Many people underestimate the hurt that taxation causes to their investment. Let us take an example.
If you invested Rs. 100,000 in a RBI bond which pays 8% p.a. before taxes, you will get Rs. 8000 as interest and assume you pay 30% tax you will be left with Rs. 5600 at the end of the year.
Assume further this amount is re-invested and earns 8% p.a. ….and the same thing continues for 25 years. Over this period you would have paid Rs. 124,491 as income tax and your capital accumulated would be Rs. 390,000.
However if you had invested Rs. 100,000 in a mutual fund with a GROWTH OPTION and earned 8% p.a. and had not withdrawn any amount do you realise you would have Rs. 685,000.
Of the gap between 685,000 to 390,000 only Rs. 124,491 is explained by taxation – the rest is the effect of compounding. That ladies and gentlemen is greater than the tax!
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