Disposable Income Formula: Meaning, Importance & Examples

Disposable income is widely known as net pay which means the savings left with a person after paying income tax. It is formulated by subtracting the income tax from the personal income. It is given by the formula, 

Disposable income = Personal income – Personal income taxes

In this article, we will cover some examples of disposable income and learn the fluctuations and importance of disposable income.

Keyterms: Disposable income, Income, Tax, Income Tax, Fluctuations, Net pay, GDP, Economy

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What is Disposable Income?

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The economic term 'disposable income' suggests the amount available for household consumption, savings, and spending after accounting for income tax. Disposable Income is called net pay. 

Disposable Income

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Formula of Disposable Income

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The formula of disposable income is depicted as follows: 

Disposable income = Personal income – Personal income taxes

Or

DPI = PI – PIT

Explanation of formula: Through the formula, we get the idea that disposable income is calculated by subtracting the personal tax from the personal income. This shows that from the entire amount earned by a person all the taxes that he or she pays are deducted to calculate disposable income. 

For example, the total income earned by the Sehgal family is 2,00,000 INR and the effective tax rate is 10%. So, disposable income, in this case, would be 180,000. The answer is calculated by using the formula of disposable income: Personal Income - Personal Income Tax (200,000 - 20,000 [10% of 200,000]). 

Economists use this formula to calculate the dependence on the current economic situation. The formula is used to anticipate the economy of the country. As per the demand, you can adjust the spending. Disposable income has a great impact on the GDP of a country as it fluctuates. 

Also Read: Discount Formula

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What Leads To Fluctuation In Disposable Income?

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The unstable economy leads to fluctuation in GDP which ultimately leads to shifting in disposable income. It depends on spending by people in the boom or recession phase. For example, in times of crisis people will ultimately spend a lesser amount which will lead to a direct impact on the country's economy. 

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Importance of Disposable Income

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Disposable income has a direct impact on a country's economy as spending of citizens on different products. 

• Disposable income reveals how much purchase can be made by the consumers during a particular point in time. 
• Disposable income tells how much saving is possible after all expenditure from the consumer's end. Thus, measuring their household income. 
• The country's economy is dependent on disposable income. 
• Other statistical information can be drawn out with the help of disposable income. Few statistical information includes Marginal propensity to consume (MPC), Marginal Propensity to Save (MPS), personal saving, and discretionary income. 

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Things To Remember

• Disposable income is calculated using personal income and personal income tax. 
• Disposable income is of high importance to accountants as future savings, money to spend on goods, and a country's economy can be easily measured. 
• Disposable income reveals how much purchase can be made by the consumers during a particular point in time. 
• It is given by the formula, 

Disposable income = Personal income – Personal income taxes

• Economists use this formula to calculate the dependence on the current economic situation.

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