A ₹100000 loan has a payment of ₹40000 at mid-year. If interest is six percent, what is the correct basis of calculation?

Correct answer: Interest on ₹100000 for six months and ₹60000 for six months

Direct answer: Option B. The interest must be calculated for six months on ₹100000 and for the next six months on ₹60000. At the beginning, the outstanding loan is ₹100000. A payment of ₹40000 is made halfway through the year, so the balance after that payment is ₹100000 − ₹40000 = ₹60000. The original balance applies for the first half-year, and the reduced balance applies for the second half-year. At 6% annually, the calculation is ₹100000 × 6% × 6/12 plus ₹60000 × 6% × 6/12. This equals ₹3000 + ₹1800 = ₹4800. Option A wrongly charges the full original amount for all twelve months and ignores the payment. Option C wrongly uses the reduced amount for the whole year, including the period before payment. Option D considers only the payment amount, not the actual outstanding loan. Exam cue: whenever a payment occurs during the year, divide the year at the payment date.