A rupee return is only half the story. What matters is how much more your money can buy at the end than at the start. That is the real return.
The formula, worked
For illustration:
- 8% nominal return, 6% inflation: (1.08 ÷ 1.06) − 1 ≈ 1.89% real. The shortcut, 8 − 6 = 2%, is close.
- 12% nominal return, 6% inflation: (1.12 ÷ 1.06) − 1 ≈ 5.66% real. The shortcut says 6%, slightly overstating.
The same return, different inflation
| Inflation | Real return on an 8% nominal return |
|---|---|
| 4% | about 3.85% |
| 6% | about 1.89% |
| 8% | 0% |
When inflation equals the nominal return, the money grows in rupees but buys exactly the same as before.
Add tax
For illustration, a deposit paying 7% to an investor in the 30% tax slab leaves 4.9% after tax. At 6% inflation, the real, post-tax return is about −1% a year. Different products are taxed differently and at different times — some only when you redeem — so compare like with like over your actual horizon. See how investments are taxed.
Why it matters for planning
- Goals: either inflate the goal's cost to future rupees and use nominal returns, or keep everything in today's rupees and use real returns. Mixing the two is the most common planning error.
- Retirement: when the post-retirement return is close to inflation, the real return is small, so the corpus has to be large. Your retirement number shows the effect.
- Low volatility is not the same as preserving purchasing power. An investment can be stable in rupees and still lose ground to prices.
The Inflation Calculator shows what today's money will be worth — and what tomorrow's costs will be — on your assumptions. For the wider picture, read inflation: the quiet tax.