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How debt funds score over fixed deposits

February 4, 2013 1 comment

ILLUSTRATION:
Suppose Mr. A. invests 10,00,000rs. in fixed deposits for 10 years renewing every 3-5 years
averaging 9% returns before tax. At end of 10 years because of paying tax every year in the 30%
tax slab the returns that Mr. A gets is 1888000rs. only i.e. a return of 6.56% after tax.
Suppose Mr. A invests the same amount in debt funds for 10 years and averages 8.5% returns
then his return is 22,60,000rs. before paying tax. The maximum tax he will pay if we do not
consider indexation benefit is 1,26,000rs. whereby his net returns is 21,34,000rs. and per annum
gains of 7.87% per annum after tax. In this case we are not considering indexation. In case we
consider indexation benefit the tax will be much less and net returns much higher.
All in all Mr. A, after tax has added 2134000-1888000 = 2,46,000rs. which is 24% of his original
investment by just changing his way of investing in fixed income securities using the beautiful
taxation laws given to us by the Income Tax Act.
In the same example:
If returns generated are 8.5% but taxation is calculated with indexation(approx 5%)
His tax will be 63000rs. AND after tax returns will be 21,97,000 which is 8.18% after tax.
If returns generated are 9% and tax is calculated with indexation(approx 5%)
His accumulated amount will be 2367363rs. his tax on the same will be 68368 and after tax returns will
be 2298995rs. which comes to post tax 8.68% per annum.
WHICH IS 2298995‐1888000 = Rs. 4,10,000 extra.
EFFECTIVELY JUST BY USING TAX EFFICIENT METHOD OF INVESTING ONE CAN GAIN 24 TO41% over
one’s investment in just 10 years without taking any undue risk.
THE BEST PART IS THAT THIS IS JUST ANOTHER WAY OF INVESTING IN FIXED DEPOSITS USING THE
TAXATION STRUCTURE TO OUR ADVANTAGE. THERE IS NO EQUITY INVOLVED IN 100% DEBT FUNDS.

Categories: Save Tax

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Categories: Save Tax
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