Profit after interest and tax is ₹1,60,000
10% Long term borrowing ₹20,00,000
Rate of Tax: 20%
Profit before interest and tax will be .....
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → ₹4,00,000
Work backwards from the profit after tax: first add back the tax to get the profit before tax, then add back the interest on the long-term borrowing.
Profit after tax = ₹1,60,000, which is 80% of the profit before tax (tax rate 20%)
Profit before tax = ₹1,60,000 × 100/80 = ₹2,00,000
Interest = ₹20,00,000 × 10/100 = ₹2,00,000
Profit before interest and tax = ₹2,00,000 + ₹2,00,000 = ₹4,00,000
Tax is worked out on the profit before tax, so it is added back by dividing by 80%, not by adding 20% of ₹1,60,000.
NCERT (2026-27 edition):
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