8. Ato XX deposited Birr 200,000 at prevailing Deposit rate (12%) at Commercial Bank of Ethiopia at the beginning of the tax year 1997 which is compounded monthly. If the deposit is in the account for two years, what is the amount of interest income tax?

1 answer

To calculate the interest income earned on Ato XX's deposit of Birr 200,000 at a 12% annual interest rate compounded monthly, we follow these steps:

  1. Calculate the total amount in the account after 2 years with monthly compounding: The formula for compound interest is:

    \[ A = P \left(1 + \frac{r}{n}\right)^{nt} \]

    Where:

    • \( A \) = the amount of money accumulated after n years, including interest.
    • \( P \) = the principal amount (the initial deposit or investment).
    • \( r \) = the annual interest rate (decimal).
    • \( n \) = the number of times that interest is compounded per year.
    • \( t \) = the number of years the money is invested or borrowed.

    Given:

    • \( P = 200,000 \) Birr
    • \( r = 12% = 0.12 \)
    • \( n = 12 \) (monthly compounding)
    • \( t = 2 \)

    Plugging these values into the formula:

    \[ A = 200,000 \left(1 + \frac{0.12}{12}\right)^{12 \times 2} \]

    \[ A = 200,000 \left(1 + 0.01\right)^{24} \]

    \[ A = 200,000 \left(1.01\right)^{24} \]

    Now calculate \( (1.01)^{24} \):

    \[ (1.01)^{24} \approx 1.268241 \]

    Now, substitute this back into the equation for \( A \):

    \[ A = 200,000 \times 1.268241 \approx 253,648.20 \]

  2. Calculate the interest earned: The interest earned is:

    \[ \text{Interest} = A - P \]

    \[ \text{Interest} = 253,648.20 - 200,000 = 53,648.20 \]

  3. Calculate the interest income tax: If we assume the tax rate on interest income is a specific percentage (which is normally specified by tax regulations), we can calculate the tax. For example, if the tax rate is 10%, the interest income tax would be:

    \[ \text{Tax} = \text{Interest} \times \text{Tax Rate} \]

    \[ \text{Tax} = 53,648.20 \times 0.10 = 5,364.82 \]

You would need to confirm the applicable tax rate on interest income to find the specific amount of tax.

Summary:

  • Total amount after 2 years: Approximately 253,648.20 Birr
  • Interest earned: Approximately 53,648.20 Birr
  • Tax on interest income (using a hypothetical tax rate of 10%): Approximately 5,364.82 Birr

Please verify the tax rate applicable to Ato XX for a precise calculation.