Use this real returns calculator to calculate the real return from a financial instrument after accounting for tax.
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 the 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%) then the purchasing power of the lump sum has enhanced (diminished) by 1% (-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 a financial instrument in protecting the purchasing power of a lumpsum from inflation. Both types of post-tax return computation are included.
- The calculator can be used for any financial instrument. Set the base interest rate (1.5%) to zero. This is applicable only for inflation-indexed bonds.
- Ruppee symbol courtesy: Wiki Commons. The arrow is my handiwork