How income tax plays havoc on your savings

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This is a short post. I am only going to carry forward what I had listed last time to encompass the possibilities of income tax

Last time we spoke on how rupees 10000 deposited at three different interest rates caused such a major change in the outcome after 30 or 40 years

Now let’s look at what can eat into the interest rates that you deposit your money at. Suppose you were to deposit in a account which is giving you 10% interest per annum and which is going to compound the money over the next 30 years

Now see what happens if you have to pay income tax on the interest at 30%. In case of India this is the approximate Income Tax you pay on Bank deposits

Suddenly you see that 10% interest has become 7% (10%-30%*10%) interest,  You do not realise this when you are paying the income tax every year but in a compounding scenario which I showed you in the last post this impacts the same way as if you had had only 7% interest

So what you have to be bothered about is not only the rate of interest that you will get but also what are the Income Tax rules for that rate.  As you saw, even though you deposited with the idea that you would get 10% interest and therefore would end 40 years with 450000 amount of money, the reality is going to be that you will only end up with about a 150000

So while everything has a place ,even a Bank Fixed Deposit has a place in your financial planning you have to be aware that Bank fixed deposits actually earn net of tax a very little amount which may actually be less than the rate of inflation

You cannot be creating wealth if what you are an is less or equal to the rate of inflation

Till next time….

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