# Real Returns Calculator

Use this real returns calculator to calculate the real return from a financial instrument after accounting for tax.

What is a real return? A real return is the return from a financial instrument after accounting for inflation and taxes. Most discussions of real return ignore taxes and simply account for inflation.

A real return gives an idea of how much the purchasing power of a lumpsum has changed upon maturity of a financial instrument.

You will need to calculate theÂ  real return after taking taxes into account to check if the buying power has been protected from inflation.

The post-tax real return is calculated as shown in the picture

• If the real return is 1%(-1%)Â  then the purchasing power of the lump sum has enhanced (diminished) by 1%Â  (-1%).
• If the real return is zero, the purchasing power of the lump sum is unchanged. That is inflation and taxes have exactly nullified the return from the financial instrument.
• Intuitively, it is clear that because of the nature of taxation (as per slab), the real post-tax return from these inflation indexed bonds will be quite low.
• The above post-tax return is valid if tax is paid as per slab each financial year.
• If tax is paid as per slab upon maturity, the formula is (thanks to Ronnie Joshua Reuben for pointing out an error)

post-tax-return =[(1+return)^duration x (1-tax)]^(1/duration) -1

Here is a real returns calculator with which you can access the effectiveness of aÂ financial instrument in protecting the purchasing power of a lumpsum from inflation. Both types of post-tax return computation are included.

Â Notes:

• The calculator can be used for any financial instrument. Set the base interest rate (1.5%) to zero. This is applicable only for Â inflation-indexed bonds.
• Ruppee symbol courtesy: Wiki Commons. The arrow is my handiwork
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## 9 comments on “Real Returns Calculator”

1. Ashal jauhari says:

Dear Pattu, an important post just in time. Not many people give a thought to real return after Inflation and taxation.

thanks

Ashal

2. AyushP306 says:

Real Returns Calculator is amazing ! Really liked it .. : )

3. Udaya Chandran says:

Thanks for the calculator. I’d like to share this calculator on my blog http://www.finsoso.com. I’d like to have your permission for this. Please let me know your consent.

4. Udaya Chandran says:

Thanks!

5. Ronnie Joshua Reuben says:

Sir can you help me understand the POST TAX RETURN on MATURITY FORMULA, i see that it is some what similar to the effective rate of interest formula but (+ tax term) I fail to understand. If you can hint me towards the source then i will surely look into that. Thanks!!

• pattu says:

Hi Ronnie, you are correct about the + tax term. It is wrong. I have corrected the equation and the excel file. Thank you so much. Here is the math for those interested.

maturity =investment x (1+return)^duration
maturity(post-tax) = (investment x (1+return)^duration) x (1-tax)
maturity(post-tax)= investment x (1+post-tax-return)^duration
So
investment x (1+post-tax-return)^duration =(investment x (1+return)^duration) x (1-tax)
(1+post-tax-return)^duration =(1+return)^duration x (1-tax)
post-tax-return =[(1+return)^duration x (1-tax)]^(1/duration) -1