Tax-free 7% vs a taxable FD: break-even rate by slab

The one-line formula

Two investments can only be compared once tax is taken out of both. For interest that is taxed at your slab rate, the money you keep is:

after-tax return = pre-tax return × (1 − tax rate)

The tax rate here is your marginal slab rate plus 4% cess. That is 5.2% for the 5% slab, 10.4% for 10%, 15.6% for 15%, 20.8% for 20%, 26% for 25% and 31.2% for 30%, ignoring surcharge. Divide the other way and you get the rate a taxable product needs in order to match a tax-free one:

taxable-equivalent yield = tax-free return ÷ (1 − tax rate)

A tax-free 7%, translated

Take a tax-free return of 7%. Examples of the kind of thing that qualifies are interest on a PPF account, or on tax-free bonds; the 7% itself is an assumption, not a current rate. How much would a taxable FD have to pay to leave you with the same 7%?

The arithmetic for the top row is 7 ÷ 0.688 = 10.17. For the 20% slab it is 7 ÷ 0.792 = 8.84. Someone in the 30% slab needs a taxable FD paying more than 10% to match a tax-free 7%. FDs generally pay well under that, which is why the tax-free choice looks so strong at the top of the scale and so weak at the bottom, where a 7.38% taxable rate would do.

The same thing the other way round

Suppose a taxable FD pays 9%. What does it leave?

At the 30% slab, a 9% FD leaves 6.19%. A tax-free 7% beats it by 0.81 percentage points. At the 20% slab, the FD leaves 7.13%, which is slightly more than the tax-free 7%. The two cross somewhere between those slabs: 9% × (1 − t) = 7% when t = 22.2%, a rate that falls between the 20% and 25% slabs.

Where this stops being a clean comparison

The formula treats the two as equal in everything but tax. They rarely are.

• Lock-in and liquidity. PPF locks money for 15 years with limited partial withdrawals. A bank FD can be broken, at a cost. See what breaking an FD early really costs.
• Rate resets. A tax-free rate on PPF is reset by the government, and a tax-free bond's coupon is fixed at issue. An FD's rate is fixed for its term.
• The rebate. Under the new regime, income up to a threshold is tax-free through the Section 87A rebate. If your taxable income falls inside it, your marginal tax rate on the FD interest may be nil and the equivalent-yield table does not apply; see Section 87A rebate explained.
• Surcharge and the cliff. Surcharge raises the top rates; the table is for incomes below those thresholds.
• TDS. A taxable FD may have tax deducted at source before you see the interest, which is a timing matter, not a change to the rate you finally pay. See TDS on FD interest, Form 15G and 15H.

What the table is good for

Use it as a sanity check, not an answer. When you see a taxable product advertised, you can ask what a person in your slab keeps from it, and whether a tax-free alternative would keep more. It also exposes a trap: a marginally higher advertised FD rate often vanishes after tax for someone in a high slab.

For debt mutual funds the comparison has an extra layer, because gains are taxed only on redemption; FD or debt fund: which leaves more after tax works through it. And the all-in picture, with inflation as well as tax, is in real return after inflation and tax. You can check your own slab in the old vs new tax regime calculator.

Reading this

• The 7% tax-free and 9% taxable rates are round assumptions to show the method, not current rates for any product.
• Rates use slab plus 4% cess; surcharge is not included, and the rules are as they stand for FY 2026-27. Confirm before acting.
• This describes arithmetic, not a recommendation to buy any instrument.