Real return

Five chapters of measurement and policy. This is the one that touches your account.

The formula, and why subtraction is not it

The usual shortcut is to subtract: 7.1% minus 5.54% is 1.56%, so that is the real return.

Close, and always wrong in the same direction. The correct form is a ratio, because the inflation applies to the grown amount rather than the original:

real return = (1 + nominal) ÷ (1 + inflation) − 1

At September 2026's inflation of 5.54%, a PPF account paying 7.1%:

(1.071 ÷ 1.0554) − 1 = 1.48%

Not 1.56%. The subtraction overstates by about eight hundredths of a point — small in absolute terms, and not small against an answer of 1.48%. At higher rates the gap widens, and the shortcut always flatters.

Use the ratio. It is one more keystroke.

Indian rates, converted

Every rate below is nominal and plausible for late 2026; the inflation figure is the published 5.54% for September 2026.

Where the money is	Nominal	Real return
Public Provident Fund, 1 Oct – 31 Dec 2026	7.1%	+1.48%
A fixed deposit at	6.5%	+0.91%
The repo rate itself, for scale	5.50%	−0.04%
A savings account at	4.0%	−1.46%

Read the last line. Money in a savings account paying 4% was losing about 1.5% of its purchasing power every year, while the statement showed interest being credited and the balance going up.

That is the single most useful thing in this subject. Nothing on a bank statement is ever negative. The loss is real, it compounds, and it is invisible unless you do this calculation.

Then tax, and the order matters

Tax comes off the nominal return first. Only what survives is yours to adjust for inflation.

A fixed deposit paying 6.5%, for someone in the 30% slab:

after tax:  6.5% × (1 − 0.30)        = 4.55%
then real:  (1.0455 ÷ 1.0554) − 1    = −0.94%

A 6.5% fixed deposit, taxed at 30%, loses about 0.94% a year in purchasing power. It looks like the safest thing a person can do with money. It is a guaranteed, slow, certain loss — and the certainty runs the wrong way.

Now the same arithmetic on PPF, where the interest is exempt:

after tax:  7.1%                      (no deduction)
then real:  (1.071 ÷ 1.0554) − 1     = +1.48%

The gap between those two is 2.42 percentage points of real, after-tax return, and almost none of it is about the headline rates — 7.1% against 6.5% is only 0.6 points. The rest is the tax treatment.

Which is why this chapter sits in the economics stream and keeps pointing at the finance one. The economics tells you the hurdle. What clears it is a question about instruments and tax, and the calculators and the fixed income subject are where that lives.

Three honest complications

Your inflation is not 5.54%. Chapter 3's whole argument. Run these numbers again with your own rate and the table moves. A rural household facing 6.08% has a PPF real return of about 0.96%, not 1.48%.

One month's inflation is not the rate you will face. The 5.54% is September 2026. The Reserve Bank's own projection for the full year 2026-27 was 5.2%, with 6.0% expected in the December quarter. A deposit locked for five years faces whatever inflation turns out to be across those five years, which nobody knows. Use a recent figure as an estimate and hold the answer loosely.

Negative real returns are not always irrational. Money you may need next month belongs somewhere safe and reachable even at a negative real return, because the alternative is selling something at a bad moment. The emergency fund is not an investment and should not be judged as one. What this chapter argues against is holding long-term money at a negative real rate by default, which is extremely common and entirely accidental.

What the whole subject was for

Six chapters, and they collapse into one sentence a saver can act on.

The number that matters is what your money will buy, not what the statement says — and the gap between those two is published monthly by the government and ignored by almost everybody.

Inflation is an average over a basket that is not yours. The committee aims at 4% and tolerates 2% to 6%. The policy rate reaches your loan quickly and your deposits slowly. And every return you are quoted has to clear inflation and then tax before any of it is yours.

A reader who does nothing else with this subject but convert one quoted rate into a real, after-tax return before accepting it has got more from it than most.

The point

Real return is (1 + nominal) ÷ (1 + inflation) − 1, not subtraction, and the shortcut always flatters. At September 2026's 5.54%, PPF at 7.1% returned about 1.48% real, a 6.5% fixed deposit about 0.91%, and a 4% savings account about −1.46%. Tax comes off first: that same fixed deposit at the 30% slab returns about −0.94% real, a guaranteed slow loss on the safest-looking thing a person can do with money.