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BHANSALI PROJECT GUIDE MR.KIRTAN SHAH K.P.B HINDUJA COLLEGE OF COMMERCE 315, NEW CHARNI ROAD, MUMBAI-400 004
B.Com (Financial Markets) 5th SEMESTER
FUNDAMENTALS OF FINANCIAL PLANNING
SUBMITTED BY PRATIK BHANSALI ROLL.NO: 1
CERTIFICATE This is to certify that Mr. PRATIK BHANSALI of B.Com Financial Markets Semester 5th [2010-2011] has successfully completed the Project on “FUNDAMENTALS OF FINANCIALPLANNING” under the guidance of MR.KIRTAN SHAH
Project Guide Course Coordinator Internal Examiner External Examiner Principal ________________ ________________ ________________ ________________ _______________
DECLARATION I MR.PRATIK BHANSALI student of B.Com-Financial Markets, 5th semester (2010-2011), hereby declare that I have completed the project on “FUNDAMENTALS OF FINANCIAL PLANNING” The information submitted is true and original copy to the best of our knowledge.
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INTRODUCTION CASH MANAGEMENT & BUDGETING UNDERSTANDING THE USE OF CREDIT INCOME TAX PLANNING TAX CREDIT TAX PLANNING AND ITS ROLE IN THE FINANCIAL PLANNING PROCESS RISK MANAGEMENT CONCLUSION SUGGESTION BIBLIOGRAPHY
EXECUTIVE SUMMARY Financial planning is the process of assessing financial goals of individual. implementation of appropriate strategy to achieve goals and review and update plan periodically. Equity Brokers. Retirement Planning and Investment and saving option. Today we avail this service from Insurance agent. Financial Planning is one such advisory service. identify risk tolerance of client. identify personal goals and financial goals and objective. determining recommendations and alternative solutions. The major things to be considered in financial planning are time horizon to achieve life goals. Chartered Accountants. Risk Planning (insurance).. it just needs to be conducted in organized manner. Although financial planning is not a new concept. Different agents provide different services and product oriented. Contingency planning is the basic of financial planning and also the most 6 . Tax Planning. A good financial plan includes Contingency planning. It is a method of quantifying a person’s requirement in terms of money. etc. Tax consultant. This are self assessment of client. identify financial problems and opportunities. Financial Planner on other hand is a service provider which enables an individual to select proper product mix for achieving their goals. which is yet to get recognition from investors. Keeping all this in mind financial planning is done with six step processes. taking an inventory of the money and other assets which the person have. determine life goals and then take necessary steps to achieve goals in the stipulated period. their liquidity need. the inflation which would eat up living and decrease standard of living and the need for growth or income. Mutual fund agents.
injury in family. loss of regular pay due to loss of job. Such events are not certain but may have financial hardship if they occur. 7 .ignored. Contingency planning is to be prepared for major unforeseen event if it occurs. Thus a person should have enough money in liquid form to cover this risk. These events can be illness.
and its effective use in paying for current living expenses and in accumulating assets which will be used in meeting financial goals. it involves choices Spend now or save for later? Pay off existing bills or increase retirement savings? Focus savings rupees on short term or long term goals? A true financial plan does not focus one aspect or product. It must be: • • • coordinated comprehensive continuous Financial planning is like all other phases of life.Chapter 1 INTRODUCTION Financial planning is the process of solving financial problems and achieving financial goals by developing and implementing a personalized "game plan. but instead seeks to take all areas of planning into consideration when making financial decisions.1 What is Included? • Cash Flow Management This aspect of planning deals with the day to day allocation of income." In order to be effective this "plan" must take into consideration an individual’s overall picture. 8 . 1.
It includes the use of insurance products and strategies. and personal savings accumulation plans. estate and inheritance taxes. Inadequate or improper planning can be financially disastrous. employer-sponsored retirement plans. 1. Financial Planning can help to achieve both greater wealth and financial security. These could include buying a home. or property. • Investment Planning and Management Almost everyone has accumulation goals for which investments must be made and managed. • Risk Planning and Management This area of planning deals with the risk of losing life.• Tax Planning and Management This area focuses on the understanding of and application of federal and state income tax law. income. or providing for retirement. minimizing these taxes. and. • Retirement Planning and Management By far the most common accumulation goal is the ability to become financially independent. insufficient savings for retirement can force a reduced lifestyle and/or 9 . Retirement strategies encompass the understanding of the Social Security system. planning for college. An uninsured loss can wipe out accumulated wealth.2 Why Plan? Anyone who has financial challenges to solve or financial goals to achieve needs financial planning. when possible.
They may be reluctant to consider some of the less pleasant aspects of planning such as thinking about death.4 The Steps in Financial Planning Identify Goals and Objectives: Gather the necessary data Analyze present situation and consider alternatives Develop strategies to achieve goals. They may believe that financial planning is too expensive THEY MAY PROCRASTINATE! (The Number One Reason For Failure) • • • • 1. Implement the strategies 10 . illness. etc. 1. disability.3 Why Do People Fail to Plan? • They may feel they do not have enough income or financial assets to consider planning.postponement of retirement. They may believe that they are too young/old to begin planning. and improper tax planning can result in higher than necessary taxes causing dollars to be lost to an accumulation plan or to one’s heirs.
2. savings and loan associations.1 Managing Cash & Savings 1) Financial Institutions • Traditional financial institutions include banks.Cash Management and Budgeting Cash Management involves how you handle your cash resources on an ongoing basis. They also offer a rate of return and easy access to funds through withdrawals or checking. savings banks and credit unions. There are a number of financial products and services. Many different accounts are available from these institutions: o • Demand Deposit Accounts – Withdrawals may be made whenever demanded by the accountholder (checking accounts) Time Deposit Accounts – Deposits in these accounts are intended for longer accumulation. 11 o o o . An Accountholder may be required to give a specific notice prior to withdrawal (Passbook or Regular Savings Accounts) MMDA Accounts – Money Market Demand Accounts are similar to MMMF Accounts – Money Market Mutual Funds pool funds from many investors and use these funds to purchase short term securities such as commercial paper.Chapter 2. etc. which can assist you in this.
depending on time horizon of the savings goal. as a rule of thumb. Once this fund is established. risk tolerance. a savings goal of 15% of gross income is a good target. savings and loan associations. The most appropriate savings vehicle for these savings goals will vary. Most planners believe that you should maintain such an account in an amount equal to at least three to six months’ living expenses.100.• Deposits in banks. Some savings vehicles available through traditional financial institutions or through brokers are: 3) The Power of Compound Interest How much you earn on your accumulated investment funds will be determined by several factors: • • Your initial Investment and subsequent additional investments The amount of time the money is left on deposit 12 . although you may not be able to achieve this goal all at once. or credit unions are insured against the failure of the institution up to Rs. 000 per account. However. 2) Developing Savings Habits A portion of your financial assets should be kept liquid and readily accessible for day-to-day needs and emergencies. etc. you may then begin to consider the funding of more long-term savings goals.
due to the compounding of interest over that period of time.5." Example Assume that you were to make a Rs. (with Rs. or by using a Future Value Table.000 as down payment for a home in five years.6105) which lies at the intersection of 5 on the vertical axis (for 5 years). At the end of 20 years. The factor (1.000 remaining accumulation goal by 5 to find out how much you would have to save per year to reach your goal.6105 = Rs. you could not simply divide the Rs.40. This process is referred to as "compounding.66. if you were to identify a savings goal of Rs.20. To apply this to a goal-setting problem. the total account value would be Rs.052. and locate 10 on the horizontal axis (for 10% interest).50 13 .8.5000 already saved).000 (20 years x Rs.2000 deposit into a Certificate of Deposit earning 5% interest per year.000 x 1. FUTURE VALUE = AMOUNT INVESTED X FUTURE VALUE FACTOR This future value factor may be arrived at by using a financial calculator. locate the factor (1. total deposits would have been Rs. This process would ignore the interest factor.132.15.6105) is then inserted into the formula: FV = Rs.• • The method The rate of interest being paid of interest calculation The future value of your investment can be determined by the use of a simple calculation: Future Value is the amount to which today’s investment will grow over a given period of time at a specific rate of interest. However. for which we will use 10%. To use this Table.2000 per year).
or the amount you would have to invest today at a given interest rate over the specified time period to accumulate the future amount.Thus. your Rs.11. This process is known as "discounting".50 in 5 years.1051.20.50 needed.052.956. the computation becomes: YS = Rs.947.8. 14 .5.1. Plugged into the formula.000 will be worth Rs.1051 = Rs.50 DIVIDED BY 6. and is the inverse of compounding.11. 4) Present value calculation Present Value is the value today of an amount to be received in the future. Subtracted from our total goal of Rs.97 So. you would have to save Rs.956. invested at 10% interest to reach your goal of Rs.11.947.000 there is still Rs.947. The second step of our problem involves using the future value formula again to determine how much savings per year will be necessary (still at the 10%) for the 5 year period in order to reach the Rs.947.50.50 goal. You again locate the intersection of 5 years and 10 percent interest with a factor of 6.11.97 per year for five years. A second time value formula involving a cash flow (sometimes called an annuity) can be used: YEARLY SAVINGS = AMOUNT DESIRED DIVIDED BY FUTURE VALUE ANNUITY FACTOR This computation uses a Future Value of an Annuity Table.1.
PRESENT VALUE = FUTURE VALUE X PRESENT VALUE FACTOR If we assume a 25-year investment at 7% the solution would look like this: PV = Rs.000 at the beginning of each of the four years of your child's college education. use a Present Value of an Annuity Table. To do this. PRES.1842 = Rs. VAL.18. VALUE = ANNUITY VAL.55.300. You believe you can achieve a 12% yield on your funds during this time.000 retirement fund by age 60 (25 years from now). OF AN ANNUITY FACTOR 15 . Another example involving present value deals with regular payments.000 x .260 This is the lump sum you would have to deposit today to reach your goal with no further contributions. For example. Example Suppose you this is in the fall of your son or daughter's senior year in high school and you want to know how much money you need to have today in order to make tuition and fee payments of Rs. X PRES.Present Value calculations are frequently used in retirement projection calculations.300. if you are 35 years old and wish to accumulate a Rs. you would use a Present Value Table .
0373.671. 2.18. 16 . 2. It can help to identify cash flow problems and can also identify dollars which may be redirected toward achieving financial goals.2-Preparation of Personal Financial Statements The preparation of certain personal financial statements will clarify the current status of your financial situation and provide the"starting point" for any future action.000 one year from today and for each of the following three years.54.2. The two forms we will be working with are the Personal Financial Statement.Enter the Present Value of an Annuity Table at four years and 12% interest and obtain the factor of 3. Therefore.40 invested today at 12% interest. These statements are very helpful in assisting you in evaluating your own situation or in gathering the information needed to work with a financial planner. you will be able to withdraw Rs. if you have Rs. the Personal Budget.1-THE PERSONAL BUDGET Why Prepare a Personal Budget? A Budget can be used as a tool in identifying how and when money is being spent.
5. You should include any targeted changes you have identified in Step 3. paid receipts (cash). 7. The first step is to record historical information as to income. Periodically compare actual results to desired target. It also makes sense to get into the habit of "paying yourself first" by making the first check 17 . as needed. 2. 6. you can identify those areas which you may wish to target for change. This information will be found in your cancelled checks. You may wish to segregate your expenses by type. The next step is to record historical information concerning your personal expenses. you will maintain Records of income and expenses as they occur. Next. Make changes as needed. credit card statements and/or tax returns.Steps in Budgeting 1. The next step in the budgeting process involves preparing projected income and expenses for the next budgeting period (usually one year). Once existing patterns are identified. and if adjustments are made. ("Fixed" expenses refer to payments which are equal and non-varying each payment period and "variable" expenses involve payments that vary in amount from one time period to the next. 3.) 4. A budget will only help you achieve your goals if is honest. if it is used. 8. checkbook registers. This information will come from pay stubs or statements or tax returns.
2. The Personal Financial Statement will include the following information: 18 . it is usually nothing! Personal Budgeting Worksheet (Period covering _______________to ________________) Item Household Expenses Food Clothing Transportation Personal Insurance Professional Debt Repayment Miscellaneous Savings and Investment Grand Total Historica l Target Actual Difference 2. If you wait to see what is left over.you write once you get paid to yourself to be deposited to you savings and investment program. The categories on a balance are assets. and net worth.2-THE PERSONAL FINANCIAL STATEMENT Why Prepare a Personal Financial Statement? The Financial Statement is like a snapshot of your financial condition as of a certain date. Financial statements should be prepared at least once per year. liabilities.
(Checking Accounts. Stocks. medical bills. clothing. etc. education etc. Mutual Funds. home. rather than for personal use. These assets generally depreciate (decrease) in value.) These assets generally appreciate (increase) in value. garage. Bonds. which can be easily and quickly converted into cash with little or no loss in value. etc. They are also grouped into broad categories: • Current Liabilities – Bills that are currently due and will be paid off within one year (Rent. • • • Liabilities Liabilities are the things that you owe. They are often grouped into broad categories: • Liquid Assets .) • 19 . Savings Accounts) Investment Assets – Assets which are held for their financial return. credit card balances.) Personal Property – Movable property usually held for personal use (automobile.) Long Term Liabilities – Liabilities on which the payment stream will continue for more than one year (long term loans for auto. etc. Current Month’s unpaid utility bills. Money Market Accounts.Cash or other financial assets. furniture.Assets Assets are the things that you own. Real Property – Land and things attached to it (house. etc.
than you are insolvent. based on your assets and liabilities.Net Worth Net Worth is the net amount of wealth or equity you own. Solvency Ratio – This calculation shows how much of a financial cushion you have in relation to your financial obligations. Utilizing and Analyzing the Information on your Personal Financial Statement Important areas to examine are: • Net Worth – If your family’s net worth is less than zero. Net worth is increased when assets are added or debts are reduced or eliminated. Liquidity Ratio – This calculation shows how long you could pay your current bills from your assets. A family’s net worth should increase over time. • • 20 . It is calculated by subtracting liabilities from assets.
There are numerous valid reasons for the use of credit. Record-Keeping – Credit borrowing provides an itemized record of all transactions. etc.1-Understanding the Use of Credit Appropriate Use of Credit The use of credit (posting payments until a future time) can be a useful tool for individuals.3. recourse is provided for unsatisfactory purchases and returns can be re-credited to the account. which could be lost or stolen . medical expenses. when other payment forms are not practical. etc. • • • • • 21 . Identification – Credit cards are often used as a form of identification for other transactions such as cashing a check. Emergencies – Consumer can deal with short term unexpected situations (auto repairs. applying for credit. airplane tickets. such as • Safety/Convenience – Consumer does not need to carry large amounts of cash.) when cash is not available. businesses and governments. etc. Also. Opportunity – Consumer can make unanticipated purchases when cash resources are not available Facilitation of Transaction – Consumer can make certain purchases indirectly by telephone or Internet or directly such as automobile rental.
Issuers must disclose the "APR" (Annual Percentage Rate) and the "PIR" (Periodic Interest Rate) for each billing cycle. Credit should not be used for routine basic living expenses or impulse purchases Credit should also not be used for the purchase of short-lived goods and services.2-Computation of Finance Charges on Credit Accounts Various charges. This balance • 22 . Be sure to compare! • Calculation of Interest rate on Unpaid Balances – May be fixed or variable. • • • 3. fees and interest computations may all affect the cost of credit when using a credit card. however. (Rule of thumb: an item purchased by credit should not be used up sooner than the bill is paid off!) Monthly debt repayment should not exceed 20% of monthly takehome pay.. • • The biggest problem with credit is the tendency to overspend.Inappropriate Use of Credit There exists. the potential for abuse of credit which leads to overindebtedness and financial problems and may ultimately impede or prevent the achievement of financial goals. Computation of Unpaid Balance – The method by which a card issuer calculates the unpaid balance on an account. High interest costs on unpaid balances can accumulate rapidly.
Grace Period – The amount of time during which no interest is charged. exceeding the credit limit and other services. This is the most expensive method for the consumer since interest is charged on the outstanding balance at the beginning of the billing period.multiplied by the periodic interest rate determines the finance charge. subtracts any payments or credits. 4. Past Due Balance Method – With this method the issuer does not charge any interest for cardholders who pay the account in full before a specific period of time. if the entire amount is paid . Previous Balance Method – The issuer charges interest on the balance outstanding at the end of the previous billing cycle. 2. These balances are they added together for the billing period and divided by the number of days in that cycle. Average Daily Balance Method – Each day the issuer subtracts any payments and adds new purchases to the account balance. otherwise. Separate fees may be charged for cash advances. such as lost card replacement. • Fees – Some card issuers charge an annual fee. late payments. and charges interest on any remaining unpaid amount. 3. so it is very important! 1. just to have access to the card. the finance charge is imposed under one of the three preceding methods. Adjusted Balance Method – The issuer starts with the previous balance. • 23 .
flight insurance. Acceptance – Some cards are more widely accepted than other cards • 24 . replacement of broken items. discounts on merchandise or purchasing clubs.• Other Benefits – A card may provide other benefits such as cash advances.
Income tax planning encompasses several areas to include: Understanding the structure and operation of our tax laws Calculation and filing of federal income tax returns Planning to minimize taxes Other forms of personal taxation 4. or even eliminate the impact of the second (taxes).1-CALCULATION AND FILING OF INCOME TAX RETURNS There are several factors.planning can postpone.but.” Financial Planning cannot postpone or prevent the first inevitable (death).Chapter4-Income Tax Planning WHAT IS IT?? As the old saying goes “Nothing is certain but death and taxes. reduce. which will determine the amount of income tax you will pay: Filing status Taxable Income (Gross) Allowable adjustments to income Allowable deductions to income Exemptions 26 . in some instances .
allowance.FILING STATUS The major categories are: An Individual A Hindu Undivided Family A Company A Firm An Association of Persons or a Body of Individuals. any receipt which satisfies the basic condition of being income is also to be treated as income and charged to income tax accordingly. Apart from the items listed in the definition. • Salary Income including any benefit. amenity or perquisite obtained in the course of such business or profession. Income includes:• Profits or gains from business or profession including any benefit. amenity or perquisite obtained in addition to or in lieu of salary. • Dividend income 27 . allowance.2-GROSS INCOME DEFINED The definition of income under the Income Tax Act is of an inclusive nature.e. whether incorporated or not A Local Authority Every artificial Juridical Person not falling within any of the preceding categories 4. i.
Income from processing stage and onwards will be taxable income. The Central Government cannot levy tax on such income.• Winnings from lotteries. Similarly. 4. • Capital gains on sale of capital assets.e. Let us understand such incomes:A. • Amounts received under a KeyMan Insurance Policy i. Income form agriculture up to and exclusive of the processing state will be agricultural income. crossword puzzles.e. a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person. 28 . • Voluntary contributions received by a religious or charitable trust or scientific research association or a sports promotion association.3-SOURCES OF INCOME EXCLUDABLE FROM TAXATION Section 10 of the Income Tax Act. gambling or betting. which are exempt from income tax. i. Section 2(1A) gives a detailed definition of agricultural income. races. Agricultural Income Under the constitution of India . which is situated in India. taxation of agricultural income eis the right of the state governments. games. incomes on which no income tax is payable. Income derived from agricultural operation from land. will be exempt agricultural income. 1961 specifies those incomes.
However. Share of income of a partner from a firm Any sum received by a partner from a firm as his share in the total income of the firm is exempt from tax. Receipt by a member out of a HUF income Any sum received by a member of a Hindu Undivided Family from out of the income of the family as well as the income received by an individual member from out of the income of the impartial estate is exempt. breeding livestock. C. distribution of HUF income amongst members is exempt from Income Tax. Thus income form basic operations on land like cultivation. income from sale of trees. and secondary operations like removal. poultry farming cannot be classified as agricultural income and is not exempt from income tax. B. The logic of such exemption is similar to that for granting exemption to income as share from HUF. Therefore. growing crops etc. The rate of tax levied on a Hindu Undivided Family is quite high. digging. An HUF is separately taxed on its income. can be classified as agricultural income and is exempt from tax. fishing activities. Impartible estate means property which cannot be disposed off or divided by the holder of the property. 29 .Income from a farmhouse used for agricultural purposes will be treated as agricultural income. etc. in order to avoid the same income from being taxed twice.
2500 in case of winnings from races) in each previous year. For example Prize won for taking part in a competition. received without stipulation or a receipt which is of a fortuitous nature and which cannot be foreseen. Casual or non-recurring receipts Any receipts which are of casual or non. etc. Payments from Public Provident Fund Any payments received from The Public Provident Fund(PPF) are exempt from tax. this exemption is not available to receipts under a Keyman Insurance Policy. Amount received under a life insurance policy.including the bonus allocated on such policy Any amount received under a life insurance policy including a bonus either on maturity of the policy.recurring nature are exempt up to a sum of rs. is exempt from tax. However the following income will not be treated as casual or nonrecurring:• Capital gains • Receipts arising from business or from exercise of profession or occupation • Receipts by way of addition to the remuneration of an employee E. 30 . or otherwise. However.5000 (rs. F.D. reward for finding a lost child. Casual income is income which is accidental.
G.1500 Any income which arises to a minor child of an assessee is added or clubbed to the parents income under Section 64(IA) of the Act. Dividend received by a shareholder Any income received by way of dividend from a domestic company.1500 annually per child. Awards and Rewards Any award or reward. J. Interest incomes of certain types 31 . whether in cash or kind from Central or any state government or any other approved body in public interest is exempt from income tax. Pensions received form gallantry award winners. Section 10(32) however gives exemption from such clubbing up to a maximum of rs. L. K. Any scholarship granted to meet the cost of education is exempt H. or from UTI or from a recognized mutual fund by a shareholder/unit holder is fully exempt from tax. Income of a minor upto rs. I. Family pension received by individual who has been in the service of the Central or State Government and has been awarded “Param Vir Chakra” or “Maha Vir Chakra” or “Vir Chakra” or other notified gallantry award or by members of his family is exempt from income tax.
the aforesaid limit has been increased upto rs.15000. certificates. one who has attained 65 years of age at any time during the previous year). An assessee (u/s 80 D) is entitled to a deduction up to rs.The following interest income is exempt from income tax:• Interest on notified securities.10000 a year in respect of the premium paid by him/her by cheque for insurance: a) On his health or on the health of his spouse or dependent parents or children. The deduction is restricted to a maximum of rs. B. An individual assessee can claim a deduction (u/s 80 CCC) for any amount paid or deposited by him in any annuity plan of the Life Insurance Companies for receiving pension from a fund set up by the said corporation.1999 4. deposits.e. • Interest on notified Capital Investment Bonds • Interest on Relief Bonds • Interest on notified Bonds in the hands of non-residents • Interest on notified savings certificate • Interest on Gold deposit bonds.4-DEDUCTIONS FROM ADJUSTED GROSS INCOME A. and b) In case of a Hindu Undivided Family on the health of any member of such family Where any of the aforesaid persons is a senior citizen(i.10000. 32 . bonds. etc.
E. charitable institutions.60000 shall be available.e.40000. Moreover assessee or any member is a senior citizen (i.C. An assessee can claim a deduction for the interest received on the following Securities: • Interest on any securities of the Central or any State Government. from the amount of income tax (Section 88) on his total income with which he is chargeable for any assessment year. D. An assessee shall be entitled to a deduction. then a fixed deduction of rs. F. • Interest on deposits under such National Deposit Scheme as may be framed by the Central Government and notified by it in this behalf in the official gazette. • Interest on deposits under the Post Office( Monthly Income Account). at least 65 years of age at any time during the previous year). The amount of deduction available shall be further reduced by any amount received from an insurer for medical treatment. Any taxpayer can claim a deduction (u/s 80 G & u/s 80 GGA) in respect of donations made to certain funds. The amount of deduction shall be limited to a maximum of rs. . Section 80DDB has been inserted to specifically provide a separate deduction for expenditure incurred for the medical treatment for the individual himself or to his dependent relative or any member of the Hindu undivided family in respect of diseases or ailments as maybe specified in the rules. It includes contributions towards 33 . of an amount equal to 20 per cent of the aggregate of the sum.
Chapter-5 TAX CREDITS Once the amount of taxes due has been determined. there may be tax credits available to offset payment due. is of more value than a deduction for an equal amount. Limitations and exclusion apply to all of these credits and their use should be coordinated through your tax advisor. and as such. which simply reduces the amount of taxable income. So. Public Provident Funds. Post Office Savings Scheme. A tax credit is a reduction in the actual tax bill.Life Insurance Premium. etc. now we complete our tax calculation as follows: Less: Equals: Less Less Equals Times: Equals Less Equals Gross Income Adjustments to Gross Income Adjusted Gross Income (AGI) Larger of Itemized or Standard Deductions Exemptions Taxable Income Applicable Tax Rate Tax Liability Tax Credits and Prepayments Tax or Refund Due 34 .
deductions and credits to which you are entitled? Is your present taxpayer status (joint return. and if so. Partnership.) best for you? Will your AMT calculation exceed your regular tax calculation. some of the more important considerations are: o Are you aware of all available exemptions. These issues will vary by individual and should generally be discussed with a tax professional. which can accomplish these goals. have you considered which form of business structure (Sole Proprietorship. etc) is most advantageous from a tax perspective? 35 o o o . exemptions and credits (thereby reducing the amount of taxable income). what planning steps should you consider? If self-employed. Some popular tax-savings strategies are: 1) Taking Maximum Advantage of Tax Filing Options This technique involves the maximization of available tax deductions. however.Chapter-6 TAX PLANNING AND ITS ROLE IN THE FINANCIAL PLANNING PROCESS Taxpayers are always seeking ways to eliminate or at least reduce their income tax burden. etc. There are some strategies. when used in conjunction with the overall financial plan. separate return. Head of Household.
o Acceleration: Income may be accelerated (taken early) so as to include it for a taxable period in which taxable income is less than in the next taxable period. if a taxpayer has already had medical deductions of 7. thereby reducing taxes. Conversely. Another instance in which this acceleration technique would work would be if current year taxable income was considerably less than anticipated income for the upcoming tax period. Deferral: Deferring or postponing income may also result in tax savings. which may provide great economic benefit to your family without 36 .2) Acceleration and Deferral Techniques Income tax liability can frequently be reduced though the techniques of deferral or acceleration. deferring income into that period could result in lower taxes.5% of AGI. If taxable income is anticipated to be less in the next taxable period. deductions would be of more value in the future to offset the higher income. Expenses may also be accelerated. o 3) Utilization of Non-Taxable Employee Benefits You may have access to certain employer-sponsored benefits through your job. and thus. For example. this would mean that any additional qualifying medical expenses incurred during that tax year. would be eligible for a deduction. One reason this strategy would be used would be to take maximum advantage of deductions and exemptions. deferring expenses into the next taxable period would make sense if taxable income was anticipated to be higher than in the current income period.
000 in most cases. the Tax Reform Act of 1986 limited the usefulness of this technique between parents and children by taxing unearned income over Rs. which is in a lower tax bracket. certain real estate. Also. are o Group medical and dental insurance (benefits received are not considered taxable income.) Group term life insurance (death benefits of up to Rs.) In this case. savings bonds.creating any taxable income.1. 37 o .) Group accidental death and dismemberment. not the donor. travel accident and related plans o o 4) Income/Deduction shifting The taxpayer shifts a portion of his/her income (and therefore taxes) to a family member or entity. are exempt from taxation. which should be discussed with your personal tax advisor. the property itself must be given away.400 per year for children who are under age 14 at their parents’ top tax rate. or may require that you share in the cost. etc. These may be at no cost to you. Also. all future income will be taxed to the recipient.50. It is important to note that this action may have Gift Tax implications. Some useful techniques are: o Making a gift of income–producing property (such as stock. Some of the most popular benefits. which result in no taxable income. since gifts of only the income will not shift the income tax burden to the recipient.
if you originally purchased a technology stock at Rs. "Tax exchanges" are available which will permit the sale of a security for a loss. o o 38 . (For example. (Note: tax laws concerning this type transaction are somewhat complicated. This involves the planning in terms of the timing of the purchase and sale of these securities so that they fall within the same tax calculation period. these gains may be offset by selling another security you own for a loss. you may be able to time investment sales in order to maximize your tax advantage.5 per share. This is accomplished by shifting allowable tax deductions to a taxpayer who is in a higher bracket than the taxpayer who would otherwise be claiming this deduction. so you should consult with your tax professional for personal advice before undertaking this strategy. but the stock had now declined to Rs. you could sell this stock.o The opposite of income shifting is deduction shifting. 5) Tax-Managing Your Investment Portfolio o As an investor. If you have capital gains on securities or other investment property. and yet maintain a similar investment position.10 per share. taking advantage of the loss for income tax purposes and immediately purchase a different technology stock. thereby keeping your position in a technology investment.) Tax laws permit a taxpayer to select which stock/fund shares they want to sell if they are selling only a part of their holdings.
trigger Alternative Minimum Tax consequences. you had purchased shares of a particular stock as follows: 100 shares at Rs. These charitable gifts may take various forms: o o Gifts of cash Gifts of appreciated property such as stock or real estate (These gifts would generally be deductible at fair market value on the date of the gift.) This may. with the donor receiving and income stream from the investment. 6) Making Charitable Contributions Charitable contributions are considered itemized deductions. you may sell shares which would result in a gain (those purchased in 1985).70 per share in 1990 100 shares at Rs. no loss or gain (those purchased in 1990) or a loss (those purchased in 1995). The taxpayer receives a current tax deduction for 39 o . (See Capital Gains Above).70 per share. o Since capital gains laws favor investments held for periods of at least 12 months.20 per share in 1985 50 shares at Rs. and the charity receiving the property. however. The establishment of Charitable Remainder Trusts in which property is transferred to the trust. If you wish to sell 50 shares. with no capital gain consequences to the donor.80 per share in 1995 The value of the stock is now Rs. if over time.Example Suppose. which reduce your taxable income. investment sales may be timed to take advantage of this lower tax rate.
This may be advantageous if the taxpayer anticipates being 40 .) Note: this strategy is generally of interest only to the higher tax brackets. and often from state and local taxes. as well. It should be noted that the effectiveness and availability of these types of investments have been greatly diminished by the Tax Reform Act of 1986. are structured to take advantage of certain tax write-offs. Another investment potentially excludable from taxation is Series EE Bonds. such as certain types of real estate.) 9) Tax Deferred Investing Other investments do not eliminate tax. these bonds would not have as high a return as the taxable bonds even after the payment of taxes. However. This was intended to discourage taxpayers from investing in a particular activity strictly for tax purposes. etc. such as depreciation. 7) Tax Shelters Some investments. One such investment category is public purpose municipal bonds (that is. you should be aware that the interest from certain taxexempt municipal securities might be subject to the Alternative Minimum Tax computation. when used for higher education purposes (Certain limitations apply. bonds issued by some governmental entities). amortization or depletion. oil and gas drilling. historical rehabilitation. due to the fact that at lower brackets.the value of the “remainder” interest that the charity is receiving. 8) Tax-Free Investing Interest paid on some investments is free from federal income tax. but simply postpone taxation until some future date.
Some of the most common vehicles for this deferral technique are: o o o o Qualified employer-sponsored retirement plans Employee Stock Options Plans Non-Qualified deferred compensation Plans Purchase of bonds (bonds issued by the state or central government on a discounted basis). Another potential advantage of this technique is that investment return during the deferral period is enhanced. Bond owners may elect when they want to be taxed on the increase in value of these funds. either yearly as interest accrues or upon maturity or when they are redeemed. they pass as a portion of the death benefit to the beneficiary with no income tax consequences ever! If values are withdrawn during the life of the insured.in a lower tax bracket in the future. Life Insurance Cash Values and the interest/investment return they receive are not subject to current income taxation. (For more information. as well. see Insurance Module. earning interest. (For more information.) o o 10) Tax Planning Wisdom 41 . since the postponed amount of tax remains invested.) Deferred Annuity policies also feature the deferral of tax on investment growth until the policyholder withdraws these funds. see Insurance and Retirement Modules. any gain over and above the initial investment of premium is taxed as ordinary income. If values remain in the policy until the death of the insured.
42 . a tax adviser should generally be consulted concerning the overall implications of any tax-savings strategies. which results in tax-savings also results in some loss of flexibility. it should never be overemphasized at the expense overall financial goals and objectives. For example. In some instances a strategy. Also. however. control. tax-favored retirement plans offer deferral of taxes until retirement. other than for tax purposes. they impose strict regulations and penalties which prevent the use of these funds prior to retirement age (59 ½ in most cases). however. In general. if a strategy to save taxes does not make sense. it should not be implemented. or some other advantage.Tax planning is very important.
or by not engaging in a specific activity which could create liability. and lessening the severity of the hazard by taking some positive action.This technique involves lowering the probability of a particular hazard occurring. The ultimate avoidance of being sued by someone being injured on your trampoline is not to own one. if you have not taken the necessary steps to eliminate risk. the retirement plan.This technique involves the avoidance of exposure to loss. or the estate plan. How Does One Manage Risk? There are four basic techniques for managing risk: • Risk Avoidance . Example The ultimate avoidance of being killed in a plane crash is to refuse to fly.Chapter-7 Risk Management The Basics Risk Management is the cornerstone of any financial planning effort. 43 . • Risk Reduction/Loss Management and Control . It makes no difference how elaborate or effective the investment portfolio. either by not owning specific property that could be exposed to loss. all remaining planning efforts could be pointless. Risk management through the wise use of insurance removes the concern for the unknown from a financial plan.
Example A risk reduction strategy for a swimming pool is to install warning alarms on all doors leading to the pool. • Risk Transfer . They do not consciously decide to take-on the full risk. In other words. Example The selection of an insurance policy (health. • Sometimes partial risk retention is used.This technique involves the acceptance of the risk. Unfortunately. you should only self-insure what you can afford to lose. wherein the person at risk chooses to accept part of the potential liability for a certain hazard. a risk reduction strategy to prevent home fires would be to refrain from leaving greasy or chemically saturated rags near a gas hot water heater. or homeowners) with a large deductible would involve partial retention. Generally. • Risk Assumption/Retention .1.This technique almost always involves some form of insurance.000 for collision coverage is an example of Risk Assumption. this technique should be used only when the potential exposure is very small or has a low probability of occurrence. many people self-insure by default. The risk of a particular hazard is transferred to another entity (usually an insurance company) in exchange for a payment of 44 . auto. Example Choosing not to insure a 15-year-old car with a value of less than Rs. they merely fail to plan and provide for an adequate risk management program.
premium. This progress also involves the determination by the insurer of whether or not the risk to be assumed is acceptable at the given premium. This process is known as the “underwriting” process. 45 .
The reason sited for this is the growth seen in the stock market and a low interest rate and return offered by traditional instruments. The Household savings in India Can is broadly categorized into the following types: •Savings in physical properties •Savings following: •Savings deposits with banks •Life insurance policies •Provident funds •Pension funds •Liquid cash of households 46 in financial instruments or financial household savingsFinancial household savings in India usually include the . Today corporate securities have become a part of household savings wherein retail individuals prefer to invest his saving in security market. Earlier the trend of saving was in terms of physical assets but it has started to shift now to financial instruments.Chapter-8 CONCLUSION The Saving behavior has been changed considerably over the last couple of years. This trend partially reflects the relentless expansion of the various branch networks of the financial institutions into the county's rural areas and partially holds the increasing trend of the easy accessibility of the alternative investment opportunities. Also the growing income of working class has also contributed largely to the changing pattern of saving in India. The savings rate in India is comparatively higher than various other countries.
Considering these two factors. the allocation of portfolio is under control that makes the low returns from the market developments. First. On the other hand. 47 . public sector dominates the markets.•Deposits with non-banking financial institutions •Unit Trust of India Investment Schemes The major portion of financial saving goes into pension funds and life insurance. It is also found that the response of saving for the interest rate changes in India was amongst the lowest in the developing countries. the mutual funds started to become more successful in the early years of 1990s. we can conclude two weaknesses of the saving market in India. Over past 30 years. the prime two instruments for household long term saving like pension saving and life insurance have come to an idle state. Second.
SUGGESTIONS After all this it can be stated that the fundamental corner stone’s of successful investing are: • Save regularly. This will ensure that the investment objectives are achieved. This is one area where many planners are lacking today. Companies can arrange for seminars and sessions through which they can provide information to people and in return can get prospective clients from the audience. Regular meetings should be conducted between the financial planner and client to review the investment portfolio. Goal should be properly divided into short term. Proper allocation should be done in various instruments according to the time period of goal. follow-up. follow-up is need of hour and it should be understood by financial service provider. Alteration should be made in portfolio as per need and requirement of the client. Invest regularly • Start Early • Diversify • Use tax shelter Keep a regular check on investment and modify plans as and when needed People need to be educated and informed about Financial Planning and this provides greater opportunity to financial product distributer like Reliance Money to educate people. Financial planning is not a onetime activity. In this way both the audience and the company can also be benefited. Follow-up. medium term and long term. It will create goodwill for the financial planner and his company. There are 48 . the initiative should be taken by financial planner to put this forward to their client.
It is better to invest in instruments which we can understand rather than being dependent on someone else advice. At time of maturity it’s necessary to produce the investment documents which act as a proof. It is also recommended that all the disclosure documents also be preserved as it would help in case of any dispute in settlement. Investment through SIP should be encouraged. Investor should know exactly what he is investing in. Investment should be done fairly for a longer period of time only then capital appreciations is possible. If an investor is seeking help from advisor then he should collect enough information of product from different sources. 49 . But many times investors do not have proper documents which dishonors the claim at maturity. Buy and hold.various instruments available which can site different time period needs. develop habit of saving and it provides convenience of investment. If they do not have adequate information. If investment are giving regular return or are going to get matured should be reinvested properly. Thus the ultimate responsibility is on the investor when it comes to taking investment decision. SIP helps in Rupee cost averaging. Diversification is must but not to a greater extend. It is also necessary that advisor should have enough experience. Always keep investment a simple affair.. A little amount regularly invested for long period can create a greater wealth. question should be asked to financial advisor. It will help to take proper investment decision and choose aright advisor. All the documentations should be complete and need to be preserved.
htm http://www.ndtv.in/ http://www.com/money/report_union-budget-2009-10highlights_1271503 http://finance. html http://www.fpsbindia.kingswoodconsultants.html 50 .mapsofworld.html http://business.com/savings/india/household.Websites http://www.dnaindia.co.com/PersonalFinance/Insurance.com/report/2009/may/15/perfin-types-of-lifeinsurance.in/financial-planning/article.com/LifetimeFinancialPlanning.htm http://www.com http http://www.com/2008/01/16190747/Compare-DifferentInsurance-Pl.com/persnl.reliancecapital.businessgyan.org/ http://profit.ndtv.itrust.rediff.action/What-IsFinancial-Planning-India http://www.BIBLIOGRAPHY 1.mywealthguide.aspx http://profit.
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