After-tax real rate of return definition

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What is the After-Tax Real Rate of Return?

The after-tax real rate of return is the percentage rate of return on an investment after deducting taxes and adjusting for inflation. It represents the actual financial benefit experienced from an investment. This approach shows less of a difference from the nominal rate of return when dealing with investments in inflation-adjusted securities, since there is no need for an inflation adjustment to the calculation of investment return.

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How to Calculate the After-Tax Real Rate of Return

To determine the after-tax real rate of return, you must complete these steps:

  1. Calculate the nominal rate of return, which is the return you will earn prior to adjusting for inflation and taxes.

  2. Subtract the taxes paid on your nominal return, so that you can derive the after-tax nominal return.

  3. Adjust the after-tax nominal return for the inflation rate.

After-tax rate of return - Inflation rate = After-tax real rate of return

As an example, in a case where the after-tax rate of return is 8% and the current inflation rate is 3%, the after-tax real rate of return is 5%.