The FD Is Not the Only Way to Earn Yield in India Anymore

What Indian fixed income really pays you, and what it quietly charges.

On 28 September 2026, the Government of India was paying 7.20% a year to borrow money for ten years. Meanwhile SBI, India's largest bank, was offering NRIs 6.40% on a two-year NRE fixed deposit. So the safest borrower in the country was paying you more than its biggest bank.

That gap is the whole story of this piece. Every extra rupee of yield in India is payment for something you give up. Once you can name what you are giving up, you stop hunting for the highest rate and start picking the right one.

Why yields are worth your attention this month

Indian bond yields just touched a two-year high, and three forces pushed them there.

The first is oil. Brent crude, the world's benchmark oil price, is near $107 a barrel because strikes on Iran have shut the Strait of Hormuz, the narrow channel between Iran and Oman that Gulf oil tankers must sail through. India buys most of its oil from abroad, so costlier oil makes almost everything costlier.

America added the next push. On 16 September, the US Federal Reserve raised rates for the first time since 2023, and the US 10-year Treasury yield climbed to 5.24%, its highest since 2007. When safe US bonds pay more, global money asks India to pay more too.

The last force sits closer to home. Indian consumer inflation rose from 2.75% in January to 4.82% in August, while the RBI has kept its policy rate at 5.25% since December 2025. For savers, that is the useful side of bad news: new money now gets paid more than it did a year ago.

The menu beyond the FD

Think of Indian fixed income as a ladder. The bank FD is the bottom rung, and every rung above it pays a little more because it asks you to carry one more risk.

Sources: CCIL via CEIC (10-year G-sec, 28 Sep 2026), Investing.com (5-year G-sec, 25 Sep 2026), BankBazaar (SBI NRE FD), BondScanner (AAA corporate ranges)

Government securities, or G-secs, are loans you make to the Government of India, and the 5-year one yields about 6.82%. Their risk is duration, which means how long your money is tied to today's rate. Bond prices and yields sit on opposite ends of a seesaw, so when yields rise, the bonds you already own lose value.

Corporate bonds add credit risk, the chance a company fails to pay you back. That is why a AAA-rated, state-owned lender like REC pays around 7.0% to 7.5%, while AAA private lenders such as Bajaj Finance pay 7.4% to 8.3%.

Target maturity funds (TMFs) sit in between. They hold a basket of bonds until one fixed date and then hand your money back, a bit like an FD you can sell on the stock exchange. The best known is the Bharat Bond series, which the government launched in December 2019. Its April 2033 fund shows the seesaw in action: it returned just 1.46% over one year, against 6.60% a year over three. If you hold a TMF to its end date, you still earn close to the yield you bought at, but selling early locks in the seesaw's hit.

The NRI catch, part one: tax

For an NRI, the pre-tax rate is the wrong number to compare. Interest on an NRE deposit, the rupee account NRIs fund with money earned abroad, is fully tax-free in India under Section 10(4)(ii) of the Income Tax Act. Interest from Indian bonds gets no such pass. Tax is deducted at 30% plus cess for NRIs, which comes to 31.2%, and since April 2023, gains on debt mutual funds are taxed at your slab rate, with no long-term discount.

Sources: BankBazaar (SBI NRE FD 6.40%), CCIL via CEIC (G-sec 7.20%), Finnovate (31.2% NRI TDS, 12.5% UAE treaty rate)

So a 7.20% G-sec leaves an NRI about 4.95% once that tax is cut. The Double Taxation Avoidance Agreement (DTAA), a treaty between India and the country you live in, can lower the Indian rate, to 12.5% for UAE residents for example. Even then the bond keeps about 6.30%, a touch under the tax-free FD.

One caveat matters for Americans in particular. The US taxes its residents on income earned anywhere, so NRE interest is taxable there even though India leaves it alone. For NRIs in zero-tax places like Dubai, though, the plain FD earns its spot, and a bond has to win on something other than rate.

The NRI catch, part two: the rupee

One number rarely shows up in yield comparisons, and for an NRI it can matter more than the rate itself. On 30 September 2016, one US dollar bought 66.66 rupees. On 28 September 2026, it bought about 95.95. That is the rupee losing roughly 3.7% a year against the dollar, on average, for a whole decade.

Sources: Business Standard (USD/INR 66.66, 30 Sep 2016), MTFX (USD/INR 95.95, 28 Sep 2026), CCIL via CEIC (India 10-year), Trading Economics (US 10-year, 29 Sep 2026), Business Today (FCNR(B) 5.5% to 7%)

Now run the 7.20% G-sec through a dollar lens. If the rupee keeps sliding at that pace, a dollar-based investor keeps about 3.4% a year, while a US Treasury pays 5.24% with no currency risk at all. The gap between Indian and US 10-year yields has shrunk below 2 percentage points, which is less than the rupee's average yearly fall.

NRIs have already told us what they want. Between June and August, the RBI let Indian banks offer FCNR(B) deposits, fixed deposits held in dollars rather than rupees, at 5.5% to 7%, tax-free in India. The diaspora poured in $133 billion, and the window shut a month early. The trick was that the RBI paid the currency hedging cost itself. That $133 billion is a vote for Indian yield without the rupee attached, and a reminder of how much that hedge normally costs.

Where Indian fixed income fits

The answer depends on the currency of your future bills. If you will spend rupees, say on your parents' care, a flat in Pune or retiring in India, a rupee bond works as a hedge. The rupee's slide does not hurt you, because the bill slides with it. If your future bills are in dollars, the bond has to beat a Treasury after tax and after the rupee, and today that bar is high.

Global money has made its call. Since June 2024, Indian government bonds have sat inside JP Morgan's emerging market bond index at a 10% weight, so funds that track that index around the world now hold India by default. Access has opened up for you too: NRIs can buy G-secs directly on RBI Retail Direct, the central bank's own platform, with no brokerage.

Before you buy any yield product, run it through five checks.

A five-question check for any Indian yield product

The highest rate on the screen is only a price. Before you take it, know what you sold to get it.