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Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

7 percent: the interest rate on State Bank of India fixed deposits

A return of 7% on long- to mid-term deposits may sound reasonable. But wait till you calculate the post-tax return and compare it with rates offered by other banks

This is the interest rate offered by the State Bank of India, the country’s largest lender, on fixed deposit (FD) in the 3- to 10-year maturity basket, effective from 1 September 2016.

This means for every Rs100 that you deposit with the bank, you will earn Rs7 annually, pre-tax, if applicable. The slide in FD rates from the largest lender is an indicator that the deposit rates may fall further in the banking sector.

SBI’s FD interest rate is 90 basis points lower than 5-year post office term deposit rates. SBI’s less-than-one-year to three-year FD rate is the range of 7%-7.50%, which was last seen in 2010. One basis point is one-hundredth of a percentage point.

Even the major private sector banks are offering similar interest rates in the range of 7-7.25%. For instance, ICICI Bank Ltd, the largest private sector bank, and HDFC Bank Ltd are offering 7.25% interest on FDs in the 1- to 10-year maturity basket.

For an individual falling in the 30.9% tax bracket, 7% annual return from an FD would get reduced to a net return of 4.84% post tax. Now, let’s factor in inflation, say 5.24%—the average CPI inflation from August 2015 to August 2016. In this case, a post-tax return of 4.84% for individuals in the highest tax bracket will translate to a negative figure of -0.4%. An investment is good when it yields a positive return post tax and post inflation. If it’s negative, it means your savings and investments are shrinking instead of growing in terms of purchasing power.

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