Tax-Equivalent Yield Formula
Tax-equivalent yield adjusts tax-free returns to show what taxable yield you'd need to match them. Essential for comparing PPF (tax-free) with FD (taxable).
Tax-Equivalent Yield
TEY = Tax-Free Yield / (1 - Tax Rate)
Where:
- TEY = Tax-equivalent yield (what taxable investment must earn)
- TFY = Tax-free yield
- T = Your marginal tax rate
Step-by-Step:
- 1
Find tax-free yield
The return on tax-free investment (e.g., PPF at 7.1%).
- 2
Find your tax rate
Your marginal income tax rate (5%, 20%, 30%).
- 3
Calculate TEY
Divide tax-free yield by (1 - tax rate).
Worked Examples:
PPF vs FD
PPF Rate: 7.1%Tax Bracket: 30%
Result: TEY = 10.14%
7.1% / (1 - 0.30) = 7.1% / 0.70 = 10.14%. An FD would need to pay 10.14% to match PPF's after-tax return!