Tax planning guides FD vs mutual funds
FD vs Equity Mutual Fund: What You Keep After Tax
The tax rate on your returns matters as much as the return itself. FD interest is taxed every year at your slab rate; equity fund gains are taxed once, at a lower rate, with a yearly exemption.
How each is taxed
| Fixed deposit | Equity mutual fund | |
|---|---|---|
| Tax rate | Your slab rate, up to 30% plus cess | 12.5% after 12 months (20% if sold earlier) |
| Tax-free portion | None | First ₹1.25 lakh of long-term gains each year |
| When tax is paid | Every year, on accrued interest | Only when you redeem |
| Returns | Fixed and guaranteed | Market-linked; can rise or fall |
Example: ₹10 lakh for 10 years, 30% slab
Assumptions: FD at 7%, equity fund at 12% a year (not guaranteed), tax at 30% plus 4% cess.
| Before tax | After tax | |
|---|---|---|
| Fixed deposit | ₹19.67 lakh | ₹16.01 lakh |
| Equity mutual fund | ₹31.06 lakh | ₹28.48 lakh |
On these assumptions the equity fund keeps about ₹12.5 lakh more after tax. Even at 9% a year it would keep about ₹22 lakh, still more than the FD for a 30% slab investor.
A balanced view: use each for the right job
| Time horizon | Better fit | Why |
|---|---|---|
| Under 1 year or emergency money | FD or liquid fund | Money must be safe and available |
| 1–3 years | FD, arbitrage or short-term debt fund | Little time to recover from a market fall |
| 3–5 years | Hybrid or balanced advantage fund | Some growth with lower swings |
| 5+ years | Equity mutual funds via SIP | Time smooths volatility and the tax edge compounds |
Common questions
Are FDs a bad investment?
No. FDs are guaranteed and suit short-term and emergency money. For long-term goals, higher-slab investors usually keep more after tax in equity funds, with market risk.
Please note: This guide is investor education, not tax or investment advice. Figures are illustrations using assumed returns and are not guaranteed. Tax rules shown apply for FY 2026-27 (tax rules as of September 2026) and can change; please confirm your own situation with a chartered accountant. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.
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