My brother says that the investment in public provident fund (PPF), which gives 8 per cent, is the best. Isn't 8 per cent a low rate of return?
An investment's pre-tax yield tells us if its return is high or low. The return on PPF (8 per cent) is tax-free. Also, this has to compared with returns of a taxable income to estimate its worth. For someone paying a tax of 30.9 per cent, the pre-tax yield in PPF is 11.57 per cent. At present, there is no fixed, safe and assured-return option that has 11.57 per cent return and a post-tax return comparable to PPF's 8 per cent.
Formula: Pre-tax yield = ROI / (100-TR)*100
Type in: =8/(100-30.9)*100 and hit enter. You will get 11.57%. ROI: rate of interest, TR: tax rate, (depends on tax slab)
Also used for: Calculating the yield on an Employees' Provident Fund or any other tax-free instrument.
Image: An investment's pre-tax yield tells us if its return is high or low. | Photograph: David McNew/Getty Images
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