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IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation

Sundaram Textiles Ltd has a corporate tax rate of 25% and issues Rs 8 crore of irredeemable debentures at par with a coupon of 10% per annum. Assuming the company is fully tax-paying and ignoring issue costs, what is the annual tax saving on the interest?

The annual tax saving is Rs 0.20 crore. Interest is 10% of Rs 8 crore, which is Rs 0.80 crore, and at a 25% tax rate the deduction saves Rs 0.20 crore of tax. Rs 0.60 crore would be the after-tax interest cost, not the saving.

  1. ARs 0.20 croreCorrect
  2. BRs 0.80 crore
  3. CRs 0.60 crore
  4. DRs 2.00 crore
  5. Rs 0.25 crore

Explanation

Interest = 10% x 8 = Rs 0.80 crore. Tax saving = 25% x 0.80 = Rs 0.20 crore. Rs 0.60 crore is the after-tax interest cost (0.80 x 0.75), a mistake of reporting the net cost instead of the saving.

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