What is the actual post-tax return on different investments? Find out
August, 22nd 2016
The actual annualised returns of financial instruments vary from the quoted rates due to different methods of calculations involved and taxation rules. ET Wealth examines some popular investment options and works out the post-tax returns, assuming an investment of Rs 1 lakh in each product.
Investment options without 80C benefits While bank FDs offer rates fixed periodically, future market situations will determine returns of debt and equity mutual funds.
1-year bank fixed deposits Interest rate: 8.0% Annualised return: 8.24% Post-tax (30.9%) return: 5.7% (Rs 5,696) Quarterly compounding ensures a higher annualised return than quoted rate.
Debt income fund Historical returns: 9.07% Annualised return: 9.07% Post-tax (20% after indexation) return: 8.8% (Rs 8,796) Based on 5-year category average return. Can vary significantly in future.
Diversified equity fund (large-cap) Historical returns: 12.7% Annualised return: 12.7% Tax-free returns: 12.7% (Rs 12,700) Based on 5-year category average return. Can vary significantly in future.
Returns get enhanced with added tax sops Taxability of returns varies between 80C products. Though risk is higher, ELSS could generate better returns in the long-term.
EPF Interest rate: 8.8% Annualised return: 8.8% Return 8.8% (Rs 8,800); 12.74% after 80C benefit Interest rate may be revised downward in future.
PPF Interest rate: 8.1% Annualised return: 8.1% Return: 8.1% (Rs 8,100); 11.72% after 80C benefit Interest rate is for current quarter. It may be revised downwards in future.
ELSS FUNDS Historical returns: 15.8% Annualised return: 15.8% Return: 15.8% (Rs 15,800); 22.87% after 80C benefit Based on 5-year category average. Can vary significantly in future.
Retirement planning and insurance-based options Compulsory annuity, taxable withdrawal at maturity and mixing investment & insurance make calculating returns complicated.
NPS Historical returns: 11.62% Annualised return: 11.62% Return: 11.62% (Rs 11,620); 16.82% after 80C benefit Based on 5-yr category average return. Calculations assume 50% investment is in equities and 25% each in corporate and govt debt.
ULIPS Historical returns: 14.92% Annualised return: 14.92% Return: 14.92% (Rs 14,920); 21.59% after 80C benefit 15 year policy. Premium allocation charge of 20% for first year, 5% for each remaining years assumed. Admin charge Rs 500 and Rs 3,000 for insurance cost.
ENDOWMENT PLANS Historical returns: 3.27% Annualised return: 3.27% Return: 3.27% (Rs 3,270); 4.73% after 80C benefit For 15 year policy with 4% annual bonus. Rs 3,000 considered as annual cost of insurance. Bonus rates of 3% and 4% may come down in future.