Wealth Erosion Sandbox
Standard calculators show nominal growth, but they fail to account for rising prices and capital taxes. Adjust the return, inflation, and tax variables below to see the exact drag on your long-term compounding.
Simulation Parameters
You lose ₹74,47,320 of your projected compound returns to taxes and inflation combined!
Erosion Growth Projection
Compounding curves showing how inflation and taxes pull returns down.
Erosion Breakdown Matrix
Categorical breakdown of compound wealth split in year 20.
Understanding Wealth Erosion: Inflation & Tax Drag
What is Inflation Erosion?
Inflation is the silent killer of wealth. Even if your bank account balance increases, the actual purchasing power of that money declines as goods and services become more expensive. If you earn 6% on a bank deposit but inflation is 6%, your real return is exactly 0%. You haven't grown your wealth; you have only preserved it.
To calculate the true purchasing power of returns, economists use the Fisher Equation:
The Impact of Tax Drag
Taxes act as a persistent frictional drag on compounding. Interest from bank Fixed Deposits (FDs) and Recurring Deposits (RDs) in India is fully taxable under your income tax slab bracket, which can be as high as 30% or 40%.
When returns are taxed every year (like FD interest), you lose not only the tax amount itself but also the future compounding power of that tax money. In contrast, tax-sheltered accounts (like PPF in India, ISAs in the UK, or Roth IRAs in the US) allow your money to compound tax-free, creating a massive wealth gap over 20-30 years.
Erosion & Purchasing Power FAQs
How do I calculate investment returns?
Investment returns can be calculated using two main metrics: Absolute Return (for simple, short-term holding periods) and Compound Annual Growth Rate (CAGR) (for multi-year investments). You can calculate these by dividing the final value by the initial value, adjusting for time, or using our automated comparison tool.
What is the difference between absolute return and annualised return?
Absolute return is the total percentage gain or loss on an investment, regardless of the time it took (e.g., a 50% gain over 5 years). Annualised return (or CAGR) converts that total return into an equivalent yearly rate (e.g., a 50% absolute return over 5 years is roughly an 8.45% annualised return), allowing for fair comparisons.
How does compound interest affect investment returns?
Compound interest is the process where your investment earns interest on both the initial principal and the accumulated interest from previous periods. Over long horizons, compounding creates an exponential growth curve, which is why starting to invest early drastically increases your final maturity wealth.
What is the average return on a savings account vs stocks?
Standard savings accounts offer low, safe yields of 1% to 3.5% (slightly higher for HYSAs), which rarely beat inflation. The stock market, represented by broad indexes like the S&P 500 or Nifty 50, has historically delivered long-term average returns of 8% to 12% per year (compounded), though it comes with short-term price volatility.
What are the risks of comparing investments only by return rate?
Evaluating investments solely based on the return rate is dangerous. It ignores credit risk (probability of default), market risk (volatility), inflation risk (loss of purchasing power if return is low), liquidity risk (inability to withdraw funds when needed due to lock-ins), and tax erosion (which reduces net returns).