negative real return; money for 10-plus years usually needs something that can outgrow inflation.
The inflation calculator shows what a future price looks like at a rate you choose, and our rule of 72 post gives a quick way to see how long money takes to double at a given real return.
This post is educational, not financial advice. Inflation, interest and tax rates change; the figures are illustrations, not forecasts.
Frequently asked questions
What is a real return?
The growth in what your money can buy. It is the nominal return adjusted for inflation: (1 + nominal) ÷ (1 + inflation) − 1.
Why not just subtract inflation from the return?
Subtraction is a close shortcut at low rates, but it overstates the answer as rates rise. 12% minus 6% gives 6%, while the exact real return is 5.66%.
Is a negative real return a loss?
Your rupee balance still grows, but it buys less each year. That is a loss of purchasing power, not of the number on the statement.
This is commentary on published data, not investment advice. WealthTicker is not a SEBI-registered adviser or distributor. Figures are as of the dates stated and can be revised by their source.
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