Real Returns Calculator

Fixed Income

Use this real returns calculator to check how effective a  financial instruments is in protecting the purchasing power of a lumpsum from inflation.

The reserve bank of India has announced the issue of inflation linked bonds in which a lumpsum  invested for 10 years will receive an interest equal to 1.5% + ‘change’ in the consumer priced index (CPI).

This change in the CPI is explained quite well here: Inflation Indexed Securities: Buy if at Lower Tax Slabs

Unfortunately, income from these bonds will be taxed as per income slab on maturity. So if you think the buying power of your lump sum will be protected from inflation, think again.

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

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 lump real-returnsum has changed upon maturity of a financial instrument.

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

real-return

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 these RBI inflation indexed bonds or any other financial instrument in protecting the purchasing power of a lumpsum from inflation. Both types of post-tax return computation are included.

Download the Real Returns Calculator – RBI Inflation Linked Bonds

 Notes:

  • The calculator can be used for any financial instrument. Set the base interest rate (1.5% for inflation indexed bonds) to zero for other financial instruments.
  • The calculator gives you only estimate. For inflation indexed bonds, the net pre-tax return will be known only on maturity and will be determined by the course of inflation.
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media

Do check out my books

You Can Be Rich Too with Goal-Based InvestingYou can be rich too with goal based investing

My first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create customg solutions for your lifestye!Get it now.  It is also available in Kindle format.

Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You Want

Gamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you want My second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a youngearner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Create a "from start to finish" financial plan with this free robo advisory software template

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

About Freefincal

Freefincal has open-source, comprehensive Excel spreadsheets, tools, analysis and unbiased, conflict of interest-free commentary on different aspects of personal finance and investing. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. We do not accept sponsored posts, links or guest posts request from content writers and agencies.

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

Published by freefincal

Published

18 thoughts on “Real Returns Calculator”

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

    thanks

    Ashal

    1. Many thanks Ashal. The problem is many financial professional do not use post-tax return for calculating real return.

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

    thanks

    Ashal

    1. Many thanks Ashal. The problem is many financial professional do not use post-tax return for calculating real return.

  9. 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!!

    1. 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

  10. 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!!

    1. 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

Comments are closed.