Interest rate after tax is calculated to get the true picture of the actual return from an investment after paying for all liabilities. It is the actual amount that the investor gets to enjoy out of investing in deposits in Banks, Financial Institutions, Post Offices, etc.
The interest income is added to all the other incomes of the individual or organisation to calculate the total income of the concerned entity and determine his tax liability.
So, the actual yield or the interest rate that an investor enjoys depends on his total income as the taxation structure in our country is not flat but in slabs.
Lets refer the table below
We consider the rate of interest on deposits to be 10%
| Investor | Rate of tax applicable on his income | Interest rate after tax |
| A | 0 | 10 |
| B | 10 | (10-(100-10)% of 10) = 9% |
| C | 20 | (10-(100-20)% of 10) = 8% |
| D | 30 | (10-(100-30)% of 10) = 7% |
For calculating the above, we have ignored surcharges like education cess, etc.
Thus we see that even though the Bank pays the same interest for the same amount and for the same term to its customers, yet the actual amount that the customer enjoys varies from person to person based on his total taxable income.
