PROJECT REPORT

ON
A STUDY ON FINANCIAL PLANNING & FORECASTING
submitted to
University of Mumbai for partial completion of the
DEGREE OF BACHELOR OF ACCOUNTING & FINANCE

SEMESTER VI
PREPARED BY:
SAKSHI SURESH KAKADE
ROLL NO 69
UNDER THE GUIDANCE OF
PROF. SHRADDHA OJHA

HINDI BHASHI JANKALYAN SHIKSHAN SANSTHA’S KALYAN

K.M.AGRAWAL COLLEGE OF ARTS,COMMERECE & SCIENCE
AGRWAL COLLEGE ROAD GANDHARE KALYAN 421301

2021-2022

1 
 
 
 

ACKNOWLEDGMENT

To list who all have helped me is difficult because they are so numerous
and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels

and fresh dimensions in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving

me chance to do this project.

I would like to thank my Principal, Dr.Anita Manna for providing the

necessary facilities required for completion of this project.

I take this opportunity to thank our Coordinator for her moral Support
and guidance.

I would also like to express my sincere gratitude towards my project

guide whose guidance and care made the project successful.

I would like to thank my College Library, for having provided various

reference books and magazines related to my project.

Lastly, I would like to thank each and every person who directly or
indirectly helped me in the completion of the project especially My
Parents and Peers who supported me throughout my project.

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 DECLARATION BY LEARNER

I the undersigned Miss / Mr. SAKSHI SURESH KAKADE hereby declare

that the work embodied in this project work titled “A STUDY ON
FINANCIAL PLANNING & FORECASTING” my own contribution to the
research work carried out under the guidance of is a result of my own
research work and has not been previously submitted to any other
University for any other Degree / Diploma to this or any other
University.

Wherever reference has been made to previous works of others, it has

been clearly indicated as such and included in the bibliography.

I, hereby further declare that all information of this document has been
obtained and presented in accordance with academic rules and ethical
conduct.

Name and Signature of the learner

Certified by

Name and signature of the Guiding Teacher

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 HINDI BHASHI JANKALYAN SHIKSHAN SANSTHA’S KALYAN

K.M.AGRAWAL COLLEGE OF ARTS,COMMERECE & SCIENCE

AGRWAL COLLEGE ROAD GANDHARE KALYAN 421301

CERTIFICATE

This is to certify that Ms/Mr SAKSHI SURESH KAKADE has worked and
duly completed his Project Work for the degree of Master in Commerce
under the Faculty of Commerce in the subject of and his project is
entitled," “A STUDY ON FINANCIAL PLANNING
FORECASTING”"under my supervision. I further certify that the
entire workhas been done by the learner under my guidance and that no
part of it has been submitted previously for any Degree or Diploma of
any University.

It is his own work and faces reported by his personal findings and
investigations

Name and Signature of

Guiding Teacher

Date of submission:

4
 INDEX

Sr. No Particular Page no

1. Introduction 1-3

2. Research methodology 4-24

3. Literature review 25-27

4. Data analysis and interpretation 28-51

5. Findings & suggestion 52-54

6. Conclusion 55-56

7. Bibliography 57-58

8. Questioners 59-66

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 TABLE OF CONTENTS

PAGE
SR.NO PARTICULARS
NO.
1 INTRODUCTION. 2

2 SCOPE. 3
3 SMART GOALS. 4
4 HOW TO ACHIEVE
5
YOUR GOALS?
5 RISK AND RETURN. 8
6 SAVINGS VS
9
INVESTMENTS.
7 LOANS VS
10
INVESTMENTS.
8 THE POWER OF
12
COMPOUNDING.
9 INVESTMENT
13
VEHICLES.
10 OTHER IMPORTANT
16
CONCEPTS.
11 INSURANCE
PLANNING AND
RISK 21
MANAGEMENT.

 
 12 INVESTMENT
29
PLANNING.
13 TAX PLANNING. 36
14 RETIREMENT
57
PLANNING.
15 ESTATE PLANNING. 63
16 SUMMARY. 71
17 BIBLIOGRAPHY. 72

 
 Source: financialplannerfl.com

Source: mortgagefactoryltd.com
  1 
1. INTRODUCTION
Planning of finances is essential for each and every one, be it a school-going kid
or a retired citizen. The more early you begin to manage your money the better
it is. Financial planning is a dynamic process that involves charting an
individual's financial goals. A financial plan is a comprehensive evaluation of an
individual's current pay and future financial state by using current known
variables to predict future income, asset values and withdrawal plans. This often
includes a budget which organizes an individual's finances and sometimes
includes a series of steps or specific goals for spending and saving in the future.
This plan allocates future income to various types of expenses, such as rent or
utilities, and also reserves some income for short-term and long-term savings. A
financial plan is sometimes referred to as an investment plan, but in personal
finance a financial plan can focus on other specific areas such as risk
management, estates, college, or retirement.
Financial planning is a process that involves charting an individual's financial
goals and long-term objectives in conjunction with ways and means of achieving
those long-term goals and objectives. This includes elements of protection,
wealth creation, planning for contingencies and emergencies as well as planning
for specific milestones in life. Importantly, an individual's financial plan should
be reviewed to be in sync with his different life stages and the various
requirements that are specific to a certain stage in life.
A financial planner is a professional who prepares financial plans for people.
These financial plans often cover cash flow management, retirement
planning, investment planning, financial risk management, insurance planning,
tax planning and estate planning.
This project on financial planning presents various aspects of financial planning
for college students. Financial planning is very important for every individual. If
people understand its significance at a younger age, achieving your future
financial goals becomes more convenient as you can invest in different products
to meet your needs.

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 2. Scope

Financial planning should cover all areas of the client’s financial needs and
should result in the achievement of each of the client's goals as required. The
scope of planning would usually include the following:

• Risk Management and Insurance Planning

Managing cash flow risks through sound risk management and insurance
techniques

• Investment and Planning Issues

Planning, creating and managing capital accumulation to generate future capital
and cash flows for reinvestment and spending, including managing for risk-
adjusted returns and to deal with inflation

• Retirement Planning
Planning to ensure financial independence at retirement.

• Tax Planning
Planning for the reduction of tax liabilities and the freeing-up of cash flows for
other purposes

• Estate Planning
Planning for the creation, accumulation, conservation and distribution of assets

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3. SMART Goals
A critical first step in managing your finances is to be able to setup SMART
financial objectives.
Your goals have to be:

S (specific),
M (measurable, motivated),
A (Attainable, achievable),
R (realistic, resource-based), and
T (time-bound).

Many people make the mistake of setting general goals that, more often than
not, will not materialize.

Source: sebi.gov.in

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4. HOW TO ACHIEVE GOALS.
Process
The personal financial planning process is described in ISO 22222:2005 and as
per FPSB as consisting of six steps.

Step 1: Establishing and defining the client and personal financial

planner relationship

The first step in the financial planning process is to establish and define the
advisor-client relationship. This normally begins at the first client meeting,
although it can start prior to this meeting through telephone interactions or other
contacts with the client. The first client meeting is essential for establishing the
framework for a successful advisor-client relationship. This meeting is where
you begin to build trust with the client and create a relationship with the client
that (it is hoped) will span the client’s entire financial life.
Establishing the advisor-client relationship when the client is a couple is a more
complex challenge because you must build trust and rapport with both parties.

Step 2: Gathering client data and determining goals and expectations

This step can begin during the initial meeting or in a unique meeting later in the
planning process. Occasionally, you may interview the client remotely (over the
phone and Internet), or through a series of correspondences to gather client data
and discuss financial goals.
Clients typically express concern about a whole host of topics including
retirement income, education funding, premature death, disability, taxation, and
qualified plan distributions. Clients may sometimes enumerate specific,
prioritized goals, but they are more likely to present a vague list of worries that
suggest anxiety and frustration rather than direction. Your task is to help your
client transform these feelings into goals

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Step 3: Analyzing and evaluating the client’s financial status

Analyze the information you receive to assess client’s current situation and
determine what you must do to meet your goals. At this stage of the process,
planner will take all of the info you have provided and sift through it to start
developing a plan for you.
Depending on what services you have asked for, your planner may analyze your
assets, liabilities, cash flow, education funding, insurance coverage,
investments, tax strategies, retirement plan, estate plan, and anything else
relevant. Most planners will evaluate and help you plan for as much or as little
as you would like.

Step 4: Developing and presenting the financial plan

Your next job is to devise a realistic financial plan for bringing the client from
his present financial position to attainment of his goals. Since no two clients are
alike, an effective financial plan must be tailored to the individual with all your
recommended strategies designed toward each particular client’s concerns,
abilities, and goals. The plan must address the needs of your client, and not be
colored by your compensation model, product offerings, or bias.
There is usually more than one way to achieve a client’s financial goals. When
this is the case, you should present alternative strategies for the client to
consider and should explain the advantages and disadvantages of each strategy.
Strategies that will help achieve multiple goals should be highlighted.

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Step 5: Implementing the financial planning recommendations

A financial plan is useful to the client only if the plan is put into action.
Therefore, part of your responsibility is to make sure that plan implementation
occurs according to the schedule agreed on with the client.
Implementation requires a clear statement of duties by the advisor and the client.
Duties will vary based on the advisor’s business model.

Step 6: Monitoring the financial plan and the financial planning relationship

The review process should involve measuring the performance of the

implementation vehicles, such as investments and insurance contracts. Second,
updates should be obtained if changes in the client’s personal and financial
situation have occurred. Third, changes in his economic, tax, or financial
environment should be reviewed with the client.

The monitoring domain will likely involve revisiting other financial planning
domains. As a client grows older, their needs will change and even the most
comprehensive and detailed financial plan will eventually require changes. Any
significant changes will result in making new recommendations and
communicating those recommendations to the client, potentially using different
communication techniques than in prior years.

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5. RISK AND RETURNS

Individuals have their own risk taking capacity. Your risk-return profile is your
level of risk tolerance. If you invest in a high-risk business like a start up firm
your risk would be high. There are three types of risk return profiles which you
can fall under depending upon your source of funds and the investments you
choose to make. They are:

1. Conservative i.e. you take minimal risks ensuring your funds are secure.
You prefer investing in post office deposit schemes, bank fixed deposits,
government bonds

2. Moderate i.e. you are willing to take some risks and prefer investing in
mutual fund schemes.

3. Aggressive i.e. you are willing to take high risks and prefer investing in
equity, commodities markets and you may even be speculating for returns.
There is an important investment principle, which says the level of your returns
depends on the level of risk you take. While you stay invested it is crucial you
take necessary measures to manage your risk. Once you invest in any asset class
you should monitor your investments and keep yourself updated about various
market happenings to avoid any pitfalls.
Always check the potential risks when quoted returns are unusually high.

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6. SAVINGS V/S INVESTMENTS

Many new investors don't understanding that saving money and investing
money are entirely different things. They have different purposes, and play
different roles, in your financial strategy.
Savings mean the funds you keep aside in safe custody like bank saving
accounts. While investing on the other hand means to purchase various financial
instruments which will pay you a return on some future date. The difference
between savings and investment is that savings is simply idle cash while
investments help your funds to grow over a period of time.
We can meet our short-term needs with our savings but to meet our long term
goals we need to make investments. Savings help to protect our principal while
investments help us earn returns over our investments.
Investing involves taking a certain amount of risk, and it also involves the desire
to compound your money over time. Done properly, investing is a carefully
planned and prepared approach to managing your money, with the goal of
accumulating the funds you need. And planning your investment strategy is
about discipline and patience. The best investments tend to be so-called
productive assets such as stocks, bonds, real estate, mutual funds, etc.
When deciding where to put your money for relatively short periods of time,
you must carefully weigh several factors related to short-term savings. These
will give you a good indication of which savings option is best suited for you.
Some things to consider include: the amount of money that you're going to put
into your savings account; the amount of time that you have before the funds are
needed; and how important to you convenience of the funds is.

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7. LOANS VS INVESTMENTS.

People always are confused whether they should avail a loan or build
investments to achieve their financial goal. Both of the options are different and
should be availed appropriately. The following points are worth remembering:

• It purely depends on your financial strength and other factors.

• Credit card debts and personal loans are very costly
• If you have a loan with a low interest rate and tax benefits as in the case of
home loans, it is advantageous to go for a loan. If you have an investment plan
where you can make good return, and then you may opt for long term
investment.
• You have to be sure that the investment is not risky and will not affect your
family if you lose the money.
For example, you are investing huge sums in share market, instead of closing the
existing debts, that is too much risk.

Advantages of Loans

1. Credit cards offer a number of gifts like cash back, holiday vouchers and
other coupons on making purchases through using credit cards.
2. Credit cards offer the benefit of traveling without cash.
3. Credit cards offer cash in advance and hence are easier to use.

Disadvantages

1. Credit cards come with a lot of additional charges like interest rates, service
charges etc. in exchange for the credit offered by them. People forget to read
these terms before purchasing a credit card.

10 
2. Credit cards often tempt people to spend more even if they do not have
money today as they have the comfort of paying back later.

3. People tend to purchase more credit cards so as to extend their income and
later end up piling huge sums of debt.

It is advised that one should learn to save and manage their funds wisely.
Always try to cut back on your spending and rethink before you buy any items
other than your basic needs. People at your age are very keen on electronic
gadgets and wish to spend on the latest in town. But what you do not realize is
these gadgets cost quite a lot on your pockets, squeezing your bank accounts to
an extent that you would not be able to pay up for your education.
If you already have debt to repay why should you go for more debt?
It will not help your financial position. You should instead make investments
that will help you repay the loan and also support your needs for the future.

11 
8. THE POWER OF COMPOUNDING

Time is an influential factor when it comes to investments. Your returns depend

upon the time you enter and exit. Compounding is a concept which when
followed with dedication gives great rewards. However, it rewards better when
savings are compounded over longer horizons. Thus compounding is a tool that
helps you make phenomenal growth in your investments over a period of time.
Thus the more time you have, the more money you are capable of making and
this is exactly why financial planning is so very important.
Recurring deposits and SIPs can help you on this front, ease in payment of
this regular investment amount through a direct debit facility or post-dated
cheque can help you execute your compounding strategy.
Compounding, in short, means earning interest on previously earned interest.

Source: sebi.gov.in

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9. INVESTMENT VEHICLES

Indian markets offer a number of financial instruments like equities, debt,

mutual funds, currencies and commodities in addition to other structured
products. However their choice should be appropriate for the investor depending
upon his or her risk profile and other investment horizon.
For younger age group individuals since the investment horizon is long one can
invest in products that offer capital appreciation or growth on investments. One
should always check that he or she has allocated funds to spend on his or her
immediate needs before investing.

Equity Products:
These are company-sponsored instruments like shares or stocks of the
company’s capital. These instruments offer the investor with shareholder rights
where in investors can participate in the annual general meeting and have the
right to vote. These products earn returns depending upon the profits made by
the company from its operations. The returns may thus fluctuate depending upon
the profitability of the company business. One can choose to invest in these
instruments when they have a longer investment horizon.

Mutual Funds:
A mutual fund is generally a professionally managed pool of money from a
group of Investors. These products may range from asset class specific portfolio
or a mixed group of asset classes. But the choice of scheme or plan should
depend upon your investment objective. Investing in mutual funds helps in
diversifying your portfolio and thus reduces the risk in your portfolio. These
products are considered to be ideal for beginners who lack the necessary
expertise to manage their funds.

13 
Insurance products:
Insurance is more a safety option than an option to invest. We buy insurance to
protect ourselves from unforeseen events like death, accidents, theft of valuables
etc. For insurance and financial planning purposes, the term risk means the
possibility of financial loss.

Real Estate:
Real estate is property consisting of land and the buildings on it, along with its
natural resources such as crops, minerals or water; immovable property of this
nature, (more generally) buildings or housing in general. Also the business of
real estate includes the profession of buying, selling, or renting land, buildings
or housing.

Bank Deposits:
Traditionally banks in India have four types of deposit accounts, namely Current
Accounts, Saving Banking Accounts, Recurring Deposits and, Fixed
Deposits. However from the point of view of financial planning, bank deposits
are worth for short term goals and risk free which does not help the client to
create wealth in long run.

Gold:
Of all the precious metals, gold is the most popular as an investment. Investors
generally buy gold as a way of diversifying risk, especially through the use of
futures contracts and derivatives. The gold market is subject to speculation and
volatility as are other markets. Compared to other precious metals used for
investment, gold has the most effective safe haven and hedging properties across
a number of countries.

14 
Source: surantarun.com

15 
 10. OTHER IMPORTANT CONCEPTS

• SYSTEMATIC INVESTMENT PLANS:

Starting early is the key to financial planning; today you don’t necessarily need
to inherit wealth from family to get wealthy. SIP or systematic investment plans
are an excellent means by which you can start investing small and fixed sums of
money at regular intervals.

• Rupee-Cost Averaging
Some investors like to speculate on the right moment to invest. But predicting
whether the market is going to move up, down or sideways is difficult even for
professionals. With rupee-cost averaging you can opt out of the guessing game
of trying to buy low and sell high.

With rupee-cost averaging, you invest a specific dollar amount at regular

intervals regardless of the investment's share (unit) price. By investing on a
regular schedule, you can take advantage of market dips without worrying about
when they'll occur. Your money buys more shares when the price is low and
fewer when the price is high, which can mean a lower average cost per share
over time.

The most important element of rupee-cost averaging is commitment. The

purpose of rupee-cost averaging is to take the guesswork out of investing by
providing you with an average cost per share that's lower over the long term.

Rupee-cost averaging is popular among people who invest in volatile funds. If a

fund's share price fluctuates a lot, rupee-cost averaging can help reduce the
average cost per share over time when you are investing, and increase your
profit when you re systematically withdrawing your money.

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• Holding Period Return (HPR)
Holding period return is the total return received from holding a Financial Asset.
It is calculated as income plus price appreciation during a specified time period,
divided by the cost of investment.
When we are looking at the return that we earn on our investments, one of the
first measures that we will look at is the Holding period of return. This return
includes income from all sources like dividends, interest, periodic receipts and
the change in the price of the asset.
Holding Period return is also known as, absolute return (or) Total Return (or)
Historic Return.
HPR = (Dividend +(Sale price – Purchase price)) / Purchase price

Example:
Mr. Sinha invested Rs 1,00,000 in stock market. After 2 months he received a
dividend amount of Rs 2,000. He sold the shares after 8 months and received Rs
1,12,000. What is the holding period return in this case?

HPR = (2000 + (1,12,000-1,00,000)) / 1,00,000

HPR = 14%

• Real Rate of Return

A real rate of return is the annual percentage return realized on an investment,
which is adjusted for changes in prices due to inflation or other external effects.
This method expresses the nominal rate of return in real terms, which keeps the
purchasing power of a given level of capital constant over time. Adjusting the
nominal return to compensate for factors such as inflation allows you to
determine how much of your nominal return is actually real return.

Assume your bank pays you interest of 5% per year on the funds in your savings
account. If the inflation rate is currently 3% per year, the real return on your
savings is 2%. In other words, even though the nominal rate of return on your

17 
 savings is 5%, the real rate of return is only 2%, which means the real value of
your savings only increases by 2% during a one-year period.

• Post Tax Returns

Different financial instruments attract different tax rates. It is important to factor
in the taxes while calculating your returns on investments. It is used to calculate
the actual returns from any investment after paying applicable taxes.
Post-tax returns = Pre-Tax returns * {(100-Tax Rate) / 100}

Example:
Continuing with the above example, Mr. Shah had to pay 15% as Short Term
Capital Gains Tax. So, what is the actual returns (in percentage) after accounting
for taxes?
Post-tax returns = 14 * { (100-15) / 100 }
Post – tax returns = 11.9%
• Compounded Annual Growth Rate (CAGR)
CAGR is the year-over-year growth rate of an investment over a specified
period of time. It is known as Annualized returns. Is is mainly used to compare
performances of mutual funds, stocks etc.,

CAGR = [{ (1+ r)^ 1/n} – 1] * 100

(r = Holding period or total return and n = Time)
Example: Mr. Shah invested Rs. 1,00,000 in a mutual fund scheme. After 4
years, he sold the mutual fund units and received Rs. 1,35,000. Calculate
Holding period return and CAGR?

HPR = (135000 -100000) / 100000

HPR = 35%
Whereas, CAGR = [{(1+. 35)^1/4} -1] *100
CAGR = 7.79%

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 Holding period return is 35% for 4 years. The annual growth rate will not be
35/4 = 8.75%. But, it will be less than this figure, which is 7.79% as growth is
compounded.
If the holding period is 1 year then CAGR and HPR will be the same. If the
holding period is more than 1 year then the CAGR will be less than the HPR.

• Time Value of Money – TVM

The time value of money (TVM) is the idea that money available at the present
time is worth more than the same amount in the future due to its potential
earning capacity. This core principle of finance holds that, provided money can
earn interest, any amount of money is worth more the sooner it is received.
Basic Time Value of Money Formula and Example
Depending on the exact situation in question, the TVM formula may change
slightly. For example, in the case of annuity or perpetuity payments, the
generalized formula has additional or less factors. But in general, the most
fundamental TVM formula takes into account the following variables:
FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years

Based on these variables, the formula for TVM is:

FV = PV x (1 + (i / n)) ^ (n x t)

For example, assume a sum of Rs.10,000 is invested for one year at 10%
interest. The future value of that money is:
FV = Rs.10,000 x (1 + (10% / 1) ^ (1 x 1) = Rs.11,000

19 
 The formula can also be rearranged to find the value of the future sum in present
day dollars. For example, the value of Rs.5,000 one year from today,
compounded at 7% interest, is:
PV = Rs.5,000 / (1 + (7% / 1) ^ (1 x 1) = Rs.4,673

• Investment v/s Speculation

Speculative risk and Pure risks involve only the possibility of financial loss,
whereas speculative risks involve both the possibility of financial loss and the
possibility of financial gain. Speculative risks, on the other hand, are what
people encounter when they purchase investment assets hoping to receive some
form of return. The term speculative risk is perhaps an unfortunate one because
both investment and speculation involve speculative risk. This is true, despite
the implication that speculative risk is only associated with speculating.
Investing is based on a reasoned consideration of expected return and the risk
associated with that return. Speculating occurs when a person buys an asset
hoping to receive some form of return, without consideration or knowledge of
the expected return or risk. It may also be the purchase of an asset in which the
buyer expects to lose some or his entire purchase price, but which might have
some huge payoff. Example of speculation is buying what are known as penny
stocks. These are common stocks that trade for pennies a share. Often, these are
stocks of companies that are about to become worthless. On a rare occasion,
something favorable happens to one of these companies and it becomes quite
valuable. Like lotteries, most buyers of penny stocks lose some, if not all, of
their entire purchase price. While a few buyers get lucky and hit it big, again,
this is speculating, not investing.

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11. INSURANCE PLANNING AND RISK
MANAGEMENT

Risk can be divided into two categories: pure risk and speculative risk.
Insurance is a technique for dealing primarily with pure risks that can be
categorized as personal risks, property risks, and liability risks. The similarity of
the financial planning process to risk management and needs analysis is then
explained, with the financial planning process used to discuss how to help
individuals and families deal with the possibility of financial loss associated
with pure risks.

IMPORTANCE OF PROTECTION OBJECTIVES

Financial planning represents an integrated approach to developing and
implementing plans to achieve individual or family financial objectives.
Although financial objectives may differ in terms of individual circumstances,
goals, attitudes, and needs, all integrated plans should include an analysis and
recommendations that satisfy the client’s protection objectives.

While planning for the accumulation of wealth may be more exciting, the
protection of that accumulated wealth cannot be overlooked. Most people work
to acquire assets (wealth) such as homes, automobiles, savings, and investments,
but the pleasure associated with this wealth is sometimes interrupted by the
chilling thought that some event they cannot control could cause assets to be
damaged or destroyed. Protecting assets and preserving the wealth represented
by those assets against the possibility of loss is challenge nearly all people face.
Risk is the basic problem with which insurance deals, we must fully understand
what risk is to deal with it efficiently through the use of insurance and/or other
risk handling techniques.

For insurance and financial planning purposes, the term risk means the
possibility of financial loss. In applying this definition of risk, recognize that

21 
there are two ways a financial loss can occur. The most common reason of a loss
involves a reduction in the value of something that an individual already
possesses—for example, the value of a family’s home can be reduced by a fire,
or the value of one’s income-earning ability can be reduced by death or
disability.

Defined in this way, risk falls into two categories:

• Pure risk—involves only the possibility of financial loss
• Speculative risk—involves both the possibility of financial loss and the
possibility of financial gain

Both pure and speculative risks involve the possibility of financial loss.
However, with pure risk the possibility of gain is essentially absent, and all that
remains is the alternative of loss or no loss (no change). The difference between
pure and speculative risk can be illustrated by the situation of a client who owns
a home. The possibility of damage or destruction to the home due to fire is a
pure risk. What are the possible outcomes? Either a fire occurs and causes
damage that results in a loss, or no fire occurs and there is no change or loss. In
contrast, the risk that the home could appreciate or depreciate in market value is
a speculative risk. In this case, the client may realize either a gain or a loss from
the sale of the home. With few exceptions, insurance is a technique for dealing
with pure, rather than speculative, risk.
Two additional points are important in fully understanding what risk is:
• Risk and uncertainty are not the same.
• Risk is not the probability of loss.

Although risk can give rise to uncertainty, risk is not the same as uncertainty.
Unlike uncertainty, which is a state of mind characterized by doubt, risk exists
all around us as a condition in the world.

22 
TYPES OF PURE RISKS
As mentioned earlier, insurance is a technique for dealing primarily with pure
risks—risks involving a chance of loss or no loss. Pure risks can be categorized
as personal risks, property risks and liability risks. These three types of pure
risks can be described briefly as follows:
1. Personal risks—involve the possibility of a loss of income-earning ability
because of
a) Premature death
b) Disability
c) Unemployment or Retirement
a. Extra expenses associated with accidental injuries, periods of sickness, or the
inability to perform safely some of the activities of daily living (bathing,
dressing, transferring from bed to chair, etc.)

2. Property risks—involve the possibility of

a. Direct losses associated with the need to replace or repair damaged or missing
property
b. Indirect (consequential) losses, such as additional living expenses that are
required due to a direct loss
3. Liability risks—involve the possibility of
a. Loss from damaging or destroying the property of others
b. Loss from causing physical or personal injuries to others

Examples: the possibility of a loss of income to family members upon a client’s

premature death, disability or retirement. In addition, the possibility of incurring
increased expenses associated with medical and long-term care is a type of
personal risk.

Clients are exposed to property risks through the ownership of real and personal
property. Real property includes the client’s dwelling and associated buildings,
and personal property includes such items as household goods, clothing, and

23 
automobiles. Direct losses to one’s real or personal property can be the result of
many perils (causes of loss) including, fire, windstorm, theft, flood, earthquake,
and automobile collisions. Indirect losses are associated with the loss of use of
property following the occurrence of a direct loss. In addition to the indirect loss
referred to as additional living expenses, other types of consequential losses
include debris removal costs, rental income losses, and demolition losses.
A consumer’s first priority should be securing adequate insurance. No amount
of budgeting and money management skill can get one through a crisis like a
serious medical emergency if there is no medical coverage. Similarly, one
should have a Motor accident occur without proper liability coverage.
Risk management is your first order of business, and that means securing
adequate insurance. Insurance protects you by transferring the risk of huge
losses to an insurance company. By paying a relatively small amount each year
to the company, you can protect yourself from the risk of losing a lot of money
in the future. There are two kinds of insurance: legacy and indemnity.
Legacy is insurance, like life insurance, which replaces income in the event of a
claim.
Indemnity (General Insurance) replaces or “makes whole” in the event of a loss,
like a theft or accident.

WHAT TYPE OF INSURANCE IS APPROPRIATE?

Term Plan – A term insurance policy covers you in the event of your death. You
buy the insurance for a specific period of time, e.g. ten years, thirty years, etc.
Term insurance is a type of life insurance policy that provides coverage for a
certain period of time, or a specified "term" of years. If the insured dies during
the time period specified in the policy and the policy is active then a death
benefit will be paid.
Whole Life – A whole life insurance policy adds an investment to the policy.
More expensive than term insurance, whole life policies might include a money
market account, bonds or stocks. Over time, as you pay your premiums, the
whole life policy builds value, which you can cash out at the end of the life of

24 
the policy. Whole life insurance, or whole of life assurance (in the
Commonwealth of Nations), sometimes called "straight life" or "ordinary life,"
is a life insurance policy which is guaranteed to remain in force for the insured's
entire lifetime, provided required premiums are paid, or to the maturity date.

WHAT’S THE RIGHT AMOUNT OF INSURANCE TO HAVE?

Consider that many kinds of insurance are designed to substitute for income
should someone die or become incapacitated. A life insurance policy for a child,
therefore, need not be terribly large—there’s no income for it to substitute. A
child’s life insurance policy should cover “final expenses”—burial and loss of
parent’s income from missed work. Parents should have much larger life
insurance policies, to cover those costs plus future income that parent is
expected to earn. The right amount of insurance varies from person to person,
but it is wise to have enough coverage to pay off specific financial obligations:
• Funeral expenses
• Education
• Debt
• Final Expenses
• Income

25 
Source: www.iciciprulife.com (term plan)

26 
Source: www.iciciprulife.com (term plan)

WHY LIFE INSURANCE SHOULD BE THE FIRST STEP IN

FINANCIAL PLANNING?

In the wake of increasing inflation, shift to nuclear families and change in

lifestyle patterns, life insurance assumes vital importance. It is paramount for
every individual to first adequately insure his life for the financial security of
his/her dependents and then proceed to address other aspects of financial
planning.
Financial planning is a dynamic process that involves charting an individual's
financial goals and long-term objectives in conjunction with ways and means of
achieving those long-term goals and objectives. This includes elements of

27 
protection, wealth creation, planning for contingencies and emergencies as well
as planning for specific milestones in life. Importantly, an individual's financial
plan should be reviewed to be in sync with his different life stages and the
various requirements that are specific to a certain stage in life.

Changing circumstances like marriage, purchase of a house, child's education

mandate that the financial plan evolves to meet these objectives within the given
timeline. Today, an individual has an array of options to choose from when s/he
starts financial planning. It is observed that people tend to focus on the 'wealth
creation' aspect of financial planning and the 'protection' element often gets
compromised or neglected. While the loss of life of the family's breadwinner is
irreplaceable, being adequately insured guarantees that the dependents are
provided with the much-needed funds to be financially independent and largely
keeps the family's financial plans on track without having to compromise on
their standard of living. This aspect of protection is unique to life insurance and
hence it should be a key ingredient in an individual's financial plan. As a risk-
management tool, the importance of adequate life insurance in an individual's
financial plan cannot be over emphasized.

However, in the unfortunate event of the demise of the family breadwinner, only
life insurance will provide succor to the family of the policyholder. There are
many complex calculations as well as simple rules of thumb to estimate the
quantum of insurance needed for an individual. A simplistic way is to calculate
life insurance as about 20 times of the individual's annual income.

28 
12. INVESTMENT PLANNING

The assets that consumers buy are of two major types that are personal assets
and investment assets. Personal assets are bought primarily for the usage and
creature comforts they provide. These include such items as homes, cars, and
clothes. Investment assets are those acquired for investing, defined as the
purchase of an asset with the expectation that the asset will provide a return
associated with its risk.
Returns (gains) come from price appreciation, income, or some combination of
the two. Income is usually in the form of dividends (when the asset is stock),
interest (when the asset is a bond), or rents (when the asset is a rental property).
The distinction between personal and investment assets is not always clear.

For example, the purchase of an antique car may be for pleasure, in which case
it is a personal asset. It might also be for investment purposes (price
appreciation), and thus an investment asset. Or, it may be for both pleasure and
investment purposes. Jewelry is another good example of where the asset may
serve dual purposes. In such cases, the ultimate distinction depends on the intent
of the buyer. The same asset may be a personal asset for one person, and an
investment asset for another person. Fortunately, the categories of most assets
held by consumers are clear and unambiguous.
Involves taking a certain amount of risk, and it also involves the desire to
compound your money over time. Done properly, investing is a carefully
planned and prepared approach to managing your money, with the goal of
accumulating the funds you need. And planning your investment strategy is
about discipline and patience.
When it comes to investing, there's a direct relationship between risk and return.
That is, in general, as the potential for return increases, so does the level of risk
of loss. The investment plan that's right for you depends largely upon your level
of comfort with

29 
You can't completely avoid risk when it comes to investing, but it's possible to
manage it.
Risk tolerance: two key questions
First, how comfortable are you personally with risk?
This is a subjective measure, and it depends on many factors, including your
financial goals, life stage, personality, and investment experience.
The second key question is how well is your investment plan set up to handle
potential losses?
The more resilient your overall plan is when faced with any potential losses, the
more risk it might be able to take on.
For example, time can be a powerful element. The longer you're going to be
invested, the more flexibility your investment plan might have to survive
setbacks along the way.

When it comes to investing, "growth" means that an investment has the potential
to grow in value; if that happens, you might be able to sell it for more than you
paid for it (of course, if an investment loses value, you could lose principal).
Income comes from regular payments of money. Interest on a savings account is
income. So as interest on a certificate of deposit, interest paid by a bond, and
stock dividends.

Stability, the third potential objective of an investment, refers to protecting your

principal. An investment that focuses on stability concentrates less on increasing
the value of that investment, and more on trying to ensure that it doesn't lose
value. As much as we might like to, we can't have it all. There is a relationship
between growth, income, and the stability of our investments. The more
important one of those areas becomes, the more you may have to trade off in
terms of the other two. The key is to tailor your investments according to what
you want them to do for you, and to balance stability, income, and growth so
that you maximize your overall returns at a level of risk that you're comfortable
with.

30 
 Basic considerations
• What kind of retirement do you want?
To a large extent, maintaining financial independence in retirement depends
upon the lifestyle you want.
• When do you want to retire?
The earlier you retire, the shorter the period of time you have to accumulate
funds, and the longer the period of time those dollars will need to last.
• How long will be your retirement?
Keep in mind that life expectancy has increased at a steady pace over the years,
and is expected to continue increasing. For many of us, it's not unreasonable to
plan for a retirement period that lasts for 25 years or more.

4 steps to creating your plan

1. Set specific and realistic goals
For example, instead of saying you want to have enough money to retire
comfortably, think about how much money you’ll need. Your specific goal may
be to save Rs.50,000,000 by the time you’re 60.

2. Calculate how much you need to save each month

If you need to save Rs.50,000,000 by the time you’re 60, how much will you
need to save each month? Decide if that’s a realistic amount for you to set aside
each month. If not, you may need to adjust your goals.

3. Choose your investment strategy

If you’re saving for long-term goals, you might choose more aggressive, higher-
risk investments. If your goals are short term, you might choose lower-risk,
conservative investments. Or you might want to take a more balanced approach.

4. Develop an investment policy statement

31 
Create an investment policy statement to guide your investment decisions. If
you have an adviser, your investment policy statement will outline the rules you
want your adviser to follow for your portfolio.
Your investment policy statement should:
Specify your investment goals and objectives, describe the strategies that will
help you meet your objectives, describe your return expectations and time
horizon, include detailed information about how much risk you’re willing to
take, include guidelines on the types of investments that make up your portfolio,
and how accessible your money needs to be, and specify how your portfolio will
be monitored, and when or why it should be rebalanced.
WHAT SHOULD ONE CONSIDER WHEN SELECTING AN
INVESTMENT?
There are several factors a consumer must consider, and some of the most
important are:
• Risk
• Rate of Return
• Marketability and Liquidity
• Diversification
• Impact of Taxes on Return
Risk:
It is the possibility of loosing or not gaining value. There are several kinds of
risk that must be considered when investing; some may be more important to
you than others. Once you understand what each of the following types of risk
entail, you can decide which of these have bearing on your personal investment
portfolio.
Economic Risk (specifically purchasing power risk)–associated with the overall
health of the economy. It may generate an uncertainty over future purchasing
power of the income and principal of a specific investment, created by changes
in the general price level of an economy.
Interest Rate Risk (also Inflation Risk)–investments that provide fixed income
(CDs, bonds, etc.) will have changes in price as interest rates increase (inflate)

32 
or decrease. In effect, a rise in the markets interest rates tend to cause a decline
in market prices for existing securities, and vice versa.

Rate of Return:
The purpose of investing is the expectation of a future return, sufficient to fund
your goals as a consumer. In order to better facilitate those goals, a consumer
must understand the variety of ways a return may be received: interest,
dividends, business profits, rental income, and capital gains.
“Total Return” is the true measure of investment results or earnings, and it can
be broken down into two main factors:
Capital Gains- the increase in the market value of your investment, which is
generally not fully realized until the asset is sold.
Current Income- is income (such as interest, rent, or dividends) received
regularly over the course of the investment’s lifetime.
Equally important in affecting the Rate of Return is the potential of
compounding, which is earning interest on interest. Compounding is the effect
that interest has when the interest rate is applied to both the initial amount
invested, in addition to the interest that the investment has already gained.
“The Rule of 72” can demonstrate a simplified calculation of a compounding
effect. In general, the number 72,
Divided by your investments interest rate, will give you an estimate of the
number of years before you see the
The rule of 72:
Number of years to double = 72 / Interest Rate

Marketability and Liquidity:

Liquidity is the ease at which an asset can be sold and turned into cash, without
loosing any of the principal invested. For example, a house cannot be easily
redeemed for cash, which is contrary to a blue chip stock, due to the nature of
the stock.

33 
 Although both characteristics of investment are desirable, it is often a trade off,
subjective to the consumer’s situation. For example, a checking account does
not have a market where it can be readily sold or bought, but it is very liquid.
Conversely, a stock on the exchange tends to have high marketability, but a sale
thereof could result in some loss of principal, which is not pure “liquidity.

Diversification:
It is an important investment principle to consider when a consumer is building
a portfolio. Diversification is the distribution of assets amongst a variety of
securities (investments). By diversifying, you avoid having all of your eggs in
one basket, or allocating all your money into one investment that may not
perform well at a particular time. By spreading the risk, it can be minimized, and
is a wise decision for most consumers.
In general, the fluctuations in price or value of different investments are not
congruent; they do not go up or down all at the same time or in the same
magnitude. Thus, an investor can protect at least a portion of his/her investment
assets by applying the principle of diversification.
Impact of Taxes on Returns: As the saying goes ‘it doesn’t matter what you get,
only what you get to keep!’ In similar nature, it is imperative to differentiate
between the return received from an investment and its ‘after-tax’ return.
There are several considerations regarding this impaction, and the following are
simplified examples:
1. An investment may yield income that is taxable as ordinary income, such as
certificates of deposit or corporate bonds. For this investment, the after-tax yield
will be less than its current yield (interest rate).
This can be calculated in the following manner:
Current Interest Rate x (1- investor’s income tax rate) = after tax yield.
Example: A CD with a taxable interest rate of 5% would have an after tax yield
of 3.6% for someone in the 30% tax bracket.
5 x (1 - .30) =3.5

34 
So the investor didn’t really make 5% on his investment, he made 3.6% yield,
which is significantly less, because the rest went to pay federal taxes.

2. If an investment yield is fully tax exempt, such as interest from some

municipal bonds, the after-tax yield equates the current yield because there is no
tax implication (the interest rate stays the same).

3. In some circumstances, an investment may yield returns that are taxable only
when realized as capital gains
For example, if a stock has paid no dividends, but increased in value from
Rs.200 per share to Rs.400 per share, the investor will not have a taxable event
until he/she sells the shares, therefore ‘realizing’ it’s capital gain of Rs.200 per
share.

Asset Allocation involves the mix of investments in your portfolio. This might
include a mix of stocks, bonds, cash and real property. Stocks are typically the
riskiest investment, but bring in the highest returns. Bonds earn less interest but
are more stable than stocks. Cash savings, including savings accounts, CDs,
treasury bills and money market accounts, are the safest investments, but offer
low returns in the long run. Finally, holding real property, like gold & silver, is a
very stable and safe investment that typically works as a hedge against inflation
but doesn’t earn high returns. A crucial element of any wise asset allocation
strategy is diversification so that if one part of your investment portfolio loses
value, your entire retirement fund won’t be devastated.

35 
13. TAX PLANNING

Tax maybe defined as an arrangement of one’s financial affairs in such a way

that, without violating in any way legal provisions, full advantage is taken of all
tax deductions, exemptions, concessions, rebates, allowances and other reliefs or
benefits permitted under Income Tax Act of India.
Any tax planning scheme would be a natural one and should not give an
appearance of an artificial arrangement on the face of it. The tax planner should
exercise great care and caution in designing any tax planning scheme, as its
failure will result in great difficulties and heavy burden on tax to the assesse to
whom the scheme is evolved.

5 Important Income Heads

A. Income from salary

Salary is defined to include:

a) Wages
b) Annuity
c) Pension
d) Gratuity
e) Fees, Commission, Perquisites, Profits in lieu of or in addition to Salary or
Wages
f) Advance of Salary
g) Leave Encashment
h) Annual accretion to the balance of Recognized Provident Fund
i) Transferred balance in Recognized Provident Fund
j) Contribution by Central Government or any other employer to Employees
Pension Account as referred in Sec. 80CCD

36 
Points to consider:
a) Salary income is chargeable to tax on “due basis” or “receipt basis”
whichever is earlier.
b) Existence of relationship of employer and employee is must between the
payer and payee to tax the income under this head.
c) Income from salary taxable during the year shall consists of following:
i. Salary due from employer (including former employer) to taxpayer during the
previous year, whether paid or not;
ii. Salary paid by employer (including former employer) to taxpayer during the
previous year before it became due;
iii. Arrear of salary paid by the employer (including former employer) to
taxpayer during the previous year, if not charged to tax in any earlier year;
Exceptions - Remuneration, bonus or commission received by a partner from the
firm is not taxable under the head Salaries rather it would be taxable under the
head business or profession.

Place of accrual of salary:

a) Salary accrues where the services are rendered even if it is paid outside India;
b) Salary paid by the Foreign Government to his employee serving in India is
taxable under the head Salaries;
c) Leave salary paid abroad in respect of leave earned in India shall be deemed
to accrue or arise in India.
Exceptions - If a Citizen of India render services outside India, and receives
salary from Government of India, it would be taxable as salary deemed to have
accrued in India.

37 
Computation of Tax
In the books of accounts the Computation of Tax will look like:
Particulars Amount Amount
Basic pay XXXXX
+ Dearness allowance XXX
+ Bonus XXX
+ Commission XXX
+ Arrears of salary XXX
+ House Rent allowance XXX
XXX
Amount of HRA exempted (XXX)
+ Leave travel allowance
XXX
Amount exempted on Leave XXX
(XXX)
travel allowance
+ Perquisites XXX
XXX
Amount exempted (XXX)
+ other allowances XXX
XXX
Amount exempted (XXX)
+VRS/Retrenchment
XXX
compensation XXX
(XXX)
Amount exempted
+ Gratuity received XXX
XXX
Exempted gratuity (XXX)
+ Leave encashment XXX
XXX
Exempted leave encashment (XXX)
+ Employers contribution (in
excess of 12% salary of XXX
employee)
Gross Salary XXXXX
Deductions under the Section 16:
Entertainment allowance XXX

38 
 Professional Tax paid XXX
Income chargeable for tax
XXXXX
under Salaries

B. Income from Business/Profession:

It means any income that is shown in profit and loss account after considering
all allowed expenditures.
The following are few examples of incomes that are chargeable under this head:
Normal Profit from general activities as per profit and loss account of business
entity. Profit from speculation business should be kept separate from business
income and shown separately.
Any profit other than regular activities of a business should be shown as casual
income and will be shown under “income from other sources” head. The value
of any benefits whether convertible into money or no from business/profession
activities.
Any interest, salary, commission etc. received by the partner of a firm will be
treated as business/professional income in hand of partner. However, the share
of profit from partnership firm is exempt in hand of partner.
Amount recovered on account of bad debts, which were already adjusted in
profit in earlier years etc.

EXPENSES THAT ARE DEDUCTIBLE ON ACTUAL PAYMENT

ONLY
Following expenses will be allowed if these expenses have been paid before or
on due date or before filing of income tax return: -
• Any tax, duty, cess or fees by whatever name called.
• Contribution to provident fund, ESI premium, gratuity fund or other funds for
welfare of employees.
• Bonus or commission or leave encashment payable to employees.

39 
• Interest on loan from public financial institutions, state financial corporation or
from scheduled bank.

Illustration:
As per Profit & Loss Account of M/s XYZ Limited as on 31.03.17, the amount
of net profit is Rs.5,50,560/=. Following information also available with profit
and loss account: -
Rs. 20000/= paid as Advance Income Tax had been debited to profit and loss
account. Rs.10000/= spent for printing of brochures of a political party were
also shown in profit and loss account. Amount or provident fund for Rs.55000/=
did not deposit till the date of filing of return.
Compute the taxable income of M/s XYZ Limited.
Solution:
PARTICULARS AMOUNT
(RUPEES)
Net Profit as per Profit and Loss Account 550560

Add: Amount of Advance Income Tax 20000

Add: Expenses Incurred for Political Parties 10000
Add: Provident Fund not deposited till filing of 55000
return
NET TAXABLE INCOME 635560

C. Income from House Property

Income from house property is defined as the income earned from a property by
the assesse. House property includes the building itself and any land attached to
the building. Property refers to any building (house, office building, warehouse,
factory, hall, shop, auditorium, etc.) and/or any land attached to the building
(compound, garage, garden, car parking space, playground, gymkhana, etc.).
There are many intricacies and types of house property, which is calculated in
different ways. Taxability may not necessarily be on actual rent or income
40 
 received. If the property is not let out, the tax will be charged on the potential
income the property is capable of yielding.
Before learning how to compute income from house property, it is important to
understand the terminology.
Annual Value: This is the capacity of a property to earn income is its annual
value.
Municipal Value: This is the value of your property as evaluated by
municipal authorities on which they charge municipal tax. Municipal authorities
have a host of factors that they consider before assigning a municipal value.
Fair Rental Value: The rent at which a similar property with similar features
in the same (or similar) area would fetch is the fair rental value.
Standard Rent: Under the Rent Control Act, a standard rent is fixed and
owners cannot receive rent higher than that specified in the Rent Control Act.
This Act ensures that owners are paid fair rent, tenants are not exploited and are
protected from eviction.
Actual Rent received/receivable: This is the actual amount received by
the owner from the tenant as rent, depending on who pays the water, electricity
and other utility bills.
Gross Annual Value (GAV): This is the highest among:
• Rent received or receivable
• Fair Market Value
• Municipal Valuation
If the Rent Control Act is applicable, the GAV is highest among:
Standard Rent
Rent Received
Net Annual Value (NAV): NAV = GAV – Municipal Taxes Paid
Deductions: To arrive at the actual taxable income from house property, two
deductions are allowed, under Section 24 of the Income Tax Act:
Statutory Deduction: 30% of the NAV is allowed as a deduction towards
repairs, rent collection, etc. irrespective of the actual expenditure incurred. This
deduction is not allowed if the Annual Value is nil.

41 
Interest on borrowed capital: is allowed as a deduction on accrual basis if
the money was borrowed to buy/construct the house. Deduction is allowed on
whichever is lesser between Rs.1,50,000 or the actual interest amount (in
case the construction was completed within 3 years of taking the loan, on or
after 1-April-1999.) In other cases, it’s between Rs.30,000, and the actual
interest, whichever is less.
Annual Value: Annual Value = NAV – Deductions.
Owner: Income from house property is taxable to the owner of the property.
The owner is the person who is entitled to receive income from property. This
means that income is chargeable to the person who receives financial benefit
from the property.

How do I Save Tax on Income from House Property?

Careful planning can enable you to save a sizeable amount from taxation. Some
of the things you can do to save tax are as follows:
Joint Home Loan – If you jointly own a property with someone and also
apply for a joint home loan with your partner, you will both be eligible for tax
deductions on interest up to Rs. 1,50,000 each.
Planning a second home? If you already have one self-occupied property
registered to your name and wish to avoid paying taxes on a second home,
register the second property on your spouse/relatives name to avoid excess
taxation.
Joint ownership – Taxation on income from house property can be divided
between co-owners, and hence lessen the load.
Ownership of more than one property – If you own multiple properties,
only one of these will be registered as your residence and rest fall under self-
occupied property (SOP). It is important to evaluate the tax liability on all your
properties and choose the one with the highest tax liability to call home, and let
out the remaining. You can also change the SOP every year.

42 
Empty houses – that you own will still be taxed based on the fair rental value,
so it’s advisable to let any and all empty properties out, enabling income and no
loss because of taxation.

Example:
Income from house property contains the income generated by the owned
property of an individual.
Let’s assume you have a property and are charging Rs. 15,000 per month as
rent. Let’s also assume that you have paid Rs. 10,000 in municipal taxes for that
year, and have Rs. 50,000 as interest on borrowed capital.

Income of House Property Amounts (in Rs.)

Total annual rental income

15,000 x 12 = 1,80,000
value
Less: Municipal Taxes 10,000
Net Annual Value (NAV) 1,70,000

Deductions under Section

24
Standard deduction (30% of 1,70,000 – 51,000 =
NAV) 1,19,000
Interest on borrowed capital (if
50,000
applicable)
Income from House
69,000
Property

43 
 D. Income from Capital Gains

Capital gains are the profit that the investor realizes when he sells the capital
asset for a price higher than its purchase price. The transfer of capital asset must
be made in the previous year. This is taxable under the head ‘Capital Gains’ and
there must exist a capital asset, transfer of the capital asset and profit or gains
arising from the transfer.
Capital Gains include any property held by the assesse except the following:
• Stock in trade.
• Consumable stores or raw materials held for the purpose of business or
profession.
• Personal effects those are movable except jewelry, archaeological collections,
drawings, paintings, sculptures or any artwork held for personal use.
• Agricultural land. The land must not be located within 8kms from a
municipality, Municipal Corporation, notified area committee, town committee
or a cantonment board with a minimum population of 10,000.
• Gold Bonds, National Defense Gold Bonds and Special Bearer Bonds.
• Gold Deposit bonds under Gold Deposit Scheme.
Capital Gains Tax:
Capital gains tax is a tax that is charged on the profits that he has made by
selling his capital asset. For making it easy for taxation, the capital assets are
classified to ‘Short-Term Capital Asset; and ‘Long-Term Capital Asset’.
Short-Term Capital Asset: If the taxpayer holds the shares and securities
for a period not more than 36 months preceding the date of its transfer will be
treated as a short-term capital asset.
Long- Term Capital Asset: If the taxpayer holds the shares and securities
for a period exceeding 36 months before the transfer will be treated as a long-
term capital asset. Equity shares which are listed in a recognized stock
exchange, units of equity oriented mutual funds, listed debentures and
Government securities, units of UTI and Zero Coupon Bonds’ period of holding
will be considered for 12 months instead of 36 months.

44 
Capital Gains Tax in India:
In India, the long-term capital gains on stocks and equity mutual funds are not
taxed. But, the short-term gains will be taxed at 15%. In case of debt mutual
funds, both short and long term capital gains are taxed. The short-term capital
gain on debt mutual fund is added to the income and taxed as per the
individual’s income tax slab and the long-term capital gains on debt mutual
funds are taxed at 20% with indexation and 10% without indexation. Indexation
is adjusting the purchase value for inflation. The indexation increases the
purchase cost and lowers the gain.
The taxpayer can avail the capital gains statement from CAMSOnline and
Karvy, they send the statement through the mail.

Computation of Capital Gains:

The computations for the capital gains are as follows:
Short-term capital gain = Full value consideration- (cost of acquisition + cost of
improvement + cost of transfer)
Long-term capital gain = Full value of consideration received or accruing –
(indexed cost of acquisition + indexed cost of improvement + cost of transfer).
Where;
Indexed cost of acquisition = Cost of acquisition X cost inflation index of the
year of transfer/ cost inflation index of the year of acquisition
Indexed cost of improvement = cost of improvement X cost inflation index of
the year of transfer / cost inflation index of the year of improvement
Cost of transfer is a brokerage paid for arranging the deal, legal expenses
incurred, cost of advertising, etc.
For Example:
Mr. Sharma is a resident individual and he sells a residential house on 12/4/2013
for Rs.25,00,000. He had purchased the house on 5/7/2011 for Rs.5,00,000 and
spent Rs.1,00,000 on its improvement during May 2012. During the previous
year, 2013-2014, his income under all heads excluding capital gains was NIL.

45 
 Since the asset was held for less than 36 months, it is a short term capital asset
and the
Short-term capital gain = 25,00,000 – 5,00,000 – 1,00,000 = 19,00,000
In case Mr. Sharma is selling the house on 12.3.2015 for the same price, then he
would’ve had the asset for over 36 months.
The indexed cost of acquisition will be 5,00,000 X 852/711 = 5,99,156
The indexed cost of improvement will be 1,00,000 X 852/785 = 1,08,535
The long-term capital gain = 25,00,000 – (5,99,156 + 1,08,535) 707691
=17,92,309
Capital Gains Tax Exemption:
1. Agricultural land in rural area in India is not considered as a capital asset and
therefore no capital gains will be applicable on its sale.
2. You will not be taxed if you use the entire sale proceed of your capital asset to
buy a house property. You must satisfy the following conditions to avail
exemption under Section 54F:
• You will have to purchase a house in 1 year before or 2 years after the sale.
• Under construction properties must be completed within 3 years from the date of
transfer of the original house.
• You will not sell the house within 3 years of the purchase or construction.
• The new house must be situated in India.
• You must not own more than 1 residential house other than the new one on the
date of transfer.
• You do not purchase a new house apart from the new one within 2 years or
construct a residential house within a period of 3 years.
• When you invest in Capital Gains Account Scheme, then you won’t have to pay
tax on the capital gains. However you must invest the money for a specified
period as specified by the bank. If you fail to keep the money invested for the
specified period, then it will be treated as capital gain.
• By purchasing Capital Gains Bonds, the tax will be exempted. This is applicable
only in case it was a long-term capital asset and the exemption is under Section
54EC. If you don’t intend to invest in another property, then there is no use
46 
investing in the Capital Gains Account Scheme. In that case, you can invest in
certain bonds for a specified purpose and these are redeemable after 3 years.
You will be given a period of 6 months to invest in these bonds.
When you satisfy these conditions and when you invest the entire sale proceeds
towards the new house, you won’t have to pay any tax on the capital gain.

3. Capital Gains Bonds:

As per Section 54EC, one can claim tax relief by investing the capital gains
earned from long-term capital assets in bonds issued by National Highway
Authority of India or by the Rural Electrification Corporation Limited. The
investment in bonds must be done within a period of 6 months. These will not
be redeemable before 3 years. You can earn a guaranteed rate of interest on the
bond. The maximum amount that can be invested in capital gain bonds is
Rs.50,00,000 during a financial year. This benefit cannot be availed for a short-
term capital gain.

E. Income from Other Sources:

Income from other sources is one of the five heads of income that the Income
Tax Act, 1961 broadly classifies income under. This category includes earnings,
which can’t be accounted for under any of the other heads of income viz.
Income from Salary, Income from House Property, Profits and Gains from
Business or Profession and Income from Capital Gains.
All taxable income under this head is calculated according to the accounting
method the assesse follows viz. accrual or cash basis. The exceptions to this are
dividend and interest income i.e. whatever the accounting method, assesses will
have to declare and pay tax on dividend and interest earned during the previous
year.

47 
Dividends:
Dividend not chargeable to tax includes dividends exempt U/S 10(34) i.e.
dividend from Indian companies, dividend liable to corporate dividend tax,
income on mutual fund.
Winnings:
This includes winnings over Rs.10,000 from lotteries, puzzles, races, games and
all forms of gambling and betting. E.g. card games, horse races, game shows etc.
Interest received:
All interest income earned in the previous year (on compensation/enhanced
compensation) is taxable. However, 50% of this income can be claimed as
deduction.

Incomes not declared under the head ‘Profits and Gains of

Business or Profession’:
This includes contributions made to an employer’s employee welfare fund,
interest earned on securities, rental income from furniture, plant and machinery
(including building where it cannot be let out separately), key man insurance
policy proceeds.
Gifts:
This includes monetary or non-monetary items received without any
consideration or without adequate consideration. Non-monetary gifts include all
immovable property and certain movable property.
Gifts are taxed only if the total amount received during the previous year is
more than Rs.50,000 and applies only to those gifts individuals or HUFs
received after Oct.1st 2009. This doesn’t apply if the assesse receives money
from relatives or a local authority or a trust, fund, educational/medical
institution, body or any such institution outlined under section 10(23C) as a
wedding gift by way of being named in a Will or as inheritance from a dying
donor.
Gifts include monetary gifts, immovable property and specified property.

48 
 Monetary gifts - sums of money received without any consideration or without
adequate consideration.
Gifts from relatives means gifts from the assesses parents, parents’ brothers or
sisters (i.e. aunts, uncles) any lineal predecessor/successor brother, sister;
brothers’ or sisters’ spouses spouse, spouse’s parents, spouse’s brothers or
sisters, spouse’s lineal predecessor/successor and their brothers or sisters.
Calculating IT Tax on Income from Other Sources with Example:
• Mr. Shah earned Rs.50,000 in dividends from trading in shares during the
previous year. He asked his son-in-law Mr. Shah how to include it in his tax
returns. He finds favour that the dividends he earned are not chargeable to tax,
being dividends from a domestic company.
• Mr. Shah also earned Rs.1 lakh as interest from fixed deposits held at various
banks. He will have to show the amount under ‘income from other sources,
which will add to his taxable income.
• Mr. Shah’s wife asks him whether she will have to pay tax on money given to
her during the previous year from guests at their wedding. He tells her not to
worry since monetary gifts received during weddings are exempt from tax. Even
gifts received from relatives after the wedding on various occasions are exempt.
• Mr. Shah’s wife then enquires about the jewelry set her neighbor had presented
to her on successful completion of her medical degree. It cost her close to Rs.1
lakh. He calms her worried nerves by reminding her that she graduated in the
year 2008 and tax on gifts only applies to those received after Oct.1st 2009.
• Similarly, they didn’t have to be worried about the money left to them by Mr.
Shah’s favorite uncle who passed away the previous year since it came to them
by way of their uncle’s Will.
These examples serve to highlight how tax rules regarding income tax from
other sources are to be understood. The key elements are the type of income, the
source of income, when the income was received and the amount of income
received. By analyzing these elements, it becomes easy to figure out how to treat
income from other sources.

49 
How to save tax legally?
Tax deduction helps in reducing your taxable income. It decreases your overall
tax liabilities and helps you save tax. However, depending on the type of tax
deduction you claim, the amount of deduction varies. You can claim tax
deduction for amounts spent in tuition fees, medical expenses and charitable
contributions. You can invest in various schemes such as life insurance plans,
retirement savings schemes, and national savings schemes etc. to get tax
deductions. The government of India offers tax exemptions for various expenses
incurred in different activities to encourage individuals and commercial
institutions take part in activities having social benefits.. Tax deduction can be
claimed on money spent for education, medical expenses, charitable
contributions, investments in insurance, retirement schemes, etc. These
deductions have been put in place to encourage members of the society to
participate in certain useful activities, helping everyone involved in the process.

Tax Deductions under Section 80C:

Section 80C of the Income Tax Act provides provisions for tax deductions on a
number of payments, with both individuals and Hindu Undivided Families
eligible for these deductions. Eligible taxpayers can claim deductions to the tune
of Rs 1.5 lakh per year under Section 80C, with this amount being a
combination of deductions available under Sections 80 C, 80 CCC and 80 CCD.
Some of the popular investments, which are eligible for this tax deduction, are
mentioned below.

• Payment made towards life insurance policies (for self, spouse or children)
• Payment made towards a superannuation/provident fund
• Tuition fees paid to educate a maximum of two children
• Payments made towards construction or purchase of a residential property
• Payments issued towards a fixed deposit with a minimum tenure of 5 years

This section provides for a number of additional deductions like investment in

mutual funds, senior citizens saving schemes, purchase of NABARD bonds, etc.
50 
Subsections under Section 80C:
Section 80C has an exhaustive list of deductions an individual is eligible for,
which have led to the creation of suitable sub-sections to provide clarity to
taxpayers.
Section 80 CCC: Section 80 CCC of the Income Tax Act provides scope for
tax deductions on investment in pension funds. These pension funds could be
from any insurer and a maximum deduction of Rs 1.5 lakh can be claimed under
it. Only individual taxpayers can claim this deduction.
Section 80 CCD: Section 80 CCD aims to encourage the habit of savings
among individuals, providing them an incentive for investing in pension
schemes which are notified by the Central Government. Contributions made by
an individual and his/her employer, both are eligible for tax deduction, subject
to the deduction being less than 10% of the salary of the person. Only individual
taxpayers are eligible for this deduction.
Section 80 CCF: Open to both Hindu Undivided Families and Individuals,
Section 80 CCF contains provisions for tax deductions on subscription of long-
term infrastructure bonds, which have been notified by the government. One can
claim a maximum deduction of Rs 20,000 under this Section.
Section 80 CCG: Section 80 CCG of the Income Tax Act permits a maximum
deduction of Rs 25,000 per year, with specified individual residents eligible for
this deduction. Investments in equity savings schemes notified by the
government are permitted for deductions, subject to the limit being 50% of the
amount invested.

Tax Deductions under Section 80D:

Section 80D of the Income Tax Act permits deductions on amounts spent by an
individual towards the premium of a health insurance policy. This includes
payment made on behalf of a spouse, children, parents or self to a Central
Government health plan. An amount of Rs 15,000 can be claimed as deduction
when paid towards the insurance for spouse, dependent children or self, while
this amount is Rs 20,000 if the person is over the age of 60 years.

51 
Both individuals and Hindu Undivided Families are eligible for this deduction,
subject to the payment being made in modes other than cash.
Subsections under Section 80D:
Section 80D is further subdivided into two sub-sections, offering clarity on the
benefits available to taxpayers.
Section 80DD: Section 80DD provides provisions for tax deductions in two
cases, with the permitted deduction being Rs 75,000 for normal disability
and Rs 1.25 lakh if it is a severe disability. This deduction can be claimed in
case of the following expenditures.
On payments made towards the treatment of dependents with disability
Amount paid as premium to purchase or maintain an insurance policy for such
dependent
The permitted deduction is Rs 75,000 for normal disability and Rs 1.25 lakh for
a severe disability. Both Hindu Undivided Families and resident individuals are
eligible for this deduction. The dependent, in this case can be either a spouse,
sibling, parents or children.
Section 80DDB: Section 80DDB can be utilized by HUFs and resident
individuals and provides provisions for deductions on the expense incurred by
an individual/family towards medical treatment of certain diseases. The
permitted deduction is limited to Rs 40,000, which can be increased to Rs
60,000 if the treatment is for a senior citizen.

Tax Deductions under Section 80E:

Under Section 80E of the Income Tax Act has been designed to ensure that
educating oneself doesn’t become an additional tax burden. Under this
provision, taxpayers are eligible for tax deductions on the interest repayment of
a loan taken to pursue higher education. This loan can be availed either by the
taxpayer himself/herself or to sponsor the education of his/her ward/child. Only
individuals are eligible for this deduction, with loans taken from approved
charitable organizations and financial institutions permitted for tax benefits.

52 
Subsections of Section 80E:
Section 80EE: Only individual taxpayers are eligible for deductions under
Section 80EE,with the interest repayment of a loan taken by them to buy a
residential property qualifying for deductions. The maximum deduction
permitted under this section is Rs 3 lakhs.

Tax Deductions under Section 80G:

Section 80G encourages taxpayers to donate to funds and charitable institutions,
offering tax benefits on monetary donations. All assesses are eligible for this
deduction, subject to them providing proof of payment, with the limit of
deductions decided based on a few factors.
100% deductions without any limit: Donations to funds like National
Defense Fund, Prime Minister’s Relief Fund, National Illness Assistance Fund,
etc. qualify for 100% deduction on the amount donated.
100% deduction with qualifying limits: Donations to local authorities,
associations or institutes to promote family planning and development of sports
qualify for 100% deduction, subject to certain qualifying limits.
50% deduction without qualifying limits: Donations to funds like the
PMs Drought Relief fund; Rajiv Gandhi Foundation, etc. are eligible for 50%
deduction.
50% deduction with qualifying limit: Donations to religious
organizations, local authorities for purposes apart from family planning and
other charitable institutes are eligible for 50% deduction, subject to certain
qualifying limits.
The qualifying limit refers to 10% of the gross total income of a taxpayer.
Subsections of Section 80G:
Under Section 80G has been further subdivided into four sections to simplify
understanding.
Section 80GG: Individual taxpayers who do not receive house rent allowance
are eligible for this deduction on the rent paid by them, subject to a maximum
deduction equivalent to 25% of their total income or Rs 2,000 a month. The
53 
lower of these options can be claimed as deduction.
Section 80GGA: Tax deductions under this section can be availed by all
assesses, subject to them not having any income through profit or gain from a
business or profession. Donations by such members to enhance
social/scientific/statistical research or towards the National Urban Poverty
Eradication Fund are eligible for tax benefits.
Section 80GGB: Tax deductions under this section can be availed by Indian
Companies only, with the amount donated by them to a political party or
electoral trust qualifying for deductions.
Section 80GGC: Under this section, funds donated/contributed by an assesse
to a political party or electoral trust are eligible for deduction. Local authorities
and artificial juridical persons are not entitled to the tax deductions available
under Section 80GGC.

Tax Deduction under Section 80QQB:

Section 80QQB permits tax deductions on royalty earned from sale of books.
Only resident Indian authors are eligible to claim deductions under this section,
with the maximum limit set at Rs 3 lakhs. Royalty on literary, artistic and
scientific books are tax deductible, whereas royalties from textbooks, journals,
diaries, etc. do not qualify for tax benefits. In case of an author getting royalties
from abroad, the said amount should be brought into the country within a
specified time period in order to avail tax benefits.

Tax Deduction under Section 80RRB:

Section 80RRB offers tax incentives to patent holders, providing tax relief to
resident individuals who receive an income by means of royalty on their patent.
Royalty to the tune of Rs 3 lakhs can be claimed as deductions, subject to the
patent being registered after 31/3/2003. Individuals who receive a royalty from
foreign shores need to bring said amount to the country within a specific time
period in order to be eligible for tax deductions on such royalty.

54 
Tax Deduction under Section 80TTA:
Deductions under Section Hindu Undivided Families and Individual taxpayers
can claim 80TTA. This section permits deductions to the tune of Rs 10,000
every year on the interest earned on money invested in bank savings accounts.

Tax Deduction under Section 80U:

Tax deductions under Section only resident individual taxpayers who have
disabilities can claim 80U. Individuals who have been certified by relevant
medical authorities to be a Person With Disability can claim a maximum
deduction of Rs 75,000 per year. Individuals who have severe disabilities are
entitled to a maximum deduction of Rs 1.25 lakh, subject to them meeting
certain criteria. Some of the disabilities, which classify for tax benefits, are
autism, mental retardation, cerebral palsy, etc.

HOW TO CALCULATE INCOME TAX

For any tax paying individual, to have a working knowledge of how income tax
is calculated can only make life simpler. It not only helps you assess the amount
of tax you have to pay in a financial year but also gives you a clearer idea on
how to save tax. Income Tax is tax levied on the income of an individual by the
Government. Computing your Income Tax for a year might seem like a complex
process but you will see that it is easy, if you are aware of the income tax slabs
of that particular year and know the mathematical calculation

Slab Income Slab (Rs.) Income Tax Rate

0 0 to 2,50,000 NIL
I 2,50,001-5,00,000 10%
II 5,00,001- 20%
10,00,000
III 10,00,001 and 30%
above

55 
Aged 60 years but less than 80 years:-
Slab Income Slab (Rs.) Income Tax Rate
0 0 to 3,00,000 NIL
I 3,00,001 to 10%
5,00,000
II 5,00,001 to 20%
10,00,000
III >10,00,000 30%

Source: simpleinterest.in

56 
14. RETIREMENT PLANNING

STARTING RETIREMENT PLANNING WHEN YOUNG

Changing lifestyles, increased longevity, and improved expectations have
drastically altered the nature of retirement. Today, people anticipate active,
vibrant retirements in which they enjoy life and economic self-sufficiency.
They see retirement not as the short final phase of life but as the reward phase of
life. Moreover, a significant percentage of the population has become
increasingly interested in achieving the financial independence currently
associated with retirement.
However, instead of waiting until one is middle-aged or older to start planning
for retirement, it is best for people to start planning when they are relatively
young. Getting younger people to take retirement planning seriously, however,
often requires some convincing. With this in mind, you may be able to motivate
younger clients to act by sharing the following information with them:
• Starting early can mean the difference between success and failure. Assuming
a 7 percent rate of return, saving Rs.5000 a month beginning at age 30 will
result in an accumulation of Rs.86,00,000(approx.) by age 65. With a start at age
40, only Rs.8,20,000(approx.) is accumulated. This example dramatically
illustrates the power of compounding.
• A majority of Indians are saving far less than needed to fund even the basic
lifestyle in retirement.
• Careful planning requires preparing for contingencies. Realistic possibilities
include Social Security cutbacks, reduction in company pension benefits,
periods of high inflation, higher tax rates, and forced early retirement.
• In the future, retiring at age 60 or earlier may not be realistic.
• Retirement may last longer than planned, because life expectancies continue to
rise. People retiring now at age 65 can reasonably expect to live 20 or more
years in retirement.
• To be sure funds are not depleted too early, clients need to plan on beating the
odds and living beyond the average life expectancy.

57 
• For most people today, maintaining the preretirement standard of living
requires 60 to 80 percent of preretirement earnings.
• Working with a financial advisor helps an individual focus on the right issues,
prepare a retirement plan, and follow through with it. The advisor provides
expertise, a dispassionate viewpoint, and motivation.
Retirement planning is no easy process, however, financial advisors who engage
in retirement planning must be prepared to answer some tough questions.
Several of these questions concern their role as retirement advisors, the amount
of income their clients will need for retirement, the sources of retirement income
available to their clients, and strategies for maximizing their client’s retirement
incomes.

Overcoming Roadblocks to Retirement Saving

An old rule of thumb, which has merit, is for clients to save a minimum of 10
percent of their gross earnings for long-term financial goals such as retirement.
As with all rules of thumb, the client’s personal situation may modify the rule.
For example, if the client has a physically demanding job that may require him
to retire at age 55 or 60, he may need to save even more than 10 percent of
earnings. Furthermore, you should routinely recommend that as a client’s
income rises, the percentage spent on current living expenses should decline.
A second obstacle to retirement saving is unexpected expenses, including
uninsured medical bills; repairs to a home, auto, or major appliance; and
unforeseen periods of unemployment. Every client should set up emergency
funds to handle these inevitable problems. Advisors typically recommend 3 to 6
months’ income to set aside for this purpose. If a client’s salary is stable and
other income, such as dividends, is part of the individual’s income flow, then a 3
to 4 months’ income level in the emergency fund can be sufficient.
Many Indians remain uninsured or underinsured for life, disability, health, and
home or auto risks. Because clients cannot always recover economically from
such losses, an important element of retirement planning is protection against

58 
catastrophic financial loss that would drain existing savings and make future
saving impossible.
You should always conduct a thorough review of your clients insurance needs to
see if they are adequately covered. Two frequently overlooked areas are
disability insurance and umbrella liability insurance. Make sure your client is
adequately protected with insurance.
A fourth roadblock to saving for retirement is incurred by a divorced client.
Divorce often leaves one or both parties with little or no accumulation of
pension benefits or other private sources of retirement income. These clients
may have only a short time to accumulate any retirement assets and may not
accrue significant pension.
Another common retirement planning problem is the lack of a retirement plan at
the place of employment. Some workers have no opportunity to participate in a
retirement plan because their employer(s) do not provide such benefits. In fact,
according to the most recent data from a survey of 501 small businesses
sponsored by Nationwide Insurance in 2011, only about one in five (19 percent)
offer their employees any sort of retirement plan. Many companies cited the
excessive costs of implementing plans along with their administrative burdens.
Furthermore, only 11 percent of the small employers in the survey said they are
likely to add an employer sponsored plan.
Workers who have frequently changed employers also may arrive at retirement
with little or no pension. Statistics show that employees today are unlikely to
remain with one employer for their entire working life and will, typically, hold
seven full-time jobs during their career. Generally, these people will not
accumulate vested defined-benefit pension benefits because they do not remain
with an employer long enough to become vested. Even if they did become
vested, they may have received a distribution of their accumulated pension fund
upon leaving the job and many have spent this money rather than investing it or
rolling it over for retirement.

Other Reasons:

59 
Roadblocks to Retirement Saving
1. Tendency to spend all income
2. Unexpected expenses
3. Inadequate insurance coverage
4. Divorce
5. No employer plan available
6. Frequent employment changes
7. Lack of financial literacy
8. Other accumulation needs
Strategies that you can recommend to accomplish this objective:
• Trading down to a less expensive home
• Obtaining a reverse mortgage
• Pension maximization
Trading Down to a Less Expensive Home
If a client sells her home and relocates to a smaller, less expensive residence, the
money from the transaction can be a valuable source of retirement income. For
example, if a retiree sells her home for Rs.3Cr and buys a new residence for
Rs.2Cr, the Rs.1Cr cash difference can produce extra income from an immediate
annuity or other investment. This is very desirable from a financial perspective,
because it enables retirees to capitalize on what for many of them is their single
most important financial asset— home.

Obtaining a Reverse Mortgage

Reverse mortgage Often, a client would like to take some equity out of her home
but is reluctant to sell it and move to a less expensive one. One alternative that is
becoming increasingly common is a reverse mortgage. A reverse mortgage is a
nonrecourse loan against an individual’s home that requires no repayment as
long as the individual lives in and maintains the home. In other words, a reverse
mortgage allows a client to live in her home while withdrawing substantial
amounts of money from the home’s equity. This money from the reverse
mortgage can be used for any purpose, and there is no need to repay it.

60 
A reverse mortgage is available only when all of the home’s owners are aged 60
or older and when the home is the principal residence. Also, the home must
either have no debt or only a relatively small debt that can be paid off with part
of the reverse mortgage loan. The amount of loan payments made to the client
depends on the client’s age the amount of equity the home currently has, the
interest rate and fees being charged, and the specific reverse mortgage program
used.
Typically, the loan only has to be repaid when the last surviving borrower dies,
sells the home, or permanently moves away. If property values erode, the
borrower receives a windfall and the lender suffers a loss. If the property is sold
after the borrower dies, her heirs receive any remaining equity after the loan is
repaid. In addition, because reverse mortgages are loans, payments received by
the homeowner are not considered taxable income.
As a financial advisor, you are likely to get many questions about reverse
mortgages, so you will need to go beyond this brief introduction. Suffice to say,
reverse mortgages are not for everyone. There are some downsides that you
should know. First, homeowners who get a reverse mortgage must continue to
live in and maintain the property adequately to preserve the lender’s interest in
the home. Second, the homeowner must continue paying for homeowner’s
insurance, which can be very expensive in some areas. Third, many seniors may
want to leave their residence to their children via their will; however, for the
children to retain the property, they would have to repay the lender for the
amount of the outstanding loan to take full possession of the home.

Pension Maximization
Pension maximization refers to a strategy for choosing a payout option at the
time of your retirement. Employees near retirement age may be faced with a
rather difficult decision when presented with the retirement plan payout options.
The goal is to replace the spousal payout from the pension with a death benefit that
will at least equal the amount that would have been paid out on an after-tax basis
following the death of the retiree. The retiree chooses to receive the single life payout

61 
and uses the differential dollar amount between the single and joint life payout to
purchase permanent life insurance.

Qualified plans typically stipulate the type of distribution your client will
receive. The normal form of benefit for a married client is a joint-and-survivor
benefit that pays between 50 and 100 percent of the joint benefit amount to the
survivor. One strategy for the married client is to elect a different payment
option than the normal benefit form with the spouse’s written consent. If a
married client elects a benefit paid in the form of a life annuity, he can increase
his retirement income significantly. If, prior to retirement, life insurance is
purchased (or kept in force) on the retiree/life annuitant, the spouse’s financial
well being can also be secured.

62 
15. ESTATE PLANNING

A narrow view of estate planning is that the process involves merely the
conservation and distribution of a client’s estate. The broader view, however, is
that estate planning is an integral part of financial planning, and the role of a
financial advisor is to maximize the client’s distributable wealth and transfer
that wealth appropriately to the client’s beneficiaries. Following this broader
view, the estate plan should employ life-cycle financial planning strategies that
increase the client’s distributable wealth, along with planning for the disposition
of such wealth. Estate planning, then, is included in a comprehensive financial
plan and must also consider other major planning areas (that is, insurance
planning, employee benefits planning, investment planning, income tax
planning, and retirement planning) within a comprehensive plan.
Three Primary Questions in Estate Planning
• Who should receive the client’s property?
• How should beneficiaries receive the property?
• When should beneficiaries receive the property?
Because the other major planning areas in a comprehensive financial plan are
covered elsewhere, this discussion will follow the narrow view and focus on the
conservation and distribution of a client’s estate. However, bear in mind that a
client’s estate plan typically is broader as an integral part of a comprehensive
financial plan.
Selecting appropriate alternatives in estate planning involves answering the
“who,” “how,” and “when” questions. The client must determine who will be
the recipients of his property. The “who” question is generally the easiest for the
client to answer and can often be determined without significant professional
advice.
The client must also determine how his beneficiaries will receive the property.
For example, property can be distributed outright to beneficiaries. Alternatively,
the property can be left to beneficiaries in trust with various restrictions on their

63 
use and enjoyment rights. Beneficiaries could also receive a partial interest in
property. One example of a partial interest is a life estate.

The client will generally need significant professional advice to answer the
“how” question. Competent financial advisors should be able to determine a
client’s goals and design a transfer mechanism that meets the goals and
complies with state property laws.
Transfer taxes imposed on a specific transfer of property often depend on the
form of the transfer. Planning for the “how” question will often focus on
minimizing transfer taxes within the framework of the client’s goals.
Finally, it must be determined “when” a client’s estate will be distributed.
Typically, distributions are not made from the client’s property until his death.
However, it is sometimes appropriate to transfer specific items of a client’s
wealth during his lifetime. The reasons behind lifetime gifts are numerous, but
the primary estate planning purpose of lifetime giving is the reduction of the
client’s estate tax base. Systematic, planned lifetime giving is often
recommended for wealthy clients to reduce the amount of death taxes payable
on testamentary (that is, occurring at death) dispositions.

ESTATE PLANNING DOCUMENTS

An estate plan (a subset of a comprehensive financial plan) is a roadmap that
directs how a client’s wealth will be assembled and disposed of during the
client’s life and/or at her death. An estate plan is useless unless the documents to
execute the plan have been drafted appropriately. The documents, such as a will,
trusts, and others must be drafted carefully to avoid hidden traps and provide
direction to the appropriate personal representatives, fiduciaries, and
beneficiaries of the client. These directions must be drafted according to
principles of state law and should clearly state the intent of the client. Because
these documents involve compliance with state law, an attorney who specializes
in estate planning in the local jurisdiction should prepare them.
Wills

64 
 Despite the importance of a will in a client’s estate plan, an estimated seven out
of ten Americans die without a valid will. Unfortunately, these individuals leave
the disposition of their estates to the provisions of state intestacy law. In
addition, a court-appointed administrator will handle the estates of these
intestate individuals. In many cases, the estate will be subject to unnecessary
taxes and administration expenses. In any event, a valid will is necessary to
implement a cohesive estate plan, whether that plan results from single purpose,
multiple purpose, or comprehensive financial planning. Without a will, your
property at your death will be distributed according to your state's intestacy
laws. Your wishes are irrelevant. A will:
• Directs how your property will be distributed
• Names an executor and a guardian of your minor children
• Can accomplish other estate planning goals, such as minimizing taxes
To be valid, your will must be in writing and signed by you. Your signature
must also be witnessed.
Requirements for a Valid Will
Although the requirements for wills are established in the laws of the various
states and differences do exist, several items are universal. With some minor
exceptions for very rare circumstances, the following are generally required for
a valid will:
• The will must be in writing.
• The will must be dated.
• the testator (maker) of the will must have the legal capacity (that is, in terms of
age and mental capacity) to make a will.
• The testator, or creator of the will, must sign the will at the end of the
document, usually in the presence of witnesses.
• A number of witnesses (generally two or three) must sign the will after the
testator’s signature. The witnesses are simply attesting that the signature of the
testator is his or her true signature.

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Source:  londonmedarb.com

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What Can a Valid Will Accomplish?
The client’s will is the centerpiece of the estate plan. Although the will’s
primary function is to direct the disposition of the client’s wealth, it serves other
purposes as well. A properly drafted will can accomplish the following
objectives:
• Nominate the personal representative of the testator, known as the executor (or
executrix), who will handle the administration of the client’s estate.
• Nominate the guardians of any minor children of the testator.
• Create testamentary trusts that will take effect at the testator’s death to hold the
property of the testator for the benefit of named beneficiaries.
• Name the trustee(s) of any trust(s) created under the will.
• Provide directions to the executor–executrix and/or trustees named in the will
to define how these fiduciaries will manage assets contained in the estate or
testamentary trust.
• Establish the compensation of executors and/or trustees named in the will.

Trusts
A trust is a legal relationship in which one acts in a fiduciary capacity (position
of trust) with respect to the property of another. Fiduciary capacity requires that
a person (the fiduciary) receive and hold title to the property that is held for the
benefit of another person (a beneficiary), to whom the fiduciary owes the
highest duty of good faith. In the case of a legal trust, the fiduciary is typically
known as a trustee. The trustee has the duty to manage the trust property
provided by the grantor for the benefit of the beneficiaries. A trust is often used
to provide for beneficiaries when, for some reason, they are unable to administer
the trust assets for themselves. For example, a trust may be created to provide
for minor beneficiaries. Minor beneficiaries are incapable under state law of
holding property in their own name and perhaps lack the necessary experience
and financial skills to manage the trust property. The trust is an excellent tool for
handling and/or consolidating.

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The trustee manages the trust property under specific terms of the trust. The
trust terms are the directions and intentions of the grantor with respect to
management of the trust. For example, there may be directions concerning the
investment objectives of trust assets. More importantly, there are directions to
provide for the beneficiaries of the trust. The trust terms may be quite specific
and restrictive and provide the trustee with very little discretion.
The terms may provide for specified distributions of income and/or principal to
designated beneficiaries at various points in time.
The five elements common to all trusts are:
1. The creator (generally known as the grantor)
2. The trustee
3. The property in trust
4. The beneficiaries
5. The terms of the trust (generally in a written document)

Power of Attorney
A power of attorney is a written document that enables the client, known as the
principal, to designate an agent, known as the attorney-in-fact, to act on the
client’s behalf. The agent has the power to act on behalf of the client only with
respect to powers specifically detailed in the document.
Under a general or conventional power of attorney, the client authorizes the
agent to act on his behalf. The client may choose anyone to act as the agent but
most often selects a trusted relative or friend. The power may be quite limited,
perhaps permitting the agent only to make deposits to the client’s bank account.
Alternatively, the power can be broad and authorize the agent to engage in
nearly any transaction the client could perform. However, regardless of how
limited or broad the power, a conventional power becomes inoperative if the
client is incapacitated. In short, the conventional power of attorney becomes
useless at the time it is needed most! Unlike a conventional power, a durable
power of attorney remains valid and operative despite any subsequent incapacity
of the client.

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It may not be needed until much later, if ever. Some clients, however, are
reluctant to grant another person wide powers to act when they themselves are
still mentally and physically capable. Such clients might prefer a springing
durable power of attorney.
Since family members may dispute whether a disability has properly triggered
the springing power, clear language is necessary in the instrument that defines
incapacity and gives the mechanism to determine whether incapacity has
occurred.

Transfers at death
Knowledge of how property is transferred at death under the laws of the
jurisdictional state is necessary to plan an estate. A common misconception is
that the client’s will determines the distribution of the entire estate at his death.
Under most circumstances, the will actually affects the distribution of only a
small portion of the client’s property. A carefully drafted will is still very
important, but the will must be coordinated with the entire client’s testamentary
transfers for effective estate and financial planning.

Conclusion
Though planning one’s estate may feel uncomfortable. Though some people are
put off by the belief that estate planning will be complicated, time consuming
and costly, setting up an estate plan doesn’t have to be a complex process. It is
not as complicated as it sounds.
• You execute a Trust Deed where you appoint a Trustee, name your
beneficiaries and specify how and when the properties of the Trust would be
distributed to the beneficiaries.
• In a Trust, you transfer ownership of some or all of your assets (which can
include investments, real estate, bank accounts etc.) and even personal property
(jewelry, antiques or furniture) from your name to that of the Trust.
• Transfer of ownership of assets to the Trust can be done at anytime after the
creation of the Trust either by the Settlor or any other person.

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• After you transfer the assets, you maintain the same access and control as you
did before you put them in the trust in case of a revocable Trust.
• In case you create an irrevocable Trust then you can retain some control over
the assets in the Trust by either having the trustee consult you or by appointing
an Administrator/ Protector who will be consulted by the Trustee.
• You lose nothing, but gain the assurance that your wishes will be carried out if
something happens to you, without the time or hassles of probate through the
hands of competent and professional Trustees.
Hence Estate planning is the foremost judicious step in securing your family’s
future and fulfilling your desires during your life and after you depart from the
world.

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16. SUMMARY

• Know the importance of financial planning.

• Set financial short and long-term goals

• Prepare an investment plan and monitor your progress.

• Invest for income and let it mature properly for your income to rise with
inflation.

• Differentiate between needs and wants.

• Adjust your living standards if your after-tax income will not be able to meet
your expenses.

• Plan how to manage all your financial resources together.

• Stay informed about issues that may affect your investments like inflation,
taxes etc.

• Keep track of how your investments are doing, changing needs for income,
how financial markets and products are changing, and how income might help
you achieve your goals.

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17. BIBLIOGRAPHY.

FINANCIAL MANAGEMENT by P.K. Jain and M.Y. Khan

THE FINANCIAL PLANNING WAY by Rajesh Dalmia
www.cleartax.in/guide/section80deductions
www.caclubindia.com
www.cfp.net
www.sebi.gov.in
www.theamericancollege.edu/assets/pdfs/fa262-class1.pdf
www.credit.org/assets/ebooks/financialplanning.pdf
www.fpsc.ca
www.rbi.org.in
www.amfiindia.com
www.bankbazaar.com
www.fimmda.org.in
www.nseindia.com
www.federalreserve.gov

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