Which of the following is NOT correct about the calculation of Personal Income from National Income?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Personal income tax is deducted.
Personal income is national income less undistributed profits, net interest paid by households and corporate tax, plus transfer payments. Personal income tax is deducted only at the next step, from personal income to personal disposable income.
Option (1) Transfer payments to households are added. — True. Pensions and scholarships are added to get personal income.
Option (2) Corporate tax is deducted. — True. Corporate tax is paid by firms, so it is deducted.
Option (3) Personal income tax is deducted. — False. Income tax is deducted from personal income to get personal disposable income.
Option (4) Undistributed profits are deducted. — True. Undistributed profits stay with firms, so they are deducted.
NCERT (2026-27): “2.3 Some Macroeconomic Identities … Thus, Personal Income (PI) ≡ NI – Undistributed profits – Net interest payments made by households – Corporate tax + Transfer payments to the households from the government and firms. However, even PI is not the income over which the households have complete say. They have to pay taxes from PI. If we deduct the Personal Tax Payments (income tax, for example) and Non-tax Payments (such as fines) from PI, we obtain what is known as the Personal Disposable Income. Thus Personal Disposable Income (PDI ) ≡ PI – Personal tax payments – Non-tax payments. …” |