Return on Investment (ROI) is a financial ratio that tells you how much you earned relative to what you put in. It is one of the first numbers an Indian founder, investor or marketing manager reaches for because it is easy to compute and easy to explain to a board or a bank. Expressed as a percentage, ROI lets you place very different decisions — a new machine, a Google Ads spend, a fixed deposit, a startup equity cheque — on a common scale.
How to calculate ROI
The basic formula is straightforward:
ROI = (Net Profit / Cost of Investment) × 100
Or, when you are measuring the change in value of an asset:
ROI = [(Current Value − Cost of Investment) / Cost of Investment] × 100
Say you invest ₹1,00,000 in a small trading business and it is worth ₹1,20,000 a year later. Your ROI is [(1,20,000 − 1,00,000) / 1,00,000] × 100 = 20%. Remember to use net profit — deduct GST paid where it is not creditable, financing costs, and any brokerage or transaction charges — otherwise the figure flatters the investment.
Simple ROI versus annualised ROI
Plain ROI hides one crucial fact: how long your money was locked in. A 40% return sounds better than 20%, but not if it took three years to earn. To compare investments held for different periods, convert to an annualised return (CAGR):
| Investment | Invested | Exit value | Holding period | Simple ROI | Annualised ROI |
|---|---|---|---|---|---|
| A | ₹1,00,000 | ₹1,20,000 | 1 year | 20% | ~20% |
| B | ₹1,00,000 | ₹1,40,000 | 3 years | 40% | ~11.9% |
| C | ₹1,00,000 | ₹1,15,000 | 6 months | 15% | ~32% |
On simple ROI, B looks best. On an annualised basis, C is the strongest performer and B the weakest. Always compare like periods and similar risk before you conclude.
Look at ROI after tax and inflation
Headline ROI is a pre-tax, pre-inflation number, and in India both bites are real. Listed equity held over 12 months attracts long-term capital gains tax at 12.5% on gains above ₹1.25 lakh a year; sold sooner, short-term gains are taxed at 20% (indexation was withdrawn for transfers on or after 23 July 2024). Interest on a fixed deposit is taxed at your slab rate. A 20% gross ROI can shrink to a mid-teens post-tax return, and if consumer inflation is running at 5-6%, your real return is lower still. For any serious decision, work out the after-tax, real ROI.
Where Indian businesses use ROI
- Comparing capital projects — a new plant versus outsourcing
- Judging marketing spend, often as ROAS (return on ad spend)
- Evaluating asset purchases and MSME loan-funded expansion
- Reporting performance to investors, lenders and the board
Limitations and common mistakes
ROI is a blunt instrument. It ignores the time value of money, which is why lenders and PE investors lean on IRR and NPV for multi-year cash flows. It says nothing about risk, so a 25% ROI on a speculative bet is not comparable to 25% from a bond. It can be nudged by accounting choices — capitalising versus expensing, or which costs you include. And it misses qualitative gains such as brand equity or customer retention. Treat ROI as a quick screen, then confirm big decisions with IRR, NPV and a hard look at the risk you are taking on.