Real Return
The return on an investment after adjusting for inflation.
Compare products on post-tax real return, not headline rate. Two instruments with the same nominal yield can differ sharply once slab-rate tax and inflation are applied.
Why Real Return matters when comparing products
In India, inflation erodes the purchasing power of money over time. While a high nominal return might seem attractive, the real return, which accounts for inflation, provides a clearer picture of actual wealth growth. Additionally, post-tax real return is crucial as taxes further reduce the effective gains, making it essential to compare instruments based on what investors truly earn after all deductions and price increases.
Illustrative example
If an investment yields a nominal return of 8% and the inflation rate is 6%, the real return is approximately 2%. If this 8% nominal return is taxed at a 30% slab, the post-tax nominal return becomes 5.6% (8% - 30% of 8%). After inflation, the post-tax real return would be a negative 0.4% (5.6% - 6%), meaning your purchasing power has decreased.
Related terms
The rate at which the general price level of goods and services rises.
Compound Annual Growth Rate represents the mean annual growth rate of an investment over a specified period longer than one year.
Gains on assets held beyond the holding period that qualifies them as long-term.