FD vs Debt Funds: The Post-2023 Reality
Before April 2023, debt mutual funds had a significant tax advantage over Fixed Deposits due to indexation benefits on long-term capital gains. But the 2023 Finance Act changed everything - debt funds are now taxed at your slab rate, just like FD interest.
Real Example: Priya invests ₹5 Lakhs for 3 years. FD gives 7%, Debt fund gives 7.5%. She's in the 30% tax bracket.
- FD: Maturity ₹6.13L, but she pays tax on interest every year. Post-tax value: ~₹5.52L (effective 4.9% return)
- Debt Fund: Maturity ₹6.21L, tax paid only at exit (₹36K). Post-tax value: ~₹5.68L (effective 5.25%)
Even with similar tax rates, debt funds earn ₹16,000 more because Priya's full corpus compounds without yearly TDS drag!
How Does This Calculator Work?
FD Calculation (Taxed Yearly)
- Interest is calculated yearly using compound interest
- Each year, tax is deducted from interest at your slab rate
- Only post-tax interest is added to principal for next year's compounding
- This simulates the real-world impact of TDS and yearly taxation
Debt Fund Calculation (Taxed at Exit)
- Full corpus compounds at expected return rate without any deductions
- At the end, total gains are calculated (Maturity - Principal)
- Tax at slab rate is applied on gains (post-April 2023 rule)
- Post-tax value = Maturity - Tax on gains
Key Formulas Used
FD Maturity (Pre-Tax)
FV = P × (1 + r)^n
Simple compound interest annually.
FD Post-Tax (Yearly Tax Drag)
Effective Rate = Pre-tax Rate × (1 - Tax Rate)
Post-Tax FV = P × (1 + Effective Rate)^n
When tax is deducted yearly, your effective compounding rate reduces.
Debt Fund Post-Tax
Post-Tax = Maturity - (Gains × Tax Rate)
Tax is applied only on gains (Maturity - Principal), and only at redemption.
Key Differences: FD vs Debt Funds (2025-26)
| Feature | Fixed Deposit | Debt Fund (Post-Apr 2023) |
|---|---|---|
| Tax Rate | Slab Rate | Slab Rate |
| Tax Timing | Yearly (accrual) | At redemption only |
| TDS | Yes (10% if interest > ₹40K) | No TDS |
| Loss Offset | Not possible | Yes (capital losses) |
| Returns | Fixed (6-7.5%) | Variable (7-9%) |
| Risk | Zero (insured up to ₹5L) | Low (credit risk) |
| Liquidity | Penalty on early withdrawal | Usually exit load for 30 days only |
Benefits & When to Choose Each
Choose FD When:
- You need guaranteed returns with zero risk
- Building an emergency fund - safety is paramount
- Short-term parking (1-2 years) for known expenses
- You're a senior citizen who qualifies for higher FD rates (7.5-8%)
- You're in a low tax bracket (5-10%) where tax drag is minimal
Choose Debt Funds When:
- Investment horizon is 3+ years - tax deferral compounds
- You're in a high tax bracket (30%) where no TDS is valuable
- You want flexibility to offset losses from other investments
- You're comfortable with slight credit risk for potentially higher returns
- You want better liquidity without premature withdrawal penalties
The Verdict: It's Closer Than Before
Post-2023, the tax advantage of debt funds has shrunk significantly. The main remaining benefits are:
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Decision Framework:
• 1-2 years: FD is likely better (guaranteed, no market risk)
• 3+ years: Debt fund might edge out due to tax deferral and no TDS
• Emergency fund: Always FD (liquidity + safety)
• High tax bracket + 3+ years: Debt fund (tax deferral compounds)
Frequently Asked Questions (FAQs)
Are debt funds better than FD after 2023 tax changes?
Not necessarily. The tax advantage has significantly reduced. Both are now taxed at slab rate. However, debt funds still offer: (1) Tax deferral - pay tax only at redemption vs yearly for FD, (2) No TDS on redemption, (3) Ability to offset capital losses. For short-term, FD may be simpler; for 3+ years, debt funds have slight advantages.
What is the tax on debt mutual funds in 2025-26?
For debt funds purchased after April 1, 2023, all gains are taxed at your income tax slab rate regardless of holding period. There's no LTCG benefit or indexation. This is similar to FD interest taxation, but the timing differs (redemption vs yearly).
Is TDS applicable on debt mutual funds?
No, TDS is not deducted on debt mutual fund redemptions for resident Indians. Banks deduct 10% TDS on FD interest exceeding ₹40,000/year (₹50,000 for seniors). This is a key advantage for debt funds - your full corpus keeps compounding without yearly TDS drag.
Which is better for 5 years: FD or debt funds?
For 5 years, debt funds likely outperform due to: (1) Tax deferral - your entire corpus compounds without yearly tax, (2) Potentially higher returns (7-9% vs 6-7.5%), (3) No TDS drag. However, debt funds carry credit risk. If you need guaranteed safety, FD is better despite lower returns.
Should I invest in debt funds or keep money in FD?
It depends on your goals. Choose FD for: emergency funds, guaranteed returns, risk-free savings. Choose debt funds for: 3+ year horizon, higher potential returns, tax deferral, flexibility to offset losses. After 2023 changes, the gap has narrowed - decision now depends more on risk appetite than pure tax efficiency.