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The real after-tax interest rate refers to the net return an investor receives on an investment after adjusting for both inflation and taxes. This measure provides a more accurate assessment of the actual purchasing power gained or lost on an investment when considering the impact of both inflation and applicable taxes.
Real rate of interest i_real=(i−r)/(1+r)
After tax interest rate i_(after tax)=i(1−T)
Real after tax interest rate
Q. Melanie can invest her money in a GIC account at 4.5% annually. However, she must pay taxes on her earning at a rate of 45%, and the expected inflation rate that year is 2.1%. What is her real after-tax return?