Tax-Equivalent Yield Calculator
Tax-Equivalent Yield Calculator
What a taxable investment would have to pay to match a tax-free one at your tax rate, what a taxable yield is worth after tax, and both after inflation.
Tax-equivalent yield
Tax-free 7.1% against a taxable 7.5%, at a 30% tax rate and 4% inflation
Tax-equivalent and after-tax yield
- t
- your marginal tax rate on the income, as a decimal
- y
- annual effective yields; the break-even tax rate is 1 − yfree ÷ ytaxable
Worked example
Tax-free 7.1% against a taxable 7.5%, at a 30% tax rate and 4% inflation
TEY = 7.1 ÷ (1 − 0.30) = 10.14%: a taxable investment must pay this to match
The taxable 7.5% after tax: 7.5 × 0.70 = 5.25%, so the tax-free one is 1.85 points ahead
They would be equal at a tax rate of 1 − 7.1 ÷ 7.5 = 5.33%
After 4% inflation: tax-free 1.071 ÷ 1.04 − 1 = 2.98%; taxable 1.0525 ÷ 1.04 − 1 = 1.20%
Tax-equivalent yield by tax-free yield and tax rate
| Tax rate | 5.5% tax-free | 6.5% tax-free | 7.1% tax-free | 8.2% tax-free |
|---|---|---|---|---|
| 0% | 5.50% | 6.50% | 7.10% | 8.20% |
| 10% | 6.11% | 7.22% | 7.89% | 9.11% |
| 20% | 6.88% | 8.12% | 8.87% | 10.25% |
| 30% | 7.86% | 9.29% | 10.14% | 11.71% |
| 40% | 9.17% | 10.83% | 11.83% | 13.67% |
Comparing tax-free and taxable income fairly
A tax-free yield and a taxable yield cannot be compared directly, because only one of them is what you keep. There are two fair ways to line them up. Gross up the tax-free yield to what a taxable investment would need to pay, the tax-equivalent yield, or cut the taxable yield down to what it leaves after tax. Both give the same verdict. With 7.1% tax-free and 7.5% taxable at a 30% rate, the tax-free option is worth 10.14% in taxable terms, and the taxable one leaves 5.25%. Over ten years 100 grows to 198.56 tax-free and 166.81 in the taxable option after tax.
Your rate, not a slab table. The rate that matters is your marginal rate: the share of the next rupee of this income that goes in tax, including any surcharge and cess. The page asks you for it rather than looking it up, because the rates, thresholds and regimes differ between countries and change with each budget. The break-even rate, 5.33% in the example, tells you how high your rate has to be before the tax-free option wins. In India, whether a product is tax-free depends on the law at the time; PPF interest has been exempt, and tax-free bonds are identified in their offer documents. Check the current position for your own case.
Like with like. Put both yields in as annual effective rates. PPF compounds once a year; a deposit that compounds quarterly has an effective rate a little above its quoted one, which the FD calculator shows. For a bond bought in the market, use its yield to maturity at your price, not its coupon. Tax-free status is also not the only difference: lock-in periods, liquidity, default risk and the length of the commitment matter too. The real yields divide by inflation, as on the real return calculator; for how a PPF account builds up, see the PPF calculator. This is arithmetic on the figures you enter, not financial advice.
Frequently asked questions
How do you calculate tax-equivalent yield?
Divide the tax-free yield by (1 − your tax rate). 7.1% tax-free at a 30% rate is 7.1 ÷ 0.7 = 10.14% taxable.
Which tax rate should I use?
Your marginal rate on this kind of income, including any surcharge and cess: the tax you would pay on one more rupee of it. The page does not know your slabs, so it asks.
Is a tax-free bond better than a fixed deposit?
Only if its yield beats the deposit’s after-tax yield. At a 30% rate a 7.5% deposit leaves 5.25%, so a tax-free yield above that wins. At lower rates the deposit may win; liquidity and risk also differ.
What is the break-even tax rate?
The rate at which both leave the same: 1 − tax-free yield ÷ taxable yield. For 7.1% against 7.5% it is 5.33%.
Related calculators
References
- Fabozzi FJ. Bond Markets, Analysis, and Strategies. Pearson. Taxable-equivalent yield = tax-exempt yield ÷ (1 − marginal tax rate).
- Government of India, Ministry of Finance (Department of Economic Affairs). Office Memorandum F.No.1/4/2019-NS dated 30 June 2026: rates on small savings schemes for 1 July – 30 September 2026; Public Provident Fund 7.1% a year, compounded annually.
- Income-tax Act, 1961, section 10(11) (Public Provident Fund interest exempt) and section 10(15) (interest on notified tax-free bonds exempt). The Income-tax Act, 2025 replaced the 1961 Act from 1 April 2026 and renumbers these provisions.
- Central-bank inflation targets used as default inflation by currency: Reserve Bank of India (4% CPI, flexible inflation targeting framework); U.S. Federal Reserve (2% PCE); European Central Bank (2%); Bank of England (2% CPI); Bank of Canada (2%); Reserve Bank of Australia (2–3%); Bangko Sentral ng Pilipinas (3% ± 1). Actual inflation often runs above target.