Taxable Equivalent Yield Calculator
From a tax-free investment's yield and your applicable tax rate, compute the taxable equivalent yield (TEY) to compare tax-free bonds with taxable investments fairly.
Input Data
Results
At a glance:The taxable equivalent yield compares a tax-free yield with a taxable one. TEY = tax-free yield ÷ (1 − tax rate). A taxable bond is worth it only if its yield exceeds the TEY; otherwise the tax-free bond wins after tax.
Formula
TEY = tax-free yield ÷ (1 − tax rate).
$$TEY = \dfrac{TaxFreeYield}{1 - TaxRate}$$How to Use
- Enter the tax-free yield.
- Enter your applicable tax rate.
- Read the taxable equivalent yield.
FAQ
What is the taxable equivalent yield and why convert it?
The taxable equivalent yield (TEY) answers: 'What pre-tax yield would a taxable investment need to deliver the same after-tax return as this tax-free investment?' It scales a tax-free yield up to a directly comparable taxable benchmark. A tax-free investment's interest is received intact, so its yield is the real return; a taxable investment's interest is taxed first, so its headline yield overstates what you keep. Comparing the two headline yields unfairly undervalues the tax-free option. Dividing the tax-free yield by (1 − tax rate) gives an equivalent pre-tax yield you can compare straight against a taxable yield. For example, a 3% tax-free yield at a 15% tax rate gives a TEY of about 3.53%—so a taxable investment must yield above 3.53% to beat the tax-free one after tax.
Does a higher tax rate make tax-free investments more attractive?
Yes. The higher your tax rate, the bigger the relative edge of tax-free investments. From TEY = tax-free yield ÷ (1 − tax rate), a higher rate makes the denominator smaller, so the equivalent taxable yield rises—meaning a taxable investment must reach a higher pre-tax yield to match. For the same 3% tax-free yield: at 10% tax the TEY is about 3.33%, at 30% it is 4.29%, and at 40% it is 5%. Tax-free investments (such as municipal bonds in some markets) therefore tend to appeal most to high-tax-rate investors. Low- or zero-tax investors gain little from the exemption, so a higher-nominal taxable investment may actually be better. Always plug in your own marginal rate, not a generic number.
Do Hong Kong investors need this calculator?
It depends on your holdings and tax residency. Hong Kong is friendly to investors: generally there is no tax on personal interest income (bank deposits, most bond coupons) and no capital gains tax, so for Hong Kong-domiciled bonds or deposits the tax-free vs taxable comparison rarely applies. But it is still useful if: (1) you hold overseas bonds or funds that are taxed or withholding-taxed in their jurisdiction; (2) you are a tax resident taxed on worldwide income elsewhere; or (3) you want to understand how international bond markets price tax-free versus taxable bonds (e.g. US municipal vs taxable bonds). In short, most local investors won't need it, but for cross-border or taxable income it enables a fair after-tax comparison. Given the complexity, seek professional tax or investment advice for significant cross-border decisions.
Is the after-tax yield the only thing to compare when choosing a bond?
No—the TEY only levels the playing field on tax. Other factors matter just as much. First, credit (default) risk: higher yields often compensate for higher risk, so compare bonds of similar credit quality rather than pitting a low-risk tax-free government bond against a high-yield risky one. Second, duration and interest-rate risk: longer-dated bonds fall more in price when rates rise. Third, liquidity: less liquid bonds may need a higher yield to compensate and can be hard to sell at fair value. Fourth, the accuracy and possible change of your tax rate—use the marginal, not average, rate, and note future tax rules may shift. Finally, costs and call features. The right approach: use the TEY to compare on an equal tax footing, then choose among comparable credit, duration and liquidity. This tool is for educational estimation only, not investment advice.
Why use the marginal tax rate rather than the average rate?
For the TEY you must use your marginal tax rate, not the average (effective) rate; using the wrong one badly distorts the result. Under a progressive system, the marginal rate is the top band your last dollar falls in, while the average rate is total tax ÷ total income and is usually lower. The TEY asks an incremental question—'if I move money into a taxable investment, how much tax hits that extra interest?'—and that extra income stacks on top of what you already earn, so it is taxed at your top marginal rate, not the lower bands. Using a lower average rate understates the tax and produces a misleadingly low TEY, possibly making a taxable bond look better than it is. Example: a 3% tax-free yield at a 30% marginal rate gives a TEY of 4.29%, but using a 20% average rate gives only 3.75%—a gap of over half a percentage point that could flip the decision. Note that Hong Kong's salaries tax is progressive but generally does not tax personal investment interest, so local investors often don't need this conversion; for taxable cross-border holdings, use the applicable marginal rate there. This tool is for estimation only, not tax advice.
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References
Content review: Calculatorism Finance Team. Results are for reference only; please refer to the relevant authorities for the official figures.