IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation
A tax system charges 5% on the first Rs 10 lakh of taxable income, 20% on the next Rs 10 lakh, and 30% on any amount above Rs 20 lakh. A person has taxable income of Rs 26 lakh. What are the total tax and the average tax rate respectively?
Total tax is Rs 4.30 lakh: 0.5 on the first band, 2.0 on the second and 1.8 on the remaining 6 lakh at 30%. The average rate is 4.3 divided by 26, about 16.5%, far below the 30% marginal rate.
- ARs 4.80 lakh; about 18.5%Correct
- BRs 7.80 lakh; 30.0%
- CRs 4.30 lakh; about 16.5%
- DRs 4.30 lakh; 30.0%
- Rs 6.30 lakh; about 24.2%
Explanation
Tax = 5% x 10 = 0.5; 20% x 10 = 2.0; 30% x 6 = 1.8; total 4.3 lakh. Hmm, rechecking: 0.5 + 2.0 + 1.8 = 4.3 lakh, so average = 4.3/26 = 16.5%. The key is therefore the option showing 4.30 lakh and 16.5%.
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