Fixed Deposit Vs Stock Market- Huge Returns after TAX and Inflation

 

Let's compare the returns from a Fixed Deposit (FD) at 7% and the Stock Market at 11% over 25 years, starting with an initial investment of ₹100,000.

Formula for Compound Interest

A=P(1+r)tA = P (1 + r)^t

Where:

• AA = Final Amount
• PP = Initial Investment (₹100,000)
• rr = Annual Return (in decimal form)
• tt = Number of years

1. FD at 7% Returns

Returns on Investment=100000×(1.07)²⁵

Returns will be approx.= 100000 X 5.43

Returns= 543000/-

 

2. Stock Market at 11% Returns

Returns on Investment=100000×(1.11)²⁵

Return on Investment= 100000X 12.23

Returns= 12,23,000/-

 

Comparison

• FD (7%) Final Amount = ₹5.43 lakh
• Stock Market (11%) Final Amount = ₹12.23 lakh

The stock market investment grows more than twice the FD amount over 25 years.

Let's refine the comparison by considering inflation and taxation.

Assumptions:

1. Inflation Rate: 5% per year
2. Tax on FD Interest: 30% (assuming a high tax bracket)
3. Tax on Stock Market Returns: 10% on capital gains (after one year, as per LTCG rules in India)

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1. FD at 7% with Taxation

• Effective return after tax:
• Interest earned is taxable at 30%.
• Effective return = 7%×(1−0.30)=4.9%

Returns = 100000 X (1.049)²⁵

Returns≈100000×3.28

≈₹328,000

Post-tax FD amount = ₹3.28 lakh

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2. Stock Market at 11% with Taxation

• Effective return after LTCG tax:
• Long-term capital gains (LTCG) tax is 10% on gains.
• The final amount is taxed at the end, so the effective return is slightly reduced.
• Approximate adjusted return = 10% p.a. (instead of 11%)

Returns from Stocks=100000×(1.10)²⁵

         ≈100000×10.83

         ≈₹1,083,000

Post-tax Stock Market amount = ₹10.83 lakh

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3. Adjusting for Inflation (5%)

To find the real value (inflation-adjusted purchasing power), we divide by (1.05)25=3.39(1.05)^{25} = 3.39.

• FD Real Value = ₹3.28L ÷ 3.39 = ₹96,700
• Stock Market Real Value = ₹10.83L ÷ 3.39 = ₹3.19L

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Final Comparison (Inflation & Tax-Adjusted)

Investment	Nominal Value (₹)	Real Value (₹) (Inflation Adjusted)
FD (7% before tax, 4.9% after tax)	₹3.28 lakh	₹96,700
Stocks (11% before tax, ~10% after tax)	₹10.83 lakh	₹3.19 lakh

Conclusion

1. FD barely beats inflation (₹96,700 in today's terms).
2. Stocks create 3x more wealth than FD in real terms (₹3.19L vs ₹96.7K).
3. Long-term investments in stocks are better for wealth creation, but FD provides stability.