Mr. Jain, a 60-year old hard working man retired this year after an illustrious career. He currently has Rs 1 Cr. as his retirement corpus. He also had other sources of income such as rents from properties and based on this he came under the 30% tax bracket. His current financial objectives currently are -
               1) Receive a steady income post retirement for his family
               2) Preserve the corpus for distribution for his children
His first thought was to invest his entire retirement corpus in a bank fixed deposit and achieve a 7% interest – giving him an annual income of Rs. 7 Lacs (pre-tax).
Mr. Jain came to us with his corpus asking for advice on other options. We told him about debt mutual funds which have favourable tax treatment and about the concept of a Systemic Withdrawal Plan (SWP). SWP is a feature provided by Mutual Funds where an investor can withdraw a fixed sum as desired from the initial lump-sum investments. He can also factor in an increase in withdrawal every year to meet the increase in cost of living.
Let us assume the following –
             a) Inflation of 5%
             b) Rate of Return on Bank FD and Debt Funds being 7%
             c) Life Span after retirement being 15 years
The below chart shows the total income Mr. Jain earns from a Bank Fixed Deposit vs. a Debt Mutual Fund after accounting for taxes. 
The total income earned from a Debt Fund is 40% higher each year vs. the Bank Fixed Deposit!
Even if Mr. Jain would fall under the 20% income tax bracket, the returns from the Debt Mutual Fund is still around 24% higher vs. the Bank FD.
Please keep in mind that in both cases, Mr. Jain still retains the initial Rs. 1 Crore investment at the end of 15 years.
 The reason for the stark difference is two fold -
            a) The investor gets the benefit of indexation – which essentially implies that any returns are adjusted first for inflation before any taxes are imposed
                b) The taxes on Debt funds are imposed on any interest earned only at the time of withdrawal
The first benefit manifests after 3 years of the initial investment and with inflation rates much higher than the 5% assumed in the above example, its advantage cannot be understated. As a result of adjusting for inflation, an investor in the debt fund reduces his/her tax liability significantly. This benefit is not available to investors in Bank Fixed Deposits.
Secondly, the withdrawal from a debt mutual fund is split between both the initial principal invested as well as earned income. Due to this the tax liability is reduced to a large extent, resulting in a tax advantages vs. the bank FD.
As a result of these two benefits, Mr. Jain can earn an additional Rs. 30 Lacs by investing in a Debt Mutual Fund vs. the Bank FD.
We thus strongly urge our readers to consider debt mutual funds and are happy to help them out in any questions they may have.
We have prepared an excel sheet that contains the detailed calculations of the comparison. Do contact us at contact@finchikitsak.com if you would like to understand the calculations behind the same.

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