Mukesh Patel.in
practical tax & investment planning online
international tax expert / columnist / author / speaker

EVALUATING TAX WORTH OF YOUR INVESTMENTS!

As a prudent investor compare your effective post-tax return while making your final choice of investment!

The most common mistake an ordinary investor makes in the choice of his investment is in jumping for a higher rate of interest, without taking into consideration the effective after tax return keeping in view the marginal rate of income-tax on his total income. Similarly, it is not uncommon to see an investor in a high tax slab who is unable to appreciate the worth of a tax-free investment, the break-even rate of interest or the pre-tax return of which is in fact much higher than the seemingly low rate of interest attached to the investment.

 Are you prepared to accept the fact that if your income is liable to income-tax in the highest tax slab, i.e. 30.9%, you would be much better off with a 8.8% tax-free return as compared to a 10% return which is taxable? If you are not, the following Illustration should convince you beyond doubt:

 Illustration: Your investment of Rs.1,00,000 in PPF would fetch you an interest of Rs.8,800 @ 8.8% p.a. Since you do not have to pay any income-tax thereon, the entire Rs.8,800 remains with you. If this amount is invested in a deposit earning taxable interest @ 10% p.a., you would no doubt earn a higher return of Rs.10,000 on the above investment. But considering the fact that you would have to pay income-tax of Rs.3,090 @ 30.9% on the interest earned of Rs.10,000, you will be ultimately left with a saving of only Rs.6,910.

In terms of ‘measuring your effective yield,’ in the above case your tax-free return of 8.8% works out to an actual break even pre-tax return of 12.74% (which would be equivalent to an after-tax return of 8.8% applying your marginal tax rate of 30.9%). This naturally compares more favourably with the given choice of 10%. To put it the other way round, your taxable return of 10% works out to an effective after-tax return of 6.91% (considering your 30.9% marginal rate of income-tax), which still cannot match the alternative of the 8.8% return which is not subject to income-tax. 

 A prudent investor should always compare the break-even or effective return on his investment keeping in view his marginal rate of income-tax, while making the choice of his investment. It must also be borne in mind that such comparison of pre-tax or after-tax returns is bound to vary keeping in view the marginal tax rate of the concerned investor.

Compiled with today’s write up are two Tables entitled ‘Break-even Rate of Interest Before Tax’ and ‘Effective Rate of Interest After Tax’ which will act as Ready Reckoners for evaluating your Pre-tax and After-tax Returns at various rates of interest and at various tax levels.

               BREAK EVEN RATE OF INTEREST   BEFORE TAX

               [As applicable for Financial   Year 2012-13

             i.e. Assessment Year 2013-14]

 

INCOME RANGE FOR INDIVIDUALS/HUFs

 

Below

Rs.2,00,000

Rs.5,00,000

Rs.10,00,000

 

 

 

to

to

&

 

 

Rs.2,00,000

Rs.5,00,000

Rs.10,00,000

Above

 

INTEREST

TAX RATE

TAX RATE

TAX RATE

TAX RATE

 

RATE

NIL

10.30%

20.60%

30.90%

 

           5.00

             5.00

              5.57

              6.30

               7.24

 

           5.50

             5.50

              6.13

              6.93

               7.96

 

           6.00

             6.00

              6.69

              7.56

               8.68

 

           6.50

             6.50

              7.25

              8.19

               9.41

 

           7.00

             7.00

              7.80

              8.82

             10.13

 

           7.50

             7.50

              8.36

              9.45

             10.85

 

           8.00

             8.00

              8.92

            10.08

             11.58

 

           8.50

             8.50

              9.48

            10.71

             12.30

 

           9.00

             9.00

            10.03

            11.34

             13.02

 

           9.50

             9.50

            10.59

            11.96

             13.75

 

         10.00

           10.00

            11.15

            12.59

             14.47

 

         10.50

           10.50

            11.71

            13.22

             15.20

 

         11.00

           11.00

            12.26

            13.85

             15.92

 

         11.50

           11.50

            12.82

            14.48

             16.64

 

         12.00

           12.00

            13.38

            15.11

             17.37

 

 

              EFFECTIVE RATE OF INTEREST AFTER TAX

 

             [As applicable for Financial Year 2012-13

 

              i.e.   Assessment Year 2013-14]

 

 

                INCOME RANGE FOR INDIVIDUALS/HUFS

 

 

        Below

Rs.2,00,000

Rs.5,00,000

Rs.10,00,000

 

 

 

to

to

&

 

 

Rs.2,00,000

Rs.5,00,000

Rs.10,00,000

Above

 

INTEREST

TAX RATE

TAX RATE

TAX RATE

TAX RATE

 

RATE

NIL

10.30%

20.60%

30.90%

 

5.00

5.00

4.49

3.97

3.46

 

5.50

5.50

4.93

4.37

3.80

 

6.00

6.00

5.38

4.76

4.15

 

6.50

6.50

5.83

5.16

4.49

 

7.00

7.00

6.28

5.56

4.84

 

7.50

7.50

6.73

5.96

5.18

 

8.00

8.00

7.18

6.35

5.53

 

8.50

8.50

7.62

6.75

5.87

 

9.00

9.00

8.07

7.15

6.22

 

9.50

9.50

8.52

7.54

6.56

 

10.00

10.00

8.97

7.94

6.91

 

10.50

10.50

9.42

8.34

7.26

 

11.00

11.00

9.87

8.73

7.60

 

11.50

11.50

10.32

9.13

7.95

 

12.00

12.00

10.76

9.53

8.29

 

Leave a Reply

You must be logged in to post a comment.

Powered by Epaperz.com | Hosted at HostADomainNow.com