Cost of Debt Calculator
After-tax cost of borrowing
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Working out after-tax cost of borrowing is easier with Cost of Debt Calculator, which answers as you type. Just enter Pre-tax Interest Rate (%) and Tax Rate (%); Cost of Debt updates the result as you type. Cost of Debt puts the headline number first. Students and professionals reach for Cost of Debt when speed matters. No sign-up is needed for Cost of Debt. The math runs on your device. Cost of Debt is part of the Finance collection on CalcProMaster, alongside after tax cost of debt calculator, free online cost of debt calculator and more. Cost of Debt is designed for real people. Labels stay plain. Try Cost of Debt now and keep it handy.
What the defaults give
A 6% pre-tax interest rate with a 25% tax rate gives an after-tax cost of debt of 4.50%.
The 1.5-point gap is the tax shield: the borrower keeps 75% of every rupee of interest as a deductible expense.
The after-tax cost of debt
Interest is usually tax-deductible, so the effective cost is lower than the headline rate:
After-tax cost of debt = Pre-tax rate × (1 − Tax rate)
A 6% loan in a 25% tax bracket: 6% × (1 − 0.25) = 4.5%.
| Pre-tax rate | Tax rate | After-tax cost |
|---|---|---|
| 5% | 20% | 4.0% |
| 6% | 25% | 4.5% |
| 7% | 30% | 4.9% |
| 8% | 21% | 6.3% |
| 10% | 35% | 6.5% |
This figure is what gets compared against the return on new projects in a weighted average cost of capital. Related: effective tax rate and finance calculators.
The formula
After-tax cost of debt = pre-tax rate × (1 − tax rate)
6% × (1 − 0.25) = 6% × 0.75 = 4.50%. The tax rate goes in as a decimal, so 25% is 0.25 and 21% is 0.21.
Worked examples
6% at 25% → 6 × 0.75 = 4.50%
8% at 30% → 8 × 0.70 = 5.60%
10% at 21% → 10 × 0.79 = 7.90%
5% at 0% → 5.00%, because there is no shield without tax
4% at 40% → 4 × 0.60 = 2.40%
Why the shield exists, and where it stops
Interest is paid out of pre-tax profit, so a business that deducts 100 of interest pays 25 less tax at a 25% rate. The net cost is 75, or 75% of the headline rate. That is why debt looks cheap next to equity in a WACC calculation even before any negotiation.
The shield is only worth the marginal rate if the business is actually profitable. A loss-making company that pays no tax gets no cash back, and the effective benefit is deferred until it has taxable income to offset. Carried-forward losses complicate the simple formula.
Many tax codes also cap interest deductibility — commonly a share of EBITDA or a fixed proportion of tax-adjusted earnings. Once the cap binds, the marginal shield on the next rupee of interest is smaller, and the after-tax number here overstates the benefit.
What not to include
Principal repayments are not an expense, so they never create a shield. Fees, commitment commissions and the amortised cost of arranging the loan reduce the cash proceeds and raise the true cost, but they are not in this two-input version.
The result is a cost of debt, not a cost of capital. Blend it with the cost of equity by market-value weights to get WACC, and use the marginal tax rate rather than the last filed effective rate.
Frequently Asked Questions
What is the after-tax cost of 6% debt at a 25% tax rate?
4.5%. Multiply 6% by 1 minus 0.25, which is 0.75, to get 4.5%.
Why is interest tax-deductible but principal not?
Interest is the cost of borrowing and counts as an expense. Principal is repayment of money you received, so it is not a cost. On a $10,000 loan at 6%, the $600 of interest saves $150 at a 25% rate, while the principal repayment saves nothing.
Should I use the effective or marginal tax rate?
Use the marginal rate on the next unit of income. The effective rate blends in brackets and credits and understates the shield on an incremental interest deduction.
Does a loss-making company get the same benefit?
Not immediately. With no tax to offset, the shield has no cash value until there is taxable profit, though carried-forward losses may preserve some of it.
Is after-tax cost of debt the same as WACC?
No. WACC blends the after-tax cost of debt with the cost of equity, weighted by market values. This figure is one input to that calculation.
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