A man invests Rs.5000 for 3 years at 5% p.a. compound interest reckoned yearly. Income tax at the rate of 20% on the interest earned is deducted at the end of each year. Find the amount at the end of the third year
Explanation:
5% is the rate of interest. 20% of the interest amount is paid as tax.
i.e 80% of the interest amount stays back.
if we compute the rate of interest as 80% of 5% = 4% p.a., we will get the same value.
The interest accrued for 3 years in compound interest = 3 x simple interest on principal + 3 x interest on simple interest + 1 x interest on interest on interest.
= 3 x (200) + 3 x (8) + 1 x 0.32 =600 + 24 + 0.32 = 624.32
The amount at the end of 3 years = 5000 + 624.32 = 5624.32
Hence, option 1 is the correct answer.
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By: Amit Kumar