Is a tax-free investment better, or a taxable one that yields more on paper? The tax-equivalent yield (TEY) answers, putting the two on the same tax footing. A tax-free bond at 3.5% can beat a taxable one at 5% if your tax rate is high enough. This calculator determines the TEY, the after-tax yield of the taxable, the gains over the period and which of the two really wins — the right tool to decide between tax-advantaged and ordinary investments.

What the tax-equivalent yield (TEY) is

The tax-equivalent yield is the yield a taxable investment would need to have, before tax, to match the after-tax yield of a tax-free investment. It turns the tax-free yield into a value directly comparable with the taxable yields you see on the market. If a tax-free bond yields 3.5% and your tax rate is 35%, its TEY is 5.38%: it means it equals a taxable bond yielding 5.38% gross. It is the correct way to compare investments with different tax treatments.

Why taxes change the comparison

Comparing gross yields is a common mistake. A taxable investment at 5% does not leave 5% in your pocket: after tax, with a 35% rate, 3.25% remains. A tax-free investment at 3.5% instead leaves the whole 3.5%. So, despite the lower gross yield, the tax-free one is more advantageous. Taxes can flip the comparison: this is exactly why a common parameter is needed, the TEY, which brings everything to equal tax footing and shows the real winner.

The TEY formula

The TEY is calculated by dividing the tax-free yield by one minus the tax rate. With a tax-free yield of 3.5% and a 35% rate: 3.5% / (1 − 0.35) = 3.5% / 0.65 = 5.38%. The higher the rate, the higher the TEY, and the more advantageous the tax-free investment becomes. It is a simple but powerful formula: it captures in a single number the value of the tax advantage, making it comparable with any taxable yield.

The after-tax yield of the taxable

The other side of the comparison is the after-tax yield of the taxable: the gross yield multiplied by one minus the tax rate. A taxable at 5% with a 35% rate yields 5% × 0.65 = 3.25% net. It is what really stays in your pocket. Comparing the after-tax yield of the taxable with the tax-free yield (both "net") is equivalent to comparing the TEY with the taxable yield (both "gross"): the two approaches lead to the same conclusion on which investment wins.

How the calculator works

Enter the tax-free investment yield, your marginal tax rate, the taxable investment yield to compare, the amount invested and the time horizon. The calculator determines the TEY, the after-tax yield of the taxable, the gains of both over the period and the difference in euros. The verdict tells you which investment wins: the tax-free, the taxable, or whether they are equivalent.

The values you need

The tax-free yield is the annual yield of the untaxed investment. The marginal tax rate is the percentage of tax you pay on the taxable yield (your highest rate, or the rate on financial income). The taxable yield is that of the alternative to compare, before tax. The amount and the years are used to translate the yields into concrete gains in euros. Use the correct rate for your case.

The tax-equivalent yield (TEY)

The TEY is the main result: the gross yield a taxable must offer to match the tax-free one. Compare it directly with the available taxable yield: if the TEY is higher, the tax-free wins; if lower, the taxable wins. With the TEY you no longer need to do mental tax calculations: you already have the comparable number. It is how professionals assess government bonds, tax-advantaged bonds and reduced-tax products against ordinary alternatives.

The after-tax yield of the taxable

The after-tax yield of the taxable shows the other perspective: how much the taxable alternative really yields after tax. It is useful to see the tax effect concretely: an attractive gross yield can shrink significantly net. Comparing this value with the tax-free yield is the most intuitive way to decide: if the after-tax taxable is lower than the tax-free yield, the tax-free wins. The calculator shows both approaches, so the conclusion is always clear.

The gains over the period

Beyond the percentages, the calculator translates everything into concrete gains on the amount and horizon you enter. The tax-free gain and the after-tax taxable gain show, in euros, how much you would get with each choice, accounting for compound growth over the years. Seeing the difference in euros makes the comparison tangible: on large amounts or long horizons, even small differences in after-tax yield become significant sums.

The difference and the verdict

The difference is how much more you earn by choosing the better option, in euros, over the entire period. The verdict sums up the comparison: the tax-free wins if its TEY exceeds the taxable yield; the taxable wins if its after-tax exceeds the tax-free; they are equivalent if the two match. The break-even point is when the TEY exactly equals the taxable yield: in that case the after-tax taxable coincides with the tax-free yield, and the tax choice is indifferent.

TEY by tax rate

How the TEY of a 3.5% tax-free changes as the rate varies:

The higher the rate, the higher the TEY: the tax advantage of the tax-free grows with your rate.

Which wins by tax rate

3.5% tax-free vs 5% taxable, as the rate varies (after-tax of the taxable):

There is a break-even rate (here 30%): above it the tax-free wins, below it the taxable.

Examples of tax-free and taxable

Typical investments with different tax treatments (rules vary by country):

Enter the real yields of the products you are comparing and your effective tax rate.

When the tax-free wins

The tax-free investment wins when its TEY exceeds the available taxable yield, and this happens more easily with high tax rates. For a taxpayer with a high rate, even a modest tax-free yield can beat a higher taxable one. For those with a low rate, instead, the tax advantage is worth little and the taxable with the higher yield often wins. The TEY tells you exactly where the boundary is for your specific tax situation.

The limits of the comparison

The TEY compares only the tax aspect: it does not consider risk, maturity, liquidity or the issuer's strength. A tax-free bond that is more profitable after tax may still be riskier or less liquid than the taxable one. Moreover, the rate may not be constant (brackets, local surcharges, special regimes) and the effective taxation may vary. Use the TEY as a first filter for the tax comparison, then evaluate the other factors before deciding.

Common mistakes

• Comparing gross yields, ignoring the different taxation.
• Using the wrong rate (average instead of marginal, or vice versa).
• Forgetting surcharges or special tax regimes.
• Deciding only on the TEY, ignoring risk, maturity and liquidity.
• Assuming a tax-free one is always better, regardless of the rate.

How to use the calculator

Enter the tax-free yield, your rate, the taxable yield to compare, the amount and the years. Read the TEY, the after-tax of the taxable, the gains and the difference. Try different rates to find the break-even point of your situation. It is the quickest way to decide, on a tax basis, between a tax-advantaged and an ordinary investment, avoiding the mistake of looking only at gross yields.

Practical example

You compare a tax-free bond yielding 3.5% with a taxable one yielding 5%, with a 35% tax rate, investing €10,000 for 1 year. The result: a TEY of 5.38%, an after-tax yield of the taxable of 3.25%, a tax-free gain of €350, an after-tax taxable gain of €325 and a difference of €25 in favour of the tax-free, with the verdict "the tax-free investment wins: it equals a higher taxable yield". The 3.5% tax-free bond beats the 5% taxable one, because it equals a 5.38% gross. Enter your numbers for your real situation. The comparison is purely fiscal and assumes a constant rate; it does not consider risk, maturity, liquidity or the issuer's strength. It is an informational estimate.

Frequently asked questions

What is the tax-equivalent yield (TEY)?

It is the gross yield a taxable investment must have to match the after-tax yield of a tax-free one. It lets you compare investments with different taxation on equal tax footing.

How is the TEY calculated?

You divide the tax-free yield by one minus the tax rate. With a tax-free at 3.5% and a 35% rate: 3.5% / 0.65 = 5.38%. It means the tax-free equals a taxable yielding 5.38% gross.

Why not simply compare gross yields?

Because a taxable at 5% does not leave 5% in your pocket: after tax, less remains. Comparing gross yields ignores taxes and leads to wrong choices. The TEY brings everything to equal tax footing.

When does the tax-free investment win?

When its TEY exceeds the available taxable yield. This happens more easily with high tax rates: the more tax you pay, the more the exemption is worth.

What is the break-even tax rate?

It is the rate at which the two investments are equivalent: above it the tax-free wins, below it the taxable. It is found when the TEY equals the taxable yield, that is when the after-tax taxable equals the tax-free.

Which tax rate should I use?

Your marginal rate, that is the one you pay on the last euro of taxable yield. For financial income, it is often the specific rate on interest and capital gains in your country, not the rate on employment income.

Does the TEY consider risk?

No. It compares only the tax aspect. A tax-free with a higher TEY may be riskier, less liquid or with a different maturity than the taxable. The TEY is the first filter, not the only choice criterion.

Does it apply only to bonds?

No. It applies to any comparison between a tax-free or tax-advantaged investment and a taxable one: bonds, deposit accounts, savings products. Wherever there are different tax treatments, the TEY helps compare them correctly.

What happens with very high tax rates?

The TEY grows rapidly. With a tax-free at 3.5%, at a 45% rate the TEY is 6.36%: the tax-free equals a much higher taxable. For high-rate taxpayers, tax-free investments become very advantageous.

Does the calculation include compounding?

Yes, for the gains in euros over the period: it applies compound yields over the years entered. The TEY and the after-tax yields are instead annual rates, directly comparable regardless of the horizon.

Can I compare two investments that are both taxable?

This tool compares a tax-free with a taxable. For two taxables with different rates, calculate the after-tax yield of each (gross times one minus the rate) and compare them directly.

Does it work for any country and currency?

Yes, the formula is universal and the calculation currency-independent: use the values and the rate of your country. The specific tax rules vary, but the principle of comparing on equal tax footing is the same everywhere.

Updated July 2026