IAI Actuarial Core Principles · Business Finance · Personal and corporate taxation
Sundaram Textiles Ltd has taxable profit of ₹50 lakh for the year and an effective corporate tax rate of 25% on it. It pays interest of ₹10 lakh, already deducted in arriving at that taxable profit. What is the after-tax cost of that interest to the company?
The after-tax cost is ₹7.5 lakh. Interest of ₹10 lakh is deductible, so it reduces tax by 25%, or ₹2.5 lakh, leaving a net cost of 75% of the interest paid.
- A₹10.0 lakh
- B₹12.5 lakh
- C₹2.5 lakh
- D₹7.5 lakhCorrect
- ₹5.0 lakh
Explanation
Interest is tax deductible, so it saves tax of 25% × 10 = ₹2.5 lakh. The net cost is 10 - 2.5 = ₹7.5 lakh, equivalent to 10 × (1 - 0.25). The ₹10 lakh option ignores the tax shield.
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