Lump Sum vs Income Tax vs Inflation: What will be value of your Rs 1 lakh mutual fund investment in 20 years after paying tax, adjusting to inflation?

Lump Sum vs Income Tax vs Inflation: When we invest an amount, the value of our investment most likely increases with time. In the long term, it may jump by 10x, 15x or more. The power of compounding plays its part in converting our small investment into a giant corpus. But when we redeem this amount, there are two factors that impact its value- inflation and income tax. Inflation eats out a large portion of investment returns.

Once we redeem an investment, we also have to pay tax on it.

So the actual value of our investments can be less than what it appears on calculators.

In this write-up, we will calculate step-by-step the real value of an Rs 1 lakh lump sum investment in a mutual fund scheme in 20 years when the annualised rate of return is 12 per cent and the inflation rate is 5 per cent, 6 per cent, and 7 per cent, respectively.

See estimates to know- 

How mutual fund lump sum investment grows 

A mutual fund lump sum investment in equity-oriented funds is suitable for investors with a long-term investment horizon as the market fluctuation impact lessens with time, and the power of compounding is more evident as time passes.

If you invest Rs 2.50 lakh today and expect a 12 per cent return from it, this is how your investment will grow in 10, 20, and 30 years.

In 10 years, estimated capital gains will be Rs 5,26,462, and the estimated corpus will be Rs 7,76,462.

In 20 years, estimated capital gains will be Rs 21,61,573, and the estimated corpus will be Rs 24,11,573.

In 30 years, estimated capital gains will be Rs 72,39,981, and the estimated corpus will be Rs 74,89,981.

You can see that the value of investment is growing faster because of the power of compounding impact. 

How inflation impacts your returns

Let’s say you invest Rs 2 lakh in a mutual fund scheme from which your annualised investment return is 12 per cent while the inflation rate is 6 per cent. You have a 20-year investment horizon. 

While the value of your estimated corpus in 20 years will be Rs 19,29,259, at a 6 per cent inflation rate, its real value will be Rs 6,01,551.96.

Income tax 

When you redeem your mutual fund investments, you also have to pay income tax on them, even if you are changing the scheme from the same fund house.

For equity-oriented funds, the long term capital gain (LTCG) tax rate is 12.5 per cent over and above the Rs 1,25,000 exemption.

Suppose LTCG of your investment is Rs 5 lakh. After a Rs 1.25 lakh exemption, your taxable capital gains will be Rs 3.75 lakh, and the estimated tax at a 12.5 per cent rate will be Rs 46,875. The post-tax corpus value will be Rs 4,53,125.

Calculations for story

We will calculate the inflation-adjusted value of a Rs 1 lakh lump sum investment in a mutual fund scheme in 20 years.

The annualised investment return will be 12 per cent annualised, while the inflation rate will be 5, 6, and 7 per cent, respectively.

LTCG tax will be calculated at a 12.5 per cent rate.  

Value of Rs 1 lakh investment in 20 years

In 20 years, estimated capital gains from a Rs 1 lakh investment at a 12 per cent annualised rate will be Rs 8,64,629.31, while the estimated corpus will be Rs 9,64,629.31.

Income tax on Rs 9,64,629.31 corpus

After a Rs 1,25,000 exemption, taxable capital gains will be Rs 7,39,629.31, and the estimated tax will be Rs 92,453.66. The post-tax corpus value will be Rs 8,72,175.65.

Value of Rs 8,72,175.65 in 20 years (at 5% inflation)

Rs 3,28,713.96

Value of Rs 8,72,175.65 in 20 years (at 6% inflation)  

Rs 2,71,948.60

Value of Rs 8,72,175.65 in 20 years (at 7% inflation)

Rs 2,25,386.85

(Disclaimer: This is not investment advice. Do your own due diligence or consult an expert for financial planning.)