RBI’s Repo Rate Cut: What It Means For Your Fixed Deposit Returns And Tax Outgo

Last Updated:June 12, 2025, 08:03 IST

Banks have started cutting FD rates, reducing returns for retirees and conservative investors who rely on them

The Reserve Bank of India’s recent decision to reduce the repo rate by 50 basis points to 5.50% has created a ripple effect across the financial ecosystem. While the move is aimed at reviving economic momentum amid easing inflation, it carries notable implications for both borrowers and savers, particularly in terms of taxation on interest income.

What This Means for Borrowers

Home loan holders and other borrowers on floating interest rates will be among the immediate beneficiaries. A lower repo rate typically leads to reduced lending rates, meaning lower EMIs. For instance, a Rs 50 lakh home loan with a tenure of 20 years may see EMIs drop by approximately Rs 1,500 per month, offering relief to households juggling multiple expenses.

The Downside for Fixed-Income Investors

With a cumulative deduction of 100 basis points in the repo rate in 2025, banks have been steadily decreasing the fixed deposit interest rates.

According to SBI research fixed deposit rates have declined by 30 to 70 basis points since February 2025. Short and medium term fixed deposits are likely to witness the most serious rate cuts.

For example, a 1 year fixed deposit rate dropping from 7% to 6.5% would result in Rs 5,000 less annual interest on a Rs 10 lakh deposit.

So, the situation is less favourable for fixed deposit (FD) investors. Banks have already begun lowering FD interest rates, which means that savers, especially retirees and conservative investors who depend on FDs, may earn less on their investments, according to CA Shefali Mundra of ClearTax.

The real pinch comes when you factor in taxes. FD interest is fully taxable as per the investor’s income tax slab. So, not only do the returns fall due to lower rates, but post-tax earnings shrink even more.

“A 6% FD for someone in the 30% tax bracket effectively yields just 4.2%—barely ahead of inflation. With rate cuts, this post-tax return may drop further,” says Mundra.

While the repo rate cut itself doesn’t alter tax laws, its effect on interest income is undeniable. As deposit rates fall, so do the absolute interest earnings, which in turn reduces the tax liability in numerical terms. However, the relative tax burden increases, as a larger portion of the now-reduced interest income goes towards taxes.

Smart Strategies for FD Investors in a Falling Interest Rate Scenario

As interest rates continue to decline, fixed deposit (FD) investors may need to rethink their approach to safeguard returns. Here are some strategies to consider:

1. Ladder Your FDs:

Spread your investments across FDs with different maturities. This helps manage reinvestment risk and ensures liquidity at regular intervals.

2. Explore Government-Backed Savings Schemes:

Consider alternatives like the Senior Citizen Savings Scheme (SCSS) or National Savings Certificates (NSC), which often offer better returns and are less influenced by repo rate changes.

3. Look into Short-Term Corporate Bonds:

Top-rated corporate bonds with 2–3 year tenures may offer higher yields than traditional FDs, with relatively manageable risk.

4. Evaluate Hybrid Mutual Funds:

Hybrid funds, which invest in a mix of debt and equity, can provide better returns than FDs while keeping risk moderate.

5. Keep an Eye on Inflation:

With CPI inflation estimated at 3.7% for FY26, real returns from FDs may be negligible. Diversifying into equity mutual funds could help preserve purchasing power over the long term.

“The key is diversification and tax efficiency. Investors must weigh not just returns, but also the post-tax impact,” adds CA Mundra.

Aparna Deb

Aparna Deb is a Subeditor and writes for the business vertical of News18.com. She has a nose for news that matters. She is inquisitive and curious about things. Among other things, financial markets, economy, a…Read More

Aparna Deb is a Subeditor and writes for the business vertical of News18.com. She has a nose for news that matters. She is inquisitive and curious about things. Among other things, financial markets, economy, a… Read More

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