When a deposit quietly loses

The last chapter of the subject, and the one that qualifies the other seven. Deposits are safe in the sense the first chapter described — a specific party promises a specific amount. They are not safe in the sense most people mean, which is that your money will still buy what it buys now.

The order of operations

This is the whole chapter, and almost everyone gets it wrong by doing the steps in the wrong order.

Wrong: 7% deposit minus 5% inflation = 2% real, then tax the 2%.

Right: tax is charged on the full nominal interest, because that is what the law treats as income. Inflation then applies to whatever survives.

Interest on a deposit is taxed as income at your slab rate. There is no inflation adjustment — no indexation, no exemption for the portion that merely compensated you for prices rising. The tax system taxes the whole nominal amount as though all of it were gain.

So the sequence is: nominal → after tax → after inflation, and the middle step is applied to the largest number.

Why this bites so hard

Work it through generally. A deposit at rate r, a slab rate t, inflation i:

• after tax: r × (1 − t)
• real: r × (1 − t) − i, approximately

The tax is proportional to the whole rate and the inflation subtraction is fixed, which means a high slab rate does disproportionate damage when r and i are close together. At a 30% slab, roughly three-tenths of your entire nominal return disappears before inflation is even considered.

Deposit rate	After 30% tax	Real at 5% inflation
6%	4.2%	−0.8%
7%	4.9%	−0.1%
8%	5.6%	+0.6%
9%	6.3%	+1.3%

A deposit paying 7% while inflation runs at 5% loses a high-rate taxpayer money in real terms. Nothing failed. The bank paid exactly what it promised, the deposit was insured, and the purchasing power still fell.

Working the problem

7% deposit, 5% inflation, 30% slab.

After tax: 7% × (1 − 0.30) = 4.9%.

Real return: the exact calculation is (1.049 / 1.05) − 1 = −0.095%, or about −0.1%. The approximation 4.9 − 5 = −0.1% agrees here because the numbers are small.

You are marginally poorer, having taken no risk and done nothing wrong.

The break-even inflation rate. Purchasing power is preserved when the after-tax return equals inflation: 4.9% = i, so inflation must be at or below about 4.9% for this deposit to hold its value.

Now compare that against the RBI's framework: the target is 4% CPI with a tolerance band of 2% to 6%. So this deposit preserves purchasing power when inflation is at target, and loses when inflation is anywhere in the upper half of the band — which is a band the RBI explicitly tolerates. The instrument is not merely vulnerable to an inflation shock; it fails inside the range the central bank considers normal.

For a saver in a low slab the picture changes entirely. At 5%, the after-tax return is 6.65% and real return is about +1.6%. The product's adequacy depends on the holder's tax position, not on the product — which is the most useful single conclusion in this subject.

What the long record shows

The administered PPF rate is the best available long series, and read naively it looks like a story of steady decline — 12.0% through the late 1980s and 1990s, 7.1% since April 2020.

But a falling nominal rate is not the same as a worsening deposit. The 1990s combined high nominal rates with high inflation, and the real return on a 12% deposit when inflation ran near double digits was unremarkable. Rates fell because inflation fell.

The honest reading is that nominal rates tell you nothing on their own. A saver who felt wealthy at 12% and feels cheated at 7.1% is comparing the wrong numbers; the comparison that matters is each rate against the inflation of its own era and the tax of its own era. This is Anchoring and framing from Behavioural finance in its most expensive form — the remembered 12% is an anchor that makes a possibly-better real return feel like a loss.

What has genuinely changed for the worse is narrower: PPF has stayed at 7.1% since 1 April 2020, which is a long time for an administered rate to sit still while prices did not.

When a deposit is still right

Nothing above argues against deposits. It argues against using them for the wrong job.

Money you will need within a few years. For an emergency fund or a known expense next year, a slightly negative real return is the correct price for certainty. Volatility matters more than inflation over short horizons, and a deposit removes it.

Money inside an exempt wrapper. Chapter 6 showed that the tax stage is where most of the damage occurs. PPF compounding at 7.1% untaxed produces a real return a taxable 7% deposit cannot reach.

Money for someone in a low slab. The table above becomes positive.

What deposits cannot do is carry a thirty-year goal. Over that horizon a persistent real return near zero means the money buys at the end roughly what it bought at the start, having been saved for three decades — and that is the argument for the rest of the course rather than against this subject.

The point

Tax is charged on the whole nominal interest with no inflation adjustment, and inflation then applies to what remains, so the order is nominal, then after-tax, then real. At a 30% slab a 7% deposit nets 4.9% and preserves purchasing power only if inflation stays below about 4.9% — which fails anywhere in the upper half of the RBI's own 2–6% tolerance band. The same deposit is comfortably positive for a low-slab saver, so adequacy is a property of the holder rather than the product. Falling nominal rates since the 1990s mostly track falling inflation, and remembering 12% as the better deal is an anchor rather than an analysis.