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Consider The Tax Bite When You Invest

Expected returns from equity investments are higher than fixed income, but taxed far less. We keep hearing the refrain that equities in the last few years haven't even kept up with FDs. There are two fallacies here:

Expected returns from equity investments are higher than fixed income but are taxed far lesser.

We keep hearing that equities in the last few years haven't even kept up with FDs. There are two fallacies here:

1. Equity returns over the last 30 years have been about 16%, despite a flat market for the past 5 years. Well managed mutual funds have delivered even better.2. Equity and debt are taxed differently, and that makes a big difference. There is no income tax charged on equity held for a year or longer whereas debt attracts some income tax options at normal rates. On a post-tax basis, the FD return (or any debt investment for that matter) is lower by 10%-30% depending on your tax bracket.

So here's how the two alternatives measure up historically :

Equity: 16% annualized return with no income tax
FD: 9% annual return, fully taxed

These are the not the best income tax saving options but are so, in the asset class of equity. Understanding the tax impact of the choice of investment is important in your decision.

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