Tax
Shield on Interest
Tax
relief on interest or tax saving on interest is technically known as tax shield
on interest. It is important to note that tax relief is discounted using the
rate of interest (pre tax) on cost of debt. Tax Shield is calculation has been
explained with example below
Tax
Shield Example
Loan Amount =
200,000
Interest Rate = 6%
Term 3 Years
Loan is to be
amortized
Solution
1.
Annual Installment
Annual installment
of loan may be calculated by dividing present value of loan by annuity factor
for 3 year.
= 200,000/2.673
=74,822 (Annual
Installment)
2.
Tax Relief
|
Year
|
Opening
Loan
|
Interest
|
Capital
|
Balance
|
|
1
|
200,000
|
12000
|
62822
|
137178
|
|
2
|
137178
|
8230
|
66591
|
70586
|
|
2
|
70586
|
4235
|
70586
|
|
|
|
|
24465
|
200000
|
|
3.
Tax Relief on
Interest
|
Year
|
Interest
|
Tax
Relief
|
Factor
(Discount)
|
PV
of tax Relief
|
|
1
|
12000
|
3600
|
(1.06)-1
|
3396
|
|
2
|
8230
|
2469
|
(1.06)-2
|
2197
|
|
3
|
4235
|
1270
|
(1.06)-3
|
1065
|
|
|
|
|
|
6658
|
