Inflation & Income Tax are silent killers -Certified Financial Planner’s guide

Inflation and Income Tax is a matter of worry for all.

You set financial goals you’re willing to reach for. Goals may be retirement, higher education & marriage, buying a house and car, international vacation, startup capital and even emergency fund etc. The best way to reach your goals is by planning, implementation of plan with periodical reviews. While you implement your plan into action, you must be considering:

(i) how much you need;
(ii) when you need;
(iii) your risk profile (attitude towards risk, while you invest) &
(iv) inflation and income tax efficiency.

Trying to hit your financial goals is a daunting task.

Income Tax Planning is necessary

I want to share few ideas about inflation & income tax which are hidden costs. While you keep aside your hard earned money to work for you, have you ever observed that you cannot retain your purchasing power of money? Whether it appreciates or depreciates? You may think of guaranteed return. But have you ever observed you’ve booked a guaranteed loss?

Of course, you can’t avoid inflation & income tax all the time; you are supposed to keep required money in savings banks bank fixed/term deposits, post office savings and debt funds of mutual funds etc, depending on your unique situations, there is no rule of thumb. Unfortunately, some of you may still follow other investors, news papers, business magazine and electronic media etc. I’m not saying these are bad, but these are overviews, these are not identical with your subjective issues. You may become victim due to your innocence and herd behavior.

Inflation affects your return on investment

Inflation & income tax devour your money which you save for tomorrow’s needs

You are forced to invest more due to those hidden costs and if you’re unable to do it, your aspirations/goals remain unattainable.

Lack of Income Tax Planning

History of inflation (silent killer)

Cost inflation index table is as follows:

If we consider both the financial years 2014 – 15 & 2015 – 16, inflation indexes are:

1024 & 1081, the rate of inflation is 5.57%.

Suppose your marginal income tax bracket is 30% and inflation is 5.57%, if you have invested in Fixed Deposits, bank interest rate is 7.5%. What will be your tax & inflation adjusted return?

You get fixed deposit returns or similar risk free return is 7.5%, and then the inflation adjusted return will be 1.70%. Although you’re getting 7.5%, but your usable return is 1.7%.

If you consider marginal tax @ 30%, your tax adjusted/post-tax return will be 5.25%.

Further if you consider both the inflation & income tax adjusted returns ( post-tax & post-inflation), your usable interest income will be – 0.43%, i.e. your money value is deteriorating – 0.43%, depending on CII (cost of inflation) & income tax bracket.

Conclusion

You work hard for money to meet your present and future needs. Don’t make these common mistakes that have caused you to remain poor without having any choice during your distribution phase. Inflation and tax are tough to offset, you have to understand both the components. You need all the required vehicles in your baskets with proper asset allocation which can offset inflation and judiciously manage your income tax & investment.