Tax free income on 21% return on investments? That's correct!

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Do a Google search for safe investments.

What results come up?

Fixed Deposits, Fixed Maturity Schemes, Fixed Income Debt Mutual Funds. Fixed this, fixed that. Am I correct?

So we'll get straight to it. Assume you open a Fixed Deposit for 1 lakh with 9 percent interest rate. That sounds pretty good, right? After a year, you earn Rs. 9,000. You're smiling, thinking you've outsmarted all the suckers who blindly earn 6-7% in their savings account, barely beating inflation.

And you'd be correct!

But then the Taxman knocks on your door. 30% of Rs. 9,000 = Rs. 2,700.


This leaves you with Rs. 6,300 post tax. A 6.3% return on your "Fixed" deposit. Are you still smiling?

The above graph represents the returns of the Sensex since 2001. Why 2001? That's the year India opened up its economy in a massive way.

Since 2001, the average yearly return has been 21%. Keep in mind, that's without compounded interest. If you had invested Rs. 100,000 in 2001 in a well diversified portfolio that closely mimicked the Sensex, you would be sitting on 14.42 lakhs after 14 years.

But what about the Taxman? The Taxman does not exist with long term investors' earnings. And so your earnings remain intact. India promotes long-term investing. One can build wealth by simply building a well diversified portfolio and holding on to their investments.

21% versus 6.7%.

Isn't that just incredible? 14 years of data to build a large enough sample size, which also includes the "Crash" of 2008. And yet, you still you still earn 21%. Would you call that a safe investment?

Happy Investing 😉

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3 responses to “Tax free income on 21% return on investments? That's correct!

  1. Hi !

    Can you explain more on “The Taxman does not exist with long term investors’ earnings”….

    Atleast point me towards a source, where I can dig it up myself. Thanks !

    1. Hi Vivek! Sorry for the late response.

      Here’s the official “jargon”

      As per the Income Tax Act, the holding period required for listed securities to be classified as a long-term capital asset is 12 months. Long-term capital gains arising from a sale of shares purchased through stock exchange on which STT is paid are tax-exempt under section 10(38).

      Therefore, in layman’s terms- if you hold the investment for more than 12 months and paid the appropriate STT on the transaction, the investment is classified as a long-term capital asset. Any capital gains (profits!) are tax-exempt.

      Pretty neat, right? It’s amazing how so many traders and investors (including myself until I wrote this blog entry) do not know about this!

      Best Regards,

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