Posts Categorised: Corpus Building
If you wish to achieve financial freedom by the time you retire, you should know what is going to be the future value of money that you are saving today. I am not sure if you know that the actual inflation is more than what the CPI (Consumer Price Index) based inflation statistics is published by newspapers. But the real inflation over the last 100 years tells a different story.
Indian media talk about GDP growth. They often overlook the fact that with a population of 1.25 billion, we should look at our per capita GDP than our overall GDP. Unfortunately, India’s GDP growth per capita has remained flat over the last century, while other major economies have shown much faster growth in their ‘GDP per capita’, refer the graph above, source courtesy Wikimedia Commons statistics.
How inflation over last decades affected the purchasing power of people
In the year 1920, a family of four could manage their expenses comfortably with an income of Re 1 per month. Those were arguably, the good old days of our grandparents.
In 1940, a similar family could have the same standard of living, with a take-home salary of Rs. 10 per month. A 10 times reduction of purchasing power.
Come 1960, for the same living standard, a family needed Rs. 100 as monthly income..
1980 – The baby boomers in India needed Rs 1000 per month to run a family well.
Enter the year 2000 – The take-home income needed to be was Rs. 10,000 per month for the same middle-class family. Throughout this period, we had different Governments and economists at the helm of policy and financial affairs. All of them tried to check inflation with their best efforts. But the inflation rate over the last 100 years seems to have remained too difficult to control. Obviously, by 2020, an average family is going to need an income of Rs. 100,000 per month to maintain their standard of living that the same person managed with Rs. 10,000 in the year 2000.
Sitting in 2017 you might think one hundred thousand rupees would be a lot, but such underestimation of inflation has been there among people over the last 100 years!.
The Compounded Annual Growth Rate (CAGR) of Inflation Over the Last 100 Years.
This is just to give you an idea about the difference between what the statistics of CPI (Consumer Price Inflation) you see on the TV and other media, while the reality is different. If we take the starting value at Re 1.00 in 1920 and take the end value at Rs. 100,000.00 in 2020, the CAGR can be calculated using the formula as:. CAGR =((End Value/Start Value)^(1/Periods) -1. Converting it into percentage works out to 12%. This is the real inflation rate that we need to prepare for. To know more about working out CAGR, Click Here..
Why is it so important to know the actual inflation in order to plan your Financial Independence?
The trend shows that if you invest your money today at any financial instrument that yields a minimum return of 12% compounded gain, then only at the end of the maturity period you will get back a sum that will have a similar purchasing power of the amount at the starting of the investment. Question is, “Which investment can ensure such return?” There are very few, and those involve taking a fair amount of risk that is not under your control. But there are ways when you can take charge of your financial growth.. I shall discuss that in my next post..
One of the primary area to achieve financial freedom is to know and plan investments to save income tax optimally in balance with returns.
Today we are going to have a look at the Income Tax Brackets for individuals and the various Tax Saving options extended to them, with some simple examples to work out the tax.
The Income Tax Slabs extend some additional exemptions for the Senior Citizens and Very Senior Citizens. You can refer to the below tables for a ready reference.
EXAMPLE OF WORKING OUT THE TAX
Vikram, aged 30 has a taxable salary of Rs. 6,75,000. His tax calculation will be as below.
Upto Rs. 2,50,000: Nil
The next slab is up to Rs. 5,00,000. Therefore, for Rs 5 lac less Rs. 2.50 lac, that is Rs. 2,50 lac, his tax liability would be Rs. 2.50 lac x 5%, working out to Rs. 12,500.
He still has Rs. 1,75,000 that will fall into the third slab which is more than Rs. 5.00 lac but below Rs. 10.00 lac. Against that his liability will be Rs. 1.75 lac x 20%, that is Rs. 35,000.
Hence his total tax liability will be Rs. 12,500 + Rs. 35,000, that is Rs. 47,500.
Besides, he has to pay 2% Education Cess and 1% Higher Education Cess on the Tax of Rs. 47,500, making the total liability as Rs. 48,925.
TAX SAVING OPTIONS
Tax Saving options are extended to individuals to encourage public to invest in various schemes to secure their financial future as well as help the Government in strengthening the country.
There are three stages when an individual can save taxes. For detailed information on investments covering the tax savings at any one or more of those stages, Click Here.
- Investment Stage
- Earning Stage
- Withdrawal Stage
IMPORTANT SECTIONS UNDER IT ACT TO BRING DOWN TAXABLE INCOME
There are many Tax Saving sections under Income Tax rules. The most common sections that can be used to save tax are:
- 80C/80CCC: Life Insurance, Provident Fund, PPF, Tax Saving Bonds, Tax Saving Mutual Funds (like ELSS), Tax Saving Fixed Deposits are some options.
- 10(10D): Interest earned from Life Insurance policies that have at least 10 times of annualized premium as Basic Sum Assured. This section gives a strong incentive to protect one’s family in addition to tax saving by investing in life insurance plans.
- 80(D): Health Insurance for normal people
- 80DD: Health Insurance when one or more family members are disabled/handicapped
- 80DDB: Health Insurance for normal people plus if any family members are handicapped and/or senir citizen
- 80E: Repayment interest against Educational Loan
- 80G: Donation with a limit of Rs. 10 lacs
- 80EE: Repayment interest against housing loan
This covers a basic overview of the individual income tax and various tax saving sections for all taxpayers who wish to start building their corpus at an early age.