Tax-adjusted return
The return an investor actually keeps after tax is deducted — the figure that tells them what income is really available to spend, unlike the pre-tax rate quoted on the product.
In plain language
A product's advertised return and what an investor actually gets to keep are two different numbers. Tax sits in between them.
Tax-adjusted return is the return after tax has been paid. It is the number that actually matters for planning expenses, because taxes genuinely reduce the money in an investor's hand.
How it works
The workbook's own example: an investor earns 10% interest on Rs 1,000, so the interest received is Rs 100. If that interest is taxed at 20%, the tax payable is Rs 20, leaving a net interest of Rs 80. The post-tax return is Rs 80 ÷ Rs 1,000 = 8% — two full percentage points below the 10% headline rate.
Markets price this in. The workbook's comparison of a tax-free bond paying 8% against a taxable bank deposit paying 9%, for an investor in the 20% tax bracket: the deposit's post-tax return is 9% × (1 − 0.20) = 7.2%, below the tax-free bond's full 8% — so despite its lower headline rate, the tax-free bond wins after adjusting for tax.
A worked example
Mr Ghosh, in the 30% tax bracket, is deciding between a taxable corporate deposit paying 9% and a tax-free bond paying 7%, on an investment of Rs 5,00,000.
Deposit: Rs 5,00,000 × 9% = Rs 45,000 interest. Tax at 30% = Rs 13,500. Net = Rs 31,500, a post-tax return of 6.3%.
Tax-free bond: Rs 5,00,000 × 7% = Rs 35,000, with no tax at all — a full 7% post-tax return.
The deposit's headline 9% looked more attractive than the bond's 7%, but on a tax-adjusted basis the bond pays Mr Ghosh Rs 3,500 more a year than the deposit does. His decision should be based on the 7% versus 6.3% comparison, not the 9% versus 7% headline numbers.
Why NISM asks about it
Chapter 5, section 5.6.1 (Tax-Adjusted Returns), gives the Rs 1,000/10%/20% worked example and the tax-free-bond-versus-deposit comparison. Expect a direct post-tax return computation, and a comparison question where the product with the lower headline rate wins after adjusting for tax.
Common exam traps
- Net interest ÷ original investment gives the post-tax return — dividing by the pre-tax interest instead of the principal is a common slip.
- A higher headline rate does not mean a higher tax-adjusted return — the bracket the investor is in decides which product actually pays more.
- The comparison depends on the investor's own tax bracket — the same two products can favour different investors depending on their slab.
- A full worked comparison for tax-free bonds specifically, including break-even rates by tax bracket, is on the dedicated Tax-free bonds page.
Where this is taught
Free preparation for NISM Series XVIIRelated terms
- Risk adjusted returnThe return an investment earns for each unit of risk it takes on, rather than the return looked at on its own — in this paper, measured through the Sharpe ratio.
- Fixed DepositMoney placed with a bank for a fixed term at an agreed rate of interest. Safe and simple, but the interest is taxable, and TDS applies once interest crosses a stipulated amount.
- Section 80CThe income-tax deduction for money put into life insurance, provident fund, ELSS, five-year bank deposits, NPS Tier 1, NSC and home-loan principal, capped in aggregate at Rs 1,50,000 a year.
- Tax-free bondsBonds issued in the past by infrastructure public sector enterprises such as HUDCO, NHAI, PFC, REC and IRFC whose interest is not taxed, so they carry a lower coupon than comparable taxable bonds.
- Negative real returnA return that looks positive on the statement but sits below the inflation rate, so the money buys less than it did before — the case the workbook flags when it says a real rate can be negative.
- Percentage returnReturn expressed as a percentage of the amount invested rather than in rupees, which puts every investment on a base of Rs 100 and makes holdings of different sizes comparable.
- Pre-tax equivalentThe taxable return an investment would have to pay to match a tax-free one after tax — a tax-free 8 percent equals a taxable 10 percent for an investor in the 20 percent bracket.