There are various definitions of the net rate, depending on in which sphere it is used. In economics, it is the rate of interest a person receives on his or her savings account after tax, especially after twenty percent of the basic rate tax, which is known as Value Added Tax, or as the abbreviation VAT, has been taken away. A net rate of interest can be presented by some banks and organizations with the use of a website or a piece of literature. Similar to a gross rate, the net rate presents what a person may receive while creating his or her savings account.
Calculating the price
The net rate can also be described as the price without the commission of the organization or person that offers something for the customers. What is more, every distributor can increase this price with the margin  she or he wants to make, or a specific amount that is agreed in the contract.
In business, such as in hospitality industry, the occurrence of the net rate can be noticed as well. Moreover, in hospitality business there are various levels of rate. For example, the inventory of a room is purchased by some of the distributors of third party at prices which are subordinated to provision. The other ones insist on a lower price which does not include provisions. This rate can be described as a Net Rate. The partners of the distributors who are given the Net Rate are among the others:
- tour operators
- group bookers
- foreign incoming travel companies (also known as FIT companies)
- destination management companies (also known as DMC).
In tourism industry, the Net Rate can be described as the price without the provision given to the travel agent. It can be calculated very easily. A person has to subtract the provision from a sell or gross rate. For example, if the rate paid is a hundred dollars (without VAT) and the provision is twenty-five percent, the net rate is seventy-five dollars. These calculations are conducted in order to define the real revenue of a company, organization, person, etc.
The net rate can be also used in studying social phenomena, such as migration. The migration rate can be described as the difference between the amount of emigrants, that means people who leave a particular area and the amount of immigrants, id est people who come into the area during the period of one year. This rate is calculated with the use of a ratio and the mid-year population. In the case when more emigrate from a country than enter it, the negative net migration rate can be noticed. In the case when the number of emigrants and immigrants is equal, the net migration rate can be described as balanced. When the amount of emigrants is smaller than the number of immigrants, it can be said that a positive net migration rate happens. This positive net migration rates suggests that there are far fewer people who leave the area in comparison to those who enter it.
Net rate in statistics
The net rate can be also used in statistics. The net reproductive rate also known as the abbreviation R0. In general, it is the number of the average amount of progenies who or which are born by females of a particular species at specific age.
Examples of Net rate
- Interest Rate: The net rate of interest is the rate an individual receives after taxes are taken away from the gross rate of interest. For example, if the gross rate is 4%, the net rate will be 3.2% after a 20% tax is taken away.
- Rental Property: The net rate of return on a rental property is the amount of income generated after all expenses associated with the property are taken away from the gross income generated from the property. For example, if a rental property generates $1000 in monthly income and the expenses associated with maintaining the property are $200 per month, the net rate of return for the property is 80%.
- Income Tax: The net rate of income tax is the amount of tax an individual pays after deductions and credits have been taken away from the gross amount of income tax owed. For example, if an individual owes $1000 in income taxes, but qualifies for a $200 deduction, the net rate of income tax they pay is $800.
Advantages of Net rate
The advantages of net rate include:
- Access to a higher rate of interest: By taking away the twenty percent of the basic rate tax, a net rate of interest allows for a higher rate of interest to be received on a savings account.
- More accurate information: A net rate of interest gives a more accurate account of the amount of interest that a person can expect to receive on their savings account. This helps to avoid confusion and provides clarity when making decisions about savings accounts.
- Lower taxes: By eliminating the twenty percent of the basic rate tax, a net rate of interest allows for lower taxes to be paid on savings accounts. This can help to reduce overall tax liability and can be beneficial for those with a limited budget.
- Easier to compare rates: By removing the tax component, a net rate of interest makes it easier to compare rates between different savings accounts. This can help to make a more informed decision when selecting a savings account.
Limitations of Net rate
- One of the main limitations of the net rate is that it does not take into account any additional costs or fees associated with the savings account. For example, many banks charge additional fees for maintenance or associated services, which cannot be included in the net rate calculation.
- Another limitation of the net rate is that it does not take into account any changes in taxation that could affect the net rate. For example, if the rate of VAT changes, the net rate could change as well, without the bank or organization informing the customer.
- Additionally, the net rate does not take into account any changes in the exchange rate. If a customer holds a foreign currency account, the net rate can be affected by the rate of exchange, and this cannot be included in the net rate calculation.
- Lastly, the net rate does not take into account any changes in the financial markets, particularly if the customer is invested in stocks and bonds. Changes in the stock market can affect the net rate and this cannot be included in the net rate calculation.
In addition to the definition of net rate in economics, there are several other ways in which this term is used. These include:
- Net Rates of Return – This is the rate of return on investment after taxes and fees have been taken into account. This rate helps to provide an overall picture of the return on an investment after all expenses have been paid.
- Net Interest Rates – This is the rate of return on a loan or debt after all fees, taxes, and other costs associated with the loan have been taken into account. This rate gives an overall picture of how much money must be paid in order to borrow money.
- Net Selling Prices – This is the price of an item or service after any discounts, taxes, or other costs associated with the purchase have been taken into account. This rate helps to provide a truer picture of the cost of an item or service.
In summary, the net rate is a term which is used in multiple contexts to denote the rate of return, interest, or price after expenses have been taken into account.
- Ben-chieh, L. (1975). Differential Net Migration Rates and the Quality of Life, The Review of Economics and Statistics, 57 (3): p. 329–337
- Camiro, T. (2008). What is a net rate?, On net reproductive rate and the timing of reproductive output
- Khan, M., Jain, P. (2006) Management Accounting
- Net present value versus internal rate of return, economics-sociology.eu (2011)
- Padney, I.M. (2018) Financial Management
Author: Jakub Chmiel