Money and tax
SIP vs FD: What Each Really Returns After Tax, With Worked Examples
By the AllToolsDesk team · Updated
Comparing an FD at 6.5% with a mutual fund SIP that might earn 12% misses half the story. The two are taxed very differently: FD interest is taxed at your slab rate every year, while gains on equity funds are taxed at lower flat rates, only when you sell, and the first ₹1.25 lakh of long-term gains each year is tax-free.
This guide sets out the tax rules for FY 2026-27 and then works through two examples, a lump sum and a monthly investment, so you can see what each option leaves in your hands after tax. The equity returns used are assumptions for illustration, not forecasts.
How each one is taxed in FY 2026-27
| Bank FD or RD | Equity mutual fund | |
|---|---|---|
| What is taxed | Interest | Gain on units you sell |
| Rate | Your slab rate | Held over 12 months: 12.5% on long-term gains above ₹1.25 lakh a year. Held 12 months or less: 20% |
| Health and education cess | 4% of the tax | 4% of the tax |
| When | Every year as interest accrues, even on a cumulative FD | Only in the year you redeem |
| TDS | 10% once interest from one bank crosses ₹50,000 in a year (₹1 lakh for senior citizens) | None for resident investors |
With cess, the effective FD tax rate is 10.4% in the 10% slab, 20.8% in the 20% slab and 31.2% in the 30% slab. On equity funds it is 13% on long-term gains above the exemption and 20.8% on short-term gains. TDS on an FD is not an extra tax; it is credited against the tax you owe when you file your return.
These rules apply to equity-oriented funds, which hold at least 65% in Indian shares. Gains on debt mutual funds bought after 1 April 2023 are taxed at your slab rate, much like FD interest. The examples ignore surcharge, which applies only above ₹50 lakh of income.
Example 1: ₹5 lakh for 5 years
Put ₹5,00,000 in a 5-year FD at 6.5%, compounded quarterly. It matures at ₹6,90,210, so the interest is ₹1,90,210 (an effective 6.66% a year). The same ₹5 lakh in an equity fund is shown at three assumed yearly returns. All units are held for more than 12 months, so the whole gain is long-term.
| Option | Value at 5 years | Tax | You keep |
|---|---|---|---|
| FD at 6.5%, 10% slab | ₹6,90,210 | ₹19,782 | ₹6,70,428 |
| FD at 6.5%, 20% slab | ₹6,90,210 | ₹39,564 | ₹6,50,646 |
| FD at 6.5%, 30% slab | ₹6,90,210 | ₹59,345 | ₹6,30,864 |
| Equity fund at 8% | ₹7,34,664 | ₹14,256 | ₹7,20,408 |
| Equity fund at 10% | ₹8,05,255 | ₹23,433 | ₹7,81,822 |
| Equity fund at 12% | ₹8,81,171 | ₹33,302 | ₹8,47,869 |
Working for the 12% case: the gain is ₹3,81,171. The first ₹1,25,000 is exempt, leaving ₹2,56,171. Tax at 12.5% plus 4% cess is 13% of that, or ₹33,302.
The tax gap matters most when returns are close. If the fund earned only 6% a year, it would be worth ₹6,69,113 and the tax would be ₹5,735, leaving ₹6,63,378. That is less than the FD leaves someone in the 10% slab (₹6,70,428) but more than it leaves someone in the 30% slab (₹6,30,864). The higher your slab, the lower the return an equity fund needs to beat an FD after tax.
Example 2: ₹10,000 a month for 10 years
Now invest ₹10,000 at the start of every month for 10 years, ₹12 lakh in all. On the deposit side, a recurring deposit at 6.5% compounded quarterly grows to ₹16,89,912, of which ₹4,89,912 is interest. On the fund side, a SIP is shown at three assumed returns and redeemed in full after 10 years.
One detail changes the SIP tax: each instalment has its own holding period. When you redeem everything at the end, the 12 instalments made in the last year are 12 months old or less, so their gain is short-term and taxed at 20.8%. All earlier instalments are long-term.
| Option | Value at 10 years | Tax | You keep |
|---|---|---|---|
| RD at 6.5%, 10% slab | ₹16,89,912 | ₹50,951 | ₹16,38,961 |
| RD at 6.5%, 20% slab | ₹16,89,912 | ₹1,01,902 | ₹15,88,010 |
| RD at 6.5%, 30% slab | ₹16,89,912 | ₹1,52,853 | ₹15,37,059 |
| SIP at 8% | ₹18,41,657 | ₹67,581 | ₹17,74,076 |
| SIP at 10% | ₹20,65,520 | ₹96,790 | ₹19,68,730 |
| SIP at 12% | ₹23,23,391 | ₹1,30,422 | ₹21,92,969 |
Working for the 12% SIP: the total gain is ₹11,23,391. Of that, ₹8,093 comes from the last year's instalments and is taxed at 20.8% (₹1,683). The remaining ₹11,15,297 is long-term; after the ₹1,25,000 exemption, ₹9,90,297 is taxed at 13% (₹1,28,739). Total tax: ₹1,30,422.
You can reproduce the deposit figure with the Compound Interest Calculator by entering a ₹10,000 monthly deposit, and the SIP figures with the SIP Calculator.
What the tables do not show
- Risk. The FD rate is fixed when you book it. Equity fund returns are not; over three to five years they can be below an FD or negative, and the examples assume a smooth return every year, which never happens.
- Timing of tax. FD interest is taxable every year even if it is reinvested, so you pay tax on interest you have not received yet. Fund gains are taxed only when you sell, so the untaxed amount keeps compounding.
- Low incomes. Under the new regime there is no tax if your total income stays within ₹12 lakh, thanks to the rebate. If your FD interest keeps you inside that limit, the FD's tax disadvantage disappears.
- Access to money. Breaking an FD early usually costs a reduced rate. Many equity funds charge an exit load, often 1%, if you redeem within a year; check the scheme's documents.
Practical ways to keep more
- Use FDs for money you may need within about three years, and for your emergency fund. Use equity SIPs for goals five or more years away.
- Use the ₹1.25 lakh exemption every year. Redeeming enough units to book about ₹1.25 lakh of long-term gain, and reinvesting, raises your cost and cuts future tax.
- Split a large redemption across two financial years, for example part in March and part in April, so you get the exemption twice.
- Spread large deposits across banks only for convenience, not to avoid tax: interest below the TDS limit is still fully taxable and must be shown in your return.
This guide explains tax arithmetic and is not investment advice. Rates of return are assumptions; FD rates vary by bank and change with RBI policy.