3.6 Applying Tax on Liquidated Principal

Your bank may need to deduct tax on principal that is liquidated on each schedule date, for a loan. The tax may also need to be applied on any interest as well as penalty interest earned on the repaid principal.

To specify the deduction of such tax on liquidated principal, you must:

• Define a tax rule for application of the tax, and associate the rule with a tax class. You must then link the tax class to a tax scheme.
• You must then link the tax scheme defined for the application of the tax to a product, and associate the amount tag PRINCIPAL_LIQD in the Product Tax Linkage Definition screen, as an attribute for the loan product. For any loan contracts involving the product, tax would be computed and deducted based on the liquidated principal amount.

In such a case, the basis amount that would be considered for the computation of the tax is arrived at as follows:

Basis amount = principal liquidated + interest earned on the liquidated principal amount + penalty interest earned due to non-payment of principal.