Post-Tax Yield: What Your Bond Actually Earns After Tax
A 9% NCD sounds attractive. But if you are in the 30% tax slab, the government takes 2.7 percentage points of that yield before you see it. Your actual return is 6.3%. Understanding post-tax yield is not optional for serious fixed-income investors — it is the only honest way to compare bonds, FDs, PPF, and other instruments.
Why gross yield misleads you
When a bond is advertised at "9% yield," that is the pre-tax, gross yield to maturity. It assumes you keep all the interest. You do not — the Interest income from bonds and NCDs is taxable as "Income from Other Sources" at your applicable slab rate.
The same ₹10 lakh investment in a 9% NCD produces very different real returns depending on who owns it:
| Tax slab | Gross yield | Tax on interest | Post-tax yield | Annual interest on ₹10L | Tax paid | Net received |
|---|---|---|---|---|---|---|
| 0% (below exemption) | 9.00% | 0% | 9.00% | ₹90,000 | ₹0 | ₹90,000 |
| 10% slab | 9.00% | 10% | 8.10% | ₹90,000 | ₹9,000 | ₹81,000 |
| 20% slab | 9.00% | 20% | 7.20% | ₹90,000 | ₹18,000 | ₹72,000 |
| 30% slab | 9.00% | 30% | 6.30% | ₹90,000 | ₹27,000 | ₹63,000 |
| 30% + surcharge (15%) | 9.00% | 34.5% | 5.90% | ₹90,000 | ₹31,050 | ₹58,950 |
Surcharge applies when total income exceeds ₹1 crore. Cess of 4% applies on top of tax — not shown above for simplicity. Consult a CA for your exact effective rate.
The formula
Post-tax yield is straightforward:
Post-tax yield = Gross yield × (1 − Effective tax rate)
For a 9% bond and a 30% tax rate: 9% × (1 − 0.30) = 9% × 0.70 = 6.30%
This is the only number worth comparing across investments for a taxpaying investor.
How TDS works on bond interest
Many investors are confused about TDS (Tax Deducted at Source) on NCD interest. The rules are:
- Listed NCDs held in demat form: No TDS deducted. Interest is paid gross. You are responsible for paying advance tax or including it in your ITR.
- Unlisted bonds or physical certificates: TDS at 10% if PAN is furnished; 20% if PAN is not furnished.
- G-Secs and T-Bills: No TDS. Interest and discount credited gross.
TDS is not your final tax — it is a prepayment. You can claim credit for TDS deducted when filing your ITR. If TDS was deducted at 10% but your slab rate is 30%, you owe the additional 20%. If your income is below the exemption limit, you can claim a refund of the TDS.
Practical tip: If you hold listed NCDs in a demat account (the most common retail scenario), TDS is not deducted. Plan your advance tax accordingly to avoid interest under Section 234B/C.
Capital gains: what happens if you sell before maturity
If you sell a bond in the secondary market before maturity, the profit or loss is a capital gain, not interest income. Different rules apply:
| Holding period | Gain type | Tax rate |
|---|---|---|
| 12 months or less | Short-term capital gain (STCG) | At slab rate |
| More than 12 months | Long-term capital gain (LTCG) | 12.5% without indexation (per Budget 2024) |
For an investor in the 30% slab who holds a bond for more than 12 months and sells at a profit, LTCG at 12.5% is significantly better than slab-rate taxation on interest. See our full bond taxation guide for the complete framework, including how unlisted bonds are treated differently. This creates a tax planning angle: bonds trading at a discount to face value (where your return comes partly from price appreciation, not just coupon) can be more tax-efficient than high-coupon bonds for long-holding investors.
Note: Tax rules on capital gains were revised in the Union Budget 2024. Verify current rates with a CA.
Comparing with tax-free and tax-advantaged alternatives
| Instrument | Gross yield (illustrative) | Tax treatment | Post-tax yield at 30% |
|---|---|---|---|
| Corporate NCD (AA rated) | 9.0% | Interest taxed at slab | 6.30% |
| 10-year G-Sec | 7.1% | Interest taxed at slab | 4.97% |
| SBI 5-year FD | 6.8% | Interest taxed at slab | 4.76% |
| PPF (current rate) | 7.1% | Fully tax-free (EEE) | 7.10% |
| Old NHAI/PFC tax-free bonds | 5.5–6.5% (secondary market) | Interest tax-free | 5.5–6.5% |
| Sovereign Gold Bond (held to maturity) | 2.5% coupon + gold price gain | Coupon taxable; maturity redemption capital gains exempt | Depends on gold price |
Yields are illustrative only. Verify current rates before any investment decision. PPF yield is subject to government revision each quarter.
The table makes the point clearly: PPF at 7.1% tax-free is worth more to a 30% slab investor than a 9% NCD (6.30% post-tax), despite the lower gross rate. PPF has an annual contribution limit of ₹1.5 lakh and a 15-year lock-in — once that capacity is used, the comparison shifts in the NCD’s favour.
Tax-free bonds: worth the premium?
NHAI, PFC, IRFC, HUDCO, and other PSUs issued tax-free bonds between 2011 and 2016. These bonds pay interest that is entirely exempt from income tax — no TDS, no inclusion in income. They are no longer being issued (the government stopped sanctioning new tax-free bond programmes), but older bonds trade in the secondary market.
For a 30% slab investor, a tax-free bond yielding 5.8% in the secondary market is equivalent to a taxable bond yielding:
Equivalent taxable yield = 5.8% ÷ (1 − 0.30) = 8.29%
If you can find a tax-free bond at 5.8% and you are comparing it to a taxable bond at 8% — the tax-free bond wins for a 30% slab investor. The break-even taxable yield for a 5.8% tax-free bond is 8.29%.
Quick reference: break-even gross yields for a tax-free bond at various secondary market prices
| Tax-free bond yield (secondary market) | Equivalent gross yield at 20% slab | Equivalent gross yield at 30% slab |
|---|---|---|
| 5.0% | 6.25% | 7.14% |
| 5.5% | 6.88% | 7.86% |
| 6.0% | 7.50% | 8.57% |
| 6.5% | 8.13% | 9.29% |
If taxable bond yields exceed these levels, the taxable bond wins. If not, the tax-free bond wins — all else equal.
Using our post-tax yield calculator
Our YTM calculator includes a post-tax yield field. Enter your tax rate alongside the bond details and the calculator will show both the pre-tax YTM and the post-tax yield in one step. Use it to compare bonds side by side on the number that actually matters.
Related: YTM calculator · What is YTM, really? · G-Secs vs FDs for high tax brackets