Key points
- At 6% inflation, ₹1 lakh today will buy only about ₹31,000 of goods in 20 years.
- Real return ≈ (1 + nominal return) ÷ (1 + inflation) − 1.
- A 7% FD earns about 0.9% in real terms before tax — and loses about 1.1% a year after tax at the 30% slab.
- Long-term goals need investments that can beat inflation after tax.
What inflation does to money
Inflation is the rate at which prices rise. When it is 6% a year, something that costs ₹100 today costs ₹106 next year. Money that sits still loses purchasing power every year.
| Years from now | Cost of what ₹1 lakh buys today | What ₹1 lakh will buy then |
|---|---|---|
| 10 | ₹1,79,085 | ₹55,839 |
| 20 | ₹3,20,714 | ₹31,180 |
| 30 | ₹5,74,349 | ₹17,411 |
Nominal vs real returns
The nominal return is what an investment pays; the real return is what it earns after inflation. The exact formula is real return = (1 + nominal) ÷ (1 + inflation) − 1. A quick approximation is nominal return minus inflation.
A 7% FD with 6% inflation: (1.07 ÷ 1.06) − 1 ≈ 0.94% a year in real terms. After tax at the 30% slab plus cess, the 7% becomes about 4.8%, and the real return is about −1.1% — the deposit is slowly losing purchasing power.
Why it matters for goals
- Plan goals in future rupees. ₹50,000 a month of expenses today becomes about ₹2.15 lakh a month in 25 years at 6%.
- Education costs have historically risen faster than general inflation, often 8%–10% a year.
- Retirement lasts 25–30 years, during which inflation keeps working; a pension that does not rise loses most of its value.
Protecting your money from inflation
- Hold only what you need for emergencies and near-term goals in cash and deposits.
- For goals more than five years away, use investments with a history of beating inflation, such as diversified equity funds, alongside PPF, EPF and NPS.
- Increase SIPs and savings each year as your income grows, so contributions keep pace with prices.
- Review goal amounts every few years using current costs.
How inflation is measured in India
The headline measure is the Consumer Price Index (CPI), published monthly by the National Statistics Office. The RBI’s monetary policy targets CPI inflation of 4%, within a band of 2% to 6%. Your personal inflation can be quite different: households spending heavily on education, healthcare or rent often see costs rise faster than the CPI.
Real returns on common savings options
| Option | Nominal return | Real return |
|---|---|---|
| Savings account (3%, taxable) | ≈ 2.1% after tax | ≈ −3.7% |
| Bank FD (7%, taxable) | ≈ 4.8% after tax | ≈ −1.1% |
| PPF (7.1%, tax-free) | 7.1% | ≈ +1.0% |
| Diversified equity (assumed 12%, before tax) | 12% | ≈ +5.7% |
Only investments whose after-tax return beats inflation actually grow your purchasing power. That is why long-term goals usually need some exposure to growth assets, while deposits are best for safety and short-term needs.
Frequently asked questions
What inflation rate should I use for planning?
A common assumption is 6% a year for general expenses, which is above the RBI’s 4% target and builds in a margin. Use 8%–10% for education and healthcare.
Does gold protect against inflation?
Over long periods gold has often kept pace with inflation in rupee terms, but with long stretches of poor returns. It is usually held as a small part of a portfolio rather than as the main inflation hedge.
Is a savings account safe from inflation?
The money is safe from loss, but at typical savings rates of 2.5%–4% it loses purchasing power whenever inflation is higher. Keep only emergency and near-term money there.