Specifying the Tax Basis

10.2.2 Specifying the Tax Basis

On a loan, you may have to pay tax on interest you earn. The tax can be paid on the basis of the following:

On the liquidated amount
On the schedule amount

For your branch, you can specify the amount on which tax has to be applied, in Branch Parameters screen.

Example

You have the following tax slab for levying tax on interest earned:

0 to 5000 - 3%
>5000 to 20000 - 4%
>20000 and above - 5%

Now, you have a loan, which starts on 1 January 1998 and ends on 31 March 1998. It has a fortnightly interest liquidation schedule and at each schedule, USD 200 is liquidated.

Tax on schedule amount

If you indicate that the tax basis is to be the schedule amount, every time the schedule is liquidated, you have to pay 3% tax on USD 200, the schedule amount (USD 200 falls into the first slab). USD 6 have to be paid every time an interest schedule of USD 200 is liquidated.

Tax on liquidated amount

If you indicate that the tax basis is to be the liquidated amount, then the tax is calculated on USD 1,200, the total interest that is liquidated for the loan at Maturity. This falls into the second slab and hence 4% is applied on USD 1,200. This works out to USD 48, and is spread out over the six schedules. That is, you will have to pay USD 8, as tax, every time an interest schedule of USD 200 is liquidated.

Parent topic: Specifying Branch Parameters