|
  |
|
|
How Tax & Inflation eat my Investments' Return
By Aditya Gupta
Hi All, Hmm.. tough time, specially with these monsters called "Tax" and ever rising "Inflation" around. They resemble "Piranhas" in eating up return on my investments. Here, how they are... Impact of Tax alone Considering only "Income Tax" for now, suppose I invest $1000 in 1 year Bank Fixed Deposit fetching around 10% nominal interest rate compounded annually and my little income falls into 10% tax slab. After 1 year, invested $1000 fetching 10% return becomes (1+0.10)*$1000 = $1100,
making my nominal gain $1100-$1000 = $100 But due to tax, Gain after Tax = $100(1-0.10)= $90
i.e my effective return(after tax) will be $90/$1000 = 9% So, tax eats up my 1% return for the given scenario.
Impact of Inflation alone Considering same investment of $1000 in 1 year Bank Fixed Deposit fetching around 10% nominal interest rate compounded annually and assuming annual inflation rate of 10%. After 1 year, invested $1000 fetching 10% return becomes (1+0.10)*$1000 = $1100 But due to inflation, the purchasing power of $1100 after one year is same as purchasing power of $1100/(1+0.10) = $1000 right now. That means, with 10% inflation and 10% return on investment, my effective return is 0%, yes a big "ZERO" or In other words, my purchasing power remains the same. So, inflation eats up my whole return for the given scenario.
Combined Impact of Tax and Inflation Considering same example, investing $1000 in 1 year Bank Fixed Deposit fetching around 10% nominal interest rate compounded annually, my little income falls into 10% tax slab and assuming annual inflation rate of 10%. After 1 year, invested $1000 fetching 10% return becomes (1+0.10)*$1000 = $1100,
making my nominal gain $1100-$1000 = $100 But due to tax, Gain after Tax = $100(1-0.10)= $90, and after-tax inflow will be $1090. Now, its reduced purchasing power due to inflation is given by $1090/(1+0.10) = $990.91, i.e net return after tax and inflation will ($990.91-$1000)/$1000 = -0.91% It means, in actual I am losing my money(by 0.91% a year), if I invest in current scenario. So, Does it mean that I stop investing ??? No, because if I don't invest, then considering 10% inflation rate, my uninvested amount $1000 becomes $1000/(1+0.10) = $909.09 after 1 year and that means, I'll be losing my money/purchasing power by 9% which is 10 times higher than 0.9%. I should keep on investing and try to invest in an alternative that can fetch higher return to nullify the combined effect of tax and inflation. It should fetch return higher than {[(1-tax rate)*nominal interest rate]- inflation rate}/(1+inflation rate), in order to have effective gain over an investment.
Be a smart investor rather than being just an investor... Hope it was worth to read...
Waiting for your precious comments and opinions... Signing off for now... Have a nice day ahead... !! |
|
 |
|
Please login or sign up to rate this intel.
Please login or sign up to add a comment.
The copyright for this content entitled "How Tax & Inflation eat my Investments' Return" has been specified by the contributor as:
Creative Commons Attribution-Share Alike 3.0
Details 
This content may be copied, distributed, and modified, as long as a) the original author is acknowledged with a link back to the content page, and b) if the work is modified, the result is distributed with this same license.
If you use this content according to the license specified, you must link to the following URL:
http://adigupta19.qondio.com/
|
|
May, 2012
2008
January, February, March, April, May, June, July, August, September, October, November, December
2009
January, February, March, April, May, June, July, August, September, October, November, December
2010
January, February, March, April, May, June, July, August, September, October, November, December
2011
January, February, March, April, May, June, July, August, September, October, November, December
2012
January, February, March, April, May
|
|
Not a member yet?
Qondio is a powerful network for making it online. If you have a website to
promote, we can help.
Sign up and get in on the action.
|
|
Welcome to Qondio! Discover the awesome power this network can deliver by going to our About page. Or you could skip straight to the Sign Up form.
|
|
