National income is 'the 'sum of factor income. In other words, it is the income which individuals receive for doing productive work in the form of wages, rent, interest and profits. Personal income, on the other hand, includes all income which is actually received by all individuals in a year. It includes income which is not directly earned but is received by individuals.

For example, social security payments, welfare payments are received by households but these are not elements of national income because they are transfer payments.

In the same way, in national income accounting, individuals are attributed income which they do not actually receive. For example, undistributed profits, employees' contribution for social security corporate income taxes etc. are elements of national income but are not received by individuals. Hence they are to be deducted from national income to estimate the personal income.

Formula For Personal Income:

PI = NI + Transfer Payments  Corporate retained earnings, income taxes, social security taxes