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How inflation erodes your wealth?

We want returns from our investments to be higher than the rate of inflation. But by how much?

Print Edition: November 2, 2006

Inflation worries us all.We want returns from our investments to be higher than the rate of inflation. But by how much? Depends on the rate at which you expect inflation to eat into your savings. E ven at a not-so-alarmi ng 6%, inflation can take away 77% of your current purchasing power in 25 years. Target investme nts that earn about 5-10% more than inflation.

Inflation that Fills Pockets.

Unless you have an eye for obscure news, you may have missed a recent annual revision of what is called the cost inflation index (CII).This is one inflation index that boosts your finances, rather than make a hole in them. The CII is used to calculate the present cost of assets bought in the past—and the tax liability in case you want to sell them.

Profits from the sale of any asset are classified as long-term and shortterm capital gains depending on the period for which it was held. Gains from sale of immovable property, gold and jewellery held for more than 36 months are long-term gains. In case of shares and equity funds, there is no tax if held for over 12 months.While short term capital gains are taxed like any other income, for computing long-term capital gains the taxman takes inflation into account, thus saving you more money. The 2006-7 CII has been fixed at 519.This figure took into account the rise in the Consumer Price I ndex (CPI) for urban non-manual employees in 2005-6.

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