Bonds, fixed deposits and debt funds: the same 7% means three different things
Coupon, yield and past return are three different numbers wearing the same percentage sign. What each one is actually telling you.
Put a fixed deposit, a bond and a debt fund side by side and all three can show you 7%. The number is the same. What it promises is not, and the difference is not a technicality. It decides what you actually end up with.
Three sevens, three meanings
A fixed deposit at 7% is telling you what the bank has contracted to pay. Barring the bank failing, that is what you get.
A bond quoted at a 7% yield is telling you something conditional: this is what you would earn if you bought it at today's price and held it until it matures. Change the price you pay and the yield changes with it. Sell before maturity and you get whatever the market pays that day, which may be more or less than you put in.
A debt fund showing 7% is telling you about a period that has already finished. It is a record, not a rate. Nothing about it carries forward, and the fund is not promising to repeat it.
One is a promise, one is arithmetic that holds only if you hold on, and one is history. They are not comparable until you make them comparable.
Then tax gets involved
Interest from a fixed deposit is added to your income and taxed at your slab. For somebody in the 30% bracket, 7% becomes roughly 4.9% before you have done anything at all.
Bond interest is generally treated the same way. Where bonds differ is on the capital side: if you sell above what you paid, that gain is taxed under its own rules rather than as interest.
Debt fund taxation changed in 2023 and is now slab-rate for most schemes, which removed the indexation advantage they used to carry. The planning point that survives is timing rather than rate, because you are taxed when you redeem rather than every year as interest accrues.
None of this makes one option better than another. It makes the headline rate the wrong thing to compare.
And then, when can you actually have it back
This is the part people discover at the worst moment, which is when they need the money.
- Fixed deposit
- Breakable, usually at a penalty of half a percent to one percent on the rate you had. You know the cost in advance.
- Bond
- Sellable only if somebody is buying. Liquidity in Indian retail bonds is thin, and the price you are quoted on a bad day can be well below what the yield calculation assumed.
- Debt fund
- Usually redeemable in a working day or two at that day's NAV, with an exit load on some schemes if you leave early.
The number worth comparing
Take the headline rate, apply your own tax slab to it, and then ask what it costs you to get out early. What is left is the only figure that means the same thing across all three.
Our post-tax yield calculator does the first half of that arithmetic. The second half is a question about your own circumstances, and it is worth answering before you commit rather than after.