Let’s understand the key considerations while investing and we will then take each of them one by one:
What amount of risk you can take?
What is your investment horizon?
What is post tax return?
We will start from the third one. What is the impact of tax on different instruments we can invest money.
So say hypothetically one instrument offers return of 10% annually which is taxable and another offers 8% which is tax free.
If your effective tax rate is 25%, then the post tax return in first is 7.5% which is lower as compared to 8% in second option. But if your effective tax rate is 15%; then first option offers returns higher.
Below table depicts the four scenarios-
Tax Treatment of returns
Scenario-1- 25% Tax
The key point is while looking at the return of any instrument you must look into post tax return of the instrument in terms of instrument and your tax bracket.
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