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Taxable Equivalent Yield (TEY) Calculator

Compare Tax-Free and Taxable Investment Yields

Enter your tax-free yield and marginal tax rate to find the equivalent taxable yield.

Enter values and calculate to see results.

Understanding Taxable Equivalent Yield (TEY)

Taxable Equivalent Yield (TEY) is one of the most important concepts in fixed-income investing. It allows you to compare apples to oranges—tax-free investments versus taxable investments—on a level playing field. Understanding TEY can save you thousands of rupees in taxes over your investment lifetime.

Why TEY Matters

When comparing a tax-free bond yielding 5% with a taxable bond yielding 7%, which is better? The answer depends on your tax bracket. TEY reveals the true comparison by showing what taxable yield equals your tax-free return. For high-tax-bracket investors, tax-free investments often outperform higher-yielding taxable alternatives.

The TEY Formula

TEY = Tax-Free Yield ÷ (1 - Marginal Tax Rate)

Example: 5% tax-free yield ÷ (1 - 0.30) = 5% ÷ 0.70 = 7.14% TEY. This means a taxable bond must yield at least 7.14% to match the 5% tax-free bond for someone in the 30% tax bracket.

Tax-Free vs Taxable Investments: A Detailed Comparison

Factor Tax-Free Investments Taxable Investments
Examples Municipal Bonds, PPF, Tax-Free Bonds (RBI, NHAI, REC) Corporate Bonds, FDs, Debt Mutual Funds
Interest Taxation Exempt from income tax Taxed at your slab rate
Typical Yield Lower (5-7%) Higher (7-10%)
Effective Yield (30% bracket) Full 5-7% 4.9-7% after tax
Risk Level Lower (government-backed) Varies (credit risk)
Best For High-tax-bracket investors Low-tax-bracket investors

How Your Tax Bracket Impacts TEY

The higher your tax bracket, the more valuable tax-free investments become. Here's how TEY changes across different Indian income tax slabs:

Tax Bracket Income Range (New Regime) 5% Tax-Free → TEY 6% Tax-Free → TEY 7% Tax-Free → TEY
0% Up to ₹3 lakh 5.00% 6.00% 7.00%
5% ₹3-6 lakh 5.26% 6.32% 7.37%
10% ₹6-9 lakh 5.56% 6.67% 7.78%
15% ₹9-12 lakh 5.88% 7.06% 8.24%
20% ₹12-15 lakh 6.25% 7.50% 8.75%
30% Above ₹15 lakh 7.14% 8.57% 10.00%

Key Insight: For someone in the 30% tax bracket, a 7% tax-free bond requires a 10% taxable bond to match returns.

Real-Life Scenarios: When Tax-Free Wins

Scenario 1: High-Income Professional

Profile: Software engineer, ₹25 lakh annual income (30% bracket)

Choice: Tax-Free Bond @ 5.5% vs Corporate FD @ 8%

TEY Calculation: 5.5% ÷ 0.70 = 7.86%

Decision: Tax-Free wins! FD @ 8% after 30% tax = 5.6%, barely beating tax-free. But FD has credit risk.

✅ Result: Tax-Free Bond preferred for safety + effectively equal returns
Scenario 2: Low-Income Saver

Profile: Teacher, ₹6 lakh annual income (5% bracket)

Choice: Tax-Free Bond @ 5.5% vs Bank FD @ 7.5%

TEY Calculation: 5.5% ÷ 0.95 = 5.79%

Decision: Taxable FD wins! FD @ 7.5% after 5% tax = 7.125%, well above tax-free.

⚠️ Result: Bank FD preferred for higher effective returns
Scenario 3: Senior Citizen

Profile: Retired, ₹8 lakh pension income (10% bracket)

Choice: Tax-Free Bond @ 6% vs Senior Citizen FD @ 8.5%

TEY Calculation: 6% ÷ 0.90 = 6.67%

Decision: Taxable FD wins! Senior FD @ 8.5% after tax = 7.65% effective return.

💡 Result: Senior Citizen FD preferred (has extra benefits too)
Scenario 4: Business Owner

Profile: Business owner, ₹50 lakh income (30% + surcharge ≈ 34%)

Choice: NHAI Tax-Free @ 5.75% vs Corporate Bond @ 9%

TEY Calculation: 5.75% ÷ 0.66 = 8.71%

Decision: Very close! Corp bond (9% - 34% tax = 5.94%) slightly beats tax-free, but tax-free has zero credit risk.

🎯 Result: Consider split: 60% tax-free + 40% corporate for balance

TEY Decision Framework: A Step-by-Step Guide

  1. Determine Your Marginal Tax Rate: Check your income tax slab under the chosen tax regime (Old vs New). Include surcharge if applicable (for income above ₹50 lakh).
  2. Calculate TEY for Tax-Free Options: Use the formula: TEY = Tax-Free Yield ÷ (1 - Tax Rate). This tells you the minimum taxable yield needed to match.
  3. Compare with Available Taxable Investments: Look at corporate bonds, FDs, debt mutual funds. Find their post-tax effective yield.
  4. Consider Risk Factors: Tax-free government bonds are essentially risk-free. Higher-yielding taxable options carry credit risk. Is the extra yield worth the risk?
  5. Factor in Liquidity Needs: Tax-free bonds often have long tenures (10-15 years). If you need liquidity, taxable options may be better despite lower effective yields.
  6. Make Your Decision: If taxable yield < TEY, choose tax-free. If taxable yield > TEY and you accept the risk, choose taxable.

When to Choose Tax-Free Investments

Ideal for Tax-Free:
  • You're in the 20% or 30% tax bracket
  • You want capital preservation with government backing
  • You have a long investment horizon (10+ years)
  • You prefer predictable, stable returns
  • You don't need immediate liquidity
  • You want to maximize post-tax returns
Avoid Tax-Free When:
  • You're in the 0-10% tax bracket
  • You need higher liquidity
  • Available tax-free yields are unusually low
  • You can find safe taxable options exceeding TEY
  • You're investing in a tax-exempt account (NPS, PPF already has tax benefits)
  • Your investment horizon is short (3-5 years)

Frequently Asked Questions About TEY

TEY is the yield a taxable investment must provide to equal the after-tax return of a tax-free investment, given your marginal tax rate. It's calculated as: TEY = Tax-Free Yield ÷ (1 - Tax Rate). This helps you compare investments fairly by converting tax-free returns into equivalent taxable returns.

TEY is crucial because it reveals the true value of tax-free investments. A tax-free bond yielding 5% might seem lower than a taxable bond at 7%, but for a 30% tax bracket investor, the 5% tax-free equals 7.14% taxable—making it the better choice. Without TEY, investors may choose inferior options that appear better on paper.

Always use your marginal tax rate—the rate applied to your last rupee of income. This is your highest tax slab. For incomes above ₹50 lakh, include surcharge. Don't use your average tax rate, as it understates the benefit of tax-free investments. Check the applicable slab under your chosen tax regime (Old or New).

Tax-free investments in India include: Tax-Free Bonds issued by PSUs like NHAI, REC, PFC, IRFC, HUDCO; PPF (Public Provident Fund) interest; Sukanya Samriddhi Yojana; EPF/VPF (within limits); and Life Insurance maturity proceeds under Section 10(10D). Note that while PPF interest is tax-free, the investment itself qualifies for 80C deduction—double benefit!

Higher tax brackets dramatically increase TEY. For a 5% tax-free yield: 0% bracket → TEY = 5%, 10% bracket → TEY = 5.56%, 20% bracket → TEY = 6.25%, 30% bracket → TEY = 7.14%. This means high-income earners get more value from tax-free investments. The 30% bracket investor needs a taxable investment yielding 7.14% to match a mere 5% tax-free—a significant advantage!

No, TEY is just one factor. Also consider: Credit Risk (tax-free government bonds are safer than high-yield corporate bonds); Liquidity (tax-free bonds may have long lock-ins); Investment Horizon (match your goals); Inflation Protection (fixed yields may lose value); and Portfolio Diversification (don't put all eggs in one basket). TEY comparison is most useful when other factors are roughly equal.

Yes! TEY changes when: (1) Your income changes—moving to a higher/lower tax bracket changes the calculation; (2) Tax laws change—new tax slabs affect rates; (3) Tax-free yields change—different bonds offer different yields. Re-evaluate your investments when any of these change. What was optimal last year may not be optimal today.

TEY is designed for fixed-income (debt) investments where yields are predictable. Equity returns are uncertain and taxed differently (LTCG, STCG). However, you can compare: ELSS (equity with 80C benefit) vs tax-free bonds. But pure equity vs bond? Compare based on risk-adjusted expected returns, not just TEY. Equity has capital gains tax implications, making direct TEY comparison misleading.

New tax-free bond issuances have been limited in recent years. However, existing tax-free bonds trade on stock exchanges (NSE, BSE). You can buy them in the secondary market. Check for NHAI, REC, PFC, HUDCO bonds. Yields vary based on market prices and coupon rates. For PPF and SSY, these remain open for fresh investment with tax-free interest benefits.

Your marginal tax rate is the slab applicable to your highest income bracket. For New Tax Regime 2024-25: ₹0-3L (0%), ₹3-6L (5%), ₹6-9L (10%), ₹9-12L (15%), ₹12-15L (20%), Above ₹15L (30%). Add 4% cess on total tax. Add surcharge for income above ₹50L. For Old Regime with deductions, calculate your net taxable income first, then apply slabs. Your marginal rate is the rate for your last rupee of income.
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Quick Tips
  • TEY helps you compare tax-free and taxable investments on an equal footing.
  • Use your marginal tax rate, not your average rate.
  • Tax laws may change, so check current rates.
Disclaimer
This calculator is for informational purposes only and does not constitute financial advice. Consult a tax advisor for personalized guidance.
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