Nominal vs Real Return (2026): Why Your 7% FD May Be Losing Money

If inflation is 6% and your FD gives 7%, are you actually building wealth?

Imagine you find a ₹500 note in an old jacket from 10 years ago. You smile—it feels like "free money." But then you walk into a store.

Ten years ago, that ₹500 could have filled half your bike's fuel tank. Today? It barely covers a few litres. The note is the same, but its power has vanished. This "shrinking" of money is the core problem with most safe investment advice in India. We focus on the number on the cheque (Nominal Return) rather than what that cheque can actually buy (Real Return).

1. The Illusion of 7% Interest

Let’s say you invest ₹1 Lakh in a Fixed Deposit (FD) offering 7% interest per annum. You get a text message from the bank: "Credited ₹7,000 interest."

You feel richer. You might even order a pizza to celebrate. But here is the silent reality: while your money grew by 7%, the cost of living (inflation) grew by 6%. The milk, petrol, and school fees you need to pay for are now more expensive.

Your actual gain isn't ₹7,000. It is the tiny gap between your interest rate and the inflation rate. If you ignore this gap, you aren't investing; you are just maintaining the status quo. Check this using our Inflation Calculator.

2. Nominal vs Real Return

Think of it like your job salary vs. your in-hand salary after tax.

1. Nominal Return (The Gross Salary)

This is the "headline" rate. It is the percentage increase in the currency value of your investment. It looks good on paper, but it ignores the "inflation tax."

2. Real Return (The In-Hand Salary)

This is the increase in your purchasing power. It answers the most important question: "Can I actually buy more stuff today than I could yesterday?"

3. The Math: The Fisher Equation

Most people calculate real return by simply subtracting inflation from the interest rate (7% - 6% = 1%). While this is a quick mental hack, it's technically inaccurate for larger numbers or longer periods.

The mathematically accurate way is known as the Fisher Equation. It divides growth rather than subtracting it:

This formula reveals a harsh truth: as inflation gets higher, your real return drops faster than you think. You need your money to run faster just to stay in the same place.

Example 1 (Low difference): Nominal = 8%, Inflation = 6%

Simple subtraction: 8% – 6% = 2%

Fisher: (1.08 / 1.06) – 1 ≈ 1.89%

Very close — the approximation works well for small gaps.

Example 2 (Higher difference): Nominal = 15%, Inflation = 8%

Simple: 15% – 8% = 7%

Fisher: (1.15 / 1.08) – 1 ≈ 6.48%

The gap widens — over long periods, this small difference compounds significantly.

4. Asset Class Comparison (India)

Let's look at the report card of popular Indian investments. When you apply the Real Return logic, "safe" investments often look risky because they lose value over time.

* Long-term averages; assumes 6% average inflation and 30% tax bracket for debt. Equity taxed at 12.5% LTCG above ₹1.25 lakh.

5. Step-by-Step Calculation Examples

Let’s walk through real-world scenarios for a ₹10 lakh investment over 10 years.

• Scenario 1: FD at 7.2% nominal, 6% inflation
  Future nominal value: ₹10 lakh × (1.072)¹⁰ ≈ ₹20.3 lakh
  Purchasing power needed to stay even: ₹10 lakh × (1.06)¹⁰ ≈ ₹17.9 lakh
  Real gain in purchasing power: ₹20.3 lakh / ₹17.9 lakh ≈ 13.4% total → ~1.3% annual real return
• Scenario 2: Equity fund at 12% nominal, 6% inflation
  Future nominal value: ₹10 lakh × (1.12)¹⁰ ≈ ₹31 lakh
  Real purchasing power: ₹31 lakh / ₹17.9 lakh ≈ ₹17.3 lakh → 73% total real gain → ~5.6% annual real return

These numbers show why even modest differences in real return create massive gaps over time.

6. Post-Tax Real Returns

Taxes are the second silent killer. Debt returns (FD, savings) are taxed at your slab rate (up to 30% + cess), while equity and gold enjoy lower LTCG tax. You can verify this using our Capital Gains Calculator.

Example (30% tax bracket):

• FD 7.2% nominal → Post-tax nominal ≈ 5% → Real return ≈ -1% (at 6% inflation)
• Equity 12% nominal → Effective tax much lower → Real return ≈ 5–6%

Tax-free options like PPF become far more attractive on a real-return basis in high tax brackets.

7. The Power of Compounding Real Returns

Small differences in real return compound dramatically over long horizons (e.g., retirement planning).

Aiming for 6–8% real return (historically achievable with equity-heavy portfolios) can turn modest savings into substantial wealth.

8. Historical Real Returns in India

Over the last 20 years (2005–2025), India’s average CPI inflation has been ~5.8–6%. In the same period:

• Nifty 50 CAGR: ~13–14%
• Gold CAGR: ~13–14% (strong recent performance)
• Fixed Deposits average: ~6.5–7.5%

This delivered real returns of 7–8% for equity and similar for gold — far superior to debt. However, past performance is not a guarantee, and equity comes with volatility.

Based on RBI CPI data and NSE historical returns (2005–2025 averages).

9. Strategies to Beat Inflation

1. Allocate to growth assets: Increase equity exposure for longer horizons (10+ years).
2. Diversify: Mix equity, gold, and debt to balance risk and inflation protection.
3. Use tax-efficient vehicles: PPF, EPF, equity mutual funds/ETFs.
4. Rebalance regularly: Maintain your target allocation.
5. Plan with conservative inflation: Use 6–7% long-term inflation even if current rates are lower.

10. Conclusion

Nominal returns grab headlines, but real returns build wealth. In India, where inflation has historically averaged 6%, focusing only on the headline rate can quietly erode your purchasing power — especially after taxes.

Shift your mindset: always ask “What will this money actually buy in the future?” Use tools, diversify into growth assets, and let compounding do the heavy lifting. Your future self will thank you.