I had a review call with my financial advisor yesterday. I expressed my desire to invest in debt-like mutual funds that are not pure bond funds to avoid paying tax at the slab rate. The advisor wasn’t particularly excited. He wanted me to invest in gilt funds to avoid credit risk and liquidity risk (which are more in corporate bonds than sovereign bonds).
While I understand that he does not want to recommend a risky asset to a client, I am also hesitant to lose money to tax when sufficiently good alternatives exist. After the meeting, I decided to run the numbers to quantify the difference in the final corpus while paying 30% tax vs 12.5%.
The results are not surprising. Once the holding period gets close to 10 years, the difference in the final corpus rises close to 10%. Holding for shorter durations, say 5 years or 8 years, it’s probably not a bad idea to stick to pure bond funds. For shorter durations, we get safety without much of a loss in the final corpus.
The following tables show the comparison for various holding periods and assumed annual growth rate. These calculations assume an initial investment of ₹1,00,000, but the delta percentage will remain the same irrespective of the principal amount.
PS: ‘Tax at slab rate’ has been a problem for me for a while now. My previous calculation did a similar comparison for higher growth rate and shorter holding periods.
| Num of years ➡ | 3 years |
| Growth rate⬇ / Tax rate ➡ | Pre-tax corpus | 12.5% | 30.0% | Corpus delta |
| 4.5% | ₹ 1,14,117 | ₹ 1,12,352 | ₹ 1,09,882 | 2.2% |
| 5.0% | ₹ 1,15,763 | ₹ 1,13,792 | ₹ 1,11,034 | 2.4% |
| 5.5% | ₹ 1,17,424 | ₹ 1,15,246 | ₹ 1,12,197 | 2.6% |
| 6.0% | ₹ 1,19,102 | ₹ 1,16,714 | ₹ 1,13,371 | 2.9% |
| 6.5% | ₹ 1,20,795 | ₹ 1,18,196 | ₹ 1,14,556 | 3.1% |
| 7.0% | ₹ 1,22,504 | ₹ 1,19,691 | ₹ 1,15,753 | 3.3% |
| 7.5% | ₹ 1,24,230 | ₹ 1,21,201 | ₹ 1,16,961 | 3.5% |
| 8.0% | ₹ 1,25,971 | ₹ 1,22,725 | ₹ 1,18,180 | 3.7% |
| 8.5% | ₹ 1,27,729 | ₹ 1,24,263 | ₹ 1,19,410 | 3.9% |
| 9.0% | ₹ 1,29,503 | ₹ 1,25,815 | ₹ 1,20,652 | 4.1% |
| Num of years ➡ | 5 years |
| Growth rate⬇ / Tax rate ➡ | Pre-tax corpus | 12.5% | 30.0% | Corpus delta |
| 4.5% | ₹ 1,24,618 | ₹ 1,21,541 | ₹ 1,17,233 | 3.5% |
| 5.0% | ₹ 1,27,628 | ₹ 1,24,175 | ₹ 1,19,340 | 3.9% |
| 5.5% | ₹ 1,30,696 | ₹ 1,26,859 | ₹ 1,21,487 | 4.2% |
| 6.0% | ₹ 1,33,823 | ₹ 1,29,595 | ₹ 1,23,676 | 4.6% |
| 6.5% | ₹ 1,37,009 | ₹ 1,32,383 | ₹ 1,25,906 | 4.9% |
| 7.0% | ₹ 1,40,255 | ₹ 1,35,223 | ₹ 1,28,179 | 5.2% |
| 7.5% | ₹ 1,43,563 | ₹ 1,38,118 | ₹ 1,30,494 | 5.5% |
| 8.0% | ₹ 1,46,933 | ₹ 1,41,066 | ₹ 1,32,853 | 5.8% |
| 8.5% | ₹ 1,50,366 | ₹ 1,44,070 | ₹ 1,35,256 | 6.1% |
| 9.0% | ₹ 1,53,862 | ₹ 1,47,130 | ₹ 1,37,704 | 6.4% |
| Num of years ➡ | 10 years |
| Growth rate⬇ / Tax rate ➡ | Pre-tax corpus | 12.5% | 30.0% | Corpus delta |
| 4.5% | ₹ 1,55,297 | ₹ 1,48,385 | ₹ 1,38,708 | 6.5% |
| 5.0% | ₹ 1,62,889 | ₹ 1,55,028 | ₹ 1,44,023 | 7.1% |
| 5.5% | ₹ 1,70,814 | ₹ 1,61,963 | ₹ 1,49,570 | 7.7% |
| 6.0% | ₹ 1,79,085 | ₹ 1,69,199 | ₹ 1,55,359 | 8.2% |
| 6.5% | ₹ 1,87,714 | ₹ 1,76,750 | ₹ 1,61,400 | 8.7% |
| 7.0% | ₹ 1,96,715 | ₹ 1,84,626 | ₹ 1,67,701 | 9.2% |
| 7.5% | ₹ 2,06,103 | ₹ 1,92,840 | ₹ 1,74,272 | 9.6% |
| 8.0% | ₹ 2,15,892 | ₹ 2,01,406 | ₹ 1,81,125 | 10.1% |
| 8.5% | ₹ 2,26,098 | ₹ 2,10,336 | ₹ 1,88,269 | 10.5% |
| 9.0% | ₹ 2,36,736 | ₹ 2,19,644 | ₹ 1,95,715 | 10.9% |
| Num of years ➡ | 15 years |
| Growth rate⬇ / Tax rate ➡ | Pre-tax corpus | 12.5% | 30.0% | Corpus delta |
| 4.5% | ₹ 1,93,528 | ₹ 1,81,837 | ₹ 1,65,470 | 9.0% |
| 5.0% | ₹ 2,07,893 | ₹ 1,94,406 | ₹ 1,75,525 | 9.7% |
| 5.5% | ₹ 2,23,248 | ₹ 2,07,842 | ₹ 1,86,273 | 10.4% |
| 6.0% | ₹ 2,39,656 | ₹ 2,22,199 | ₹ 1,97,759 | 11.0% |
| 6.5% | ₹ 2,57,184 | ₹ 2,37,536 | ₹ 2,10,029 | 11.6% |
| 7.0% | ₹ 2,75,903 | ₹ 2,53,915 | ₹ 2,23,132 | 12.1% |
| 7.5% | ₹ 2,95,888 | ₹ 2,71,402 | ₹ 2,37,121 | 12.6% |
| 8.0% | ₹ 3,17,217 | ₹ 2,90,065 | ₹ 2,52,052 | 13.1% |
| 8.5% | ₹ 3,39,974 | ₹ 3,09,978 | ₹ 2,67,982 | 13.5% |
| 9.0% | ₹ 3,64,248 | ₹ 3,31,217 | ₹ 2,84,974 | 14.0% |
| Num of years ➡ | 20 years |
| Growth rate⬇ / Tax rate ➡ | Pre-tax corpus | 12.5% | 30.0% | Corpus delta |
| 4.5% | ₹ 2,41,171 | ₹ 2,23,525 | ₹ 1,98,820 | 11.1% |
| 5.0% | ₹ 2,65,330 | ₹ 2,44,664 | ₹ 2,15,731 | 11.8% |
| 5.5% | ₹ 2,91,776 | ₹ 2,67,804 | ₹ 2,34,243 | 12.5% |
| 6.0% | ₹ 3,20,714 | ₹ 2,93,124 | ₹ 2,54,499 | 13.2% |
| 6.5% | ₹ 3,52,365 | ₹ 3,20,819 | ₹ 2,76,655 | 13.8% |
| 7.0% | ₹ 3,86,968 | ₹ 3,51,097 | ₹ 3,00,878 | 14.3% |
| 7.5% | ₹ 4,24,785 | ₹ 3,84,187 | ₹ 3,27,350 | 14.8% |
| 8.0% | ₹ 4,66,096 | ₹ 4,20,334 | ₹ 3,56,267 | 15.2% |
| 8.5% | ₹ 5,11,205 | ₹ 4,59,804 | ₹ 3,87,843 | 15.7% |
| 9.0% | ₹ 5,60,441 | ₹ 5,02,886 | ₹ 4,22,309 | 16.0% |
| Num of years ➡ | 25 years |
| Growth rate⬇ / Tax rate ➡ | Pre-tax corpus | 12.5% | 30.0% | Corpus delta |
| 4.5% | ₹ 3,00,543 | ₹ 2,75,476 | ₹ 2,40,380 | 12.7% |
| 5.0% | ₹ 3,38,635 | ₹ 3,08,806 | ₹ 2,67,045 | 13.5% |
| 5.5% | ₹ 3,81,339 | ₹ 3,46,172 | ₹ 2,96,937 | 14.2% |
| 6.0% | ₹ 4,29,187 | ₹ 3,88,039 | ₹ 3,30,431 | 14.8% |
| 6.5% | ₹ 4,82,770 | ₹ 4,34,924 | ₹ 3,67,939 | 15.4% |
| 7.0% | ₹ 5,42,743 | ₹ 4,87,400 | ₹ 4,09,920 | 15.9% |
| 7.5% | ₹ 6,09,834 | ₹ 5,46,105 | ₹ 4,56,884 | 16.3% |
| 8.0% | ₹ 6,84,848 | ₹ 6,11,742 | ₹ 5,09,393 | 16.7% |
| 8.5% | ₹ 7,68,676 | ₹ 6,85,092 | ₹ 5,68,073 | 17.1% |
| 9.0% | ₹ 8,62,308 | ₹ 7,67,020 | ₹ 6,33,616 | 17.4% |
| Num of years ➡ | 30 years |
| Growth rate⬇ / Tax rate ➡ | Pre-tax corpus | 12.5% | 30.0% | Corpus delta |
| 4.5% | ₹ 3,74,532 | ₹ 3,40,215 | ₹ 2,92,172 | 14.1% |
| 5.0% | ₹ 4,32,194 | ₹ 3,90,670 | ₹ 3,32,536 | 14.9% |
| 5.5% | ₹ 4,98,395 | ₹ 4,48,596 | ₹ 3,78,877 | 15.5% |
| 6.0% | ₹ 5,74,349 | ₹ 5,15,055 | ₹ 4,32,044 | 16.1% |
| 6.5% | ₹ 6,61,437 | ₹ 5,91,257 | ₹ 4,93,006 | 16.6% |
| 7.0% | ₹ 7,61,226 | ₹ 6,78,572 | ₹ 5,62,858 | 17.1% |
| 7.5% | ₹ 8,75,496 | ₹ 7,78,559 | ₹ 6,42,847 | 17.4% |
| 8.0% | ₹ 10,06,266 | ₹ 8,92,982 | ₹ 7,34,386 | 17.8% |
| 8.5% | ₹ 11,55,825 | ₹ 10,23,847 | ₹ 8,39,078 | 18.0% |
| 9.0% | ₹ 13,26,768 | ₹ 11,73,422 | ₹ 9,58,737 | 18.3% |
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