Free Press Journal

When investing take care of inflation When Investing Take Care of Inflation


The following is an extract from a communiqué received by us from a reader who read our last week’s article, entitled, ‘How to Earn Tax Free Income’ — For the sake of saving space, we have paraphrased the same :

Reader’s note : I am scheduled to retire next year, after having reached the age of 60 years and becoming a senior citizen. Coincidently, I felt that you have addressed this article only to me since all the figures you have used are exactly applicable to me.

(For those readers who have missed last week’s article, here is the gist of the same: “Say you invest Rs 1 crore in a debt based fund and it grows by 10% in one year, leaving Rs 110 lakh in the kitty. If you withdraw the entire amount of immediately after 1 year, the growth of ` 10 lakh will be treated as short-term capital gains and taxed at the normal rate applicable to your tax zone. The tax applicable is not on the entire amount of withdrawal of Rs 110 lakh but only on its growth of Rs 10 lakh. This is simple to understand. What most of investors fail to understand is that on similar lines, if you don’t withdraw the entire capital but only the growth part of it i.e. if you withdraw only the Rs 10 lakh of growth, thus keeping your original investment intact, you would have in essence withdrawn Rs 9 lakh from capital and Rs 1 lakh from the growth thereon. It is this Rs 1 lakh that gets taxed at the rate applicable to you. And since the minimum tax exemption limit is Rs 2.50 lakh, the entire taxable growth would be in effect tax-free! This would be the situation for the initial period of 3 years. Thereafter, you can apply indexation to arrive at the taxable income. And once again you will find that on account of the additional benefit of indexation, the growth continues to remain tax-free.”)

Yes, I am scared to invest in equities because I strongly feel that it is a gamble. When I buy a scrip, someone else is selling. Over time, either I gain and he loses or vice versa. If you take the entire community of such gamblers, it ends up poorer over time  because both the buyer and seller have to pay brokerage,  GST thereon, Exchange Transaction Charges, SEBI Turnover Fees, Stamp Duty, etc. etc.

That was the reason why I was planning to invest the entire amount in bank FDs, earning at most 7.5% assured returns, but fully taxable. Now, thanks to your article, I have decided to invest in debt-based MF schemes.

I will be having around  a total of Rs 1 crore from my retirement benefits along with my own savings. I also require Rs 50,000/month (Rs 6 lakh/year). Actually, I need around Rs 40,000/month but I have assumed a higher figure for emergencies, catering to the age of myself and my wife, though our health is extremely good. Our children are not dependent upon us.

The Table you have presented in the article mentions the returns from these funds between 10% to 11% p.a. I shall spread my investment in these schemes and assume a return of 10% p.a., to be on safe side. Consequently, after having taken all the precautions, I have, thanks to you, come to the conclusion that I require  Rs 60 lakh to be invested in such schemes to last for me and my wife during our life time. I am planning to donate Rs  40 lakh to a charitable institution with which both of us are closely connected.

Request your comments.

Our Reaction : You are broadly on the right path, however, you have not taken cognisance of a monster called inflation which will enlarge your requirement of expenses each year slowly but steadily. Have a look at the accompanying table. You will face a bad problem beyond the age of 77 years. At that stage, you will require Rs  1,123,789 for your day-to-day expenses and your capital would have vanished.

You  have to realise that if you or your wife live for 40 more years (100 years in age), the current expense of Rs  6 lakh will rise to Rs 27.70 Lakh (= 6*(1.04)^39).

For catering to this requirement, you will need to invest  almost Rs  90 lakh.

My suggestion is that you invest the entire amount of Rs 100 lakh in debt-based schemes of MFs and make a will donating the corpus to the charitable institution upon the demise of yourself or your wife, whosoever expires later. In any case, we have always been propagating giving of gifts through your will. Keep the title to your funds with you as long as you are alive.

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