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Per Annum

Updated on July 23, 2024
Article byAswathi Jayachandran
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Per Annum Meaning

Per annum denotes the calendar duration of twelve months. ‘Year’ refers to 365 days or 366 in a leap year. It is associated with a calendar year from January 1st to December 31st instead of a financial year from October 1st to September 30th of the following year (U.S.). Its purpose is to focus on achieving a measurable and impactful outcome within the next year.

Per Annum

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Per-year calculations are used everywhere, especially in the field of finance. The components are calculated on an annual basis for convenience. Monthly calculations can be tedious. Moreover, the differences or significant changes in interest rates or returns are better understood when comprehended yearly. It reduces confusion and saves paperwork and time.

Key Takeaways

  • “Per annum” has a Latin origin. The term denotes a year. It is often used in finance, especially in banks and interest cases. Typically, this phrase refers to a sum of money paid or received in the financial industry.
  • The purpose of using annual terms is for convenience and profitability.
  • Rounding the figures for payment is easier than making people pay weekly or monthly. This is especially true in cases of long-term loans.
  • The total responsibility of the payment made as interest would rise if the interest were determined on a per-month basis because it would compound each month.

Per Annum Explained

Per annum has a Latin origin, and it means one year. It is often used in finance, especially in banks and interest cases. Typically, this phrase refers to a sum of money paid or received in the financial industry. The purpose of using annual terms is for convenience. Rounding the figures for payment is easier than making people pay weekly or monthly.

This is especially true in cases of long-term loans. For example, suppose an individual has to pay $2 million in 25 years. Where the tenure is long and the amount is large, reducing it to a per-year payment is easier. In this case, the payable amount would be $80,000 per year. The individual who has such a huge amount to pay will naturally have to earn more than that. Hence, it also helps people plan and makes the process easier than planning it every month.

Another reason to address rates on an annual basis is profitability. Effective annual rates, or Annual Percentage Rates (APR), determine interest rates. This interest compounds annually as a result of the annual rate used. The total responsibility of the payment made as interest would rise if the interest were determined on a per-month basis because it would compound each month. As a result, the interest component under an APR or annual rate is substantially lower than if it were determined monthly.

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Examples

Check out these examples to get a better idea:

Example #1

Ray wants to invest some money. He has sorted his long, short, and medium-term goals and has to plan his investments to meet his goals within the stipulated period. Then, all he needs to do is calculate interest per annum.

Let’s say he wants $700,000 to fulfill the goal and can afford to keep $2,500 as the initial amount toward his long-term goals. At the end of each year, $1,000 will be invested regularly, with plans to do it over 25 years. The plan has an expected rate of return of 7% compounded annually.

At the end of 25 years, his total contributions would amount to $25,000, along with the initial corpus of $2,500. With the above mentioned details, the per annum interest calculator showed that the interest accrued would be $49,317.62. Thus, the ending balance of the investment will be $76,817.62.

Example #2

David wants to take a personal loan. He has to calculate and think through the decision. The loan amount is $1,000,000, and the total interest he has to pay is $334,667.

The table below, created using a per annum interest calculator, shows how his loan process will unfold over time, totaling $1,334,667.

YearPrincipal paid(A)Interest paid(B)Total payment (A+B)Outstanding loan balance
2022$12,244$10,000$22,244$9,87,756
2023$1,56,844$1,10,091$2,66,935$8,30,912
2024$1,76,735$90,198$2,66,933$6,54,178
2025$1,99,150$67,785$2,66,935$4,55,028
2026$2,24,407$42,528$2,66,935$2,30,622
2027$2,30,621$14,066$2,44,687$0

Here, the total interest he has to pay in total is $334,667 and his yearly interest payment will be as follows:

$10,000+$1,10,091+$90,198+$67,785+$42,528+$14,066= $334,667, and therefore, he has to plan his expenses accordingly.

Difference Between Pro Rata And Per Annum

Following are the key differences between pro rata and per annum:

Key differencesPer Annum Pro Rata
Meaning In per annum, components are calculated on a yearly or annual basis.Pro-rata is a proportional value calculation. Therefore, it could be a component of “any” whole value.
Period involvedPA is for 365 days. It may be 366 days on leap years.It can be for any period, particularly hours in the case of salary.
Method of calculationThe desired value is calculated for 365 days. The whole is divided by the part, such as when the company allocates the salary payment for an employee annually, there may be situations where weekly wage will be given on a proportional basis based on the hours worked. For instance: annual salary=$50000 hours to work is 1820, the salary per hour will be $27. Suppose the weekly hours are 35 and the employee only works 30 hours. Then, the wage will be paid proportionately to $27*30 = 630 a week instead of $735.
Length of the period calculatedIt is calculated for a longer period. A pro rata calculation is for shorter periods.
ExampleExamples include an annual salary, interest on mortgages, etc.Examples include part-time work and divided payments.

Frequently Asked Questions (FAQs)

What is per annum salary?

Each year’s total money received from a job is termed per annum salary. Typically, this amount is determined per calendar year, covering the period of 12 months from January to December. However, it is usually calculated per year and paid monthly.

How to calculate interest per annum?

One can calculate interest per annum using the simple interest (SI) or compound interest method (CI). SI = P*I*N (Principal x Interest Rate x Time), while CI = P (1+r/n) (n*t). Here, P=principal, n=number of times interest is compounded, r=rate of interest, and t= time.

Is the per annum amount before tax?

Generally, gross or income per annum (salary) excludes taxes. Whatever taxes must be deducted will have to be declared by the individual later. It is done at the end of the financial year.

What is CTC per annum?

Cost to Company (CTC) is an employee’s total annual compensation package (gross or income per annum). It shows an employer/organization’s overall costs for one employee over a year.

This article has been a guide to Per Annum and its meaning. Here, we explain the topic in detail, such as its differences with pro rata and examples. You may also find some useful articles here –

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