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GlossaryReturns & risk

Real return

Your return after accounting for inflation — the growth in what your money can actually buy.

A nominal return is the percentage by which your investment grew in rupees. A real return adjusts that for inflation, showing how much your purchasing power grew. If an investment earned 8% in a year when prices rose 6%, its real return was about 1.9%, not 8%.

Why it matters

Goals are about what money can buy, not about rupee totals. A corpus that looks large in 2046 rupees may buy far less than the same number would today. Real returns are the honest way to compare options and set expectations, especially for long-term goals such as retirement.

How to read it

  • Use the exact formula for precision; “return minus inflation” is a close shortcut only when both rates are low.
  • Post-tax real return is what ultimately matters. Tax on interest or gains reduces the nominal return before inflation is taken into account.
  • Negative real returns are common for cash and some fixed-income holdings when inflation is high, even if the nominal figure looks healthy.

Common misconceptions

  • “A positive return means I’m better off.” Only if it beats inflation, after tax.
  • “Real return is a niche concept.” It underpins every long-term plan. Any tool that shows future values in today’s rupees is using it.
  • “My inflation is the headline number.” Your own spending mix may inflate faster or slower than the CPI.

Note: Interest on deposits is generally taxed at your slab rate, so the post-tax real return on a deposit can be far lower than its headline rate suggests.

Formula

Real return = [(1 + Nominal return) ÷ (1 + Inflation)] − 1

Worked example

For illustration, assume an FD pays 7% a year, you are in the 30% tax slab (ignoring cess) and inflation is 6%. Post-tax return ≈ 7% × (1 − 0.30) = 4.9%. Real post-tax return = (1.049 ÷ 1.06) − 1 ≈ −1.0%: purchasing power shrinks despite a positive nominal return.

Figures are for illustration only — not a forecast or a recommendation.

Related terms

  • Inflation

    The rate at which prices rise over time, which steadily reduces what a fixed amount of money can buy.

  • Compounding

    Earning returns on past returns as well as on the original amount, so growth accelerates the longer money stays invested.

  • CAGR

    Compound Annual Growth Rate

    The steady yearly growth rate that would take an investment from its starting value to its ending value over a given period.

  • Fixed deposit

    A deposit with a bank or finance company that earns a fixed interest rate for a chosen term, with principal and interest due at maturity.

  • XIRR

    Extended Internal Rate of Return

    An annualised return for investments with several cash flows on irregular dates, such as SIPs, top-ups and partial withdrawals.