Personal Income is the aggregate of all individual incomes which are received directly by the individuals in their hands in one year as rewards for their productive services. In order to arrive at personal income, part of the rewards of the factors of production which is not received by them is subtracted from National Income, similarly, some payments which are received by the individuals as part of their personal income are added to the National Income as they are not counted in the national income initially for some reason or the other e.g. transfer payments. Therefore, the following adjustments have to be made with the National Income in order to arrive at the aggregate personal income.

The amount of the tax is not received by the share holders as part of their dividends. Instead it goes to the Government and hence corporate profit tax has to be subtracted from the National Income merely because it does not constitute any part of personal income.

The total profit of corporations is usually distributed among share holders in the form of dividends. However, a certain portion of the profit is retained by the corporate with the intention of ploughing it back into the original investment for the expansion of business enterprises. This portion of profit is not literally received by the share-holders. Instead, it is distributed in the form of shares to share-holders according to the amount of profit retained. Hence, this form of profit does not go into the pockets of the share-holders and thus is must be subtracted from National Income.

Usually entrepreneur will make a certain amount of contribution into the social security fund of the government for the benefit of its employees in case of emergencies or accidents etc. The contribution made is provided from the entrepreneurs’ profit. Thus, the entrepreneurs’ personal income is reduced proportionately with the contribution made. Hence, this contribution has got to be subtracted from national income because it is no longer part of the entrepreneurs’ personal income.

Payments e.g. pensions, unemployment, allowances, scholarships etc. do not constitute a part of the national income. However, such payments are given out to certain individuals who, from the point of view, receive it as part of their personal income. Thus, it should be added to the National Income to arrive at Personal Income.

These payments are like donations by business firms to different organizations. This transfer becomes part of the income of different organizations and hence must be added to National Income for the same reason as explained in government transfer payments.

Such payments are a certain portion of the earnings of workers abroad which is remitted back to their families for household maintenance etc. for the families at home, this is a form of personal income and must thus, be added to the National Income.

Disposable Personal Income (D.P.I)
Personal Income of individual cannot be spent as well as the individuals are not exempted from certain duties such as the payment of income tax, road tax, radio and television license fees etc. These taxes are known as direct taxes or personal taxes and cannot be avoided by or shifted to any other individual. These taxes are given to the government and hence the total amount received by individuals after the payment of personal tax is known as the always divided into two parts i.e. (i) Aggregate Consumption and (ii) Aggregate Investment / Savings.

Therefore, D.P.I. is also = Personal consumption expenditure + Personal savings / Investment.