How to calculate post-tax returns on investments is very crucial for to understand so that know exactly what returns the product is actually generating.
If you were to buy into a Fixed Deposit (FD) and Senior Citizen Saving Scheme of say, 8 and to 9 % per year, at the end of the year when you have pocketed your 9 %, you still need to pay tax on it. That reduces your overall return to less than 9 %..
Example one
Letus take an example. Given below are the rate of returns, before you pay tax on the returns from them after they have matured, of some products. Letsus calculate the post - tax return for these.
| Product Name | Pre-Tax Return | |||
| Fixed Deposits (FD) | 8 % | |||
| Senior Citizen Saving Scheme (SCSS) | 9 % | |||
| National Saving Certificate (NSC) | 8 % | |||
| Post Office Monthly Income Scheme (POMIS) | 8 % | |||
Letus further assume that the calculation is done for the investor who happens to be in the highest tax bracket.
The formula is :
Post Tax Returns = R – ( R * TR %)
where
R = Rate of return on the investment
TR % = Tax bracket (in percentage) of investor.
So for an FD of 8 %, Post tax return = 8 – ( 8 * 30.9 /100) = 5.528 %.
For a person paying tax in the highest tax bracket, the rate of tax is 30.9 %. What this means is that had you invested into a FD thinking you were going to get 8 % returns, actually the returns would be 5.528% if you were into the highest tax bracket.
Example Two
Let us calculate for SCSS.
Post tax return = 9 – (9 * 30.9 / 100) = 6.219 %. So, a senior citizen falling in the highest tax bracket does not get 9 % from the Senior Citizen Saving Scheme – he gets 6.219 %.
The below figure shows the actual post tax - returns for the above products for an investor in the highest tax bracket (30.9%).
| Product Name | Pre-Tax Return | Post -Tax Return |
| FD | 8 % | 5.528 % |
| SCSS | 9 % | 6.219 % |
| NSC | 8 % | 5.528 % |
| POMIS | 8 % | 5.528 % |
Lowest tax bracket tax rate being 10.30 %,
For an investor in the lowest tax bracket tax rate being 10.30 %, the returns will look like below..
| Product Name | Pre-Tax Return | Post-Tax Return |
| FD | 8 % | 7.176 % |
| SCSS | 9 % | 8.073 % |
| NSC | 8 % | 7.176 % |
| POMIS | 8 % | 7.176 % |
It must also be noted that this can only be applied to products which are taxable.So, you could not apply the same to Provident Fund (PF), Public Provident Fund (PPF), Five year Bank FD, ELSS as the returns are not taxed for anyone, irrespective of which tax bracket he falls in.
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