Question 1104663
5000 * 1.04 = 5200.
his profit is 2000 which he gets to keep because it's tax free.


5000 * 1.06 = 5300.
his profit is 300 but he has to pay 20% tax on it.
20% of 300 = 60.
he is left with 240.


even though he had to pay 20%, he is still better off with the 6% investment that he has to pay 20% tax on rather than the 4% investment that he doesn't have to pay tax on.


his after tax earning on the 6% is .06 * .8 = .048.


5000 * 1.048 = 5240.
his tax free interest is 240.


first investment at 4% gives him a tax free interest of 200.


second investment at 6% with 20% tax on the interest gives him a tax free interest of 240.


he can compare the investments directly by calculating the after tax interest rate.


after tax interest rate = before tax interest rate * (1 - tax rate on interest).


.06 - .2 * .06 = .048.