Purchasing Power Calculator India

Understanding “The Silent Tax”

Purchasing power refers to the quantity of goods or services that one unit of money can buy. Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.

Economists often call inflation the “Silent Tax” because it reduces your wealth without money ever leaving your bank account. If you keep ₹1 Lakh under your mattress, it is still ₹1 Lakh ten years later. But if inflation is 6%, that money will only buy what ~₹55,000 buys today.

Why Purchasing Power Matters in India

India typically experiences higher inflation than developed economies due to food, fuel, housing, and healthcare costs. This makes long-term cash savings especially vulnerable. Understanding purchasing power is essential for Indian households planning retirement, education, or major life expenses.

How Calculations Work

This calculator uses the “Present Value” formula to determine what your future money is worth in today’s terms:

• PV: Present Value (Real Purchasing Power)
• r: Inflation Rate (e.g., 0.06 for 6%)
• n: Number of years

The “Rule of 72” for Inflation

A quick mental shortcut to understand inflation is the Rule of 72. By dividing 72 by the inflation rate, you can estimate how many years it will take for your money’s value to be cut in half.

• At 6% Inflation: Your purchasing power halves in 12 years (72 ÷ 6 = 12).
• At 8% Inflation: Your purchasing power halves in just 9 years (72 ÷ 8 = 9).

Real vs. Nominal Returns

When investing in India, it is crucial to distinguish between the “Nominal” return (what the bank promises) and the “Real” return (what you actually keep after inflation).

If a Fixed Deposit offers 7.5% interest, but inflation is 6%, your Real Rate of Return is approximately 1.5%. If you fall into the 30% tax bracket, your post-tax return might actually be negative, meaning you are losing purchasing power despite saving money.

Frequently Asked Questions