Post-tax return
Return after taxes on investment income and realised capital gains: pre-tax return × (1 − tax rate). It is what matters to the investor, but performance is communicated pre-tax.
In plain language
Two investors own identical PMS portfolios. Both earn 13.88% after fees. Do they end up with the same money? Not if they pay different tax.
Post-tax return is the return after taxes are paid on investment income and realised capital gains. Pre-tax return is the return before taxes.
The workbook explains why both exist. Investors belong to different tax brackets, so performance is communicated as pre-tax return — that allows comparison across investments and strategies. But what really matters to the investor is post-tax return, and investors make decisions on that basis. It is left to investors or their financial advisors to convert pre-tax into post-tax at the rates that apply to them.
How it works
Formula (Chapter 10, section 10.1.5).
Post-tax return = Pre-tax return × (1 − tax rate)
Which tax rate? (Chapter 11, as printed in the workbook)
| Income in PMS | Treatment |
|---|---|
| Equity STCG (held ≤ 12 months) | 20% (Section 111A), no exemption |
| Equity LTCG (held > 12 months) | 12.5% above ₹1.25 lakh a year (Section 112A) |
| Debt LTCG (held > 24 months) | 12.5%, no indexation (removed since July 2024) |
| Debt STCG (≤ 24 months) | Slab rate |
| Interest and dividends | Slab rate, as income from other sources |
| F&O | Business income, slab rate |
Fees and tax. PMS fees — management and performance fees, brokerage, GST — are not deductible while computing capital gains for individual investors (Chapters 10 and 11). PMS fees also attract 18% GST, which is not deductible from taxable income.
Why the investor has to do this. The portfolio manager reports performance pre-tax: TWRR for an investment approach, XIRR for the individual investor's own portfolio (Chapter 8). Separately, it provides taxation reports — quarterly within 30 days and annually — showing capital gains, income and fees, which the investor or adviser uses to work out the post-tax position (Chapter 11).
The formula
Post-tax return = Pre-tax return × (1 − tax rate)
Workbook: 13.88% × (1 − 20%) = 11.10%
A worked example
The workbook's figures (Chapter 10, section 10.1.5). The ₹1 crore portfolio from the gross-versus-net example earns a net, pre-tax return of 13.88% and is exited within a year, so equity STCG at 20% applies:
Post-tax return = 13.88% × (1 − 0.20) = 13.88% × 0.80 = 11.10%
On ₹1,00,00,000, the net gain of ₹13,87,600 becomes roughly ₹11,10,000 after tax.
Same portfolio, held longer (simplified illustration using the workbook's rate; it ignores the ₹1.25 lakh exemption and assumes the whole return is long-term equity gain):
13.88% × (1 − 0.125) = 13.88% × 0.875 ≈ 12.15%
| Holding | Tax rate | Post-tax return |
|---|---|---|
| Under 12 months | 20% | 11.10% |
| Over 12 months | 12.5% | ≈ 12.15% |
The pre-tax number is identical in both rows. The investor's experience is not — which is why the workbook insists the post-tax figure is what investors decide on, and why a portfolio's reported performance never tells a particular client what they kept.
Why NISM asks about it
Post-tax return is section 10.1.5 of Chapter 10 (Performance Measurement and Evaluation of Portfolio Managers, 10% weightage), with the 13.88% → 11.10% calculation. Chapter 11 (Taxation) supplies the rates and the rule that PMS fees are not deductible from capital gains, and opens by saying understanding tax implications is crucial for investors to optimise post-tax returns. Chapter 9 adds that the asset allocation decision should maximise the investor's after-tax return.
Common exam traps
- Performance is communicated pre-tax; the investor or adviser computes post-tax.
- Multiply by (1 − tax rate); do not subtract the tax rate from the return (13.88% − 20% is nonsense).
- The workbook applies tax to the net return in its illustration, while also stating that PMS fees are not deductible in computing capital gains. For exam arithmetic, follow the illustration.
- Equity STCG is 20% and LTCG 12.5% in Chapter 11's main tables. Section 11.5.3 prints older NRI rates of 15% and 10% — do not use those for this calculation.
- Section reference slip: the workbook's post-tax example refers to "the same example from 10.2.4"; the gross-versus-net example is actually section 10.1.4.
Check yourself
1.Using the workbook's formula, a pre-tax return of 13.88% with a tax rate of 20% gives a post-tax return of:
- a)11.10%
- b)13.88%
- c)16.66%
- d)2.78%
Show the answer
Answer: (a) 11.10%
Post-tax = Pre-tax × (1 − tax rate) = 13.88% × 0.80 = 11.10%.
2.78% is the tax itself, not the return kept. 16.66% wrongly adds tax. Note the workbook uses 20% here because the investment was exited in one year, so STCG applied.
Where this is taught
Free preparation for NISM Series XXI-ARelated terms
- Income from other sourcesThe head of income under which interest and dividends earned in a PMS are taxed, at the investor's slab rate — with no indexation or capital gains benefit.
- ReturnThe reward for postponing consumption — the difference between what an investor gives up today and the larger amount received later, measured in several ways depending on the purpose.
- Long Term Capital GainThe gain on mutual fund units sold after the long-term holding period — 12 months for equity-oriented funds, 24 months for most others — taxed at 12.5% on equity funds above a Rs 1.25 lakh yearly exemption.
- Short Term Capital GainThe gain on mutual fund units sold within the holding period — 12 months or less for equity-oriented funds, 24 months or less for most others — taxed at 20% for equity funds and at slab rate otherwise.
- Gross returnThe total return on an investment before deducting any fees, expenses or commissions. Useful for broad evaluation, but misleading as a measure of what the investor actually earns.
- Net returnThe return on an AIF's NAV after fund expenses, costs and management fees — measured before incentive fees (pre-incentives) or after them (post-incentives, what the investor actually keeps).
- Form 16AThe TDS certificate a portfolio manager issues for tax deducted at source on a client's dividend and interest income, part of the regular tax reporting a PMS provider must give investors.
- Taxation reportThe periodic statement a portfolio manager must give every PMS client under Regulation 30, covering capital gains, derivatives income, dividends, interest and fees so the client can work out tax due.