MONEY TALKS – PART 3

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-

  Instrument 1 Instrument 2
Return 10% p.a. 8% p.a.
Tax Treatment of returns Taxable Tax free
Tax applicable    
Scenario-1- 25% Tax 7.5% p.a. 8% p.a.
Scenario-2-15% Tax 8.5% p.a. 8% p.a.

 

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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