On almost all investments, we need to bear tax on interest,
capital gains, etc. So on hand what we earn is income / gains after paying tax
on it. So, it is important to calculate Post Tax Return, while comparing investments and their returns; all investments have different tax implications.
What is Post Tax Return?
Post Tax Return, is the return that you earn, net-of paying
tax on the income (or gains) earned on the investment. The tax that you pay is
eventually the cost of investment, so it has to bee deducted while calculating
return on any investment.
How to calculate Post Tax Return?
You can calculate Post Tax Return by simple calculation. You
just need to know the tax rate, at which the gains / income will be taxable.
For example, interest on Fixed Deposits is added to your income and is taxable
as per your slab rate.
Post Tax Return = Return on Investment X (1 – Tax Rate)
Illustration:
Mr.Ajay has invested in a Fixed Deposit @ 10% per annum. He
has an annual income of Rs.4 lakhs, and thus in the first tax bracket of 10%.
What is his Post Tax Retrun?
Solution:
Post Tax Return = Return on Investment X (1 – Tax Rate)
= 10% X (1 – 10%)
= 10% X (1 – 10/100)
= 10% X (1 – 0.10)
= 10% X (0.90)
= 9%
So, Mr.Ajay is earning 9% Post Tax Return on his investment in Fixed Deposit.
