Best investment option
In the current era, interest rates on fixed deposits are extremely low. Also, FD does not become a better option in terms of rising inflation. In such a way, you can earn big money every month by investing in the market in smart way, that too by paying very less tax.
- Last Updated:
January 28, 2020, 8:51 AM IST
- Edited by: Puja menon
What is FD mathematics for regular income
First let's talk about fixed deposits. Suppose you have a savings of 1 crore rupees and you want to earn regular income from it. This amount will be only 1.07 crores in 1 year through bank FD. In total, you earned Rs 7 lakh, that is, Rs 58,000 thousand per month. Now if the inflation rate is 5 percent, then to maintain a savings of Rs 1 crore, you will have to invest 1.05 crore. After this, you will be able to save only 2 lakh rupees, which is only 16,666 rupees per month. From this you can guess that if you have to earn 50 thousand rupees every month from your savings, then for this you will have to make an FD of Rs 3 crore. Now here you will also have to worry about income tax, which will be 30 thousand annual tax on 3 crore rupees.
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How is mutual fund better
However, this situation is completely different in case of Hybrid Mutual Fund. Here, instead of receiving your interest, you are earning from your investment. Unlike deposits, it is a source of more income, but it is also volatile. The returns in a hybrid mutual fund may be more or less in a year, but in a period of five years you will easily get 6-7 per cent profit over the inflation rate. For example, in the past five years, most equity funds have given 12-14 per cent returns. Even in any one year, these returns have seen ups and downs.
3 crore will not be needed to earn 50 thousand every month
In such mutual funds, you can withdraw 4% per annum. Additionally, very little tax is payable on it. You will have to pay Capital Gains Tax (LTCG) on your withdrawal. If you invest for more than 1 year, then you will have to pay only 10 percent tax. If you want a regular income of Rs 50 thousand per month, then your work will become Rs 1.5 crore instead of Rs 3 crore. The special thing is that whatever your return will be, tax will be only 10 percent.
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How will your tax be saved
However, this tax benefit has another factor. Suppose you have invested Rs 10 lakh in a mutual fund. After one year this amount increased to Rs 10.80 lakh. Now if you want to withdraw 80 thousand rupees. There has been a gain of 7.4 percent in your total holding and the remaining 92.6 percent is the amount you have invested. Now when you withdraw any amount, your return for tax and the amount invested will be calculated in this proportion. In this way, on the withdrawal of 80 thousand rupees, your gain becomes only 5,926 rupees and you have to pay tax on this amount.
Overall, regular withdrawal from equity mutual funds can prove to be better for you in every way. Especially, in terms of earning interest. Systematic withdrawal plans (SWPs) are also available for regular withdrawal. One thing you have to pay special attention to is that in the short term it is volatile, that is, it depends more on the market risk.
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First published: Jan 28, 2020, 4:47 AM IST
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