Financial Planning F-FIBA306

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Financial Planning
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© Amity University Press
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SLM & Learning Resources Committee
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Chairman : Prof. Abhinash Kumar
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Members : Dr. Divya Bansal
Dr. Coral J Barboza

Dr. Monica Rose
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Dr. Apurva Chauhan
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Dr. Winnie Sharma
Member Secretary : Ms. Rita Naskar

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Published by Amity University Press for exclusive use of Amity Directorate of Distance and Online Education,
Amity University, Noida-201313
Contents
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Page No.
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Module - I: Introduction to Personal Financial Planning 01
1.1 Personal Financial Planning
1.1.1 Concept of Personal Financial Planning
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1.1.2 Ethical Issues in Personal Financial Planning
1.1.3 Per Capita Investment - Overview
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1.1.4 Residential Status of Individual, HUF and Company
1.2 Real Assets
1.2.1 Investment in Real Assets
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1.2.2 Types of Real Assets
1.2.3 Merits and Demerits of Investment in Real Assets
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1.2.4 Return on Real Assets Investment Over the Past Few Years
1.3 Financial Assets
1.3.1 Financial Assets - Overview
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1.3.2 Investments in Securities - Through IPO and Secondary Market
1.3.3 Investment in Government Securities
1.3.4 Debt Instruments
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1.3.5 Post Office Instruments

1.3.6 Insurance Policies
1.3.7 Mutual Funds
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1.3.8 Certificate of Deposits

1.3.9 Investment in Foreign Market
Case Study on Personal Financial Planning
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Module - II: Basics of Taxation 82

2.1 Personal Taxation
2.1.1 Personal Taxation - Overview
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2.1.2 Planning for Tax Considerations

2.1.3 Heads of Income Tax
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2.1.4 Computation of Tax Implications Heads of Income Tax

2.1.5 Individual Taxation Slabs
2.1.6 Computation of Taxable Income
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2.1.7 Tax Planning

2.1.8 Tax Evasion and Tax Avoidance
2.1.9 Wealth Tax and Gift Tax
2.1.10 Capital Gains Tax - Overview
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2.1.11 Computation of Capital Gains
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2.1.12 Basis of Classifying Short-term and Long-term Capital Asset
2.1.13 Various Deductions Under Income Tax Act, 1961
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2.1.14 Recent Tax Saving Schemes
2.1.15 Service Tax
2.1.16 Comprehensive Illustration on Personal Taxation
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Case Study on Personal Taxation
Module - III: Liability Planning and Investment Fundamentals 151
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3.1 Life Insurance
3.1.1 Concept of Life Insurance
3.1.2 Why Should One Buy Life Insurance?
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3.1.3 How Much Life Insurance is Right for you?
3.2 Health Insurance
3.2.1 Health Insurance - Overview r
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3.2.2 Health Insurance Plans
3.2.3 Health Insurance Decisions
3.3 Property and Liability Insurance
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3.3.1 Basic Principles of Property Insurance

3.3.2 Homeowner’s Insurance
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3.3.3 Automobile Insurance

3.3.4 Other Property and Liability Insurance
3.4 Stocks and Bonds
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3.4.1 Investment Planning in Securities Markets

3.4.2 Investing in Stocks and Bonds
3.4.3 Investing in Mutual Fund and Real Estate
3.4.4 Investment Avenues as per Client Profiling
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Case Study on Investment
Module - IV: Tax Planning and Retirement Planning 192

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4.1 Tax Planning

4.1.1 Effective Tax Planning
4.1.2 Calculating and Filing Taxes (with Illustration)
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4.1.3 Tax Return Forms (with Example)

4.1.4 Concept of Risk Assessment of Individual
4.2 Retirement Planning
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4.2.1 Introduction to Portfolio Management
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4.2.2 An Overview of Retirement Planning
4.2.3 Income Generation After Retirement
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4.2.4 Estimating Future Retirement Needs
4.2.5 Liability Management
4.2.6 Anticipation of Expenses
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4.2.7 Investment for Major Goals (House, Family, Education and Medical Goals)
4.2.8 Reverse Mortgage (Role, Significance and Growth)
Case Study on Retirement Planning
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Module - V: Recent Trends and Developments in Personal Financial Planning 228
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5.1.1 Recent Developments in Financial Sector - Overview
5.1.2 Disruptive Trends in Personal Financial Planning - Overview
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5.1.3 Use of Information Technology in Personal Financial Planning
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5.1.4 Concept of Re-Wired Investor
5.1.5 Science vs. Human-Based Advice
5.1.6 Analytics and Big Data
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5.1.7 Holistic and Goals-Based Advice

5.1.8 Democratisation of Investment Solutions
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5.1.9 New Investment Environment

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Financial Planning 1
Module - I: Introduction to Personal Financial Planning

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Learning Objectives:
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At the end of this topic, you will be able to understand;
● Concept of Personal Financial Planning
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● Ethical Issues in Personal Financial Planning
● Per Capita Investment - Overview
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● Residential Status of Individual, HUF and Company
● Real Assets, investment and its types
● Merits and Demerits of Investment in Real Assets
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● Return on Real Assets Investment Over the Past Few Years
● Financial Assets
● Investments in Securities - Through IPO and Secondary Market
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● Investment in Government Securities (Debt Instruments, Post Office Instruments
etc.)
● Investment in Foreign Market r
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Introduction
The act of thoroughly analysing your financial condition and creating a customised
financial plan to achieve your objectives is known as financial planning. As a result,
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financial planning frequently covers a wide range of financial topics, including

insurance, investing, taxes, savings, retirement, and more.
Financial planning include assessing a client’s overall financial situation and

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providing guidance on how to meet both short- and long-term financial objectives.
Financial planners build meaningful relationships with their customers in order to
provide them the confidence they need today and a more secure future tomorrow,
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helping them with everything from retirement planning, education savings to tax, and
insurance management.

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Amity Directorate of Distance & Online Education

2 Financial Planning
The phrase “personal finance” refers to managing your finances as well as

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saving and investing. It includes financial planning for retirement, banking, insurance,
mortgages, investments, and taxes as well as estate preparation.
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The phrase is frequently used to describe the entire sector that offers financial
services to people and households and provides them with financial and investment
advice.
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Personal finance is about achieving individual financial objectives, such as having
enough money to cover immediate expenses, making retirement plans, or setting aside
money for your child’s college tuition.
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●● Everything depends on your income, costs, living standards, and personal
objectives and desires—and creating a strategy to meet those demands within
your means.
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●● It’s crucial to develop financial literacy so you can discern between good and bad
advice and make wise decisions in order to maximise your earnings and savings.
●● It’s important to realise that the same ideas that help you succeed in business
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and your job also apply to how you manage your personal finances. Prioritisation,
assessment, and restraint are the three main guidelines.
●● Prioritisation— This implies that you are able to assess your financial situation,
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identify the sources of your income, and ensure that you maintain your attention
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on those activities.
●● Assessment— The essential ability that prevents professionals from overextending
themselves is this one. Ambitious people are always thinking of new methods to
succeed, whether it be through a side business or a potential investment. While
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taking a flyer has its place and time, managing your finances like a company
requires that you take a step back and objectively weigh the advantages and
disadvantages of any potential new endeavour.
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●● Restraint—This is the last, most important big-picture company management skill

that must be applied to personal finances. Financial advisors frequently meet with
prosperous individuals who, despite their success, still find a way to spend more
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money than they bring in.
1.1.1 Concept of Personal Financial Planning

The practice of managing your finances to attain personal financial satisfaction
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is known as personal financial planning. You can manage your financial position with
this planning technique. Every individual, family, or household has a different financial
situation, therefore any financial activity must be carefully planned to fit particular needs
and objectives.
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Personal financial planning also includes making short- and long-term financial
plans on one’s own or with a professional adviser’s help. It will include the use of
tax-efficient strategies like Individual Retirement Accounts, making sure that proper
retirement provisions are being made, and looking at short- and long-term borrowing
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needs like overdrafts and mortgages.
How do I plan my own finances?

The process of creating a personal road map for your financial security is known as
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financial planning. Financial planning process inputs include:
(a) your financial situation, which includes your income, assets, and liabilities;
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(b) your goals, which include your present and long-term financial demands; and
(c) your risk tolerance.
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A personal financial plan that outlines how to spend your money to accomplish your
goals while taking inflation, actual returns, and taxes into consideration is the result of
the financial planning process. Financial planning, in its simplest form, is the process of
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methodically organising your resources in order to realise your short- and long-term life
objectives.
Need of Personal Financial Planning
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A financial strategy guarantees that you are prepared to handle dynamically
changing situations on both a micro and macro level. Without a financial plan, you
may not have the ability to achieve your goals and may not be well equipped to handle
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unforeseen events.
Below are some points that will help in understanding the need of Personal
Financial Planning.
1. Budgeting or Cash Flow Management

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You need to arrange your finances more effectively if you are unaware of where
and how your income is spent each month. Many people don’t understand how
their monthly paychecks disappear, leaving them with very little or nothing left over
for savings. Long-term issues are caused by impulsive purchases and a lack of
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budgeting for costs.

2. Effective Debt Management
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A loan does provide immediate gratification. But when the liabilities become a debt
trap, it’s important to create a financial plan to organise your personal finances.
Credit cards, overdraft services, and personal loans are frequently used to increase
our debt.
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3. Making Investments More Efficient

It’s time to organise your portfolio if your holdings are dispersed and you yourself are
unaware of where you have invested. Without properly analysing their needs or doing
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enough research on financial items, many people frequently engage in haphazard

investing. Most often, advice from friends and family is used to build a portfolio,
which may ultimately result in a portfolio that is inappropriate for you. Additionally,
sporadic investing creates investments that are hard to manage and keep track of.
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Such investors have very cluttered investment portfolios full of investments that
duplicate one another and do not offer any benefits of diversification.
4. Purchase the appropriate financial products
Many people use shares or mutual funds to invest in the equities asset class.
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However, as was already indicated, these investments are frequently made on the
advice of friends and family members without taking into account the investor’s

financial objectives or risk tolerance. Most frequently, these impulsive and poorly
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researched investments end up costing the investors money. Therefore, it is crucial
that you only invest after conducting extensive research on any investment proposal.
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5. Decide on the ideal asset allocation
The majority of people believe that stocks are the best form of investment, particularly
when the stock market is rising. However, putting all of your eggs in one basket is
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never a good idea. You must comprehend that not all assets move simultaneously
in the same direction. It is improbable that other asset classes—such as gold, debt
securities, and real estate—will experience a downturn concurrently with an equity
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bear market, or vice versa.
6. Getting Rid of Wasteful Financial Products
Due to lack of information or improper product sales by agents, customers may
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end up purchasing several insurance policies, such as Endowment, Money Back,
ULIPs, Pension Plans, etc. These insurance plans frequently fail to fulfil the needs
of the insured and instead serve simply to enrich the broker who sold you the policy.
Some market-linked policies that guarantee you life insurance and returns may fall
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short on both counts.
7. Choosing the Correct Insurance Coverage
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The correct amount of insurance can help you or your family members financially
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in the event of unfavourable situations. The correct quantity of health insurance
will prevent burning a giant hole in your finances that accidents or unforeseen sad
occurrences could have caused. Life insurance will ensure that your family members
can keep the same quality of living even in your absence
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8. Set SMART financial objectives

Prudent financial planning can be your solution if you want to set financial goals like
purchasing your ideal home, a car, a foreign trip, your retirement, your children’s
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education, and their marital needs, among many others. We know from experience
that many people strive to achieve the aforementioned objectives, but lack of careful
financial planning and/or delaying putting the financial plan into action prevent them
from being achieved.
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9. A Plan for Your Long-Term objectives

A carefully crafted financial plan can be your road map to achieving all of your
financial goals while giving you the ability to deal with unforeseen circumstances if
you don’t already have one. Consequently, financial planning is for individuals who
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are unsure of their thoughts or plans for achieving their goals and aspirations in life.
Scope of Personal Financial Planning

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1. Personal Financial planning guarantees the availability of sufficient finances inside

the company for efficient operation. It determines potential sources for obtaining
such funds after first estimating the capital needs.
2. By providing the appropriate cash at the appropriate moment, it reduces the
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likelihood of uncertainties for business. Personal Financial planning done properly

prevents any obstacles to a company’s expansion and ongoing operations.

3. Personal Financial planning helps businesses avoid unnecessary expenses by

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reducing the likelihood of both a funding shortage and an overabundance. Prior to
soliciting money from various sources, it accurately calculates the needed finances.
The profitability of a business is negatively impacted by both of these circumstances,
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a scarcity of cash and a surplus of finances.
4. Maintaining the right balance between cash inflows and outflows is key to ensuring
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that the business has the most liquidity possible. Every cash transaction, loan, and
borrowing made by a company entity is governed by financial planning.
5. Personal Financial planning helps businesses carry out their long-term growth and
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expansion strategies. This facilitates growth and expansion programmes. This
ensures that the organisation will always have the necessary cash on hand to help
it achieve its long-term objectives.
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Importance of Personal Financial Planning
Terms like personal finance and financial planning have become rather trendy
during the past few years. Financial planning is frequently discussed in publications
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including newspapers, periodicals, television shows, and channels. What then is
financial planning, and more importantly, is it worthy of the attention it is receiving?
Through the process of financial planning, a person can create a road map for
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addressing both anticipated and unforeseen requirements. Simply expressed, the goal
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is to take the necessary actions to make sure the person has what it takes to attain his
goals and is able to handle unforeseen circumstances.
It is impossible to emphasise the value of financial preparation, particularly in

the current environment. Among other things, inflation and evolving lifestyles are two
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variables that contribute to the same.
With the help of financial planning, one may make sure they are prepared to
handle the effects of inflation, particularly during periods like retirement when expenses
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increase but sources of income decrease.
Making a financial plan can help you relax because

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● Knowing your financial objectives helps you direct your investments toward
achieving them.
● By concentrating your assets, you may make sure that you make profitable
investments at the right time. It also makes sure that your wealth is protected.
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● Making money guarantees your financial stability and puts you on the right
track to reaching your financial objectives.
● Financial security is the ability to weather life’s foreseen and unanticipated ups
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and downs, such as retirement and concealed illnesses.

● Finally, carefully executed financial planning guarantees that your investments
are inflation-proof.
A novel approach to personal finance planning

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● Most people aim to manage their money in such a way that they make the
most of every dollar they have. A new automobile, a bigger house, more

extensive vacation, advanced career training, and financial independence

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during working and retirement years are examples of common financial
ambitions.
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● People must prioritise their goals in order to accomplish these and other
objectives. Personal money management, also known as personal financial
planning, is a systematic procedure that produces both financial and personal
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fulfilment.
● The benefits of personal financial planning in particular include:
● A rise in the efficiency with which you accumulate, manage, and safeguard
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your financial assets throughout the course of your lifetime.
● Better control over your finances by avoiding excessive debt, bankruptcy, and
reliance on other people for financial stability.
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● Better interpersonal relationships as a result of well-thought-out and clearly
articulated financial decisions.
● A feeling of being liberated from money problems as a result of planning
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ahead, budgeting, and accomplishing your own financial objectives..
The Steps in the Personal Financial Planning Process

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Step 1: Analyse Your Financial Situation Currently
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You will assess your present financial condition in this initial step of financial
planning, taking into account your income, savings, living expenditures, and debts.
Making a list of your present assets, liabilities, and expenditures lays the groundwork
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for your financial planning tasks.
Step 2: Create financial objectives

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You should review your financial ideals and objectives on a regular basis. This
entails determining your feelings regarding money and the reasons behind such
feelings. This analysis’s goal is to distinguish between your necessities and your wants.
Financial planning must include a clear set of financial objectives. Others may
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make financial goal suggestions for you; however, it is up to you to choose which ones
to pursue. Your financial objectives can include living off all of your present income or
creating a robust savings and investment strategy to ensure your financial security in
the future.
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Step 3: Determine Additional Courses of Action

Creating alternatives is essential for wise decision-making. Possible courses of
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action typically fall into these categories, despite the fact that other factors will affect the
available possibilities:
● Maintain your current path of action.

● Extend the current circumstance.
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● Alter the current circumstance.

● Notes: Try a different strategy.

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Effective decisions require creative decision-making. You’ll be able to make more
efficient and gratifying judgments if you take into account all of your options.
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Step 4: Consider Alternatives
You must weigh your living position, personal ideals, and the state of the economy
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while deciding on a course of action.
The effects of decisions. Every choice eliminates other options. For instance,
choosing to invest in stocks can prevent you from taking a vacation. You might be
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unable to work full-time if you decide to attend school full-time. What you give up when
you choose is known as the opportunity cost. This price, often known as the decision’s
trade-off, is not necessarily definable in monetary terms.
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Making decisions will always be a component of your financial and personal
situation. You must thus take into account the missed chances because of your choices.
Assessing Risk
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Every decision involves some level of uncertainty. Risk is involved while picking a
college major and a career. What happens if you don’t enjoy your job or are unable to
find employment there?
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Other choices have a very low risk associated with them, such as depositing
money in a savings account or making inexpensive purchases. In these circumstances,
your likelihood of losing something of significant worth is low.
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Step 5: Put together and carry out a financial action plan

You create an action plan in this step of the financial planning process. To do this,
you must decide how to carry out your objectives. The objectives that are next in priority
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will come into view when you accomplish your short-term or immediate goals.
You may need outside help to carry out your financial action plan. For instance, you
could utilise an investment broker’s services to buy stocks, bonds, or mutual funds, or
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an insurance agent’s services to get home insurance.
Step 6: Review Your Plan and Make Changes

The process of financial planning is ongoing and does not terminate when a
specific action is taken. You must periodically evaluate your financial choices. More
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regular assessments might be necessary due to shifting personal, social, and economic
conditions.
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This financial planning procedure will offer a means of accommodating

modifications when life events have an impact on your financial needs. You can
prioritise changes that will align your financial goals and activities with your existing
situation by regularly assessing this decision-making process.
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Significance of Personal Financial Planning

Personal financial planning is a methodical process whereby a person makes the
most of their current financial resources by properly managing their money in order to
best meet their financial goals and objectives. Join me on this brief but fascinating tour
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to learn the significance of personal financial planning.
● Setting Financial Goals, first
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If you ever meet with a financial adviser, there’s a good chance they’ll start the
conversation on your financial goals. Most people devote more effort to planning
their vacation than to achieving their financial objectives, but having a financial plan
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will make it simpler for you to pinpoint your objectives.
● Management of Income
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A well-defined plan can help you handle your income more skillfully. This might
be accomplished easily by making a budget so that, as you are aware, you won’t
need to worry about money or stress. Simply said, prioritising your spending and
keeping an eye on your budget can help you find needless spending, adjust swiftly
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to changes in your financial circumstances, and reach your financial goals.
● Monitoring your goals’ progress
Once you have a financial plan in place, you can establish quantifiable objectives
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like setting aside a certain amount of money each month for savings or paying off
debt over time. A personal financial plan will keep you accountable for staying within
budgetary constraints and reaching your goals.
● Financial Awareness
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You can better understand your finances with a financial plan by setting quantifiable
financial goals and tracking the results of your decisions. Overall, financial planning
can help people approach their budget in completely new ways and find better
strategies to maintain control over their financial lives.
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● Management of Assets vs. Liabilities

One frequently finds themselves in a predicament because they are unsure of their
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goals or the best way to go about achieving them. It is crucial to ascertain the
true value of an asset because often, an owned object will have responsibilities
attached. A financial plan will advise you on the best way to pay off your debts, and
it will also enable you to possess assets that won’t cause you trouble down the road.
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● Emergencies
Savings, in the opinion of many, serve as a safety net. A lack of sufficient funds,
though, can still cause you to go off course due to unforeseen monetary changes.
Having investments with high liquidity that can be used in an emergency is always
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a good idea.
● Investment Aggregation
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You probably have investments in a variety of products, such as stocks, mutual

funds, bank deposits, post office products, gold, etc. The information about these
investments, such as the account number, nominee information, valuation, etc., is
frequently not kept in a single location. For better administration, financial planning
enables you to collect and consolidate all of these into one location.
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● Better Budgeting
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List your income and expenses as one of your first activities. These aid in the
effective use of resources and the creation of an appropriate budget. For instance,
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a family can look at reducing unnecessary spending if it wants to boost the amount
it wishes to save each month.
● Don’t store money in inactive investments
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In the past, saving was calculated as follows: income - expenses = savings (Which
were often not invested in time). With the use of financial planning, you can change
this formula to Income - Investments = Expenses. You can start investing as soon
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as you get paid because you have budgeted for your costs.
● Choose your objectives
Establishing a plan and budget for your significant life milestones is the first step
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in achieving them. According to research, when you have a specific objective in
mind, you’ll work more and be more motivated. Additionally, it aids the advisor in
encouraging you to make wise investments.
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● Keep an eye on your investments
The advisor assists you in regularly reviewing your portfolio. This makes it possible
to reallocate any bad investments to assets that are performing better.
● Invest based on your risk tolerance
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Investing in accordance with your risk tolerance not only allows you to continue in your
investments for a longer period of time without worrying about market fluctuations,
but it also brings you peace of mind. For instance, it is preferable to have a mix of
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investments that provide guaranteed returns and market-linked returns if you are a
moderate investor.
● Establish an emergency fund
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The establishment of an emergency fund, which enables you to handle any

unforeseen circumstances, is one of the first steps in putting a financial plan into
action. In challenging circumstances, such as the current one where many people
had their salaries reduced and some also lost their jobs, having an emergency fund
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is helpful.
● Attend to Needs for Protection
Financial planning encompasses more than simply investments. The right insurance
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products, such as term life insurance, medical coverage for every household
member, and other insurance like critical illness and personal accident coverage,
will also be assisted by a financial advisor. The health insurance can be used to
cover hospital expenses in the event that a family member needs to be admitted.
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Similar to this, a term insurance policy helps a family cope financially with the loss
of an income-producing family member.
● Focusing on your work and profession will help
You can give your profession and job your full attention because you’ve made
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future plans. By doing this, you can be certain that you will succeed in both your
professional and financial lives.

1.1.2 Ethical Issues in Personal Financial Planning

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Fig: Ethical Issues
When attempting to act in their clients’ best interests, sincere financial advisers
may encounter difficult decisions. Investment professionals may run into some typical
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problems, but there is advice on how to solve them.
Planners today must determine whether the client would benefit more from
purchasing one of the many diverse alternative goods available than from using this
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old strategy. A client who is placed in a universal variable life insurance policy might
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have actually been in a better position overall. Due to the financial industry’s complexity,
people now have more possibilities to choose wisely. It has also significantly raised the
possibility of being misled.
Balance between advisors’ motivations and their clients’ demands is a difficult

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assignment. Financial transactions are characterised by unequal market power and

unequal access to pertinent information between parties, particularly in sectors where
legal or regulatory restrictions are of questionable effectiveness. As a result, ethical
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issues in finance are particularly crucial.
Given the significance of topics like agency theory, financial contracting under
information asymmetry, moral hazard and adverse selection, and reputation acquisition
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in finance, it is clear that modern financial economics, as well as finance theory and
practice, are deeply concerned with ethical questions and behaviour.
The primary objective of the company, according to the majority of finance

professionals, is to maximise shareholder wealth. Some claim that only ethical
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behaviour makes it possible to maximise shareholder wealth over the long term.
Contrarily, ethical behaviour can increase wealth. Unethical behaviour is expensive
since it harms a company’s brand.
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Either side of the argument can be made for the moral problem of earning
commissions on portfolios with declining value. Some advisors claim that if they hadn’t
offered financial advice, prospective losses might have been higher.
Others emphasise how financial markets fluctuate over time. As the ultimate
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objective is to assist the customer in achieving financial independence by boosting

their net worth, there is an inherent risk in advisors earning fees on portfolios that are
losing money.
Principles of Ethics
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● Integrity: The financial planner should act honourably and refrain from any
disagreeable, hurtful, or unsightly conduct.
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● Objectivity: When offering clients services, a financial planner should be impartial.
With specific reference to the client’s unique financial situation and in the client’s
best interest, the financial planner should provide clients with the goods or services
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that best fulfil their needs.
● Competence: In order to provide clients with advice, the financial planner must
maintain a high degree of professional knowledge and expertise. Only areas where
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the financial planner is informed and technically competent should they receive
advice and services.
● Fairness: The financial planner must provide services to clients, principles, partners,
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and employers in a way that is reasonable and fair, and must disclose any conflicts
of interest.
● Confidentiality: The financial planner should respect the privacy of all customer
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information. Without the client’s express permission, the financial planner should
not divulge any confidential client information.
● Professionalism: A financial planner should always conduct themselves
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professionally. The behaviour of the financial planner should be commendable.
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● Diligence: The financial planner must use the necessary competence, attention, and
diligence.
Table below briefly explains the principles of ethics in financial planning

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Principle Code of Ethics Definition

Integrity When running a financial planning business and offering financial
planning services, uphold the highest standards of honesty and ethics.
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must be honest, truthful, and reliable when making promises. to totally,

truthfully, and accurately provide all information that is relevant to the
client’s decision-making.
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Objectivity Act in the client’s best interests while upholding the standards of
professional independence and objectivity. Any restrictions on your
capacity to offer unbiased financial planning services should be
made clear to the client. Offer suggestions for remedies based on the
demands and goals of the client.
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Diligence When giving financial planning advice, exercise due care,

professionalism, and thoroughness. Deal with all parties, especially
clients and other professionals, with dignity, respect, and kindness.
)A
Professionalism They behave in a way that upholds the profession’s sterling reputation.
Make sure your actions don’t damage the reputation of the financial
planning industry. Utilise proper professional standards when using
your discretion. Accept responsibility for one’s decisions and the results
of one’s actions.
(c

Confidentiality Respect the privacy of any information you learn while working. Do
Notes
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not disclose any confidential information without the provider’s express
permission, unless needed by law or to fulfil legal responsibilities.
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Fairness Fair and equitable financial planning services should be offered. not
letting bias, conflict of interest, or prejudice trump objectivity.
Competence Ensure that behaviour adheres with the Association’s Professional
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Standards, rules, and Constitution. Act in accordance with the spirit
of the Code and inspire others to do the same. Make all necessary
preparations to ensure a timely and equitable settlement in the event
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of a claim.
Compliance Maintain the knowledge and skills required to continue providing quality
financial planning services in the areas in which the member is involved.
Be courteous, effective, and responsive at all times.
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Planners today must determine whether the client would benefit more from
purchasing one of the many diverse alternative goods available than from using this
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old strategy. A client who is placed in a universal variable life insurance policy might
have actually been in a better position overall. Due to the financial industry’s complexity,
people now have more possibilities to choose wisely. Additionally, it has significantly
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raised the chance of being misled.
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The issue includes investments. A client’s risk tolerance and investment time
horizon must be determined and maintained in order to place them in acceptable
portfolios. A 21-year-old attempting to start a family and a profession should receive
investment advice that differs from that given to a 70-year-old customer beginning their
retirement journey.
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Most of our financial needs—management of retirement savings, stock and bond

investment, and protection against unanticipated calamities, to mention a few—are
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such that they are better left in the hands of others since we lack the skills and time to
do them successfully.
However, it is too difficult to apply the corporate method of contractualization and

the agency relationship to the numerous financial transactions between individuals and
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institutions that occur in the financial market every day. People are less organised than
stockholders, and they frequently are not aware of the agency issue. Their capacity to
keep tabs on an agent’s behaviour is likewise limited by a lack of information.
Consequently, what we have in our sophisticated modern economic system

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is a contradictory situation: on the one hand, the growing need for other people to
accomplish things, and on the other, a depiction of human nature that emphasises
selfish behaviour.
)A
The majority of the ethical issues and falling morality in the modern business
and financial sphere can be explained by this paradoxical circumstance, or by the
inconsistency in the modern capitalist system’s foundation.
(c
Financial Planners’ moral Obligations

This section examines the ethical framework that already exists for the developing

field of financial planning. This is significant to the study because, in stage two, the
Notes
e
main categories of unethical behaviour among participants in financial planning were
identified using the major professional associations’ codes of ethics as a baseline.
in
Any profession’s aspirational ethical principles and code of conduct typically reflect
the industry’s collective opinion on the calibre of the acts or conduct stakeholders
expect of members. These norms and guidelines are frequently codified and stand in
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addition to the minimal requirements of law and regulation.
Receiving some alternative compensation perks, such as volume incentive

payments that were previously made to financial advisors by third parties, is one
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contemporary example in financial planning. Members of professional associations are
typically subject to codes of ethics and conduct that apply to financial planners.
1.1.3 Per Capita Investment - Overview
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Fig: Per Capita Investment

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In economics and statistics, the phrase “per capita” is largely used to describe how
specific measures apply to a population. It is most frequently used in relation to national
statistics and how they relate to that nation’s populace. The terms gross domestic
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product (GDP) per capita and income per capita are most frequently used. To compute
per capita, divide the statistical value by the population under consideration.
● In economic and statistical analysis, the phrase “per capita” refers to a single
individual.
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● When comparing an economic statistic to a population, per capita is utilised.

● The two examples of per capita that are used most frequently are gross domestic
)A
product (GDP) and income.

● In comparison to aggregate statistics, per capita data offers information that is more
detailed. It frequently serves as an apples-to-apples comparison across nations with
various populations.
(c
● Per capita data is frequently compared to median data, which paints a sharper
picture because it considers outliers.

A nation is measured per person using the per capita method. That could be
Notes
e
income or GDP. Any statistical measure can be computed using the following formula:
Measurement Per Capita = Measurement/ Population
in
This offers a more comparable assessment since it enables more precise analysis
across countries. It can be utilised in various social sciences in addition to economic
data like GDP.
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The amount of investment in a nation is a key indicator of economic growth. Per
capita investment is a better indicator of an economy’s development than overall
investment.
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Despite being more than three and a half times greater than it was in the 1990s,
average yearly investment from 2010 to 2014 was still more than that. As can be seen
from the table, China’s rate of growth in per capita investment has been far larger than
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India’s. Furthermore, there is still a very long way to go until per capita investment
levels match those of industrialised nations in China and India.
This form of measurement can be illustrated by looking at how per capita estimates
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shed light on GDP data.
GDP assigns a dollar value to every item produced inside a nation’s borders. It
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basically serves as a gauge for the size of a nation’s economy, and it is typically
reported for quarters or entire years.
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The gross national income per capita is another often-used per capita metric. This
number is the population divided by the GDP plus resident foreign investment income. It
also includes dividend and interest revenue from other countries.
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Men, women, children, and even newborn babies are all included in the calculation
of per capita income because they are all constituents of the region’s or country’s
population. This feature of per capita income distinguishes it from other prevalent
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metrics of the region’s success.
Family income is one such additional metric that takes into account everyone
residing in a single household. Family income is a different metric that takes into
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account everyone who lives under one roof and is linked to it by blood, marriage,
adoption, or any other type of relationship.
The ability to afford a place can be determined by looking at per capita income.
This is helpful in determining whether the homes in a particular region are out of the
m
price range of the typical middle class family when combined with real estate prices.
Businesses also consider per capita income when deciding where to locate new
operations. The firm has a higher possibility of making more money there if the per
)A
capita income is high.
Because customers in these locations won’t be hesitant to spend money, the

corporation or business has a better possibility of increasing its income. In places with
low per capita income, this is not feasible.
(c

1.1.4 Residential Status of Individual, HUF and Company

Notes
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in
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Fig: Residential Status
The extent to which an assessee’s income is chargeable depends on his
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residential status. Depending on his residency status, a person may or may not be
charged with a specific income.
Residential Status of Individual r

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Any assessee’s tax liability is based on the Act’s definition of residency. Taxpayers
are divided into three general groups based on their residential status for income tax
purposes: (1) Residents and Ordinarily Resident (2) Residents but Not Normally
Resident (3) Non-Resident
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An assessee’s residential status must be determined in relation to each prior year.

A person who is a resident and a regular resident one year may switch to being a non-
resident or a resident but not a regular resident the next year, or vice versa.
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Residential Status of Individuals

1. Based on the number of days spent in India, residential status
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According to section 6(1), a person is considered to have been a resident of India in

any preceding year if he or she meets any one of the following criteria:
I He was in India for at least 60 days in the relevant previous year and was there for
at least 182 days in the previous year as a whole; (ii) He was in India for at least 365
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days in the four years that were immediately prior to the previous year.
The person is a resident if he or she meets any of the aforementioned requirements.
If neither of the aforementioned conditions is met, the individual is a non- resident.
)A
Exceptions: The following groups of people will only be considered Indian residents
if they spent at least 182 days there during the applicable prior year. In other words,
even if such individuals spent 60 or more days in India in the relevant prior year (but
less than 182 days), they will not be considered residents because their stay in India
(c
was 365 days or more for the 4 immediately preceding years.

(1) An Indian national who departs India during the relevant previous year to
Notes
e
serve on a ship owned by an Indian company or to seek employment abroad;
(2) An Indian national or person of Indian origin1 who, while abroad, travels to
in
India during the relevant previous year.
However, a person who had total income in excess of ‘15 lakhs during the previous
year that was not from foreign sources—that is, income that accrued or arose outside
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India (apart from income from a business controlled from or profession established in
India) and is not deemed to accrue or arise in India—will be considered to be a resident
of India if—
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● His stay in India during the relevant previous year was 182 days or longer;
● His stay in India during the four years immediately preceding the previous
year was 365 days or longer; - His stay in India during the relevant previous
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year was at least 120 days.
2. Deemed Resident (Section 6(1A))
A person who is an Indian citizen and has total income that exceeds ‘15 lakhs
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during the previous year, excluding income from foreign sources [i.e., income that
accrues or arises outside India (except income from a business controlled from
or profession established in India), and is not deemed to accrue or arise in India],
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would be deemed to have resided in India during that previous year, provided he is
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not subject to tax in any other country or territory as a result of his income.
However, section 6 of the Income Tax Act states that this rule does not apply to
someone who was an Indian resident during the immediately preceding year (1).
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Resident and Ordinarily Resident/ Resident but not Ordinarily Resident

In India, “resident but not normally resident” status is only available to individuals
and HUF. The assessees in all other classifications can be either residents or non-
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residents. A person who meets any one of the requirements listed in Section 6(6) is
considered a non-normal resident.
(i) If the person has not resided in India for at least 729 days during any nine out
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of the ten years prior to the relevant previous year;

(ii) If the person has not resided in India for at least 729 days during any seven of
the prior years prior to the relevant previous year; or
(iii) If such a person is an Indian citizen or person of Indian origin (who, while
m
outside India, comes to India on a visit in any previous year), who had total
income, other than the income from foreign sources, exceeding Rs.15 lakhs
during the previous year, and who had been in India. or
)A
(iv) If the person in question is an Indian national who is considered to live in India
pursuant to section 6(1A) [Note: A presumed resident is always considered to
be a resident but is not considered to be a resident ordinarily].
HUF’s residential status

(c
A HUF would be considered resident in India if it is entirely or partially controlled

and managed there.

Non-resident: An entity would become a non-resident if it completely outsourced its

Notes
e
control and management of its affairs.
The definition of “control and management”
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◌◌ The term “control and management,” as used in section 6, applies to
centralised administration and control, not to the conduct of daily operations
by servants, employees, or agents.
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◌◌ Even though the firm may be operated from outside of India, it may
nevertheless be entirely controlled and managed there. As a result, it is
argued that a business’s administration and control are located where the
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adventure’s head and brain are.
◌◌ The location of control may differ from the location where business is
typically conducted and, in some cases, even from the assessee’s registered
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office. This is due to the fact that management and control of a business
are not always exercised from the assessee’s registered office or place of
operation. However, control and management do indicate that the directing
and regulating power is operating at a certain location with some degree of
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permanence.
Resident and Ordinarily Resident/ Resident but not Ordinarily Resident

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Karta of resident HUF will be resident and normally resident if it satisfies both of
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the following additional characteristics (as appropriate in the case of an individual),
otherwise it will be resident but not ordinarily resident.
In the ten years immediately prior to the pertinent previous year, the resident HUF’s
Karta must have resided in at least two of those years, and their stay must have lasted
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at least 730 days throughout those years.
Residence status of companies

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A company would be considered to have had a preceding year of residence in India

if it was either
(i) an Indian company or

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(ii) had its seat of effective management there during that year.
“Place of effective management” refers to a location where crucial management
and business choices that are essential for the operation of an entity as a whole are, in
essence, made. [Section 6(3) Explanation]
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Due to the closure and cancellation of international flights brought on by the

Covid-19 epidemic, many non-residents had to extend their stay in India, which could
)A
have changed their status as residents.
The Central Board of Direct Taxes (CBDT) clarified residence requirements for
non-resident Indians (NRIs) and foreign visitors whose stay in India was prolonged as a
result of the Covid-19 lockdown in Circular No. 11 of 2020, dated May 8, 2020.
(c
Key elements of the CBDT’s clarifications

According to CBDT, the following days would not be taken into account while

calculating tax residency1 for the FY 2019–20 for anybody who arrived in India on a
Notes
e
visit before 22 March 2020 and intended to depart India on or before 31 March 2020:
● In cases where a person was unable to depart India between March 22, 2020
in
(during the days when international flights were halted), and March 31, 2020
(the end of the FY);
● Days from the start of the quarantine to the date of departure in cases where
nl
a person was under quarantine in India on or after March 1, 2020, and had left
on an evacuation flight on or before March 31, 2020;
● When a person was quarantined in India on or after March 1, 2020, and was
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unable to leave the country on or before March 31, 2020, the days from the
start of the quarantine to March 31, 2020;
● When a person boarded an evacuation flight on or before March 31, 2020, the
days from March 22 to the date of departure.
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Depending on the circumstances, a person may have been a resident, an irregular
resident, or a non-resident in any prior year.
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A. The resident
Prior to 1982–1983, an individual’s residence was also important, but now his
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status as a resident in India is determined by how long he has lived there. He will be
a resident in India (also known as an ordinarily resident) if he satisfies both the Part 11
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and Part I requirements.
Section 6(1) of Part I’s conditions ‘A’: He spent at least 60 days in India during the
previous year and at least 365 days there over the course of the four years before that.
‘B’: He spent at least 60 days in India during the previous year and at least 182 days
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there overall during the previous year.
Explanations: In the case of a person

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i) As an Indian citizen, the period of 60 days in clause (b) above will be extended to
182 days or more if he left India in any prior year in order to seek employment abroad.
ii) If you are an Indian citizen or a person of Indian ancestry who is visiting India
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from outside of India, the period of 60 days indicated in clause (b) will be extended
to 90 days or more (as of 1.4.1990, this period has been increased to 150 days or
more). If a person was born in unrecognised India, one of their parents or any of their
grandparents is considered to be of Indian ancestry.
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The requirements of Part II (See 6(6))

a) If he had lived in Indiana for at least nine out of the ten years prior to the
previous year.
)A
b) He spent at least 730 days in India during the course of one or more periods
during each of the seven years prior to the current year.
Keep to India
(c
His stay in India for at least 182 days in the preceding year need not have been
continuous or at the same location; instead, the overall length of his stay in India will be

taken into account. It doesn’t matter if he remained in his own home, a hotel, a rented
Notes
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home, or with some friends; what matters is that he had to spend at least 182 days in
India the year before.
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His stay, which must last at least 365 days, may be routine, sporadic, or just once
every four years prior to the current year. But throughout the course of the four years,
he was required to spend 365 days in India. The four years prior to the previous year
nl
are the twelve calendar months that immediately preceded the start of the pertinent
previous year.
Regarding the second requirement of Part I, which is his stay of 365 days or
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more, the stay need not be routine; it may only occur once in the four years prior to the
previous year. The important factor is the overall length of stay, which must have been
365 days or longer in the four years prior to the previous year.
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Determining if a person is a resident or non-resident
According to the Income-tax Law, if a person meets either of the following criteria
(i.e., may meet either one requirement or both requirements), they will be considered to
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be residents of India for the duration of the year:
(1) He spent at least 182 days in India in the preceding calendar year; or
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(2) He spends at least 365 days in India during the course of the four years
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immediately preceding the relevant previous year, as well as at least 60 days
within the previous year.
An individual shall be considered a non-resident of India if they fail to meet any of
the aforementioned requirements.
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Identifying if a person is a resident and an ordinary resident, or a resident but not

an ordinary resident
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If the following criteria are met, a resident person will be recognised as a resident
and ordinarily resident in India for the entire year:
(1) He has lived in India for at least two of the ten years that have come right
before the applicable year.
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(2) He spent at least 730 days in India over the seven years that were
immediately prior to the year in question.
A resident person who does not meet any of the aforementioned requirements or
m
does so with only one of them will be considered a resident but not one who resides
there regularly.
The person’s residence status will be determined, in brief, by the tests that follow:
)A
● The person will become a resident and normally resident of India if he or she
satisfies either one of the conditions listed at Steps 1 or both of the conditions
listed at Step 2, or both.
● If the person meets both of the qualifications listed at step 1 and any one of
(c
the conditions listed at step 2, he will become a resident of India but not one
who lives there regularly.

● The person will cease to be a resident if the first step’s requirements are not
Notes
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met.
Importance of residential status
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Whether a person is taxable in India for any given financial year depends on
his residency status there. The phrase “residential status” was created by the Indian
income tax regulations and should not be confused with a person’s Indian citizenship.
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A person who is an Indian citizen may find themselves a non-resident for a given year.
Similar to this, a foreign national could find themselves considered an Indian resident
for the duration of a certain tax year. Additionally, it should be noted that different sorts
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of people—individuals, firms, companies, etc.—have different ways of determining
their residential status. In this post, we’ve spoken about how to figure out a taxpayer’s
residence status for any given fiscal year.
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Taxability
A resident will be taxed in India on all of his income, including income earned both
inside and outside the country.
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NR and RNOR: They only have to pay taxes on the income they receive from India.
On their international income, they are not required to pay any taxes in India. Also keep
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in mind that one may turn to the Double Taxation Avoidance Agreement (DTAA) that
India would have agreed into with the other country to prevent the possibility of paying
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taxes twice in a case of double taxation of income where the same income is taxed in
India and abroad..
Residential Status of HUF

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The Income-tax Act of 1961’s Section 6(2) expressly allows for the possibility of
a HUF being a non-resident in certain circumstances. Actually, HUF can also be Non-
Resident.
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Unless the control and administration of HUF’s affairs were entirely located outside
of India during the preceding year, HUF will be regarded as a resident of India. It will
be regarded as a non-resident HUF in this situation. According to Section 6(6)(b) of the
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Income-tax Act of 1961, a HUF whose manager has not resided in India for nine out of
the ten years prior to the previous year or such HUF is to be regarded as not ordinarily
resident within the terms of the Income-tax Act, 1961, if it has spent a total of 729 days
or less in India over the seven years prior to that year. As a result, a HUF need not be a
resident of India.
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1. Resident
A HUF that controls and manages its affairs entirely or in part in India is deemed
)A
to be a resident in every situation. It denotes that a HUF is a Resident, unless its

control and management are fully located outside of India. Now let’s define “control
and administration of affairs” first. The head and brain, which have the directing
and controlling power, are referred to as the control and management of matters.
It implies that India is the location of the decision-making authority for important
(c
matters. Control and management refer to actual control and management, not only
the ability to do so.

a. Ordinary Resident
Notes
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A HUF becomes an Indian resident once the aforementioned qualification
is met, however in order for the Karta to be considered an ordinary Indian
in
resident, the Karta must meet BOTH of the following two requirements: I Out
of the 10 years immediately before the year in question, he had resided in
India for at least two of those years. AND (ii) He has spent at least 730 days in
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India in each of the seven years that came right before the year in question.
b. Not Ordinarily Resident
A HUF will be regarded as Not Ordinarily Resident of India if one of the
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following conditions is met: I Karta has not resided in India for at least two of
the ten years prior to the relevant accounting year; OR (ii) Karta has not spent
at least 730 days in India during the seven years prior to the previous year in
question.
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In the case of Karta of such HUF, these two requirements must be met. If
another man has succeeded the Karta, the duration of each successive
Karta’s tenure in India will be added when determining the length of the
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Karta’s presence in India. Therefore, we might get the conclusion that the
HUF members’ residences, aside from Karta, are unimportant. The status of
a HUF’s Karta is strongly related to whether it is typically a resident or not.
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Therefore, the HUF will also be regarded as not normally resident if Karta is
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taken as a person.
2. Non Resident
For all purposes of this Act, a HUF would be considered to have been a “Non
Resident” during the applicable prior year if its control and management of its affairs
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were located entirely outside of India.

Whether the income received by members from HUF is taxable?
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Any money received by an individual from a Hindu Undivided Family of which he

is a member is exempt from taxation under Section 10(2) of the Income-tax Act, 1961.
However, the amount received pursuant to a statutory provision, etc. rather than as a
member of a joint family would not be excluded under this section. In addition, a joint
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family member’s ability to assert their entitlement under Section 10(2) is unaffected by
the fact that they live separately from the other family members.
Residential Status of a Company

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(c
Fig: Residential Status of a company

A corporation with Indian roots will always be based there. A foreign firm is only
Notes
e
considered to be a resident of India if all of its operations during the previous year were
controlled and managed there.
in
A foreign firm, on the other hand, is considered a non-resident if, during the
preceding year, control and management of its affairs were either entirely or partially
located outside of India.
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A firm can never have a regular or irregular residence in India. If a foreign firm
exercises even a small amount of control or management from outside India, it will be
regarded as a non-resident.
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The phrase “control and management” refers to the “head and the brain” that
manages important business management matters like policy, finances, and profit
distribution.
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Typically, a company’s control and administration of its affairs are located where
its board of directors meetings are held. It can be challenging to prove that control and
management of a subsidiary business’s activities are vested in the location where the
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parent company is based when that subsidiary firm is run by its local board of directors.
Determination of the residential status of a company
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A business that was founded in India is always regarded as a resident of India.
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A company that isn’t Indian (i.e., a foreign corporation) is considered to have a
place of effective management in India for the duration of the year.
The term “place of effective management” (POEM) refers to the actual location of
where important managerial and business decisions that are crucial to the operation of
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an entity as a whole are made.
The POEM concept will be in use starting with the 2017–18 assessment year.
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Consequently, the CBDT recently published the definitive standards for determining
POEM of a foreign enterprise.
Some distinctive elements can be seen in the final POEM recommendations. The
Active Business Outside of India test is one of the distinctive features (ABOI). According
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to the regulations, a corporation is considered to be conducting “active business outside

India” if its passive income does not exceed 50% of its overall revenue. There are also
some extra cumulative requirements related to the location of payroll costs, personnel,
and total assets that must be met.
m
If the majority of the board of directors meetings for a company conducting active
business outside of India are held outside of India, that location is assumed to be where
effective management for that firm resides.
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The determination of POEM would take place in two stages for enterprises other
than those that are actively conducting business outside of India, and would involve:
● Finding the individual or people who actually make the important managerial
and business decisions for the overall operation of the organisation would be
(c
the first step.

● Finding the location where these decisions are actually being made would be
Notes
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the second stage.
However, it has been stated that a corporation with a turnover or gross receipts of
in
INR 50 crores or less in a financial year shall not be subject to the POEM standards.
The following table illustrates the general range of income and its ability to be
subject to income tax for both residents and non-residents:
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Income Resident Resident and Non-
and Ordinary Not ordinary Resident
Resident Resident
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1. Income received or deemed to be Taxable Taxable Taxable
received in India whether earned in India
or elsewhere
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2. Income which accrues or arises or Taxable Taxable Taxable
deemed to accrue or arise in India during
the previous year, whether received in
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India or elsewhere.
3. Income which accrues or arises outside Taxable Taxable Not Taxable
India and received outside India from a
business controlled from India r
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4. Income which accrues or arises outside Taxable Not Taxable Not Taxable
India and received outside India in the
previous year from any other source
5. Income which accrues or arises outside Not Taxable Not Taxable Not Taxable
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India and received outside India during the

years preceding the previous year and
remitted to India during the previous year.
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1.2 Real Assets

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)A
Figure: Real assets
Real assets are tangible possessions with inherent value derived from their
composition and characteristics. Precious metals, commodities, real estate, land,
machinery, and natural resources are examples of real assets. Because they have a
(c
relatively low correlation with financial assets like equities and bonds, they are ideal for
inclusion in the majority of diversified portfolios.

Assets can be classified as tangible, monetary, or financial. To a business or

Notes
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person, all assets can be said to have economic value. An item is regarded as an asset
if its worth can be converted into cash. Valued property that is not physical in nature is
known as an intangible asset. Patents, copyrights, brand awareness, trademarks, and
in
intellectual property are examples of such assets. A strong brand identity is likely the
most significant intangible asset for a company.
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Financial assets are a type of liquid property with value derived from a legal claim
to ownership or a contractual right. Financial assets include things like stocks, bonds,
mutual funds, bank deposits, investment accounts, and plain old cash. They can be
tangible, such as a dollar bill or a bond certificate, or they can take an intangible form,
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such as a money market account or mutual fund.
A real asset, on the other hand, has a tangible shape, and its value is derived from
its inherent characteristics. It can be something man-made, like machines or buildings,
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or something natural, like gold or oil.
Example of Real Assets
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Real assets are those that offer hedging against inflation, currency value
fluctuations, and other macroeconomic issues from the perspective of an investor. A
firm might possess real estate, for instance, along with a fleet of vehicles and office
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space. Even while it has market worth, the brand name is merely a marketing tool and
not a true asset.
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To better comprehend the idea of real assets, let’s use another example.
We examine a personal balance sheet for two people, Mr. Kate and Ms. Jane, in
the instances that follow. The components, value, and weight (allocation) of a person’s
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personal assets and obligations are frequently determined by their stage of life (early or
late) and risk tolerance.
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Personal Balance Sheet Assets
Personal Assets for Two Individuals

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Ms. Jane Ms. Kate

Item Value % Value %
Real Assets
Art, Furnishings and Clothing Rs. 10,000 10% Rs. 10,00,000 10%
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Car(s) Rs. 10,000 10% Rs. 1,00,000 1%

Career Rs. 60,000 60% Rs. 30,00,000 30%
House 0 0% Rs. 10,00,000 10%
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Financial Assets
Bank Accounts Rs. 10,000 10% Rs. 9,00,000 9%
Mutual Funds Rs. 5,000 5% Rs. 20,00,000 20%
Stocks Rs. 5,000 5% Rs. 20,00,000 20%
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Total Assets Rs. 1,00,000 10% 1,00,000,000 100%

Keep in mind that real assets are typically more long-term and income-producing.
Notes
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Also take note of how the liquidity of those assets as well as the ratio of real to financial
assets frequently fluctuates over time.
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Personal Balance Sheet Liabilities
The Personal Balance Sheet’s Liability section must also be taken into account.
Loans are frequently issued for real assets rather than financial ones. The margin
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balance on a brokerage account serves as an illustration of a liability connected to a
financial asset.
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Personal Liabilities for Two Individuals
Ms. Jane Ms. Kate

Item Value % Value %
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Liabilities
Credit Card Rs. 10,000 20% 0 0%
Student Loans Rs. 40,000 80% 0 0%
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Mortgage 0 0% Rs. 5,00,000 100%
Total Liabilities Rs. 50,000 50% Rs. 5,00,000 100%
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Again, keep in mind that liabilities higher on the chart imply obligations with a
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shorter maturity. This is significant to take into account for both personal and company
balance sheets.
1.2.1 Investment in Real Assets

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There are three main categories of real assets, which are each defined in the table
below.
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Real Estate Land and properties for residential and commercial purposes, e.g.
family homes, housing apartments, commercial buildings, offices,
malls, storage units, and warehouses.
Infrastructure Systems and networks that facilitate the transportation, storage,
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and distribution of goods and services, e.g. roads, airports,

railroads, sewer systems, power lines, subways, pipelines, and
towers.
Commodities Resources used in commerce and often a necessary input for
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the production of another type of good, e.g. oil, natural gas, corn,
soybeans, precious metals like gold and silver.
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The Benefits Of Investing In Real Assets

Owning land, property, and other tangible possessions has a long and illustrious
history. Society started to favour permanent structures and more dependable food
sources, like agriculture, around 12,000 years ago. Physical possession of precious
(c
metals extends back 5,000 years to Ancient Egypt, when copper was forged into
swords, tools, or statues, and gold was first used for jewellery, decorations, or charms.

Modern methods of real estate investing have existed for a lot less time. In 1960,
Notes
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Congress issued laws permitting the creation of REITs, and in 2012, it passed the JOBS
Act, which cleared the door for the mainstreaming of equity crowdfunding platforms like
FarmTogether. There are currently an estimated $235 trillion in investable real assets
in
worldwide.
Real assets, however, are much more complex and provide more possibilities than
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you might think. Let’s define the market, contrast real assets with conventional financial
assets, and examine the advantages of this asset class for portfolios.
Three main justifications for purchasing real estate
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Real estate may be an option for your investment portfolio for a number of reasons.
1. Traditionally low correlation to other assets: Stocks and conventional bonds,
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which are the other types of assets you are most likely to already own, have
historically had a poor connection to real assets.
2. Diversify your equity exposure: Including real assets in your portfolio gives
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you access to a frequently underrepresented asset class while also allowing
you to diversify your equity exposure.
3. The potential to enhance investment results: Strategic exposure to real assets
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may enhance risk-adjusted returns due to low historical correlations and
greater diversity.
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.What are the Risks Associated with an Investment in Real Assets?
Economic Turbulence
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Real assets frequently experience both economic expansion and contraction first.
The revenue generated by and the value of real asset investments could be impacted
by a decline in the global economy or the economy of a sizable developed nation.
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However, some real assets, like farms, are sometimes regarded as a “disaster hedge”
by many investors and rise in value as economies falter. Economic downturn exposure
is fairly high for the asset class. But before purchasing a particular real asset, investors
should weigh its risks both on its own and in the context of a diversified portfolio.
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Political Dangers
Commodities and the assets that generate or are necessary to produce them,
particularly on a global scale, are frequently subject to laws and may even be
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nationalised in some nations. If an investor possesses crucial infrastructure needed

for the transmission or storage of energy or water, such assets may be subject to
nationalisation, especially in nations other than the US, and investors may lose all of
their investment in this situation.
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Investors in real estate may also be subject to political risks from environmentalist
concerns, notably in the oil and wood sectors. These pressures could result in
legislative demands that raise the cost of producing the commodities the investment
aims to produce. As happened with coal mines over the past ten years, this might make
(c
operating the assets unprofitable. Each single subcategory’s risks should be thoroughly
considered, as should the risks associated with each individual item.

Risks Associated to the Weather

Notes
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Weather risks should be taken into account and maybe insured when investing
in real assets such as agriculture, timberland, mining activities, and in certain
in
circumstances real estate. A crop, a piece of land, or a mine could be completely
destroyed by a bad storm, a bad drought, or other natural disasters like earthquakes
or volcanic occurrences. Given that real asset investments are sometimes made for
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very long periods of time, these risks must be taken into consideration. Investments are
often very long-term.
Real Asset vs. Financial Asset
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● Stocks, bonds, and cash are examples of financial assets, whereas real assets are
things like real estate, infrastructure, and commodities. The economy’s foundation
and lifeblood are its assets, which allow us to generate riches.
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● Financial assets are highly liquid investments that can be quickly converted to
cash or are available in cash. They consist of financial instruments like equities
and bonds. The main characteristic of financial assets is that their economic value
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may be quickly and easily realized. However, on its own, it is less valuable. Real
assets, on the other hand, are actual things that have a value that a corporation
owns. They can be things like automobiles, land, or structures. Its distinctive quality
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is that they are valuable without the need for transactions; they are valuable in and
of themselves.
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● Real and financial assets are comparable in that their valuation is based on their
ability to generate cash flow.
● Real assets differ from financial assets in that they are more difficult to trade and
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lack an effective and competitive exchange, making them less liquid. They are
more dependent on their location, but financial assets are more transportable and
location-independent.
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1.2.2 Types of Real Assets

The infrastructure and resources needed to support regular economic activity
are provided by real assets. While a variety of investments could be regarded as real
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assets, the following are included in our definition:
● Property, such as real estate investment trusts (REITs). Land and commercial
assets, such as condos, offices, warehouses, and shopping centres.
m
● Infrastructure. assets and networks, such as toll roads, pipelines, airports, and
cellphone towers, that are used to transport, store, and distribute products, energy,
people, and information
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● Commodities. basic commodities including corn, soybeans, natural gas, precious

metals, gold, and oil.
Real Assets Classification

● Natural Resources
(c
● Real Estate
● Infrastructure
Natural Resources
Notes
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Natural Resources can be grouped into:
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a. Energy resources, which are primarily focused on oil and gas and have
revenue from proved reserves, offer exposure to commodity prices and have a
limited capacity for value addition.
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b. Timberland: Because this asset class involves the production and harvesting
of timber, returns are primarily driven by commodities products (i.e., biological
growth).
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c. Agriculture: This sector offers exposure to commodity and land prices and
includes investments in farmland. Rental income and commodity production
are the main sources of profit.
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d. Mining and Minerals: Income-generating reserve-based prospects in mining
and minerals and more private equity-focused strategies.
Real Estate
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Real Estate investments, which are characterised by heavy building costs and
long duration of life and are backed by hard assets, can be broadly divided into three
investment styles:
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a. Core Investments: These are typically income-oriented and consist of
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completely leased existing properties with little debt.
b. Value-added investments, which have higher gearing than core real estate
and are centred on both property appreciation and income, could include
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remodelling projects and might need lease-up requirements.

c. Opportunistic real estate has the highest gearing and relies mostly on property
appreciation as a source of income; it may involve redevelopment projects
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and capital market transactions.
Infrastructure Investment
Higher entry barriers, economies of scale, inelastic demand, long life cycles, and
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inflation sensitivity are typical characteristics of infrastructure investments, which also

include the following:
a. Investment in core infrastructure governs the assets that produce income

streams of the availability type.
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b. Mature businesses with greater economic exposure define Core Plus

investments.
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c. Investments that take advantage of opportunities have the greatest economic

risk because they frequently involve developing markets.
1.2.3 Merits and Demerits of Investment in Real Assets

Every Investment comes with its merits and demerits. Same is applicable to real
(c
assets.

Merits of Real Assets

Notes
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● Comparing real assets versus financial assets, stability is an advantage. Financial
decisions are more influenced by macroeconomic conditions, currency valuation,
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and inflation than by actual events.
● It is strongly inversely correlated with the financial markets.
● They are independent of the turbulence of the financial markets. It gives profitability,
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is unrelated to or dependent on financial markets, and is a profitable investment
solution for risk diversification.
● They offer good protection from inflation. A high level of inflation raises asset prices.
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● The real assets market, in contrast to the capital market, is rife with inefficiencies.
Due to a knowledge gap, there is a high likelihood of profit.
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● It is possible to leverage it such that debt is used to purchase actual assets.
● Investors receive reliable and consistent income streams from cash flow from real
assets including land, plants, and real estate developments.
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Demerits of real assets
Let’s talk about actual assets’ drawbacks below.
● r
It has expensive transaction fees. The transaction expenses are reduced
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when we purchase stocks or shares. However, the transaction expenses
for purchasing it are rather substantial. The value of investments may be
impacted by transaction expenses, and it might not be simple to turn a profit. It
is not very liquid.
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● These assets are somewhat less liquid than financial assets since it is difficult
to effectively swap capital assets like land and buildings without suffering a
considerable loss in value.
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● When real property is sold for more money, capital gains tax is due. A property
sold within three years of acquisition will be subject to short-term capital gains
tax, but if sold after three years, long-term capital gains tax will apply.
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● The capital asset that must be purchased involves a significant capital outlay.
It becomes difficult to acquire and sell due to the high capital expenditures. It
explains why most people use borrowed money to purchase tangible things.
● They also cost more to maintain than other kinds of assets. The investment
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is difficult to redeem because it is illiquid and locks up a significant amount of

capital.
1.2.4 Return on Real Assets Investment Over the Past Few Years
)A
A factor-based approach, which combines quantitative and qualitative risk/return

drivers, could be used to analyse the growth or return-generating element of a portfolio.
Real assets can be treated with the same method. Numerous risk factors must be taken
into account, and their importance varies across different sub-asset classes.
(c
● GDP growth sensitivity is the susceptibility to overall economic expansion.

● Inflation Sensitivity is the level of exposure to the market’s average price level.
● Dependence on cash yield is a part of total return that results from cash yield.
Notes
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● Particular sensitivity to a change in base rates is known as interest-rate
sensitivity.
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● Exposure to project-specific development risk is referred to as “project
development risk exposure.”
● Finance sensitivity refers to a reliance on ongoing financial supply.
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● Exposure to developing markets, namely emerging economies.
● The ability to sell exposures in a timely and orderly manner is measured by
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the liquidity rating.
One thing on everyone’s mind when they invest is getting a solid return. The kind of
investment, the timing, and the risks involved can all affect returns. Because of the wide
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variation in returns, it is frequently difficult for investors to plan for their financial future.
Investors should have reasonable expectations about the kind of return they will
experience. This manual will explain what a decent return on investment looks like and
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which assets may be able to assist a person in achieving their financial objectives.
Some investments are better than others for investors who have a high risk
tolerance (who are ready to face significant risks in the hopes of earning great returns).
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For instance, investing in a CD won’t yield a big return on your money. Therefore, riskier
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investments are the way to go for individuals seeking larger returns.
Since 1991, the National Council of Real Estate Investment Fiduciaries (NCREIF)
has documented and kept track of farmland performance on a quarterly basis. This
performance includes appreciation and income returns prior to management fee
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deductions. In the past, rental income has contributed steadily and favourably to the
returns on farmland investments. Annual total index and income returns have shown
positive values consistently for the previous 30 years. The appreciation component,
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on the other hand, has fluctuated more. Some years, annual appreciation was close
to zero or negative due to bad market conditions, while other years, it beat yields and
generated double-digit returns.
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)A
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Source: NCREIF. Past performance is no guarantee of future results.

1.3 Financial Assets

Notes
e
in
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Fig: Financial Assets
A financial asset is a liquid asset with value derived from a legal claim to ownership
or a contractual right. Financial assets include things like money, investments
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like stocks and bonds, mutual funds, and bank deposits. Financial assets do not
always have an intrinsic physical value or even a physical form, unlike real estate,
commodities, or other tangible physical assets. Instead, their value is determined by
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market forces such as supply and demand as well as the level of risk they involve.
An investment asset whose value derives from a contractual claim of what it

represents is known as a financial asset. These are liquid assets since the ownership
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or economic resources can be changed into physical assets like money. These are also
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known as securities or financial instruments. They are frequently employed to fund the
purchase of tangible property and other assets.
1.3.1 Financial Assets - Overview

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Most assets fall into one of three categories: tangible, financial, or financial. Real
assets are tangible possessions that derive their worth from other things, such as
commodities like soybeans, wheat, oil, and iron, precious metals, land, and real estate.
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The valuable item that is not physical in nature is known as an intangible asset.
They consist of intellectual property, trademarks, and patents.
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Between the other two assets are financial assets. With merely the stated value on
a piece of paper, like a dollar bill, or a listing on a computer screen, financial assets may
appear intangible—non-physical. The ownership of an entity, such as a publicly traded
business, or a claim to contractual rights to payments, such as interest income from a
bond, is what that paper or listing actually represents. The value of financial assets is
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based on a legal claim to an underlying asset.
This supporting asset could be tangible or intangible. For instance, commodities

are the actual, underlying assets that support certain exchange-traded funds and
)A
commodity futures contracts (ETFs). The real asset linked to shares of real estate
investment trusts is also real estate (REITs). REITs are publicly traded companies with
a portfolio of properties that are financial assets.
Measurement of Financial Assets

(c
How to disclose the values on the balance sheet is the most crucial accounting
issue for financial assets. In terms of all financial assets, no one measurement method

is appropriate for all assets. The current market price is an appropriate metric for
Notes
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investments that are not very large. The market price, however, is less important for a
firm that holds the majority of the shares in another company because the investor has
no intention of selling its shares.
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The management’s intention for the investment is, in reality, a crucial element in
the presentation of financial accounts. For instance, if a corporation bought shares
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of another company with the goal to hold them for a while before selling them (i.e.,
trading) as opposed to owning a sizeable portion (75%) of the company, the value of
the investment would be displayed differently.
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However, just because certain financial assets are flexible and distinctive doesn’t
mean businesses can use any strategy they want. Accounting standards outline broad
principles for accounting for various financial assets. Below are a few rules that the
IFRS has established.
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Accounting Classification of Financial Assets under IFRS
Type of Business Model Accounting Accounting Treatment
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Financial Classification
Instrument
Equity Control Subsidiary Consolidation
Equity
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Joint control of assets Joint operations Proportionate
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and liabilities consolidation
Equity Joint control of net assets Joint venture Equity method
Equity Significant influence Associate Equity method
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Equity/ Debt Realise changes in value Fair value through Fair value, changes
profit or loss (FVPL) recorded through net
income
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Debt Collect contractual cash Amortised cost Amortised cost method

flows
The first four rows of equity investments are references to strategic investments.
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The first row refers to investments where a business has control over another company
(i.e., typically owns more than 50% of the voting stake). The correct accounting
procedure is to combine the investor’s and the subsidiary’s financial statements into a
single set of financials.
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Rows 2 and 3 also use the term “joint control” to refer to any agreement between
two or more businesses. The proper handling for joint operations is proportionate
consolidation, where the financial statements are generated based on the ownership
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percentage. On the other hand, large influence investments and joint venture
classifications adhere to the equity method.
Common Types of Financial Assets

According to the commonly cited definition from the International Financial
(c
Reporting Standards (IFRS), financial assets include:

The definition of financial assets as given by the International Financial Reporting

Notes
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Standards (IFRS) is as follows:
● Cash
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● A company’s equity instruments, such as a share certificate.
● A receivable, or contractual right to collect money from another party, is a
financial asset.
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● The legal right to trade financial obligations or assets with another party in a
beneficial exchange.
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● A deal that will be settled using the company’s own stock instruments.
The aforementioned term also includes financial derivatives, bonds, assets
in money market or other accounts, and equity interests in addition to stocks and
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receivables. Since the value and price of many of these financial assets vary, especially
in the case of stocks, many of them do not have a fixed monetary worth until they are
converted into cash.
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The more frequent forms of financial assets that investors encounter, aside from
cash, are:
● Stocks are monetary assets that have no predetermined end or expiration

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date. A shareholder who purchases stock becomes a part-owner of the
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business and shares in its gains and losses. Stocks can be kept for as long as
desired or sold to other investors.
● Companies and governments can finance short-term projects in part by
issuing bonds. The bonds specify the amount owed, the interest rate being
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paid, and the bond’s maturity date. The bondholder is the lender.
● An investor can deposit money at a bank for a certain length of time with a
certificate of deposit (CD), which offers a guaranteed interest rate. Depending
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on the contract, a CD normally pays monthly interest and can be held for three
months to five years.
Financial Assets Classification

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For all of these assets, there is no solitary measurement classification technique

that works. On a company’s balance sheet, they could be categorised as Current
Assets or Non-Current Assets.
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Current Assets
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(c
Image taken from https://www.educba.com/current-asset/

All of a company’s assets that are anticipated to be easily sold, consumed,

Notes
e
utilized, or expended through routine business operations within a year are referred
to as current assets. The balance sheet of a corporation, one of the annual financial
statements that must be prepared, lists current assets.
in
It includes investment assets that are liquid and suited for short-term holdings.
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Important Current Asset Elements
Current assets obviously include cash, cash equivalents, and liquid investments
in marketable securities like interest-bearing short-term Treasury bills or bonds. The
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following, however, are also incorporated into contemporary assets:
Accounts Receivable
Accounts receivable—As long as they can be anticipated to be paid within
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a year, current liabilities, which are the money owed to a corporation for goods or
services delivered or utilised but not yet paid for by consumers, are also called
current assets. A part of an organisation’s accounts receivables could not be eligible
si
for inclusion in current assets if the company generates sales by giving its clients
extended terms of credit.
Additionally, some accounts might never be fully paid off. An allowance for dubious
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accounts, which is deducted from accounts receivable, reflects this consideration. Bad
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debt expenses are recorded for accounts that are never paid, and such entries are not
taken into consideration when calculating current assets.
Inventory
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Inventory—which represents components, finished goods, and raw materials—

is included as current assets; nonetheless, the consideration for this item may require
some careful study. Depending on the product and the industrial sector, different
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accounting techniques can be employed to artificially inflate inventory, and occasionally

it may not be as liquid as other current assets.
For instance, there is little to no assurance that a dozen pieces of expensive, heavy
earthmoving equipment will be sold in the upcoming year, but there is a considerably
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higher likelihood that 1,000 umbrellas will be sold successfully during the impending
rainy season. Inventory restricts operating capital and may not be as liquid as accounts
receivable. Inventory can back up if demand changes abruptly, which happens more
frequently in some industries than others.
m
Prepaid Expenses
Prepaid expenses—which represent payments paid in advance by a business
)A
for future goods and services are regarded as current assets. They are the payments
previously made, even if they cannot be changed into cash. These elements allow the
capital to be used for various purposes. Payments to contractors or insurance firms are
examples of prepaid expenses
(c
Current assets are often included on a balance sheet in order of liquidity, with the
assets with the highest likelihood of being converted into cash being listed first. Cash,

including cash from checking accounts and petty cash, short-term investments such
Notes
e
liquid marketable securities, accounts receivable, inventories, supplies, and prepaid
expenses are the usual sequence in which current assets are listed.
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The Formula for Current Assets
Thus, the current assets formulation is a simple summation of all the assets that
can be converted to cash within one year. For instance, looking at a firm’s balance
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sheet, we can add up:
Current Assets = C + CE + I + AR + MS + PE + OLA
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where:
C = Cash
CE = Cash Equivalents
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I = Inventory
AR = Accounts Receivable
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MS = Marketable Securities
PE = Prepaid Expenses
OLA = Other Liquid Assets

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Non-Current Assets
Noncurrent Assets are long-term investments made by a corporation that won’t be

fully realised within the accounting year. Since they are frequently quite illiquid, these
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assets cannot be quickly changed into cash. Investments, intellectual property, real
land, and equipment are a few examples of noncurrent assets. The balance sheet of a
firm includes noncurrent assets.
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Non-current assets such as debt instruments or shares of other companies held in

the portfolio for longer than a year.
Natural resources, intangible assets, and tangible assets are the three main
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categories of noncurrent assets. Whether they are natural resources, intangible

assets, or both, noncurrent assets will provide the organisation with benefits for longer
than a year. They are distinct from current assets, such as inventories and accounts
receivable, which can be simply sold, used, or consumed through normal business
operations within a year.
m
Tangible Assets: A company’s tangible assets often include its real estate and other
types of tangible property. They are the primary kind of assets used by businesses to
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create their goods and services.
Assets without a physical existence are known as intangible assets. Intangible

assets can come into existence, like a patent, but they can also result through the sale
or acquisition of business units.
(c
Resources derived from the earth are known as natural resources. Natural
resources include things like wood and fossil fuels.

Difference between Current Assets and Non- Current Assets

Notes
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With the aid of the following table, the key distinctions between current assets and
noncurrent assets can be grasped.
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Current Assets Non- Current Assets
Equivalent to cash or will become cash Not going to be turned into cash in the next year
within a year
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Applied to cover existing or immediate Applied to long-term or upcoming demands
needs
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Things such as cash and cash Long-term investments, property, plant, and
equivalents, short-term investments, equipment, goodwill, depreciation, amortisation,
accounts receivable, and inventory and long-term deferred tax assets are a few
examples.
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Valued at current market prices Valued at cost less depreciation
Tax ramifications: The gain from Tax repercussions: Capital gains from the sale
trading operations is realised upon the of assets are subject to capital gains tax.
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sale of existing assets.
Although inventories may be vulnerable Common PP&E revaluation: For instance, when
to revaluation in some circumstances, a tangible asset’s market value drops below its
current assets are often not.r book value, a company must revalue that asset.
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Advantages of Financial Assets
● Some of these assets, which are quite liquid, can be quickly used to settle debts or
deal with sudden financial needs. This category includes cash and cash equivalents.
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On the other hand, because stocks must first be traded in exchange before being
settled, one might have to wait for the stock to earn money.
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● When investors park more money in liquid assets, they are more secure.
● It plays a significant role in the economy by financing physical assets. It is made
feasible by moving money from people who have an excess of it to those who need
it for such financing.
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● Financial assets disperse risk in accordance with the preferences and risk tolerance
of the parties engaged in the investment of the intangible asset. It represents
legitimate claims to upcoming cash that is typically anticipated at a specified maturity
and rate. The business that will pay the future cash (the issuer) and the investors
m
are the counterparties to the arrangement.
Disadvantages of Financial Assets

)A
● Financial assets (liquid assets) with no withdrawal limitations, such as deposits in

savings accounts and checking accounts with banks, have a significantly lower
return on investment.
● Additionally, certain assets, such as certificates of deposit and money market
(c
accounts, may be callable or prohibit withdrawal for months or years according to

the arrangement.

● The contract includes a maturity date; attempting to cash out assets before that
Notes
e
period will result in penalties and lesser returns.
Important Points to be Considered
in
● The market’s supply and demand for similar assets define this asset’s value.
● These assets are evaluated according to the money needed to convert them, which
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is again determined based on specific criteria. People’s financial holdings can alter
dramatically in value, especially if they have made significant stock investments.
● There is no one measurement technique that can be used to measure financial
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assets. If we measure stocks at a period when the amount invested is minimal, the
market price can be used to gauge the stock’s value at that point. The market price
of a share, however, is irrelevant if a firm controls a significant portion of the stock
of another company because the shareholder who holds the majority of the shares
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might not be able to sell them.
● Every financial asset carries a unique set of risks and rewards for the buyer. For
instance, a vehicle firm typically isn’t aware of how many automobiles are sold,
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therefore the stock price may rise or fall. A bond’s issuers could fail to repay the
bond’s par value, causing the bond to default. Risks exist with cash and savings
accounts as well since inflation may reduce purchasing power.
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1.3.2 Investments in Securities - Through IPO and Secondary
Market
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Trading financial assets like stocks or fixed income instruments that are purchased
with the goal of holding them for investment are referred to as investment securities. In
)A
contrast to investment securities, securities are typically bought by a broker-dealer or

other middleman for immediate resale.
Marketable securities are often one of the two main sources of income for banks,
along with loans, and are frequently bought by them to maintain in their portfolios. Many
(c
banks’ balance sheets include investment securities, which are valued at amortised
book value (defined as the original cost less amortisation until the present date).

The primary distinction between loans and investment securities is that loans
Notes
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are frequently obtained through direct negotiations between the borrower and lender,
whereas the purchase of investment securities is frequently accomplished through a
third-party broker or dealer. Capital constraints apply to investment securities at banks.
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For instance, Type II securities or securities issued by a state government are limited to
a maximum of 10% of the total capital and surplus of the bank.
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Banks benefit from the liquidity of investment securities as well as the revenues
from realised capital gains when these securities are sold. These investment
instruments, if they are investment-grade, can frequently assist banks in fulfilling their
pledge obligations for government deposits. Investment securities can be treated as
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collateral in this case.
Investment Securities categories
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A) Securities for Traditional Investments
#1 – Gold
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Fig: Gold
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It is the earliest type of investment from a time when investors had no access
to any developed investment markets. When its demand-supply balance became
unbalanced, it was being used as an investment after being used as a replacement
to money in the past. The International Monetary Fund and central banks both have a
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significant impact on gold prices.
#2 – Real Estate
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)A
Fig: Real Estate

(c
Real estate investing has traditionally included buying, building, running,

maintaining, renting, and selling real estate. Real estate investments are made in order
to profit from price increases as well as from rental income, which acts as a consistent
source of cash flow for managing daily operational costs (benefit for holding the
Notes
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property for long term).
#3 – Commodities
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Due to their seasonal nature, commodities have been exploited as investments to
profit from the mismatch between supply and demand. The main expense is storage,
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and the profit comes from convenience yield.
B) Modern Investment Securities
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#1 – Fixed Income Bearing Securities
Fixed income bearing securities are those that will produce a fixed cash flow either
through interest (especially on debentures/bonds) or through a fixed proportion of
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dividend (in the case of preference shares). Any market-related factors would have no
impact on the return on these securities. Such securities involve a lower level of risk.
#2 – Debentures/Bonds
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These choices for long-term investments provide fixed income dependent on the
rate of interest. The risk associated with these securities depends on the issuer type.
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The primary risk is the issuer of these instruments’ credit risk. There are numerous
investing options accessible in this category:
● Government Securities
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● Debentures issued by private sector businesses

● Public sector unit (PSU) bonds
#3 – Preferred Stock
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)A
(c
Fig: Preferred Stock

Preferred Stock is stock whose holders have preference rights over common stock
Notes
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or equity in the following two situations:
● Dividend payment, meaning that these stockholders receive a fixed rate of
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dividends and are paid in advance of the ordinary stockholders.
● These shareholders have priority rights to payment of capital in the case of
liquidation before anything is distributed to the holders of common stock, but
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after debenture and bondholders.
#4 – Variable Income Bearing Securities
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Variable income-bearing securities are securities that bear an income other than
fixed income. Because of the shifting market circumstances, the return on these
securities is not fixed and fluctuates.
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#5 – Common Stock or Equity
The company’s owners are its common stockholders. This implies that such
stockholders hold the company’s income and assets in the highest regard. Depending
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on factors like risk, rate of return, liquidity, growth, marketability, etc., income from such
a stock can vary. These investments are both riskier and liquid assets. Both primary and
secondary markets for these investment assets can be conveniently used for trading.
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#6 – Mutual Funds
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Fig: Mutual Funds

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Simply put, a mutual fund is a portfolio of different securities. It is a fund financed

by the owners of its units that was established to invest in either equity or debt
securities, or a combination of both. The ultimate proprietors of the mutual fund are the
)A
investors who possess units. By investing in a portfolio as opposed to a single stock,

the goal is to diversify risk as the impact of that risk is lessened.
What is an IPO?
(c

Notes
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Fig: IPO
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When an unlisted company (a corporation not listed on the stock exchange) seeks
to raise money by selling securities or shares to the public for the first time, it publishes
an initial public offering (IPO). To put it another way, an IPO is when securities are sold
si
to the general public on the primary market. The first-time issuance of new securities
is dealt with on a primary market. The corporation becomes a publicly-traded company
after it is listed on the stock exchange, and its shares are then available for free market
exchange.
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Investment through an IPO
If they are intelligent and knowledgeable, investors who wager on an IPO can
make excellent profits. The prospectus of the companies launching an IPO will help the
investors make a decision. They must carefully read the IPO prospectus to get a clear
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understanding of the company’s business strategy and the rationale behind its stock
offering. To find the opportunities, one must, however, be vigilant and have a firm grasp
of assessing financial measures.
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When an unlisted company (a corporation not listed on the stock exchange) seeks
to raise money by selling securities or shares to the public for the first time, it publishes
an initial public offering (IPO). To put it another way, an IPO is when securities are sold
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to the general public on the primary market. The first-time issuance of new securities
is dealt with on a primary market. The corporation becomes a publicly-traded company
after it is listed on the stock exchange, and its shares are then available for free market
exchange.
m
Securities are created on the primary market, and investors trade those securities
on the secondary market. Companies sell fresh stocks and bonds to the public for the
first time on the primary market, such as through an IPO (IPO).
)A
Securities are created in the primary market. Firms first offer new stocks and bonds
to the public (float them) on this market. One illustration of a primary market is an initial
public offering, or IPO. Investors have the chance to purchase securities from the bank
that handled the first underwriting for a certain stock through these deals. When a
private corporation releases stock to the general public for the first time, it is known as
(c
an IPO.

This is the first chance that investors have to invest money in a company by
Notes
e
purchasing its stock. The money raised from the selling of stock on the primary market
makes up an organisation’s equity capital.
in
Purchasing securities on the secondary market
Investors can acquire and sell securities they already possess on the secondary
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market. Although stocks are also sold on the main market when they are originally
issued, it is what most people refer to as the “stock market.” Secondary markets include
the national exchanges, such the NASDAQ and the New York Stock Exchange (NYSE).
O
In the primary securities market, new securities that firms issue are bought. These
securities are bought and sold on the secondary market after they are issued, which
might entail more complicated securities (derivatives) and represents the vast majority
of trade volumes.
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Simply because they are one step removed from the transaction that originated the
securities in issue, secondary transactions are those that take place on the secondary
market.
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The secondary market offers the average investor an effective platform for trading
his assets. Secondary equity markets serve as a monitoring and control conduit for the
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management of the firm by enabling value-enhancing control activities, enabling the
implementation of incentive-based management contracts, and gathering data (via price
ve
discovery) that informs management choices.
Prices in the primary market are frequently predetermined, whereas prices on the
secondary market are governed by supply and demand. A stock’s price will normally
grow if the majority of investors rush to buy it because they feel it will improve in value.
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A company’s stock price drops as demand for that security decreases if it loses favour
with investors or doesn’t generate enough earnings.
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On behalf of an investor, a broker often purchases securities on the secondary

market. Prices on the secondary market fluctuate in response to demand, unlike the
primary market, where prices are fixed prior to an IPO. Additionally, investors will be
required to pay a commission to the broker for executing the transaction. The issuing
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firm is also no longer a party to any sales between investors now that the initial offering
has been completed, with the exception of company stock buybacks.
As supply and demand change day by day, so does the amount of securities
traded. The pricing is greatly impacted by this as well.
m
The auction market and the dealer market are the two distinct subcategories of
the secondary market. The open outcry system, where buyers and sellers gather in
one place and declare the prices at which they are willing to purchase and sell their
)A
securities, is unique to the auction market. One such instance is the NYSE. However,
in dealer markets, commerce occurs across electronic networks. The majority of small
investors transact on dealer markets.
Advantages of investing in IPOs over Secondary Markets

(c
There was a distinct advantage to investing in IPOs prior to the development of

demat. Most purchases on the secondary market have to be made in minimal basic

lot sizes. Because of this, the majority of small and retail investors were unable to
Notes
e
purchase equity. The IPO method, which would allow one to engage in shares even
with a tiny investment, was the only way out.
in
But as dematerialization spread, everything altered. The demat system eliminated
the idea of lots, making it feasible to buy or sell a single share of any publicly traded
corporation. Consequently, a primary barrier to participating in secondary markets was
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no longer the magnitude of the investment.
IPOs Provide Access to Quality Unlisted Stocks
O
Numerous high-quality unlisted names have entered the market via initial public
offerings (IPOs) over the past few years. The issuers and merchant bankers jointly
decide on the IPO price, setting it at a point where the most demand is anticipated. As
a result, there is a propensity to leave something on the table for small investors, which
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benefits them. Of course, one could argue that these stocks could also be acquired
later on in the secondary markets after they were listed, but given the recent premiums
that equities have demanded, you might end up paying a high price.
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Access to high-quality paper from government-owned PSUs is made possible via
IPOs.
There has been a vast selection of high-quality paper to invest in thanks to the
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divestiture of reputable PSU firms during the past 15 years. Government-owned
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businesses provide a secure atmosphere for business operations, comforting dividend
returns, and safe ownership. By the time they are listed on secondary markets, these
stocks frequently become expensive. This is a further chance for regular investors to
benefit from IPOs.
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You Profit from Information Symmetry with IPOs

This is a very special advantage that initial public offerings have over secondary
U
markets. Institutional investors, analysts, and insiders have an advantage over small
and retail investors in the secondary markets when it comes to information accessibility.
The company’s prospectus is the only source of information because analysts do not
follow initial public offerings. A retail investor is therefore on an equal footing with other
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investors in terms of information accessibility. This is a particularly special benefit that

retail investors receive from IPOs.
SEBI has Tightened the Rules for Initial Public Offerings

m
Companies and investors are now required to adhere to stricter standards of

openness and transparency since SEBI has made it a priority to protect the interests
of retail investors. As a result, the IPO markets are now much more expert and secure
)A
for regular investors. In contrast to secondary markets, where there is an abundance of

data but no understanding, IPOs are able to compile all available information about the
company into the prospectus.
Small Investors are given Preference Under the new IPO Regulations
(c
The SEBI has worked hard in recent years to make sure that retail and small
investors get a good deal in the IPO market. There have been quite a few significant

adjustments made in this direction. Retail investors, for instance, are qualified to receive
Notes
e
a reduction off the issue price that is valid for HNIs and institutions. Second, under the
new allocation rules with an emphasis on expanding the retail ownerships, these small
investors are able to receive bigger allotments even within the retail limit. These are
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advantages not present in secondary marketplaces.
1.3.3 Investment in Government Securities
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Government securities, often known as bonds, treasury bills, or notes, are financial
instruments that are issued by the national and state governments of India.
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They are typically issued to refund securities that have reached maturity, advance
repay securities that haven’t yet reached maturity, and generate new cash resources.
They are referred to as risk-free gilt-edged instruments, however they only entail
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little risk. So let’s examine the various categories of Indian government securities.
When government securities mature, the investor is guaranteed to receive their

entire investment back. Additionally, some government securities may make regular
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interest or coupon payments. Since the government that issued them backs them,
these securities are regarded as conservative investments with low risk.
Key Points
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● Government debt is issued in the form of government securities, which are then
used to finance military and special infrastructure and daily operations.
● They frequently make periodic coupon or interest payments and guarantee the
complete repayment of invested principal when the security matures.
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● Government securities are seen as risk-free since the government that issued them
is behind them.
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● The disadvantage of investing in risk-free assets is that they typically provide lower
interest rates than corporate bonds.
● Government security buyers will either keep the securities until they mature or sell
them to other buyers on the secondary bond market.
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Government bond issuance in India is overseen by the Reserve Bank of India.

Government bonds were once sold by the central bank at large-scale auctions. Banks,
mutual funds, and insurance firms purchased these bonds. With the launch of the non-
competitive bidding process in 2017, the RBI opened up the bond markets for ordinary
m
investors. Now, small investors can purchase government bonds through mobile apps
like NSE goBID and BSE Direct for a minimum investment of Rs 10,000.
)A
Government Securities in India Come in a Variety of Forms

Different Types of Government Securities in India
There are several types of government securities offered by the Reserve Bank of
India.
(c

Treasury Bills
Notes
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Fig: Treasury Bills
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Treasury notes, often known as T-bills, are short-term government securities issued
by the Indian central government with a maturity of less than a year. Treasury Bills are
three main forms of short-term instruments:
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1) 91 days
2) 182 days
3) 364 days r
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Treasury Bills, often known as zero-coupon securities, do not pay interest because
there are other financial instruments that do.
These securities are issued at a discount rate and are redeemed at face value on
the maturity date; they do not pay interest.
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Treasury bills are sold at weekly auctions held by the RBI.

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Cash Management Bills (CMBs)

New instruments called cash management bills have recently entered the Indian
financial market. In 2010, the Indian government and Reserve Bank of India introduced
this security.
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Treasury bills and cash management bills are both short-term instruments that are
issued as needed.
However, the maturity period between these two is one of their main differences.
m
CMBs are ultra-short-term investment options because they have a maturity horizon of
less than 91 days.
These securities are typically used by the Indian government to meet short-term
)A
cash flow needs.
Government securities with dates

Because they either carry a set or a fluctuating interest rate, generally known as
(c
the coupon rate, dated government securities are a special kind of security. They are
first issued at face value and maintain that amount until redemption.

Government securities, as opposed to Treasury and Cash Management Bills, offer

Notes
e
a wide variety of tenure ranging from 5 years to 40 years, making them known as long-
term market vehicles.
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Primary dealers are the people who buy dated government securities. The Indian
government has issued nine different categories of dated government securities, as
follows:
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1) Capital Indexed Bonds
2) Special Securities
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3) 75% Savings (Taxable) Bonds, 2018
4) Bonds with Call/Put Options
5) Floating Rate Bonds
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6) Fixed Rate Bonds
7) Special Securities
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8) Inflation Indexed Bonds
9) STRIPS
State Development Loans

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State development loans are dated government securities that the State
government has issued to cover its financial obligations. With the assistance of the
Negotiated Dealing System, the issue is auctioned off once every two weeks.
SDL offers a range of investment tenures and supports the same repayment
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method. But compared to dated government securities, SDL has slightly higher rates.
Government securities are issued by the central government, whilst state

development loans are granted by the state governments of India. This is the main
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distinction between the two types of debt.
Treasury Inflation-Protected Securities (TIPS)

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Treasury Inflation-Protected Securities (TIPS) are offered with terms of five,

ten, or thirty years. Every six months, these securities provide interest payments
to all users. TIPS are comparable to traditional treasury bonds, however there is a
significant distinction. In a typical treasury bond, the same principle is issued for the
duration of the bond.
m
However, in order to keep the bond’s principal in line with inflation, TIPS’ par value
will eventually rise to keep pace with the Consumer Price Index (CPI). The value of the
)A
security will grow for the duration of the year if inflation rises. It means that as opposed
to a bond that becomes worthless after maturation, your bond will retain its value
throughout your life.
Zero-Coupon Bonds
(c
Zero-coupon bonds are typically sold for less than their face value and redeemed
for that amount. The date of issue for these bonds was January 19, 1994. Due to the

set term of the securities, there are no coupons or interest rates attached to them. The
Notes
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security is ultimately redeemed at face value on the maturity date.
Capital Indexed Bonds
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These securities provide investors with a strong inflation hedge because the
interest is paid in a predetermined percentage above the wholesale price index. On
December 29th, 1997, the capital indexed bonds were offered on a tap basis.
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Floating Rate Bonds
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Bonds with a floating rate don’t have fixed coupon rates. As government-issued
variable rate bonds, they were initially released in September 1995.
Let’s examine what government securities are and a few alternative investment
strategies.
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G-secs are backed by the government and have no credit risk; however, they do
have interest risk. As a result, you should consider the maturity of the government
securities as well as the interest rate cycle while investing in government assets. For
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instance, the value of your bond will decrease if you own a long-term bond with a 7
percent interest rate and the interest rate increases to 8%. The effect on the bond price
is greater the longer the bond’s term.
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“Because G-Secs are long-term debt securities, investing in them necessarily
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entails interest rate risk. Investors must therefore have a basic understanding of
interest rates and their outlook. The danger of interest increases with age length. G-Sec
investors who are acting independently must exercise caution. This interest rate risk is
still present in debt funds, but skilled fund managers are in charge of the portfolio and
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create it based on their knowledge.
Before making an investment, it’s crucial to analyse the interest rate prospects.
The interest rate risk in modest saving schemes is minimal because some have fixed
U
interest rates at the outset of the investment and some are determined every three
months. Therefore, even though there is no default risk because these instruments
are backed by the government, investment in G-Secs should be done with the aid of
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knowledge of the interest rate environment.
Who should invest in Government Bonds?
One of the safest investment options in India are government bonds. Investors that
desire security in their investments and have minimal risk tolerance should be fit for
m
it. The likelihood of capital growth is typically unpredictable when investing in market-
linked securities. As a result, they serve as a long-term investment choice for investors
who lack stock market experience. Additionally, investors might buy government bonds
)A
to lower the portfolio’s total market risk.
The Indian government has recently taken a number of steps to guarantee that
government securities are understood and well-liked by ordinary investors. Additionally,
they have made it simpler for regular investors to subscribe.
(c
For some government bonds, the GOI has implemented a non-competitive bidding
mechanism. Market players can quickly make their minimum bid online thanks to this
tool. Through certain websites and mobile applications, the lowest bid can be placed.
To sum up, investors that are looking to diversify/weaken their portfolio should think
Notes
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about buying government bonds (fixed income instruments). Additionally, entrepreneurs
intending to launch their firm might invest any spare funds in government bonds.
in
Advantages of Government Securities
● Government securities may provide a consistent flow of interest income.
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● Government securities typically function as safe-haven investments due to their
minimal default risk.
● Some government securities have state and municipal tax exemptions.
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● Trading in government securities is simple.
● Government securities can be purchased through exchange-traded funds and
mutual funds.
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● Government securities’ drawbacks include their low rates of return in comparison to
other types of assets.
● Government bond interest rates typically do not keep pace with inflation.
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● Foreign governments’ government securities can be dangerous.
● In a market with rising interest rates, government securities frequently pay less
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1.3.4 Debt Instruments
Today, the debt markets outperform the banking sector as a key source of funding.
Any market circumstance where debt instruments are traded qualifies. It creates a pre-
planned setting where the interested parties can transfer debts. Depending on the kinds
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of assets traded, the debt markets go under several names. For instance, the debt
market is referred to as the bond market when municipal or corporate bonds are sold,
but the credit market is used when notes, securities, or mortgages are traded.
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An electronic obligation or any paper that enables a party to raise money by

promising to pay back a lender in line with the terms of a contract is referred to as a
debt instrument. The periodicity, interest rate, and date of the principal payback are the
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predetermined conditions that are listed in the contract.
By kind of debt instrument, the issuance markets for institutionalised companies

differ greatly. A sort of loan instrument that an institution can use to raise cash are credit
cards and credit lines. These revolving debt lines often have a straightforward structure
m
and just one lender. Additionally, they are not frequently linked to a major or secondary
market for securitization. Advanced contract structuring and the participation of many
lenders or investors, who typically make their investments through a regulated market,
are required for more sophisticated debt instruments.
)A
Objectives and Features of Debt Instruments

● The primary goal of debt funds is to preserve principal while earning moderate
returns. Both short-term and long-term investments are sought for by investors.
(c
Since there are so many instruments on the market, one can easily select any one
or a combination of instruments based on their needs. Debt instruments’ primary
goals are:
● The principal is kept secure.

Notes
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● Investors receive rewards that are guaranteed. Currently, quotes for medium- to
long-term deposits range from 8 to 9% interest yearly, while those for short-term
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deposits range from 6 to 7%.
● Some of these instruments are also eligible for Section 80C tax breaks.
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Debt instruments have three main characteristics;
Maturity: The bond’s maturity date is referred to as its maturity. The agreed-upon
date for repayment of the principle is when the borrower decides to do so. The term-
O
to-maturity measures how many years are left until the bond matures. From the bond’s
issue date until its maturity, it changes every day. It is also known as the bond’s tenure
or term.
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Coupon: The monthly interest payments made by the bond issuer to the bond
lender are referred to as coupons rates. Coupons are stated as a number (for instance,
“8%”) or as a benchmark rate (for instance, “MIBOR+0.5%”). It is often expressed as a
percentage of the bond’s face value or par value.
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Principal: It is the sum that has been borrowed. It is the bond’s face value or par
value. The coupon is the result of the principal and the coupon rate.
Different types of Debt Instruments

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● Government Securities
The main borrower on the Indian debt markets is the government, which takes
out loans by issuing securities with varying maturity dates. This is done to pay for
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government expenditures on a variety of topics, including infrastructure, social

spending, health, defence, and education, among other things. Given that the
government is the guarantor in this situation, government securities have the highest
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credit ratings in the nation. The grade is SO (sovereign). They are a significant
source of funding for government deficits.
State governments only issue bonds known as State Development Loans, but
the Central Government also issues Treasury Bills and Bonds or Dated Securities
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(SDLs). G-Secs, as government securities are also known, pose no credit risk.
● Treasury Bills
Treasury Bills are the government of India’s short-term (up to one year) borrowing
m
instruments. They allow investors to lodge their short-term surplus funds while
lowering market risk. The Reserve Bank of India regularly auctions them and issues
them at a discount to face value.
)A
● Commercial Paper
Commercial paper, commonly known as CP, is a type of short-term debt that
businesses issue to borrow money, typically for a year or less. It is a money market
instrument that is unsecured.
(c
● Certificate of Deposit
A depositor and a bank or financial institution that has been authorised to do
business therein enter into a Certificate of Deposit (CD). Banks and other financial
institutions reward depositors for their investments by paying interest over a certain
Notes
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period of time.
The bank issues a promissory note to depositors, which can be people or businesses.
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● CBLO
An obligation between a borrower and a lender is represented by a CBLO, a money
market instrument. These instruments are run by the Reserve Bank of India (RBI)
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and the Clearing Corporation of India Ltd. (CCIL), whose members are organisations
with limited to no access to the interbank call money market in India.
● Non-convertible Debentures
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Companies utilise non-convertible debentures (NCDs), a type of financial instrument,
to raise long-term financing. A public issue is used to do this. People who invest in
NCDs, a financial product with a defined tenure, get regular interest at a set rate.
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● Corporate Bonds
Corporate bonds are debt securities issued by private and public corporations. …
In exchange, the company promises to return the money, also known as “principal,”
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on a specified maturity date. Until that date, the company usually pays you a stated
rate of interest, generally semi-annually.
● Call Money r
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These loans are exchanged in the call money market and have a short term maturity
of 1 to 14 days. In this market, cash that is lent for a single day is referred to as “Call
Money.” In order to achieve the legal criteria for the Statutory Liquidity Ratio (SLR)
and Cash Reserve Ratio (CRR), as set forth by the RBI, banks must borrow in this
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money market to cover any gaps or short-term mismatches in funds.
Advantages of Debt Instruments

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● Tax Benefit for Interest Paid: In debt financing, businesses receive the benefit of
deducting interest payments from profits prior to determining their tax obligations.
● One of the main benefits of debt financing is that because the debenture does not
constitute a portion of the share capital, the company does not lose its ownership to
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the new shareholders.

● Flexibility in Funding: Because debt holders get fixed-rate interest payments on a
regular basis, debt instruments are a more flexible source of funding than equity
investments.
m
● Easier Cash Flow Planning: Companies are able to plan ahead for their cash flow
and funds flow status since they are aware of the payment schedules for the funds
obtained from debt instruments, such as the annual interest payment and the set
)A
time period for redemption.

● Periodic Meetings of Corporations: Unlike in the case of equity holders, companies
collecting funds through such instruments are not required to mail or transmit notices
to debt holders in advance of regular meetings. They would only receive invitations
(c
to meetings that directly affect the debt holders’ interests.

Disadvantages of Debt Instruments

Notes
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1. Repayment: They have a tag that reads “repayment” on them. Debt instruments are
used to raise money that must be repaid at maturity.
in
2. Interest Burden: This instrument contains a periodic interest payment that must be
made, necessitating the company’s continued maintenance of a healthy cash flow.
Interest payments significantly lower the company’s profit.
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3. Cash Flow Requirement: The corporation must pay both the interest and the principal
in order to maintain the cash flow necessary to make both payments on time.
4. The debt-to-equity ratio Lenders and investors view as riskier the companies with
O
a higher debt-equity ratio. It should only be employed up to the point where the
dangerous debt financing is reached.
5. Charge Over the Assets: It has a charge over the business’s assets, many of which
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must be pledged or mortgaged in order for the business to preserve its interest and
cash for redemption
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1.3.5 Post Office Instruments
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Fig: Post Office Instruments

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Post Office Investments offers a variety of savings plans with high interest rates,
favorable tax treatment, and, most significantly, the sovereign backing of the Indian
Government. Continue reading to learn about several Post Office savings plans,
interest rates, important characteristics and advantages, deposit terms, etc.
m
To meet the various needs of various investors, Indian Post provides a variety of
investment alternatives. All Post Office Savings Plans offer returns since the Indian
government supports them. Additionally, the majority of post office investment plans
)A
fall under Section 80C, which allows for a tax exemption of up to Rs. 1,50,000. Learn
more about the Post Office’s numerous minor savings programs, including the Public
Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Savings Certificate
(NSC), Post Office Time Deposit for a 5 Year Term, Senior Citizen Savings Scheme
(c
(SCSS), and others, in the sections that follow.
The first thing that comes to mind when we think about India Post is the postman
and parcel services offered by the Indian Postal Department. Some people are aware
of the India Post’s other services, but the majority are unaware of its banking services.
Notes
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Under the Post Office Savings Schemes, India Post provides a variety of savings
programs.
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1. Post Office Savings Account
● A post office savings account must have a minimum deposit of Rs 500 to be
opened.
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● The domestic customer has the option of opening an account with a single or
joint owner.
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● On deposits made to the post office account, there is a 4% annual interest
rate that is applicable.
● On request, the account comes with a chequebook, an ATM card, e-banking,
mobile banking, and other services. After each fiscal year, interest is credited.
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● According to Section 80TTA of the Income Tax Act, individuals are eligible for
a deduction of up to Rs 10,000 from their total income.
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2. 5-Year Post Office Recurring Deposit Account (RD)
● The duration of this RD account is fixed for five years, as the name would
imply.
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You can accept a fixed monthly deposit payment starting at Rs 100 and
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receive 5.8% p.a. in interest.
● The interest is compounded every three months.
● Following the completion of 12 instalments without a default, you are eligible
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for a loan of up to 50% against the deposit that is currently in the account.
3. Post Office Time Deposit Account (TD)
● You can choose from four different post office time deposit account tenures:
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one year, two years, three years, and five years.

● The account’s minimum deposit requirement is Rs 1,000.
● Although it is calculated on a quarterly basis, the interest is only due once a
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year. The rate is 5.5% per year for tenures up to three years, and 6.7% per
year for terms more than five years.
● The investment in the five-year-old account will be eligible for a Section 80C
deduction.
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● A scheduled or cooperative bank may likewise accept a promise of the Post

Office TD account as collateral.
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● Deposits cannot be withdrawn until six months have passed since the date of
the deposit.
4. Post Office Monthly Income Scheme Account (MIS)
● You can deposit a sum of Rs 1,000 up to Rs 4.5 lakh in a single account and
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up to Rs 9 lakh in a joint account.

● You can earn an interest rate of 6.6% p.a. through this account and get a
monthly fixed income from the scheme.
● You cannot prematurely close the account before completing one year.
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Premature closure beyond one year can attract penalties.
● For example, if you invest up to Rs 4.5 lakh in Post office MIS account for a
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term of 5 years, you will receive monthly interest of Rs 2,475 every month up
to the end of the tenure. You wil get the deposit amount of Rs 4.5 lakh at the
end of the term of five years.
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● The interest income in post office TD/RD is received at the end of the term
but interest from post office MIS is received monthly during the tenure of the
scheme.
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5. Senior Citizen Savings Scheme (SCSS)
● This is a retirement program that is supported by the government and allows
for a single, lump-sum payment.
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● The deposit might be anything between Rs. 1,000,000 to Rs. 15 Lakh.
● Only married individuals are permitted to open the account.
● The program offers an annual interest rate of 7.4%. The interest is due every
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three months.
● A person must be at least 60 years old to open this account.
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Subject to investing the retirement benefits within one month of the date of
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receipt of the benefits, retired civilian personnel aged 55 to 60 and retired
defence employees aged 50 to 60 can also open the account.
● Under Section 80C of the Income Tax Act, the investment made as part of this
plan is deductible.
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6. 15-Year Public Provident Fund Account (PPF)

● As a retirement and investing vehicle, PPF is preferred by many salaried
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people because it provides income tax deductions of up to Rs. 1.5 lakh every
fiscal year under Section 80C.
● The account can have a minimum deposit of Rs 500 and a maximum amount
of Rs 1.5 lakh.
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● The account has a 15-year term starting on the day it was opened. To keep
the account operational, you only need to pay Rs 500 a year.
● The program offers a 7.1% p.a. compounded yearly interest rate. Additionally,
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this account’s interest is tax-free.

● Section 80C of the Income Tax Act allows for the deduction of PPF
investments.
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● The investor has the option to prolong the account for another five years.
7. National Savings Certificates (NSC)
● NSC has a five-year term, and there is a $1,000 minimum deposit
requirement.
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● For this account, there is no set maximum deposit amount.

● The 6.8% yearly interest rate is compounded and only paid out at maturity.

● Under the plan, a person may create as many accounts as desired.

Notes
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● The certificate may be given as collateral to the home finance firm, banks,
government organisations, and others by way of pledge or transfer.
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● For instance, an investment of Rs. 1,000,000 will increase to Rs. 1,38,949.29
after five years.
● The sum deposited in this account is deductible under Section 80C.
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● NSC is a security that can be committed to co-operative or scheduled banks.
● The National Savings Certificate (VIIIth Issue) is currently available.
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8. Kisan Vikas Patra (KVP)
● The appeal of this program is that throughout the course of the account, you
can double your money.
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● The opening balance requirement for this account is Rs 1,000. The
appropriate interest rate for the fourth quarter of the fiscal year 2020–21 is
6.9% per annum.
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● The account has been open for 124 months (10 years and four months).
During this time, the investment grows by a factor of two. In 124 months, an
investment of Rs 1 lakh in KVP will increase to Rs 2 lakh.
●
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Please be aware that the account’s tenure varies depending on the interest
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rate.
● KVP is a security that can be pledged to scheduled or cooperative banks.
9. Sukanya Samriddhi Accounts (SSA)
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● This is a government initiative aimed at ensuring the financial security of

young girls.
● Only girl children under the age of 10 are qualified to receive the account’s
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advantages.
● Until the girl child becomes 18, the account must be opened and managed by
parents or legal guardians.
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● The needed minimum deposit is Rs 250, while the annual maximum deposit is
Rs 1.5 lakh.
● There is a 7.6% annual interest rate that is applied. Every year, the interest is
calculated and compounded.
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● The interest received is tax-free.

● The account can be managed by the guardian up until the girl kid turns 18
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years old.
● You have a maximum of 15 years from the account opening date to make
deposits.
● Section 80C of the Income Tax Act allows deductions for contributions made
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to SSA accounts.

Scheme Interest Rate Minimum Investment Maximum Investment Eligibility Tax Implications
Post Office Savings 4% per annum One can start from as No limit The applicant must be a One can claim the tax benefit of up
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Account low as Rs. 20 Non- resident Indian, Minor or to Rs. 50,000 from the financial year
Cheque Facility Rs. 50 Major 2018-19
interest rates:
Post Office Time 1st Year– 6.9% p.a. One can start with as low No limit Individual As per Section 80C, one gets the tax
Financial Planning
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Deposit Account (TD) 2nd Year -6.9% p.a. as Rs. 200 benefit up to 5 years on deposits
3rd Year– 6.9% p.a.
4th Year – 7.7% p.a.
Post Office Monthly
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7.6 % per annum (one One can start with as low In the case of one account Individual The interest earned is taxable and no
Income Scheme can pay monthly) as Rs. 1500 holder, Rs. 4.5 lakhs and deduction under Sec 80C for Deposits
Account (MIS) 9 lakhs for joint holders. made
Senior Citizen Savings 8 . 6 % p e r a n n u m One can start with as low Maximum deposit Rs. Any individual who is Depositor gets tax benefit under 80C
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Scheme (SCSS) and it is compounded as Rs. 1000 15 Lakh above the age of 60 If the interest earned is more than Rs.
annually years or individuals who 50,000 (p.a.), TDS is deducted on
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have taken the VRS or
Superannuation
15 year Public 7 . 9 % p e r a n n u m Rs. 500 per financial Rs. 1.5 Lakh per financial Individual Tax rebate under section 80C for
Provident Fund and it is compounded year year deposits (maximum Rs. 1.5 Lakh pa)
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Account (PPF) annually
National Savings 7 . 9 % p e r a n n u m Rs. 100 No limit Individual The depositor gets the tax rebate under
Certificates (NSC) and it is compounded Section 80C for deposits (maximum
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annually r Rs. 1.5 Lakh p.a.)
K i s a n Vi k a s P a t r a 7 . 6 % p e r a n n u m Rs. 1,000 No limit Individual (Adult) Interest is taxable but when the
(KVP) and it is compounded depositor gets the amount on maturity,
annually then there it is non-taxable
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Sukanya Samriddhi 8 . 4 % p e r a n n u m Rs 1000 per financial Rs 1.5 Lakh per financial Girl Child – up to 10 years Investment (up to Rs 1.5 Lakh exempt
Accounts and it is compounded year year from birth and 1 additional under Section 80C), interest and
annually year of grace
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Here is a brief overview of the different post office investment and post office
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Notes

55
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Benefits of India’s Post Office Investment-Saving Programs

Notes
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Easy to Invest
The saving plans are simple to join and are ideal for both urban and rural investors.
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These programs are open to everyone who wishes to manage risk in their portfolio for a
guaranteed respectable return. These investments are a popular choice for saving and
investing money because of their accessibility and simplicity.
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Documentation and Procedures
These savings plans are easy to choose from and secure to lock into because
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the government backs them thanks to minimal paperwork and proper post office
procedures.
Fulfilment of Investments Goals
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With a PPF account’s maximum investment tenure of 15 years, Post Office
Scheme investments are long-term in nature. As a result, these investment choices are
fantastic for pension and retirement planning.
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Tax Exemption
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For the deposit amount, the majority of these programs qualify for tax breaks under
Section 80C. A select few programs, including the PPF, the Sukanya Samriddhi Yojana,
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etc., also exempt the amount of interest received from taxes.
Interest Rates
These programs offer risk-free interest rates in the 4% to 9% range. Due to the
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Government of India’s involvement in these investing alternatives, there is very little risk.
Different Buckets of Products

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There are many different items based on various types of people. Public Provident
Fund (PPF), Kisan Vikas Patra, and Sukanya Samriddhi Yojanas are well-known
programs. These small savings programs have been made available by the government
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through post offices to give the general population a safe outlet for investing by offering
lucrative returns and safeguarding their investments. These plans are simple to
control. If the aforementioned characteristics and advantages align with your financial
objectives, consider investing in a post office savings plan to protect your financial
future with little risk.
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1.3.6 Insurance Policies

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Insurance is a contract whereby the insurer (Insurer Company), in exchange for

Notes
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the payment of a sum (premium), agrees to pay the insured (the person or party being
insured against the risk) a certain amount in the event that an unfortunate event occurs.
When an event occurs, the insurance promises to compensate the insured for any
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losses.
Unexpected costs are a cruel reality of life. Even if you believe that you are
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financially secure, an unanticipated or sudden expense might seriously undermine this
confidence. You could become indebted as a result of such situations, depending on the
severity of the emergency.
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Insurance policies provide some support to reduce financial exposure from
unanticipated events, even though you cannot prepare ahead for eventualities
stemming from such situations.
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There are many different insurance policies available, each designed to protect
particular facets of your health or possessions.
Types of Insurance Policies
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Following are the types of insurance available in India:
1. Life Insurance
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Fig: Life Insurance
The difference between life insurance and other types of insurance is that in this
case, the object of insurance is a person’s life. At the time of death or at the end
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of a predetermined period, the insurer will pay the defined amount of insurance.
Because a person’s life is their most valuable possession, life insurance currently
has the widest application possible. Every single person needs insurance. This
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insurance offers security to the family in the event of an untimely death or provides a
sufficient sum throughout old age when earning capacity is diminished. At the scene
of the accident, personal insurance makes a payment. Because a specific amount
is returned to the insured upon death or the passing of a specified period, insurance
serves as both protection and a form of investment.
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2. General Insurance

Notes
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Fig: General Insurance
Property insurance, liability insurance, and other types of insurance are all
considered general insurance. Property insurance is the official name for fire and
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marine insurances. Liability insurance is partially covered by motor, theft, fidelity,
and machine insurances. Fidelity insurance, which compensates the insured for loss
when he is obligated to pay a third party, is the toughest type of liability insurance.
3. Property Insurance r
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Fig: Property Insurance

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Property of a person or people is protected under property insurance against a

specific risk. The risk could be caused by sea or fire hazards, theft of products or
property damage from an accident.
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Numerous plans fall under the umbrella of property insurance, including renters’
insurance, homeowners insurance, flood insurance, and earthquake insurance. A
homeowners or renters policy often provides coverage for personal property. The
exception is expensive and high-value personal property, which is typically covered
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by purchasing a “rider” to the policy. In the event of a claim, the property insurance
coverage will either pay the insured the replacement cost of the damaged item or
the actual worth of the damage.

4. Marine Insurance
Notes
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Fig: Marine Insurance
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Protection from the loss caused by marine risks is offered by marine insurance.
These risks result in damage, destruction, or disappearance of the ship and
cargo as well as non-payment of freight. Other marine perils include attacks by
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adversaries, fire, collision with a rock or ship, and capture by pirates. Therefore,
maritime insurance covers the hull, cargo, and freight of ships. Prior to the division
into Ocean Marine Insurance and Inland Marine Insurance, only a few minimal
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hazards were covered by marine insurance. The latter covers inland hazards that
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may occur with the delivery of cargo (goods) from the insured’s go-down and may
continue through to the receipt of the cargo by the buyer (importer) at his go-down.
The former only insures sea perils.
5. Fire Insurance
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Fig: Fire Insurance
The risk of fire is covered by fire insurance. Without fire insurance, the damage from
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fires will increase for everyone involved as well as for society as a whole. The losses
brought on by fire are reimbursed with the aid of fire insurance, and society suffers
little overall. The person is protected from such losses, and his assets, company, or
industry will largely stay in the same condition as before the loss. The fire insurance
covers more than just initial losses; it also covers some subsequent losses due to
(c
things like war risk, unrest, riots, etc.

6. Liability Insurance
Notes
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The general insurance also includes liability insurance, which makes the insured
responsible for paying for property damage or making up for lost wages due to
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accident or death. These types of insurance include fidelity insurance, auto
insurance, machine insurance, etc.
Liability insurance is a type of insurance that shields an insured party against
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lawsuits brought about by injury to third parties and property damage. Any legal fees
and payouts that an insured party is accountable for in the event that they are held
legally liable are covered by liability insurance policies. Liability insurance coverage
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typically does not cover intentional harm or contractual obligations.
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7. Social Insurance
The purpose of social insurance is to safeguard the less fortunate members of
society who cannot afford the premium for sufficient insurance. The numerous
types of social insurance include pension plans, disability benefits, unemployment
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benefits, sickness insurance, and industrial insurance.

Although the word “social insurance” may be unfamiliar, most individuals are aware
of its programs. Social insurance refers to government-run, citizen-funded initiatives
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that assist the neighbourhood when finances become precarious due to adversity,
age, or financial difficulty.
Programs for social insurance are paid for by the beneficiaries. You can notice the
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deductions for Social Security, Medicare, and unemployment insurance if you look
at the average paycheck. These deductions go to a pool of benefits that serve as a
safety net for retirement, difficult times, and illness.
8. Personal Insurance
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Fig: Personal Insurance

Personal insurance covers human life, which may be at risk of financial loss due
Notes
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to illness, injury, or death. Thus, life insurance, personal accident insurance, and
health insurance are additional subcategories of personal insurance.
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Any type of insurance that protects individuals from financial loss due to death,
injury, or loss of property is referred to as personal lines insurance. These insurance
coverage options typically shield clients and their families from losses they couldn’t
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otherwise pay. Driving a car and owning a home are just two examples of things you
may do thanks to personal lines insurance without worrying about going bankrupt.
This is not the same as commercial lines insurance, which gives firms protection
against property and casualty losses.
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9. Property Insurance
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Fig: Property Insurance
The property of an individual and of the community is insured against loss from fire
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and sea disasters, as well as against the sudden death of working animals, machine
breakdown, and theft of commodities and property.
A collection of policies that offer property owners liability insurance or coverage for
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their property’s protection are together referred to as property insurance. Property

insurance offers financial compensation to the owner or tenant of a building and its
contents in the event of damage or theft, as well as to a third party in the event that
person sustains injuries while on the property.
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Numerous plans fall under the umbrella of property insurance, including renters’
insurance, homeowners insurance, flood insurance, and earthquake insurance. A
homeowners or renters policy often provides coverage for personal property. The
exception is expensive and high-value personal property, which is typically covered
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by purchasing a “rider” to the policy. In the event of a claim, the property insurance
coverage will either pay the insured the replacement cost of the damaged item or
the actual worth of the damage.
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10. Guarantee Insurance

The loss resulting from employee or third party dishonesty, disappearance, or
disloyalty is covered by the guarantee insurance. The party must be included in the
agreement. His failure costs the first party money.
(c
Credit insurance is not included in guarantee insurance, which is defined as the

promise to fulfil an agreement or contract or to fulfil a duty, trust, or obligation in the
event that the party responsible for the performance or discharge defaults, or to pay
money in lieu of the performance or discharge or in the event that there is loss or
Notes
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damage as a result of the default; (assurance-cautionnement)
For instance, in export insurance, the insurer will cover the loss if the importers fail
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to make the required payment.
Tax Benefits of Various Types of Insurance in India
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Tax deductions are available for amounts paid toward premiums for several types
of life insurance plans.
1. The premium paid for all types of life insurance plans is tax deductible up to Rs 1.5
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lakh under Section 80C of the Income Tax Act of 1981.
2. The premium paid for all types of health insurance plans is tax deductible under
Section 80D of the Income Tax Act of 1981, subject to a maximum of Rs 25,000 for
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oneself, one’s wife, and one’s children, and an additional Rs 25,000 for parents who
are under the age of 60. The tax savings can reach Rs 50,000 for senior citizens and
Rs 50,000 if parents are senior citizens. Total deductions are up to one million)
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1.3.7 Mutual Funds
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Fig: Mutual funds

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In order to invest in securities such as stocks, bonds, money market instruments,

and other assets, mutual funds aggregate the funds from shareholders. Professional
money managers run mutual funds, allocating the assets and attempting to generate
capital gains or income for the fund’s investors. The portfolio of a mutual fund is
set up and kept up to date in accordance with the specified investment goals in the
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prospectus. Small or individual investors have access to professionally managed

portfolios of stocks, bonds, and other securities through mutual funds. As a result, each
shareholder shares proportionately in the fund’s profits or losses. Mutual funds invest in
)A
a huge variety of assets, and performance is typically gauged by changes in the fund’s
overall market capitalization, which are obtained from the performance of its underlying
investments combined.
Investors can benefit from economies of scale and buy stocks or bonds at
substantially cheaper trading costs by pooling their funds in a mutual fund as opposed
(c
to directly participating in the capital markets. Diversification, expert stock and bond
selection, low prices, ease of use, and flexibility are further benefits.

Types of Mutual Fund Schemes

Notes
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Based on their investment goals or maturity periods, mutual fund schemes can be
divided into many types and subcategories. Based on their maturity durations, mutual
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fund schemes can be divided into three groups.
● Open-ended funds: A fund or scheme that is continuously open to subscriptions and

redemptions is referred to as being open-ended. Investors can buy and sell units
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conveniently at Net Asset Value (NAV) linked prices that are announced each day.
● Closed-ended funds have a predetermined maturity period that can be anywhere
between a few months and a few years, such as six months, five years, or seven
O
years. i.e., the fund is only available for subscription within a specific time period
at the time of the New Fund Offer’s introduction (NFO). At the time of the NFO,
investors can invest in the scheme. Later, they can buy or sell the plan’s units on
stock exchanges where the units must be legally listed.
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● Interval funds: These types of plans have the characteristics of both an open-ended
and a closed-ended structure. These plans are available for both purchase and
redemption at the current NAV-based pricing during pre-specified periods (such as
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monthly, quarterly, or yearly). Close-ended funds and interval funds are extremely
similar, however they differ in the following ways:-
◌◌
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They already have a redemption window, thus they are not required to be
listed on stock markets.
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◌◌ They are permitted to issue additional units during the designated interval
period at the current NAV-based prices.
● There is no specified maturity time.
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● Exchange Traded Funds: Also known as ETFs, Exchange Traded Funds are
basically Index Funds that are listed and traded on exchanges like equities.
They give investors access to indexes on Indian financial markets and, in some
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circumstances, foreign stock markets as well. These indexes would offer exposure
to those sectors with relative ease, in real time, and at a lower cost than many other
types of investing if they were centred on certain specific sectors or themes. There
are ETFs that track the S&P CNX Nifty, BSE Sensex, etc., for instance. Gold ETFs
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are mutual fund plans using actual gold as the underlying investment.
● Fund of Funds: Fund of Funds (FoF) are mutual fund schemes that invest in other
mutual fund schemes, as the name implies. The idea is well-liked in markets where
picking a good mutual fund product based on one’s objectives might be challenging.
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similarly to how a mutual fund scheme would invest in a basket of securities including
debt, equity, etc. The units of other mutual fund schemes, whether from the same
fund family, other fund houses, or funds domiciled outside of the home nation, make
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up the underlying investments for a fund of funds (FoF) (known as overseas feeder
fund or fund of funds explained in detail under section types of equity funds).
Based on investment goal classification

Mutual fund schemes can also be divided into categories based on their investing
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goals in addition to the ones mentioned above. Equities Funds: Growth/Equity oriented
schemes are those that invest primarily in equity and securities that are related to
equity. Such programs aim to increase capital over the course of the medium- to long-
term. These kinds of schemes are often designed for investors with a long time horizon
Notes
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for their investments and a higher risk tolerance.
Type of Equity Funds
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a) Diversified Funds
◌◌ Multi-Cap Funds: These funds make investments in large, midsize, and small-
nl
cap companies across the market capitalization spectrum.
◌◌ Large Cap: These funds put a lot of their money into big businesses. Due to
their size, large cap corporations often expand more slowly than mid sized
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companies and are far less risky. They are also referred to as blue chip
businesses.
◌◌ Mid Cap: These funds mostly invest in mid cap businesses. The majority of
mid cap companies develop faster than large cap corporations.
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◌◌ Small-cap companies are those that are less established and have a lower
market capitalization. Small cap firms are the most risky for investors to invest
in, but they also have the potential for the largest returns.
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◌◌ Tax Saving Fund: These funds are sometimes referred to as Tax Saving
Funds (ELSS). Investments made in ELSS plans up to Rs. 1 lakh are eligible
for deductions under Section 80C of the Income Tax Act of 1961, although
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these plans have a 3-year lock-in period.
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◌◌ Equity–International: These funds make investments in international
corporations. The investment may be regionally or globally diversified, or it
may be country-specific (such as the China, US, or other fund) (like Europe,
Asia etc.). To spread investing risk and promote diversity, one can look
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to include exposure to international stocks in a portfolio. AMCs typically

partner with a foreign fund (known as an “Underlying Fund”) and establish a
“Feeder Fund” in India. The funds received in the feeder fund are sent into
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the underlying fund for investment. AMCs occasionally introduce programs

that invest directly in the equity securities of foreign corporations. In these
programs, rupee investments are made by local investors to purchase the
units. For international investment, rupees are converted into foreign currency.
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As a result, there is some foreign exchange risk while investing in such

schemes. It should be emphasised as well that international equity funds
receive identical tax treatment to debt funds.
◌◌ Equity Income / Dividend Yield Schemes: Typically, dividend yield schemes
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invest in a well-diversified portfolio of businesses with high dividend yields,

which generate a consistent flow of cash flows in the form of dividends.
b) Sector Funds: These funds invest in businesses within a specific industry. For
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instance, a fund dedicated to the banking industry will exclusively invest in banking
company stock.
c) Thematic funds: These funds make investments in accordance with a specific
concept. An infrastructure thematic fund, for instance, will invest in the stock of
(c
businesses that are either directly or indirectly involved in the infrastructure industry.
d) Arbitrage Funds:These funds take use of arbitrage possibilities to reduce risk
while increasing return. By taking advantage of a price difference between two or
more markets for the same asset, such as the mispricing between the cash and
Notes
e
derivatives markets, arbitrage is pursued. In general, these funds offer modest
risk-return trade-offs.
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e) Index Funds: In order to mimic a certain market index and deliver a rate of return
over time that will roughly match or resemble that of the market they are mirroring,
subject to tracking error, index funds invest in the same proportion of companies
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that make up the index.
f) Income/ Debt Oriented Funds: These plans frequently invest in debt assets such
as Treasury Bills, Government Securities, Bonds, and Debentures. While offering
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smaller returns than equity plans, they are regarded as less hazardous.
g) Gilt Funds:These funds only put money into government bonds. There is no default
risk with government securities. As with income- or debt-oriented schemes, the
NAVs of these schemes fluctuate in response to changes in interest rates and other
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economic factors.
h) Money Market/Liquid Funds: These funds are designed to offer moderate income,
convenient liquidity, and capital preservation. They make short-term investments
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in safer securities like commercial paper and certificates of deposit. Institutions
and individuals primarily use these programs to temporarily store their excess
cash. These funds take advantage of the existing market yields while being mostly
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protected against changes in the interest rate in the economy.
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Hybrid Funds
Balanced Funds: Balanced funds are those that try to divide up their total assets
among a variety of debt and equity instruments in their portfolio. By investing in both
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stocks (for growth) and bonds (for income), balanced funds give investors the choice of
a single mutual fund that incorporates both growth and income objectives (for income).
Equivalent in tax treatment to equity funds, balanced funds are also known as equity
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oriented funds. Their typical returns and risk profile are in the middle of the growth and
debt fund spectrum.
Monthly Income Plans: These plans aim to offer consistent income by issuing
dividends. As a result, it mostly invests in debt securities. To increase the scheme’s
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yield, a tiny portion is put into equity shares. Another name for monthly income plans
is debt-oriented hybrid schemes. However, “Monthly Income” is not guaranteed and is
based on the scheme’s distributable surplus.
Capital Protection Oriented Schemes: These mutual fund plans work to safeguard
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the capital deposited therein by appropriately orienting their portfolio structures. The
portfolio structure of the scheme is what gives rise to the scheme’s focus on capital
protection, not any bank guarantee, insurance coverage, etc. The close-ended
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character of these types of schemes, their listing on the stock exchange, and the
requirement for a credit rating agency rating of the anticipated portfolio structure are all
requirements set down by SEBI. A typical portfolio structure might invest a significant
amount of the assets in highly rated debt instruments and put aside a significant portion
of the assets for capital safetyTo provide capital appreciation, the remaining share
(c
would be invested in stock or products related to equity. It is important to distinguish

between “Capital Guaranteed” plans and capital protection oriented schemes.

1.3.8 Certificate of Deposits

Notes
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A Certificate of Deposit (CD) is a money market instrument that is issued in a
dematerialized form in exchange for money that has been placed in a bank for a
in
predetermined amount of time. The Reserve Bank of India (RBI) occasionally releases
rules regarding certificates of deposit.
Scheduled commercial banks and a few other financial organisations in India
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are permitted to issue certificates of deposit within a certain range by the RBI.
Certificates of Deposit are granted to a variety of parties, including people, businesses,
corporations, and funds. Non-Resident Indians may also receive Certificates of Deposit,
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but only on a non-repatriable basis.
It is crucial to remember that banks and other financial organisations cannot offer
loans secured by certificates of deposit. Also, banks are prohibited from purchasing
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their own Certificates of Deposit before those securities mature. The RBI may, however,
waive the aforementioned requirements for a limited time. The statutory liquidity ratio
(SLR) and cash reserve ratio (CRR) on the cost of a Certificate of Deposit must be
maintained by banks, it is crucial to note.
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Minimum size and maturity of a Certificate of Deposit
Only one issuer may issue a certificate of deposit, and only in multiples of Rs. 1
r
lakh, for a minimum of Rs. A certificate of deposit’s maturity is determined by the
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investor. For example, a certificate of deposit issued by a bank must have a maturity
time of at least seven days and no more than one year, whereas a certificate of deposit
issued by a financial institution must have a maturity period of at least one year and no
more than three years.
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Features of Certificates of Deposits

Following are some key characteristics of CDs and how they stack up against other
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financial vehicles.
● In India, CDs can be produced for a minimum deposit of 1 lakh and in multiples of
that amount.
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● All-India Financial Institutions and Scheduled Commercial Banks (SCBs) are

permitted to issue CDs. A CD cannot be issued by RRBs or cooperative banks.
● The term duration for CDs that SCBs issue ranges from three months to a year.
● Financial institutions’ CDs typically have terms of one to three years.
m
● Dematerialised CDs can be transferred by endorsement or delivery, much like

dematerialized securities.
)A
● For a CD, there is no lock-in necessary.

● A CD cannot be used as collateral for a loan.
● According to the Income Tax Act, a certificate of deposit is entirely taxable.
● A CD cannot be traded openly.
(c
● A CD cannot be repurchased by banks before it matures.

Difference Between Certificate of Deposits vs Fixed Deposits

Notes
e
A fixed deposit and a certificate of deposit are very similar to one another. They
are interchangeable. Some banks even refer to fixed deposits as CDs or time deposits.
in
They have the same term length, a minimal deposit requirement, and higher interest
rates than conventional savings accounts. One distinction is that whereas FDs are not
readily negotiable, CDs are.
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Benefits of CD Publishing in India
CD There are advantages to releasing a CD, which is why investors favour it so
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much.Those are:
Security:
Due to market volatility, a certificate of deposit or fixed-term investment won’t
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consume all of your funds. Similar to regular insurance, it is a perfectly secure financial
instrument with an assured amount at maturity. There is no risk of losing any of the
money you deposit into your CD, which will continue to expand reliably. A short- to mid-
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term investment in it is quite safe.
High-Interest Rate:
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Most investors are drawn to CDs because of this perk. They provide higher interest
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rates—up to 7.8% on the lump sum deposited—than standard savings accounts, which
have interest rates that hover around 4% on average.
Flexibility:
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When your CD reaches maturity, you can choose to withdraw a flat sum, monthly
instalments, or annual payouts. Although it must adhere to a number of requirements
established by the bank, you can choose the length and price of the investment. You
may make the most of the CD if you adapt it to your needs.
U
Low to Minimum Maintenance Costs:

For the delivery, purchase, and sale of shares on the market, there are always
ity
brokerage fees. A CD often doesn’t incur any additional fees. With some institutions,
you only pay what you invest.
1.3.9 Investment in Foreign Market

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)A
(c
Fig: Investment in Foreign Market

The investment options of today are not geographically restricted. You might want
Notes
e
to invest in some of these economies if you are fascinated by emerging markets and
their rapid growth.
in
By spreading out their risk, many investors can diversify by purchasing
international stocks, which also exposes them to the expansion of other economies.
Foreign equities are viewed by many financial experts as a beneficial complement to a
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portfolio of investments. For conservative investors, they advise a 5% to 10% allocation,
and for aggressive investors, up to 25%.
Any investment created in India with funds coming from outside the country
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is considered a foreign investment. According to this definition, investments made
by foreign corporations, foreign individuals, and non-resident Indians would all be
considered foreign investments.
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Types of Foreign Investments
Investments made with foreign money might be made in stocks, real estate,
ownership and management, or joint ventures. This is how foreign investments are
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categorised.
Foreign Direct Investment (FDI)
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Foreign Portfolio Investment (FPI)
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Foreign Institutional Investment (FII)
The information on each sort of foreign investment is provided below:
Foreign Direct Investment (FDI)

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A firm or individual who uses a legal entity in one nation might invest in another
country by purchasing a majority stake in a company there. This is known as foreign
direct investment (FDI). FDI may take the form of starting new businesses, forming joint
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ventures, mergers and acquisitions, the construction of new facilities, etc.
Foreign Portfolio Investment (FPI)

ity
Foreign Portfolio Investment (FPI) is the term for investments made in Indian
securities such as shares, government bonds, corporate bonds, convertible securities,
infrastructure securities, etc. by foreign entities and non-residents. The goal is to
guarantee a controlling interest in India at a smaller investment than FDI, with room for
entry and exit.
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Foreign Institutional Investment (FII)

)A
Foreign portfolio investment (FPI) is the term for investments made in securities,
real estate, and other financial assets by foreign entities. Mutual fund businesses,
hedge fund companies, and others are examples of investors. The goal is to diversify
the portfolio, ensure hedging, and achieve high profits with quick entrance and exit
rather than acquiring a controlling interest.
(c
The names FPI and FII are interchangeable because the only distinction between
them is the type of investors.

The Securities and Exchange Board of India oversees the Indian Securities Market
Notes
e
(SEBI). For more details on this subject, see the SEBI article.
Advantages of Foreign Direct Investment
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1. It benefits regional economies in several places.
Companies or people who take part in FDI might encourage local community
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economic growth for their headquarters or homes. Profits are frequently invested
in employees or expanding organisational opportunities, which can result in the
creation of new jobs and new FDI chances. The investments also have a similar
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effect on the foreign organisation’s home market.
2. It facilitates the completion of international trade.
There are import taxes on goods and services in many nations. Due to these tariffs,
ty
import/export companies may find it difficult to keep their products at competitive
costs for clients. Since a minimal share in a foreign organisation is acquired
through FDI, it is conceivable to reduce or do away with these tariffs. This increases
market dominance for the neighbourhood company while preserving pricing
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competitiveness.
3. Foreign income can increase.
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Employees in many overseas markets are paid wages that in the US would be
deemed to be below the poverty line. Most people in the world make less than $4
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an hour. In certain foreign marketplaces, the going rate for an hour is less than $1.
Foreign income levels can rise with FDI. Wages for workers rise. Due to the creation
of new resources, communities may start to grow.
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4. It improves human resources.

Because people are skilled, businesses succeed. Human abilities are only
capable of performing basic labour, agricultural work, and other entry-level tasks
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in underdeveloped and emerging nations. Education opportunities are created by

foreign direct investment so that people can broaden their skill sets. Greater skill
sets can result in higher pay. Higher levels of production are attained. Benefits
accrue to the business, the individual, and ultimately each community.
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5. It makes your money more effective for you.

Many countries have imposed tax incentives on this form of investment in order
to promote FDI. This increases the amount of money that can be used to work
for a foreign company without significantly affecting the budget of the investment
m
agency. Because the money used for these incentives can be allocated to resources
rather than government coffers, goals are easier to achieve. Additionally, when the
difference between cost and income narrows, more opportunities to find revenue
)A
streams present themselves.

6. It gives a foreign business the necessary experience.
More than just money is brought to an FDI partnership by investors. They may
also provide their personal experiences in a particular sector. Such an investment
(c
may result in an instant increase in productivity for the foreign company. If contact
access from the investor is allowed in the relationship, investments can also give

the foreign organisation greater facilities, better equipment assets, and increased
Notes
e
vendor access.
7. It gives workers new opportunities.
in
The investing company’s employees have the opportunity to go abroad and
encounter various cultures and viewpoints. They might be more effective at home as
a result. Because they have better access to the developed best practices, foreign
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workers also help to create new chances. Both parties mature through this process
more quickly than they would on their own.
Disadvantages of Foreign Direct Investment
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1. It isn’t without risk.
Global political unrest makes it possible for the business environment to shift at
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any time. Even when businesses and individuals choose foreign organisations that
pose less risk, risk in a transaction can never be totally eliminated. A foreign direct
investment may not be feasible in some nations due to the political risk concerns.
2. It can be more expensive.
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The dollar is one of the world’s most powerful currencies in the US. The value of
the currency can be stretched longer for an investment into a developing country
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than it would be domestically. However, given that the euro and the pound trade
higher than the dollar, it isn’t always the case. Compared to a local investment, there
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would be higher costs for the person or company making the FDI into one of those
markets.
3. It may have an impact on exchange rates.
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A foreign direct investment may result in a rise in popularity for a developing nation
with a weak currency. Investments are seen as a sign of stability by both individuals
and businesses, which increases interest in the sector under study. This greater rate
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of interest may result in a superior monetary worth for the foreign country, which
could cause exchange rates to become unstable.
4. It can lead to exploitation.
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FDI can be exploited on a variety of levels. The investment could be seized by

a foreign government. For political reasons, assets or confidential information
might be seized. The foreign corporation could invest the money and lose it. Even
though the terms and circumstances of the investment are outlined in a well-written
contract, some foreign businesses may opt to take the money and run. As a result,
m
an investor may have few, if any, possibilities for getting their money back.
)A
(c

Case Study
Notes
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Anish and Natasha Nair live in Chennai’s central suburbs as a married couple on a
salary. Prashant works as a programmer for an IT company, and Natasha is employed
in
by an FMCG company in the administration division. The family is made up of Anish
and Natasha, their two children, and Anish’s parents.
Name Age Relationship Health HIstory
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Anish Nair 38 Self Healthy
Natasha 35 Wife Healthy
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Dinesh Nair 74 Father High BP.
Lakshmi Nair 70 Mother High BP, Diabetes
Astha 7 Daughter Healthy
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Vinay 5 Son Healthy
Details about their inflows, outflows, and net worth are shown here.
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Inflows Monthly Yearly
Anish 64500 774000
Natasha 21000 252000
Total 85500 r1026000
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Outflows
Household expenses 27500 330000

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Life insurance 5333.33 64000

Total Outflow 32833.33 394000
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Investments
PPF 5833.33 70000

Surplus 46833.33 562000
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Networth
Self Occupied home 4200000

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Savings Account 550000

PPF (both accounts) 400000
EPF (both accounts) 445000
)A
Stocks & Mutual funds 200000

Loans 0
Net worth 5795000
(c
Natasha has made the decision to leave her job after one year in order to focus
on her children’s schooling. In the absence of Anish and Natasha, grandparents take

care of the children during the day while they are both in school. The family’s financial
Notes
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objectives are listed below, and Anish would like to continue working in the IT sector.
Financial Planner India
in
Insurance
Anish is protected for a sum assured of Rs. 12 lakhs despite paying a yearly
premium of Rs. 64000, whereas Natasha is covered for Rs. 400,000. For the family
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of four, excluding the parents, Anish’s employer offers group floater medical insurance
coverage in the amount of Rs. 300,000. There is no medical insurance available to
parents.
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Financial Goals
The following are the financial goals as enumerated by Prashant and Srividya in
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present value terms.
1. Astha received Rs. 1 lakh annually from the age of 17 to 20 and Rs. 3 lakhs at the
age of 21 for her education.
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2. Vinay received Rs. 1 lakh annually from the age of 17 to 20 and Rs. 3 lakhs when
he turned 21.
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3. At 26 years old, Astha received Rs. 4 lakhs for her marriage.
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4. Vinay’s 27-year-old marriage was financed.
5. Retiring in 2031, when Anish will be 58 years old
Sr. Financial Goal Category:- Today’s Approximate Inflation

No. Responsibilities Cost No. of Years Adjusted Cost
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to Goal
1 Daughters Education’ Rs. Rs.
1.2 Required at Age 17 Years Rs.100,000.00 10 2021 Rs.259,374
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1.3 Required at Age 18 years Rs.100,000.00 11 2022 Rs.285,312

ity
1.6 Required at Age 21 years Rs.300,000.00 14 2025 Rs.1,139,250

Rs.700,000.00 Rs.2,343,005
2 Son’s Education Rs. Rs.
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)A
2.6 Required at Age 21 Years Rs.300,000.00 17 2028 Rs.1,516,341

Rs.700,000.00 Rs.3,118,540
3 Marriage of Daughter Rs.400,000.00 19 2029 Rs.2,446,364
4 Marriage of son Rs.400,000.00 22 2032 Rs.3,256,110
(c
5 Retirement at Age 58 years Rs.252,000.00 20 2027 Rs.1,070,458

Corpus required 20 Rs.22,953,250

Assumptions
Notes
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◌◌ General inflation (retirement) – 7.5%
◌◌ Educational & Marriage inflation – 10%
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◌◌ Expected annual increase in salary – 5%
◌◌ Returns on Equity & Equity mutual funds – 12%
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◌◌ Returns on PPF – 8%
◌◌ Returns on EPF – 8.5%
◌◌ Retirement corpus growth 1.87% (adjusted to inflation)
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Projections and Recommendations.
A. Contingency Fund:
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1. The family must keep an emergency reserve of Rs. 83000 on hand (rounded
off). He is to keep Rs. 15000 in cash at home and the remainder in a savings
account that is linked to an FD.
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2. With Prashant’s parents’ current health and the lack of any medical insurance,
Rs. 300000 should be kept in a bank FD as a reserve for unforeseen medical
costs.
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The above allocation can be managed from the savings account balance
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B. Insurance
Accident: Anish should purchase a 25 lakh TTD (Total Temporary Benefit) accident
coverage. The premium will be about 3500 rupees.
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Health: For a cost of about Rs. 15500, Anish and Natasha should purchase a
personal health insurance policy with a limit of Rs. 5 lakhs for each of them and Rs. 2
lakhs for each of their daughters.
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Life: Using the expense replacement technique, there is a life insurance coverage
gap of Rs. 80 lakhs, which should be filled by a term plan for a 25-year period at an
estimated cost of Rs. 20000 per year.
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C. Financial Goals
1. To start a SIP in an equity diversified mutual fund for Rs. 6750 in order to meet
your daughter’s educational needs from the time she becomes 17 to the time
m
she turns 21.

2. A Rs. 5750 recurring investment in a Diversified Equity mutual fund is to be
made to cover the costs of the son’s educational requirements from his 17th to
)A
his 21st year.

3. A 3000 rupee SIP in a diversified mutual fund might be started to meet the
daughter’s marriage expenses.
4. A SIP of Rs. 2500 in a Nifty Index MF can be used to pay for the son’s
(c
wedding.

5. To cover the annual retirement needs of Rs. 10, 70,458 at age 58, a corpus of
Notes
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Rs. 2, 29, 53,250 is needed, which can last until the age of 85.
PF, PPF, and gratuity benefits, which will collectively pay out Rs. 1, 59, 15,000
in
upon retirement, can easily cover a significant portion of the capital. Start a SIP of Rs.
7250 in an index mutual fund to cover the Rs. 70, 38,000 deficiency.
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Recommended Cash Flow
Total Inflows 85500 1026000

Outflows
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Household expenses 27500 330000
Life insurance 7000 84000
Accident & Mediclaim 1583.33 19000
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PPF 5833.33 70000
SIPs 25250 303000
Total Outflow 67166.7 806000
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Surplus 18333.3 220000
The surpluses can be maintained in savings banks and can be used to fund the
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SIPs for next year when Natasha won’t be working.
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Summary
● Few schools have courses in how to manage your money, so it is important to learn
the basics through free online articles, courses, blogs, podcasts, or at the library.
ni
● Smart personal finance involves developing strategies that include budgeting,

creating an emergency fund, paying off debt, using credit cards wisely, saving for
retirement, and more.
U
● Being disciplined is important, but it’s also good to know when to break the rules—
for example, young adults who are told to invest 10% to 20% of their income for
retirement may need to take some of those funds to buy a home or pay off debt
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instead.
● In economic and statistical analysis, the phrase “per capita” refers to a single
individual.
● When comparing an economic statistic to a population, per capita is utilised.
m
● The terms per capita most frequently refer to gross domestic product (GDP) and
income.
)A
● Compared to aggregate statistics, per capita data offers more detailed information.
It is frequently employed as an apples-to-apples comparison across nations with
various populations.
● Per capita data is frequently compared to median data, which paints a sharper
picture because it takes outliers into account.
(c
● A tangible investment with inherent value based on its substance and physical
attributes is known as a real asset.

● Real assets include things like natural resources, land, buildings, and machinery.
Notes
e
● Real assets diversify a portfolio because they frequently move counter-clockwise to
financial assets like stocks or bonds.
in
● Compared to financial assets, real assets are typically more stable but less liquid.
● A claim of ownership of an entity or a contractual right to receive payments in the
future from an entity are represented by and have value from financial assets, which
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are liquid assets.
● Although a financial asset’s value may be derived from an underlying material or
O
real asset, market supply and demand can have an impact on it.
● Financial assets include things like stocks, bonds, money, certificates of deposit,
and cash.
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● An investment vehicle of this type that consists of a portfolio of stocks, bonds, or
other securities is known as a mutual fund.
● Small or individual investors can access diverse, expertly managed portfolios
si
through mutual funds.
● The various categories that mutual funds fall under describe the different types of
securities, investing goals, and return types that they invest in.
● r
Annual fees, cost ratios, and commissions paid by mutual funds may have an impact
ve
on their overall returns.
● Mutual funds are frequently used by employer-sponsored retirement plans to invest.
● An initial public offering (IPO) is the process of selling new shares of a private
ni
company to the general public.

● To hold an IPO, businesses must satisfy Securities and Exchange Commission
(SEC) and exchange standards.
U
● IPOs give businesses the chance to raise money by selling shares on the primary
market.
● Investment banks are hired by businesses to sell products, assess customer
ity
demand, determine IPO pricing, and other tasks.

● The company’s founders and early investors can use an IPO as an exit option to
realise the full return on their private investment.
● An initial public offering (IPO) is the process of selling new shares of a private
m
company to the general public.

● To hold an IPO, businesses must satisfy Securities and Exchange Commission
(SEC) and exchange standards.
)A
● IPOs give businesses the chance to raise money by selling shares on the primary
market.
● Investment banks are hired by businesses to sell products, assess customer
demand, determine IPO pricing, and other tasks.
(c
● The company’s founders and early investors can use an IPO as an exit option to
realise the full return on their private investment.

Glossary
Notes
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● Mutual Funds: In order to invest in securities such as stocks, bonds, money market
instruments, and other assets, mutual funds aggregate the funds from shareholders.
in
Professional money managers run mutual funds, allocating the assets and attempting
to generate capital gains or income for the fund’s investors.
● Personal Finance: The phrase “personal finance” refers to managing your finances
nl
as well as saving and investing. It includes financial planning for retirement, banking,
insurance, mortgages, investments, and taxes as well as estate preparation.
● Real Assets: Real assets are tangible possessions with inherent value derived from
O
their composition and characteristics. Precious metals, commodities, real estate,
land, machinery, and natural resources are examples of real assets.
● Per Capita: In economics and statistics, the phrase “per capita” is largely used to
ty
describe how specific measures apply to a population. It is most frequently used in
relation to national statistics and how they relate to that nation’s populace.
● IPO: An initial public offering (IPO) is the procedure of releasing fresh shares of
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stock to the public for the first time in a private firm. A corporation can raise equity
funding from the general public through an IPO.
● Secondary Market: Investors can acquire and sell securities they already possess
r
on the secondary market. Although stocks are also sold on the main market when
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they are originally issued, it is what most people refer to as the “stock market.”
● Debt Instruments: Debt instruments are tools that can be used by an individual, a
government, or a business to raise funds. An entity that pledges to repay the money
over time receives funding from debt instruments. Debt instruments include things
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like bonds, credit cards, credit lines, loans, and loans.

● Post Office Instruments: The Post Office Saving Schemes offer safe returns on
investment and a variety of trustworthy products. These programmes are run by
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over 1.54 lakh post offices that are dispersed throughout the nation. For instance,
the government uses the 8200 public sector banks and local post offices to manage
the PPF programme.
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● Certificate of deposits: A certificate of deposit (CD) is a type of savings product that

accrues interest on a single sum of money for a predetermined amount of time.
Unlike savings accounts, CDs require that the money remain untouched over the
full term to avoid penalties and lost interest. Savings accounts often provide lower
interest rates than CDs as compensation for liquidity loss
m
Check Your Understanding

1. The process of identifying upcoming financial needs and making appropriate
)A
preparations for them is known to be as: ___________

a. Financial Planning
b. Stock Planning
c. Equity Planning
(c
d. Organisational Planning

2. _________ handle resources and financial concerns for people who frequently lack
Notes
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market and financial expertise and understanding.
a. Financial Managers
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b. Financial Advisors
c. CEO
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d. Line Managers
3. _________ are the tangible possessions with intrinsic value because of their nature
and characteristics.
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a. Current Assets
b. Financial Assets
c. Real Assets
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d. Fixed Assets
4. The extremely liquid assets that can either be quickly converted to cash or are in
si
cash are known to be as:
a. Fixed Assets
b. Current Assets
c. Real Assets
r
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d. Financial Assets
5. The market where investors trade previously issued securities outside of the control
of the issuing corporations is known to be as: __________
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a. Primary Market
b. Secondary Market
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c. Tertiary Market
d. Fixed Market
6. A tool that is available to individuals, governments, and businesses for the aim of
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raising finance is known to be as ___________.

a. Debt Instruments
b. IPO
m
c. Equity Shares
d. Certificates
7. The purest and most cheapest kind of life insurance policy, providing the policyholder
)A
with financial protection in exchange for a certain sum in premium payments over a
predetermined period of time is known to be as____________.
a. Travel Insurance
b. Automobile Insurance
(c
c. Liability Insurance
d. Term Insurance
8. The most straightforward and cost-effective type of life insurance policy, providing the
Notes
e
policyholder with financial protection in exchange for a certain amount of premium
payments over a specified period of time is known to be as ______________.
in
a. Shares
b. Mutual Funds
c. Debentures
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d. Certificates
9. The _____________ of a tax-paying person or business is crucial information that
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the Income Tax Department needs to know.
a. Residential Status
b. Income
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c. Savings
d. Expenses
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10. A money market instrument that is issued in a dematerialized form in exchange for
money that has been placed in a bank for a predetermined amount of time is known
as ________.
a. Debentures r
ve
b. National Savings Certificate
c. Certificate of Deposits
d. Bonds
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11. ____________ policies are one of the insurance types that provide protection in the
form of a sum insured against losses incurred other than the policyholder’s death.
a. General Insurance
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b. Life Insurance
c. Health Insurance
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d. Liability Insurance
12. ______________ are short-term debt securities that can only be repaid at maturity
and have an annual maturity. If sold prior to maturity, they are sold at a reduced
price.
m
a. Mortgages
b. Debentures
)A
c. Promissory Notes
d. Treasury Bills
13. When a business needs to raise money, it has three options: internally generated
cash, equity financing, and __________.
(c
a. Shares
b. Debentures

c. Bonds
Notes
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d. Debt Financing
14. The minimum investment in a post office fixed deposit account is ________.
in
a. Rs. 3,000
b. Rs. 5,000
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c. Rs. 1,000
d. Rs. 10,000
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15. Postal fixed deposit investments are eligible for a tax deduction in _________.
a. Section 80D
b. Section 80C
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c. Section 80CC
d. Section 80DD
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16. Unlike any other life insurance instrument that offers coverage for a fixed number of
years, _________, also known as “traditional” life insurance plans, offer coverage
for the insured person’s whole life.
a. Term Life Insurance Plans r
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b. Whole LIfe Insurance Plans
c. Life Insurance Plans
d. Health Insurance Plans
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17. ____________ give the policyholder financial protection against life’s uncertainties
while enabling regular savings over a certain length of time.
a. Unit- Linked Insurance Plans
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b. Pension Plans
c. Endowment Plans
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d. Health Insurance Plans

18. __________ are the funds that only put money into government bonds and are risk-
averse investors that desire no credit risk linked with their investment like them.
a. Balanced Funds
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b. Gilt Funds
c. Mutual Funds
)A
d. Hybrid Funds
19. A _______ issuer has the opportunity to call the CD back before it matures after a
predetermined amount of time.
a. Brokered CD
(c
b. Zero-coupon CD

c. Callable CD
Notes
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d. Traditional CD
20. ______________ are insurance policies that provide financial support in the event
in
that your automobile or bike is involved in an accident.
a. Motor Insurance
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b. Car Insurance
c. Bike Insurance
d. Commercial Vehicle Insurance
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Exercise
1. What do you mean by Personal Financial Planning?
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2. How is Per Capita Income different from Per Capita Investment?
3. What do you understand by the term Real Assets? Discuss its types.
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4. Explain the merits and demerits of investment in real assets.
5. Why are ethical issues in personal financial planning important?
6. Briefly explain the difference between Real Assets and Financial Assets.
7.
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What are the different insurance policies?
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8. Discuss the role of investment in Foreign Market.
9. Discuss how Life insurance is different from Health Insurance.
10. Briefly explain the residential status of an Individual.
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Learning Activities
1. What are the different Post Office Savings instruments prevalent in the Indian
U
Market?
2. How to compute the Taxable income of an Individual?
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Check Your Understanding - Answers

1. a 2. b
3. c 4. d
5. b 6. a
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7. d 8. b
9. a 10. C
)A
11. a 12. d
13. d 14. c
15. b 16. b
(c
17. c 18. b
19. c 20. a

Further Readings and Bibliography

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1. Financial Management by R.P Rustagi
2. The Total Money Makeover: A proven plan for financial fitness by Dave Ramsey
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3. Taxation of Capital Gains: 11th edition, 2022 by CA S. Krishnan
4. The Only Financial Planning Book that you will ever need by Amar Pandit,
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CFA, CFP
5. Computation of Income from Salary, under Income Tax Law with Tax Planning
by Ram Dutt Sharma
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Module - II: Basics of Taxation

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At the end of this topic, you will be able to understand:
● Personal Taxation - Overview
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● Planning for Tax Considerations
● Heads of Income Tax
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● Computation of Tax Implications Heads of Income Tax and taxable income
● Individual Taxation Slabs
● Tax Planning: Tax Evasion and Tax Avoidance
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● Wealth Tax and Gift Tax, Service Tax
● Capital Gains Tax - Overview and Computation
● Basis of Classifying Short-term and Long-term Capital Asset
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● Various Deductions Under Income Tax Act, 1961
● Recent Tax Saving Schemes
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Introduction
The idea that income taxes is the most equitable form of taxation is based on the
idea that a person’s income is the best single indicator of their capacity to support the
government. The ability of the taxpayer to pay taxes is impacted by a variety of life-
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course factors, but income taxes are simpler to adjust than sales taxes or property
taxes (such as the number of dependents the taxpayer supports or extraordinary
medical expenses).
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A significant and significant portion of the government’s revenue comes from taxes.
The funds obtained from taxes are used by the government for a number of initiatives
aimed at advancing the country. There are three federal tiers to the Indian tax system,
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which is well organised.
2.1 Personal Taxation

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Fig: Tax

Before understanding the concept of Personal Taxation, it is important to

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understand the concept of Income Tax.
Income Tax
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Fig: Income Tax
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One type of direct tax is the income tax. Tax is the cost that the government
imposes on income, goods, or activities. Direct taxes and indirect taxes are the two
categories of taxes that the government charges. Direct taxes, such as income taxes,
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wealth taxes, etc., place the burden of paying the tax directly on the taxpayer. Indirect
taxes, such as excise taxes, customs taxes, service taxes, sales taxes, and value-
added taxes, are paid by parties other than the person who uses the good or service.
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Taxes have become recognised as a tool for achieving the social and economic
goals of a welfare state, albeit their primary goal still remains to provide the government
with a sufficient amount of income. They are now used to achieve social goals like
eliminating inequalities and expanding opportunities for the average person. They
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are also used to encourage greater earnings and more savings, promote industrial
development through targeted concessions, restrain ostentatious spending, and check
inflationary pressures.
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Personal Tax
Individual income taxes, also known as personal income taxes, are levied on the
earnings, salaries, dividends, interest, and other income that an individual receives
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throughout the course of the year. Typically, the state where the revenue is earned is
the one who levies the tax. Nevertheless, some states have reciprocity agreements with
one or more other states that permit income earned in another state to be taxed in the
earner’s home state.
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2.1.1 Personal Taxation - Overview

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Fig: Personal Taxation
The IRS provides a number of tax credits and deductions that people can use to
lower their taxable income. While a tax deduction can lower your taxable income and
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the tax rate used to determine your tax, a tax credit lowers your income tax by giving
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you a larger return of your withholding.
While individual income taxes are a significant source of funding for states, local
governments receive just a small portion of that funding.
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Individuals are generally taxed in India based on where they lived during
the applicable tax year. Individuals’ residence status is assessed on the basis of
their physical presence in India during the applicable tax year and is evaluated
independently for each tax year as well as past year.
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Personal income taxes are those imposed on an individual’s net income, which
is calculated by deducting available tax relief from their gross income, as well as any
capital gains. This metric is proportional to both the GDP and the total amount of taxes
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collected and pertains to the entire government (all levels of government).
India utilises the Top Marginal Tax Rate for Individuals, which includes surcharges
and health and education cess on taxes, as its benchmark.
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Indian personal income tax rates currently stand at 35.88%, according to the
Ministry of Finance. At 33.99% in 2015, the rate was.
Section 87A allows for a tax credit of Rs 12,500 for anyone with net taxable annual
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incomes up to Rs 500,000. This indicates that under both tax systems, individual
taxpayers with net taxable income up to Rs 500,000 will continue to pay no taxes.
People who chose the new tax system, however, would not be able to take use of
typical tax benefits like section 80C deductions for up to Rs 150,000 invested in certain
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instruments, section 80D for medical insurance, house rent allowance, etc.

2.1.2 Planning for Tax Considerations

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Fig: Planning for Tax Considerations
Tax planning is the review of a financial position or plan to make sure that every
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component functions as intended to allow you to pay the least amount of taxes. Tax
efficient refers to a strategy that lowers your overall tax burden. An individual investor’s
financial strategy should include tax preparation at every level. Success depends on
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minimising tax obligations and increasing the amount that can be put into retirement
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savings.
Applying existing tax regulations to the money earned over the course of a
certain tax period is one of the key goals of tax planning. Any source of income that
the relevant entity currently uses to generate income is eligible to provide the revenue.
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This can refer to sources of income for individuals like interest accumulated on bank
accounts, salaries, wages, and tips, bonuses, investment gains, and other kinds of
income as currently defined by law. Businesses will take into consideration revenue
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from client sales, stock and bond issuances, interest-bearing bank accounts, and any
other sources of income that are currently regarded as taxable by the relevant tax
authorities.
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Understanding Tax Planning

Given that all persons who come within the IT category are required to pay taxes,
tax preparation is crucial to everyone’s financial development. One can streamline their
tax payments through tax planning so that they can obtain significant returns over a
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predetermined time period with little risk. Effective tax preparation will also aid in
lowering a person’s tax obligation.
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The following categories apply to tax planning:

● Tax planning that is permitted by the law is referred to as permissive tax
planning.
● Tax planning with a purpose: Planning with a particular goal in mind.
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● Tax planning that is done in the beginning and near the conclusion of the fiscal
year is referred to as long-range and short-range planning.

Any financial plan for individuals, families, or corporations must include tax
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planning. With careful planning, you can identify the tax benefits for which you are
eligible. You might be able to benefit from:
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1. Deductions: You can lower your taxable income by taking tax deductions.
They often take the form of annual expenses that you can deduct from your
gross income. A charitable donation might be deducted.
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2. Rebates: Refunds in the form of rebates take place after a retroactive tax cut.
During financial recessions, Congress occasionally grants rebates to assist
boost the economy. Additionally, they are employed as incentives for eco-
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friendly behaviours.
3. Credits: Credits give you the option to deduct off the total amount you owe.
You can be eligible for a tax credit if you have children, are a low-income
household, or are a student.
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4. Tax breaks: A tax break is when the government lowers the amount that a
particular group of people must pay. They are typically employed to encourage
particular behaviour.
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5. Exemptions: Exemptions lessen or do away with a person’s obligation to pay.
You can lower your taxes by a specific amount for each child or other relative
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under your care thanks to dependent-related exemptions.
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Types of Tax Planning
Here are the three types of tax planning:
1. Purposive tax planning

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2. Permissive tax planning

3. Long range and Short range tax planning
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1. Purposive tax planning: Purposive tax planning implies utilising tax laws intelligently
in order to take advantage of tax benefits depending on national priorities. It entails
tax planning with the aim of maximising benefits by creating appropriate plans for
asset replacement, wise investment choice, shifting residential status, and diversified
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business activities and revenue. Additionally, Sections 60 to 65 of the Income Tax

Act deal with the income of other people who are included in the assessee’s income.
Here, the assessee can make plans to prevent provisions from being attracted in
order to increase the available resources. Purposeful tax planning is what this is.
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2. Permissive tax planning: Permissive tax planning refers to the strategies that are
permitted by various legal provisions, such as strategies for earning income covered
by Section 10(1) or Section 10(l), strategies for taking advantage of different
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deductions, incentives to profit from various tax breaks, etc. Alternatively put, it
refers to preparation done in accordance with the provisions of the tax rules.
3. Long range and Short range tax planning: Short-range planning means preparation
done yearly to achieve limited or defined goals. It is carried out at the end of the
year to formally lower taxable income. Also, there is no long-term commitment in
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short-term tax planning. When an individual’s income increases, they may, up to

the required maximum, invest in PPFs or NSCs (National Savings Certificates).

The purchase of LIC, ULIP, pension plans, etc. is not recommended. Long-term tax
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planning is the term used to describe the actions done by the assessee.
The beginning of the income year is when long-term planning is done to be
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implemented throughout the year. Long-term planning, such as the transfer of assets
without taking into account minor children, does not instantly benefit. In this instance,
the money will be merged to transfer to the child while they are still minors, but after
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they turn 18, they will own the income.
Planning for Tax Considerations
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Salaried people in India rush to make investments at the conclusion of tax planning
season to lower their tax bill since they are not completely informed of the tax planning
process. They eventually wind up paying more taxes than they should because of this,
which has a negative impact on the tax they must pay.
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● Utilise the Section 80C deduction in its entirety: Salaried people with a gross salary
of at least Rs. 2,50,000 are eligible to use the whole Rs. 1,00,000 limit, which is
the maximum reduction allowed by Section 80C. People who invest more than
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Rs. 1,000,000 in Section 80C in particular locations fail to realise that the benefits
are constrained. The amount the investor is entitled to is just Rs. 100,000 despite
depositing Rs. 70,000 and Rs. 40,000 in Public Provident Fund and ELSS (Equity
Linked Savings Scheme), respectively. r
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● Tax burden reduction beyond Section 80C deductions: If your salary exceeds Rs.
2,50,000 per year and the tax savings provided by Section 80C are insufficient to
reduce your overall tax obligation, take into account the following:
◌◌ Home loan: Under Section 24, interest payments up to Rs. 1,50,000 per year
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are eligible for a reduction.

◌◌ Medical insurance: This qualifies for a deduction of up to Rs. 15,000 per year
under Section 80D.
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◌◌ Donations: Donations to specific funds or institutions are entitled to tax

benefits under Section 80G.
● Assert tax advantages on house rent paid: IIf HRA (House Rent Allowance) is not
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incorporated in the wage structure, salaried employees might deduct the rent they
pay for a place to live. The least amount of the following reductions is available
under Section 80GG:
◌◌ 25% of total income,
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◌◌ Rs. 2,000 per month, or

◌◌ the excess of housing costs above 10% of total income.
● Reorganise the salary: Over time, reorganising the salary and introducing specific
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equipment can help to reduce the tax liability. Salary reform is a more effective
strategy for claiming tax benefits. The following can be incorporated into a person’s
compensation package:
◌◌ Up to Rs. 60,000 might be exempt from taxes each year with food coupons.
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◌◌ Up to Rs. 15,000 in medical costs per year are covered by the employer.

◌◌ People who live in rented homes should have House Rent Allowance (HRA)
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included in their pay.
◌◌ Up to Rs. 800 in transportation allowance discharge per month.
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● Consider a combined mortgage: The primary repayment on a mortgage is eligible
for a reduction of up to Rs. 100,000 per year and the interest paid is eligible for a
reduction of up to ‘150,000 per year. When a home loan is large enough, the interest
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and principal repayment exceed the allowed amount. To make sure that tax benefits
are used to their fullest, a salaried person might apply for a joint house loan with his
parent, spouse, or sibling.
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By doing this, both owners can claim tax breaks based on how much of the loan
they actually own.
2.1.3 Heads of Income Tax
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Five primary income tax heads apply to an individual under Section 14 of the
1961 Income Tax Act. An essential component that must be determined based on an
individual’s income is the computation of income tax. The income needs to be correctly
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classified in order to make the calculation simple and to avoid any misunderstandings.
The income sources are divided up into different categories by the government, and the
tax is then calculated in accordance with those categories. The laws and regulations
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are in accordance with the information provided in the Income Tax Act.
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1. Income from Salary
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Fig: Income from Salary

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The income can be charged under this section of the Income Tax Act if there is a
relationship between the payer and payee in a firm or agreement, and the relationship
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is characterised as one of employer and employee, where the employee is receiving

payment for their services. Any form of financial compensation can be considered a
salary. Any basic and typical wage, annuity, pension, gratuity, leave encashment, etc.
could fit this description.
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The total amount or gross salary is subsequently taxed under this income head of
the Act after making a total aggregate of the complete amount of income excluding the
exemptions, if any are present.

All basic salary, as well as commissions and incentives, are fully taxable.
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Salaries are included in the category of income referred to as “salary,” and certain
allowances are subject to tax exemption in certain circumstances. According to the Act,
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an employee is paid a set sum of money as compensation for the work and services
he performs. Unless otherwise specified, the allowance is usually paid in addition to
the wage. Some allowances are exempt from tax, up to a monthly maximum of 800
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rupees. One example is a conveyance allowance, which is issued for the purpose of an
allowance.
2. Income from House Property
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Fig: Income from House Property
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This section of the Income Tax Act, which is under a different heading, provides
clarification and detail regarding the taxation regime applicable to the home or other
real estate that you as a taxpayer are occupying. Regarding the deduction for income
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taxes, vacant residential property is regarded as “self-occupied.” When a taxpayer

owns more than one self-occupied home, only one home is classified as a single self-
occupancy dwelling property. When you take a break, you’ve been released.
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From sections 22 to 27, the second head of the Income Tax Act is devoted to the
computation and calculation of the whole standard amount of income by a person in
the home or other property that he or she is legally the owner of. The whole value of
the property or piece of land is what determines the amount of tax due, not the amount
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of rent received. However, the rent-generated revenue will also be included in the
calculation of taxable income if the property or both are being used in the ordinary
course of business.
Taxes apply to every single piece of residential or commercial property that is

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owned.
A few requirements must be met in order for income from residential property to be
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taxable.
● The house property must include a house, a building, or any attached land.
● The owner of the dwelling property ought to be the taxpayer.
● The taxpayer may not conduct any business or engage in any professional
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activity through the use of the house property. It’s restricted to residential use
only.

Once these requirements are completed, the income produced by residential

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property becomes chargeable and subject to tax deduction in accordance with the
Income Tax Act.
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3. Income from Profits and Gain of Business or Profession
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Fig: Income from Profits and Gains of Business and Profession
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The Income Tax Act’s third head is represented by this. Any sort of trade,
manufacturing, or trading of any kind is considered to be a business. A profession
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means that after receiving formal education and passing a valid examination,
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one has acquired specialised or specialised knowledge in a certain sector. Profits
and gains made throughout the course of a business are fully and entirely taxable
under this heading for income. Any type of remuneration or other payments owed to
specific individuals are not exempt from tax, according to Section 28 of the same Act.
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Taxes are also applicable to income derived from the professional’s particular line of
business or trade.
All profits derived from the sale of imported goods, incentives, any type of interest,
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salary, bonus, or commission from a company are subject to taxation under the Income
Tax Act’s “Income” head of law. Even money received by a corporation that sells key
man policies is subject to taxation. There are a few requirements that must be met in
accordance with Section 28 of the Income Tax Act in order for an income to be charged
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under the heading of income from profits and gains from business or profession.
● Business or profession must first exist in order for income to be charged.

● The taxpayer must operate the business or practise the profession or make
the assessment themselves.
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● The profession or business whose revenue is to be assessed must have been

in operation and sustained for a significant portion of the prior year.
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● The tax amount is determined by the business’s income and gains from the
previous year’s running and operating period.
● Charges may be applied to any ongoing or active business or profession that
the assessee is engaged in.
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The income from profits and gains earned can only be subject to tax under the
Income Tax Act if and only if certain circumstances apply. It is significant to remember
that in order to be assessed under this area, a business or profession need not have
been in operation the entire prior year. It is charged if the assessee engaged in it for a
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significant portion of the prior year.
4. Income from Capital Gains
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Fig: Income from Capital Gains
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Income derived from any capital asset, whether it be moveable or immovable, is
regarded as taxable under the fourth head of income under the Income Tax Act. Long-
term capital gains and short-term capital gains are the two categories into which capital
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profits are split.
If a capital owner sells their investment within 36 months, they are eligible for
a tax deduction for short-term capital gains. The same is true for securities that are
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sold within a year after their purchase. Equity and equity share funds that have been
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sold on the stock exchange are subject to securities transaction tax on such short-
term capital gains, which is chargeable at a rate of 10% up until 2008–09 and 15%
beginning in 2010.
Long-term capital gains, on the other hand, are subject to a 20% tax rate. Long-
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term tax deductions are not permitted under sections 80C through 80U. The basic
exemption limit is adjusted against long-term capital gains in the case of single and
HUF taxpayers whose income is less than the minimum amount needed to qualify for
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tax exemption.
In the case of securities and shares, this is a period of twelve months from the
date of purchase. Long-term capital gains are those that have been held for longer than
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thirty-six months. By subtracting the long-term capital asset’s net selling consideration
from its index cost of acquisition as well as its acquisition and improvement costs, it
is possible to calculate the long-term capital gain. Following that, the Income Tax Act
levies tax under the remaining amount.
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5. Income from Other Sources

Income from other sources is the fifth and final category of income under the
Income Tax Act. This category of revenue includes any earnings that originate from
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sources besides the four heads described earlier.
Other sources of income could include things like interest from bank deposits,
lottery winnings, or even any amount of money that is greater than Rs. 50,000 that the
taxpayer receives from someone else who is not a relative, spouse, or if the money is
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inherited through inheritance or a bequest. According to Section 56(2) of the Act, taxes
are due on all of these sources, including gambling and card games.

The specifics for the computation and income tax calculator produced from other
Notes
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sources are outlined in Section 145 of the Income Tax Act. The Section mandates that
the assessee’s regular accounting technique be used to compute and calculate income
from other sources. Both cash and a mercantile accounting system are acceptable
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forms of payment for this.
Conclusion
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When the taxpayer is aware of the type of tax they are paying to the government,
collection of that tax is considerably easier and more practical overall. All citizens
who are qualified to pay taxes are required to comply with these income categories.
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Any taxpayer who is found trying to avoid paying the required tax amounts after being
detected breaking one of the Income Tax Act’s sections is subject to the full force of the
law.
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2.1.4 Computation of Tax Implications Heads of Income Tax
1. Computation of Tax under the Salaries Head
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● Any salary that an employee is owed from a current or past employer for the
preceding year, regardless of whether it has been paid or not.
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Even though the employee is not owed the money during the accounting year,
any remuneration paid or permitted to him during the previous year by or on
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behalf of an employer, or former employer, would be subject to taxation under
this head.
● In circumstances where the arrears of salary received or permitted to the
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employee during the prior year by or on behalf of an employer or a former

employer were not subject to tax in an earlier year, they would be subject to
tax during the prior year.
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However it would not include:

1. Any pay paid in advance and included in a person’s total income for any prior
year may not be included in that person’s total income again at the time the
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salary is due.
2. For the purposes of this section, “salary” shall not include any incentive,
commission, or other payment owed to or received by a partner of a firm from
the firm, regardless of the name given to such payments.
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Although all pay-related income is included in salary, there are several types of
income in each of these categories that are either completely exempt or exempt up to
a specified amount. The term “Gross Salary” refers to the sum of the aforementioned
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revenues, less any applicable exemptions. According to Section 16 of the Act, the
following three deductions are permitted from the “Gross Salary” to determine the “Net
Salary”:
1. Section 16 of the standard deduction

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2. Section 16’s deductibility of entertainment expenses (ii)

3. Section 16 of the Code allows for a deduction for any amount paid as
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employment taxes (iii).
Due Basis of Taxation
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The standard method for taxing salary income is on a “due” basis. As a result,
whether an employee receives the wage owed to him or not, it is still taxable. There are
several exceptions to this rule, such as when an employee receives advance payment
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of wages that are subject to taxation at the time of receipt even if they are not owed to
them.
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However, the explanation to Section 15 specifically states that where an item of
salary income received in advance by an employee is taxed as and when it is received,
it shall not again be charged to tax when it becomes due to the assessee in order to
prevent double taxation of the same item of income in the hands of the same employee.
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It is not necessary for the employee who is subject to tax under this head to receive pay
from his current employer in order for there to be liability to tax under this head.
Points for Consideration for Taxability of Salary
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The following points should be kept in mind while computing Income under the
Salaries:
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1. Any lump sum payment made by an employer to an employee in lieu of, or in
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commutation for, a salary, pension, or other form of income from employment
is nevertheless subject to taxation as income from salary in the year in which
it becomes due or in which the employee receives it, whichever comes first.
Any corporation is strictly forbidden by Section 200 of the Companies Act from
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providing any of its employees with tax-free compensation.

2. The employee’s gross remuneration is to be used as the basis for calculating
the income taxable under this section. The net wage that the employee
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receives should thus be increased by any tax withheld at source or additional

deductions made by the employer on the employee’s behalf for a provident
fund, insurance premium, or for any other reason. The fact that some
deductions, such as provident fund contributions or insurance premiums, may
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qualify for any reduction from gross total income in the employee’s personal
assessment has no bearing on the amount of compensation that is owed to
the employee.
3. Any pay that an employee voluntarily surrendered to the Central Government
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on or after January 4, 1961 in accordance with the Voluntary Surrender of

Salaries (Exemptionfrom Taxation Act), 1961, would not be considered taxable
income in the employee’s hands. In all other circumstances, even if the
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employee might not receive the income, the wage that was willingly forgone
or otherwise surrendered by the employee would still be subject to tax. For
the simple reason that the amount returned is only an application of income,
which is irrelevant for the purposes of taxing the employee, there is no tax
exemption available for salary surrender.
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The aforementioned or surrender of compensation may qualify the employee

for a deduction from gross total income under Section 80G of the Act if it
reflects a donation for charitable purposes. Salary forfeited before it is due,
however, is not subject to taxation. Furthermore, the seeming foregoing

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of a fictitious compensation would not be subject to tax when there is no
agreement to pay any salary in actuality.
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4. When a person agrees to serve as a principal in a facility out of a sense of
altruism without receiving compensation from the facility, his salary is shown
in the school accounts as an item of expenditure, but the same amount is
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entered in the receipts as a donation by the management in a separate cash
book intended exclusively for their use. These entries are merely book entries,
and no money is actually paid to him; therefore, taking into consideration.
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5. Salary is taxable even if payment is not made or if the employer is unable
to be reached for any other reason, such as insolvency. The costs, if any,
incurred by the employee to file a lawsuit against his employer in an effort to
obtain payment would not also be permitted as a deduction from the income
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that is readily available in his hands. This is due to the fact that, for the
purposes of taxation, the actual receipt of the money is irrelevant.
6. Whether a company is a government employer or a private employer is
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irrelevant. Additionally, a foreign government may pay a salary to its personnel
who are working in India, and this compensation is subject to taxation under
the “Salaries” heading.
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7. The leave salary given to the employee’s legal heirs in relation to privilege
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leave that was still credited to their account at the time of their death is not
taxable as salary. It is a gift in the form of an ex-gratia payment made on the
basis of compassion. The payout does not therefore have the characteristics
of a salary.
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2. Computation of Tax under the Head House Property

The sections 22 to 27 of the law cover the provisions for calculating income from
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real property. The guidelines for calculating income from residential property are
covered in this unit. In the charging section (Section 22), the annual value is specified
as the foundation for charging, and this value is used to calculate the income from
house property. In order to calculate “Income from House Property,” one must first
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determine the property’s annual worth. Section 23 contains the definition of yearly
value as well as the formula for calculation. In section 24, it is stated what allowable
deductions are allowed from real estate.
Ownership of House Property

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Only the owner of a residential property (or the deemed owner) is subject to
income tax under this head. An owner could be a single person, a group of people
who work together as a cooperative, or a company. Both residential and commercial
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uses of the property are permissible for rent to third parties. Even though the owner
does not receive any income, the annual worth of the property is assessed to tax in his
hands. Only the owner from the prior year must still exist for tax reasons. Due to the
fact that the tax is to be paid on the income from the prior year, it is irrelevant whether
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the ownership of the property changes during the pertinent assessment year.

Computation of Income from Let Out House Property

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After taking specific deductions from the net annual value of the rental property,
rental income is calculated.
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Calculating the Net Value of a Rented Property: The gross annual value will be the
highest of the next three figures for properties that are rented out.
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1. The property’s municipal value;
2. The actual rent earned throughout the year; and
3. Fair rent, which is the rent of comparable properties in the same or nearby
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neighbourhood..
Municipal taxes that were actually paid during the year must be subtracted from
the gross yearly value to get the net annual value. The following situations require a
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deduction of municipal taxes:
1. The property was rented out for all or a portion of the previous year (one self-
occupied residential property for which “nil” annual value is adopted does not
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qualify for this deduction).
2. The landlord is responsible for paying the municipal taxes (If the Municipal
taxes or any part thereof are borne by the tenant, it will not be allowed)
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3. Municipal taxes must be paid during the year; it will not be acceptable if they
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become due but are not actually paid.
According to Section 24, the following costs may be deducted from the Net Annual
Value (the value after municipal taxes are subtracted from the Gross Annual Value):
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1. Repair and collection fees, which account for 30% of the annual value It is
a statutory deduction that is independent of the owner’s actual repair or
collection costs.
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2. Interest: Interest payable thereon is subtracted from the annual value when
money is borrowed at interest and used to either buy, construct, repair, or
reconstruct the subject property. Calculate and deduct the amount of interest
that will be due for the applicable year. Whether or not the interest was
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actually paid during the year is irrelevant.

3. Allowed Deductions for Rental Property: The following deductions are allowed
when calculating House Property Income.
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30% of the property’s net annual worth will be used for repairs, upkeep, and rent
collecting costs.
Interest on borrowed funds used to construct, purchase, or renovate the property;

)A
Computation of Annual Value or Net Annual Value

The “annual value” serves as the basis for determining income from real estate.
This has been defined as the sum for which it is reasonably anticipated that the
property will be rented out from year to year. It is the intrinsic ability of the property to
(c
generate money. The property does not have to be rented out in full. Furthermore, it’s
not necessary for the reasonable return on a property to be the same as the actual rent

that is collected when the property is really rented out. It is expressly stated that the
Notes
e
annual value of the real rent shall be used when it exceeds the fair return.
If the tenancy is influenced by fraud, an emergency, a close relationship, or another
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factor, for example, and the actual rent is less than the reasonable rent, the latter will
be the annual value. The cost of construction, the standard rent, if any, under the Rent
Control Act, and the rent of comparable properties in the same neighbourhood are all
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indicators that might help determine the property’s annual value.
Gross Annual Value [Section 23(1)]
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The Gross Annual Value of the Property shall be determined by taking into account
the following four factors:
1. The tenant must pay the rent (actual rent)
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2. The property’s valuation by the municipality.
3. Appropriate rent (market value of a similar property in the same area).
4. The minimum rent required by the Rent Control Act
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Computation of Income from Self-occupied House Property
● One self-occupied dwelling property’s annual worth is assumed to be “Nil” [Section
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23(2)(a)] if it was never really rented out during the previous year. Only the interest
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on borrowed capital is permitted as a deduction under section 24 from the yearly
value. The deduction shall be for the lesser of the actual amount incurred or Rs.
30,000.
● When borrowing money or purchasing property after 3.31.999, the deduction is Rs.
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1,50,000/- for the fiscal years 2002-03 and later.
House which is Partly Self-occupied and Partly Let Out

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In this situation, the annual value calculating process is as follows:
(a) A partially rented property The yearly worth of the house shall be determined as
follows when a portion of it is self-occupied for the entire year and a portion is self-
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occupied for the entire year:

(i) The proportional yearly value for the self-occupied component for the entire
year shall be subtracted from the house’s total annual value.
(ii) The remaining amount under I represents the annual value for the portion that
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was leased for a portion of the year.

(b) A home that was vacant for any period of the prior year but was occupied by the
owner for the balance of the year The benefit of Section 23(2) is not applicable in
)A
this situation, so the revenue will be calculated as though the property were rented.
c) Self-occupied House Remaining Vacant: If the assessee has designated only one
of the houses (owned by him) for his residence or is the owner of only one house
intended for his own residence but was forced to live in a house that is not his in the
(c
previous year, he may be eligible to receive a non-occupation or vacancy allowance

for the time period during which this occurred. He may be relocating for work or

professional reasons, or he may be a salaried employee who has been transferred,

Notes
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among other possibilities. The house’s annual worth while it was empty shall be nil.
3. Computation of Tax under the Head Business and Profession
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Sections 24 to 44D cover the provisions for calculating income from business and
profession. The provisions for calculating income from business and profession are the
subject of this unit. The range of income that can be taxed under this head is specified
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in Section 28. Sections 29 to 37 list the expenses or allowances that the Act expressly
permits, while Sections 40, 40A, and 43B list the expenses that the Act expressly
forbids for calculating taxable income.
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4. Computation of Profits of Business or Profession
According to the rules in Sections 30 to 43D, business and professional income
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and gains are calculated. Deductions that are specifically permitted for calculating
commercial or professional profits can be found in Sections 30 to 37.
Section 40 lists the expenses that are permitted for calculating a business’s or
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profession’s profits based on general commercial principles. Before understanding
the deductions that are specifically permitted when calculating business or profession
profits, it is vital to understand these principles.
The following are the basic business tenets:

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1. Profits should be calculated using the usual accounting technique used by the
assessee, whether it be on a receipt basis or an accrual basis, provided that
actual profit can be determined by this method.
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2. Only losses and expenses linked to business that occurred during the
applicable prior year are eligible for deduction.
3. These misfortunes and costs must be incidental to running the company.
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4. Expenses from a business that was shut down before the start of the
preceding year cannot be deducted from the revenue of any other active
business owned by the assessee.
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5. Some necessary expenses, even though they are not expressly permitted
nor denied, are deducted when calculating the earnings of a business or
profession based on basic commercial principles, provided that they are not
losses or expenses of a capital or personal nature.
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6. Any expense incurred in consideration of commercial expediency is eligible for

a deduction.
7. Only the income of the business for which the expenses were spent may
)A
be deducted. It is not permitted to deduct one business’s expenses from

another’s revenue.
Specific Deductions under the Income Tax Act

Sections 30 to 37 address expenses that are specifically permitted as a deduction
(c
when calculating business income, while Sections 40, 40A, and 43B cover expenses

that are not. It is specifically permitted to deduct the following costs from company or
Notes
e
professional profits and gains:
1. Rent, rates, taxes, repairs, and insurance for buildings: The following deductions are
in
permitted under section 30 with regard to rent, rates, taxes, repairs, and insurance
for spaces used for a business or profession:
(a) if he has agreed to pay for repairs (applicable if the assessee has occupied
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the property as a tenant), the amount of rent, the amount of current repairs
(not capital expenditure) (if the assessee has occupied the premises other
than as a tenant), and the amount of current repairs (not capital expenditure).
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(b) any sum on account of land revenue, local rates or municipal taxes; and
(c) Amount of any premium for insurance against the danger of property damage
or destruction.
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(d) Applications of section 43B: Under certain conditions, land revenue, local
rates, or municipal taxes are deductible.
2. Machinery, plant, and furniture repairs and insurance costs are deductible under
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section 31 since they do not count as capital expenditures. Section 31 also allows
for the deduction of expenses for insurance and current repairs of plant, machinery,
and furniture used for commercial purposes.
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3. Depreciation: Depreciation is calculated in accordance with the guidelines in section
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32.
Basis of Depreciation
As was mentioned in the previous section of this unit, depreciation is given with
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regard to “Block of Assets,” which, according to Section 2(11), is defined as a group

of assets falling under a class of assets, including tangible assets like buildings,
machinery, plant, or furniture and intangible assets like know-how, patents, copyrights,
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trademarks, licences, franchises, or any other business or commercial rights of a similar

nature, in respect of which the same percentage of depreciation.
In addition, all sorts of assets can now be depreciated based on their written-down
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value. Once more, no deduction shall be permitted under this provision in respect of
any motor vehicle built outside of India if the assessee purchases the vehicle after
February 28, 1975, and the usage of the vehicle is not for the purpose of operating a
company to rent the vehicle to tourists, or,
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a. the actual cost of any machinery or plant is allowed as a deduction in one

or more years under an agreement entered into by the Central Government
under Section 42 of the Act, and
)A
b. outside of India in his business or profession in another country.

The following concepts are significant for depreciation:
1. Actual Cost,
2. Written Down Value, and
(c
3. Depreciation Classification

Calculation of Written Down Value (WDV) of a Block of Asset

Notes
e
The WDV of an asset block can be computed in the following manner:
1. Determine the write down value (WDV) of all depreciable assets for which the
in
same rate of depreciation is permitted on January 1 of the year prior, relevant
to the assessment year. Block assets refer to all such assets;
2. The rise in WDV caused by the actual cost of any asset purchased inside that
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block over the previous year that is included in that block;
3. Reduce from the aforementioned the moneys payable in respect of any asset
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included in that block that is sold, discarded, destroyed, or demolished during
the preceding year, as well as the amount of the scrap value, if any, so that
the amount of such reduction does not exceed the written down value as so
increased; and
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4. In the case of a slump sale, decrease by the actual cost of the asset included
in that block as reduced by the amount of depreciation that would otherwise
be applied.
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It implies that there would be no capital gain if the net consideration of an asset
removed from the block is less than the balance under (ii). The excess shall be judged
to be short term capital gain if the net consideration of an asset exceeds the balance
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under (ii) (the value of all assets in the block). The loss will be considered a short-term
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capital loss if all of the assets in the block are sold in the preceding year and the net
consideration is less than the amount under (ii).
When a capital asset is purchased by the assessee pursuant to a plan for the
corporatization of an Indian recognised stock exchange, approved by the Securities
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and Exchange Board of India established pursuant to Section 3 of the Securities and
Exchange Board of India, 1992 (15 of 1992), the actual cost of the asset shall be
deemed to be the amount that would have been considered the actual cost had there
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been no corporatization.
5. Computation of Tax under the Head Income from other Sources

Income that is subject to taxation under the Income-tax Act but is not expressly
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subject to assessment under any of the areas previously mentioned shall be charged
as “income from other sources.” Thus, this head is a residuary head of income, and
income under it can only be estimated after determining whether a given item of income
is otherwise assessable under one of the previous four categories. In addition to taxing
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income not covered by the other heads, Section 56(2) particularly lists specific income
sources that are always subject to taxation under the head.
)A
Such incomes are:

1. Dividends [Section 56(2)(i)]: A subsidiary on capital account cannot be
recognised as an accumulated profit, although current profit would be included
in accumulated profits.
(c
2. Keyman Insurance Policy: If it is not taxable under any other head of income,
the amount received under a Keyman insurance policy, including any bonuses
on each Policy.

3. Lottery winnings [Section 56(2)(ib)]: Any winnings from lotteries, crosswords,

Notes
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races, including horse races, card games, and other games of any kind, as
well as winnings from gambling or betting of any kind.
in
Without any expenses, allowances, or deductions permitted by Sections 80C
to 80U, the entire wins income will be taxed. However, costs associated with
owning and caring for race horses are acceptable. Additionally, such income is
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subject to a special rate of income tax, which is 30% plus a surcharge and a
cess at 3%.
4. Contribution to a provident fund: If income of the type described in
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Section 2(24)(x) (relating to certain contributions to any provident fund,
superannuation fund, fund established under the provisions of the ESI Act, or
any other fund for the welfare of such employees) is received by the assessee
from his employees in his capacity as an employer, income of that type will
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be subject to income tax under the head “income from other sources” if it is
not. However, if the employer makes a deposit of that sum on or before the
deadline for making such a contribution, he will be entitled to a deduction.
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5. Interest from Securities: If the interest from Securities is not subject to income
tax under the heading “Profits and Gains of Business or Profession,” the
income from Securities is not subject to income tax.
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6. Revenue from the rental of equipment, etc. [Section 56(2)(ii)]: If the income is
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not taxable under the heading “earnings and gains of business or profession,”
it may come from the assessee’s machinery, plant, or furniture that is rented
out.
7. Renting out a building with machinery, plant, or furniture [Section 56(2)(iii)]:
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If an assessee rents out a building and also leases out machinery, plant, or
furniture that belongs to him, and the building is inextricably linked to the lease
of the said machinery, plant, or furniture, the income from the rental, if it is
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not subject to income tax under the heading “Profits and gains of business or
profession.”
8. Money Gifts: If an individual or a Hindu undivided family receives a sum of
money in any previous year from a person or persons on or after the first
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day of April 2006 but before the first day of October 2009 that exceeds fifty
thousand rupees in total value without receiving any other compensation, the
entire aggregate value of that sum is subject to taxation [Section 56(2)(vi)].
Provided that this clause shall not apply to any sum of money received:
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(a) from a relative;

(b) on the occasion of the person’s marriage;
)A
(c) in accordance with a will or inheritance;

(d) in anticipation of the payer’s passing;
(e) from any local authority as described in the Explanation to clause (20) of
Section 10; or (f) any combination of the foregoing.
(c
(f) from any trust or institution mentioned in clause (23C) of section 10;

(g) from any trust or institution registered under section 12AA; or

Notes
e
(h) from any fund, foundation, university, or other educational institution, hospital,
or other medical institution.
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9. Gifts in Cash or in Kind: If an individual or a Hindu undivided family receives,
in any prior year, from any person or individuals on or after the first day of
October 2009,
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a. any sum of money, without receiving anything in return, the whole value of
which exceeds Rs. 50,000; any immovable property,
b. without receiving anything in return, the total value of which exceeds Rs.
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50,000; and the stamp duty value of such property.
c. any type of property, excluding immovable property
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Without consideration, the total aggregate fair market value of such
property exceeds fifty thousand rupees;
or consideration that is less than the total aggregate fair market value of
such property by a sum greater than fifty thousand rupees, the portion
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of such consideration that is greater than the total aggregate fair market
value of such property
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However, the Assessing Officer may refer the valuation of such property
to a Valuation Officer if the Assessee contests the stamp duty value of the
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immovable property mentioned in sub-clause (b) on the grounds listed in
sub-section (2) of section 50C. In this case, the provisions of sections 50C
and (15) of section 155 will, to the extent possible, apply to the stamp duty
value of such property for the purpose of sub-clause (b), just as they do for
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valuation of capital assets under that section.

Additionally, this clause shall not apply to any sum of money or any
property received from a local authority as defined in the Explanation to
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clause (20) of Section 10;

from any relative; on the occasion of the individual’s marriage; under a will
or by way of inheritance; or in anticipation of the payer’s or donor’s death,
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as applicable.
from any fund or foundation or university or other educational institution or
hospital or other medical institution or any trust or institution referred to in
clause (23C) of section 10; or
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from any trust or institution registered under section 12AA.

10. Shares received as gifts: If a business or company that is not one in which the
general public has a significant investment received shares of a business that
)A
is not one in which the general public has a significant investment from any
person or individuals on or after June 1, 2010,
(a) without consideration, for which the total aggregate fair market value of
such property exceeds fifty thousand rupees;
(c
(b) for consideration, for which the total aggregate fair market value of such
property exceeds such consideration but for which the total consideration

is less than the total aggregate fair market value of such property by an
Notes
e
amount exceeding fifty thousand rupees:
With the caveat that any such property acquired through a transaction
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that is not recognised as a transfer under section 47’s clauses (via), (vic),
(vicb), (vid), or (vii) is exempt from this clause.
11. When a company that is not one in which the general public has a significant
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stake receives, in any previous year, from a resident, any consideration for
the issuance of shares that exceeds the face value of such shares, the total
consideration received for such shares that exceeds the fair market value of
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the shares shall be treated as income.
As long as the compensation for issuing shares is received, this provision won’t
apply.
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◌◌ by a firm from a class or classes of people that the Central Government may
notify in this regard, or
◌◌ by a venture capital initiative from a venture capital company or a venture
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capital fund.
Tax Treatment for Dividends
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Dividends, as described in Section 115-O, are exempt from taxation in the hands
of their receivers under Section 10(34). However, Section 115-O, the primary operative
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provision in the newly introduced Chapter XII-D, mandates that a company declaring or
distributing dividends pay 15% plus surcharge plus Education & Secondary and Higher
Education Cess as a tax on distributed profits in addition to the tax it is required to pay
on its income normally. Any provision of the Act does not permit a deduction for this tax
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on distribution that a corporation has paid.
Dividend is the same as what is defined in Section 2(22) for the purposes of
Section 115-O and, consequently, for the purposes of Section 10(33), with the exception
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that clause (e) thereof shall not be recognised as a dividend for either of these
purposes.
According to the definition in the Income-tax Act, ‘Dividend’ includes the following
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items:
1. Any distribution of accumulated earnings by a business, whether capitalised or not,

if the business releases any or all of its assets to its shareholders as a result of
the distribution; Current profit would be included in accumulated profit, but capital
m
account subsidies cannot be included in that calculation;

2. Any distribution of shares by way of a bonus to a company’s preference shareholders,
up to the extent that the company has accumulated profits, whether or not they
)A
have been capitalised; and any distribution by a company to its shareholders of

debentures, debenture stock, or deposit certificates in any form, with or without
interest;
3. Any payout to shareholders following a company’s dissolution, to the extent that
(c
such distribution may be attributed to the accumulated profits of the business just
prior to its bankruptcy, whether or not those gains were capitalised;

4. Any payment made to shareholders by a firm on the decrease of its share capital,
Notes
e
to the extent that the company has accrued profits, whether or not they have been
capitalised;
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5. Any payment made by a company, in which the general public is not significantly
interested, of any amount, whether it represents a portion of the company’s assets
or is made in any other way, made after May 31, 1987, by way of advance or loan to
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a shareholder, who is a person who is the beneficial owner of shares and who holds
at least 10% of the voting power, or to any concern in which such shareholder is a
member or a partner and in which he has a substantial interest, or
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Sub-section (22) to Section 2 specifically excludes the following:
1. Any distribution made by a company in accordance with items (3) or (4) above
in relation to any share issued for full cash consideration in circumstances
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where the shareholder is not entitled to share in the surplus assets of the
company in the event of liquidation;
2. Any distribution made in accordance with items (3) and (4) above in so far
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as the distribution is attributable to the capitalised profits of the company
representing bonus shares allocated to its equity shareholder
3. Any advance or loan given by a business to a shareholder, such as a
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HUF firm, an AOP, a BOI, or a business acting in the regular course of its
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operations when lending money is a significant portion of that business;
4. Any dividend received by a firm that is offset by that company against all
or a portion of any amount previously received by it and is recognised as a
dividend under item (e) above to the extent that it is so offset;
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5. Any payment made by a corporation to a shareholder in accordance with

Section 77A of the Companies Act of 1956 when it buys the shareholder’s own
shares;
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6. Any share dividend made by the successor firm to the demerged company’s
shareholders as a result of a demerger.
Deductions in Calculating Income from Other Sources

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After taking the following deductions, the income that is subject to taxation under
the heading “Income from other sources” is the income.
1. From interest on securities: Any reasonable amount paid as a commission or other

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compensation to a banker or other individual for the purpose of realising such

interest on the assessee’s behalf. You can deduct the interest paid on borrowed
funds used to buy equities.
)A
2. Based on the employee contributions that the employer has received for pension,
superannuation, or other funds: In the case of income of the kind mentioned in
Section 2(24)(x), which is subject to income tax under the heading “Income from
other sources,” deduction shall be allowed in accordance with the rules of Section
36(1)(va), i.e., if the employer has given credit therefor to the employee’s accounts
(c
in the relevant funds for the amounts of contributions received.

3. Income from rentals: If income is derived from renting out machinery, plant, or
Notes
e
furniture for hire, as well as buildings where the letting of the building is inextricably
linked to the letting of such machinery, plant, or furniture, and the income from such
letting is not subject to income tax under the head “Profits and Gains of Business
in
or Profession,” the following expenses incurred in relation to those assets must be
deducted:
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a) Current building repairs.
b) The cost of the insurance against the danger of property damage or
destruction.
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b) Repairs and insurance for equipment, furnishings, or other structures.
d) Decreasing value.
When the expenses listed at (a) to (d) above are paid for property that is utilised in
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part for the assessee’s business, a proportionate deduction is permitted.
4. Income in the nature of a family pension: When an employer pays a regular monthly
sum to a member of an employee’s family in the case of the employee’s death,
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referred to as a “family pension,” a deduction of up to 15,000 or 33-1/3% of the
income is permitted. Only when the assessee provides the required information will
all of these charges be approved.
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5. No deduction shall be permitted under any other provision of this section with
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respect to interest on compensation or enhanced compensation, with the exception
of a deduction of an amount equivalent to 50% of such income.
6. Additional deductions: Any additional costs (that are not capital expenses) that are
incurred solely for the purpose of producing or receiving such income.
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Conditions to Meet Before Making Deduction Claims

Therefore, deductions under this provision will only be permitted if the following
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requirements are met:
(a) The expense is planned entirely and only for the benefit of generating such
income. It will not be permissible to claim that the assessee obtained the
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deduction under Section 57(iii) if the purpose of obtaining income is combined

with another unrelated purpose.
(a) It is not a capital expenditure in the traditional sense.
(c) It is not a private purchase.
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(d) It is incurred within the current accounting year and not in any earlier or later
year.
)A
The section does not specify that an expense is only deductible if money is
generated or earned. The clause allowed for the deduction of interest on borrowed
funds used to purchase shares that had not generated any income.
(c

Amounts not Deductible (Section 58)

Notes
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When calculating income chargeable under the head “Income from other sources,”
the following sums cannot be subtracted:
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In the case of any assessee:
1. The assessee’s personal costs.
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2. Any interest owed outside of India that is due under the Income-tax Act but for
which no income tax has been paid or withheld at source.
3. Any payment that is subject to the “Salaries” heading if it is made outside of
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India unless tax has been paid on it or withheld from it at source.
4. Any expenditure listed in Income-tax Act Section 40A. According to Section
58(3), when calculating income under this heading for a foreign corporation,
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the rules of Section 44D will be used.
Tax Concessions
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The Income-tax Act does not define the term “security.” As a result, both its plain
meaning and the meaning as construed by the case laws must be followed. “Security”
is defined as “a document held by a creditor as guarantee of his right to payment” in the
Shorter Oxford English Dictionary. This suggests that a simple “debt” is not a security
unless the payment of debt is somehow guaranteed. r
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The term “security” refers to a debt or claim whose payment is in some way
guaranteed. When the term is employed in its conventional definition, a secured liability
of some kind is assumed. Stock or shares of a corporation are not considered securities
and must be interpreted in the manner stated above.
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2.1.5 Individual Taxation Slabs

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Individual taxpayers are subject to taxation under the Indian Income Tax based on
a slab structure. Different tax rates are established for various income groups under a
slab system. It indicates that when a taxpayer’s income rises, so do their tax rates. This
kind of taxation helps the nation to have progressive and equitable tax systems. These
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income tax slabs frequently vary with each budget. These slab rates vary depending on
the type of taxpayer. Three categories of “individual” taxpayers under the income tax
system include:
◌◌ individuals under the age of 60, including residents and non-residents

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◌◌ Residents who are seniors (60 to 80 years of age)

◌◌ Super old citizens that live there (aged more than 80 years)
)A
Income Tax Slab for FY 2022 - 23 (AY 2023 - 24)

The various tables for the FY 2022–2023 and AY 2023–24 Revised Income Tax
Slabs and Rates are shown below:
(c

Income Tax Slab Tax Rate

Notes
e
Up to Rs.2.5 lakh NIL
Above Rs.2.50 - Rs.5 lakh 5% of the total income that is more than Rs.2.5 lakh
in
Above Rs.5 lakh - Rs.7.50 lakh 10% of the total income that is more than Rs.5 lakh + Rs.12,500
Above Rs.7.50 lakh - Rs.10 lakh 15% of the total income that is more than Rs.7.5 lakh + Rs.37,500
Above Rs.10 lakh - Rs.12.50 20% of the total income that is more than Rs.10 lakh + Rs.75,000
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lakh
Above Rs.12.50 - Rs.15 lakh 25% of the total income that is more than Rs.12.5 lakh +
Rs.1,25,000
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Above Rs.15 lakh 30% of the total income that is more than Rs.15 lakh +
Rs.1,87,500
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●● Please be aware that under the new tax regime, the tax rates are the same for
all categories of individuals, including Individuals and HUF under the age of 60,
Senior Citizens between the ages of 60 and 80, and Super Senior Citizens over
the age of 80. Therefore, under the New Tax regime, senior and super elderly
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citizens will not receive the enhanced basic exemption limit benefit.
●● Individuals who qualify for a tax rebate under Section 87A have net taxable
incomes of less than or equal to Rs. 5 lakh, meaning that their tax obligations
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under the new and previous tax laws are zero.
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●● No of their age, NRIs are only eligible for a basic exemption of Rs 2.5 lakh.
●● In every situation, an additional 4% Health and Education Cess will be added to
the income tax obligation. (up 4% from FY 18-19; previously 3%)
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●● Surcharges are applied to all of the aforementioned categories at the following tax
rates:
◌◌ 10% of income tax if total income is greater than Rs. 50 lakh
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◌◌ 15% of income tax is due if the total income exceeds Rs.

◌◌ 25% of income tax if total income is greater than Rs. 2 crore
◌◌ 37% of income tax if total income is greater than Rs. 5 crore
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Income Tax slabs & Rates as Per Old Regime FY 2022 - 23

The three tables for the alternative Income Tax Slabs are provided below:
m
Income Tax Slab for Individual who are below 60 years
Income Tax slab Tax Rate

Up to Rs.2.5 lakh Nil
)A
Above Rs.2.50 lakh - Rs.5.00 lakh 5% of the total income that is more than Rs.2.5
lakh + 4% cess
Above Rs.5 lakh - Rs.10 lakh 20% of the total income that is more than Rs.5 lakh
+ Rs.12,500 + 4% cess
(c
Above Rs.10 lakh 30% of the total income that is more than Rs.10
lakh + Rs.1,12,500 + 4% cess

People who earn less than Rs. 5 lakh are entitled to tax deductions under Section
Notes
e
87A
Income Tax Slab for people aged 60 to 80. (Senior Citizen)
in
Income Tax slabs Tax Rate
Up to Rs.3 lakh Nil
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Above Rs.3.00 lakh - Rs.5.00 lakh 5% of the total income that is more than Rs.3 lakh
+ 4% cess
Above Rs.5.00 lakh - Rs.10 lakh 20% of the total income that is more than Rs.5 lakh
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+ Rs.10,500 + 4% cess
Above Rs.10 lakh 30% of the total income that is more than Rs.10
lakh + Rs.1,10,000 + 4% cess
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Slab Income Tax Rates for Persons Over 80 (super senior citizen)
Income Tax slabs Tax Rate

Up to Rs.5 lakh Nil
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Above Rs.5 lakh - Rs.10 lakh 20% of the total income that is more than Rs.5 lakh +
4% cess
Above Rs.10 lakh 30% of the total income that is more than Rs.10 lakh +
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Rs.1,00,000 + 4% cess
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2.1.6 Computation of Taxable Income
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Fig: Taxable Income
Any compensation received by an individual or corporation that is used to calculate

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tax liabilities is referred to as taxable income. To determine how much the person or
business owes the government for the particular tax period, the entire income amount,
also known as gross income, is used as the basis.
Understanding Taxable Income

(c
Both earned and unearned income are included in taxable income. Cancelled
debts, government benefits (such as unemployment benefits and disability payments),

strike benefits, and lottery winnings are all considered unearned income and are subject
Notes
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to taxation. Earnings from appreciated assets that were sold during the year, as well as
dividend and interest income, are also included in the definition of taxable income.
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Before calculating your taxable income on salary, it is imperative to get all the
information needed to prepare your income tax returns. Following the calculation of final
tax refundable or due, you will need to determine your total taxable income. Prior to
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deducting taxes already paid through advance tax or TCS/TDS from the tax amount
payable, you must utilise the applicable tax rates to determine the final tax.
According to the income tax legislation, a person’s income can originate from five
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different sources: salary, business or property income, capital gains income, rental
income, and income from other sources. Each source of income that a person receives
must fit into one of the categories listed above.
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What is Salary Income?
The compensation given by the employer to the employee for the services provided
during a specific time period is known as a salary. It is paid at regular intervals, or one-
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twelfth of the annual income is paid each month.
Basic Income or the set component of salary according to the terms of employment
is included in the salary.
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Employer payments to the employee in the form of fees, commissions, and
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bonuses
Allowances given by the employer to the worker to cover personal costs.

Allotments are either totally, partially, or not taxed at all.
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Fully taxable allowances are:

◌◌ Employees receive a dearness allowance to cover expenses brought on by
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inflation.
◌◌ City Compensatory is a stipend given to people who relocate to major cities
with high standards of life, such as Mumbai, Delhi, or Chennai.
◌◌ Employees that work longer than the allotted hours receive overtime pay.
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◌◌ servant allowance and deputation allowance.
Partly taxable allowances are:

If the employee lives in his own home, the house rent allowance is entirely taxable.
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The exemption from allowance is the smallest of
◌◌ Realistic housing allowance

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◌◌ If he pays more than 10% of his income in rent

◌◌ If the rent is 50% of his (metros) or 40% of his earnings (other areas).
◌◌ entertainment budget (except for Central and State Government employees).
◌◌ special stipends for things like uniforms, travel, and research, etc.
(c
◌◌ A special allowance is given to cover personal expenses like child care and
education costs.

Fully exempt allowances are:

Notes
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◌◌ paid to personnel posted overseas as a foreign allowance.
◌◌ Judges of the Supreme Court and High Court get allowances.
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◌◌ allowances provided to personnel of the United Nations.
Employees who earn perquisites receive payments in addition to their income.
They are not an expenditure reimbursement. Some perks are taxed for all employees,
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including the following:
◌◌ a free place to stay.
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◌◌ reduction in the cost of rent
◌◌ No-interest loans
◌◌ movable property
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◌◌ payments for club dues
◌◌ Education-related costs
◌◌ Insurance premiums paid on the employees’ behalf
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Employees receive retirement benefits either while they are still working or when
they retire.
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Pension payments can be made monthly or all at once. Depending on the
employee’s classification, the tax is handled differently.
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Gratuity is paid as a token of gratitude for prior performance and is exempt up to a
specified amount at the time of retirement.
The category of the employee determines the leave salary tax. The employee has
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the option of using the leave or cashing it in.
Each month, both the employee and the company make contributions to the
provident fund. The sum with interest is given to the employee upon retirement. The
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type of provident fund that the employer maintains determines how it will be taxed.
How to Compute Taxable Income

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Every tax season, workers are compelled to compute their income to ascertain how
much tax they must pay. Although some people can complete the task on their own,
many people turn to accountants for assistance. Here are some easy steps to follow in
order to estimate your adjusted gross income, which is the figure used to compute your
tax obligation.
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1. Calculate the total income. People should total up all compensation they have
received.
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2. Determine unearned income. Income that is received without working for pay, such
as dividends, alimony, unemployment benefits, and real estate income, is referred
to as unearned income.
3. Decide on the filing status. The four filing statuses are head of household, married
filing jointly, married filing separately, and single.
(c

4. Diminish the income. There is a list of frequent deductions from gross income on
Notes
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Form 1040.
5. For the adjusted gross income, compute. The total, or gross income, will be
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subtracted from that amount after adding up all the deductions from the previous
stage to determine the “adjusted gross income.” This is the amount of income that
is subject to actual taxation.
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Let us understand the concept with the help of an illustration:
Example:
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Mr. Joshi earns Rs. 25,000 per month in salary, Rs. 4500 in discretionary
allowance, Rs. 2250 in amusement allowance, and Rs. 3500 in professional tax, his
taxable income would be determined as follows:
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Basic Salary 25,000*12 = 3,00,000
DA 4500*12 = 54,000
EA 2250*12 = 27,000
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Gross Salary = 3,81,000
Professional Tax 3,500
Net Income
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His taxable income of Rs. 3,77,500 places him in the 2.5 lakhs to 5 lakhs income
tax bracket. He must therefore pay income tax equal to 10% of his net income.
Taxes on the net income mentioned above equal 10% of Rs. 3,77,500, or Rs.
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37,750.
2.1.7 Tax Planning

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Fig: Tax Planning

(c
To guarantee that these factors work together to enable you to pay the least
amount of taxes, tax planning involves analysing a financial condition or plan. Tax
efficient refers to a strategy that reduces your tax liability. An individual investor’s

financial plan should include tax planning as a crucial component. Success depends
Notes
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on minimising tax obligations and increasing one’s capacity to make contributions to
retirement programmes.
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Planning for taxes involves a number of factors. The timing of income, the
magnitude and timing of purchases, and the preparation for additional expenses are all
factors to take into account. To achieve the best results, the choice of investments and
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retirement plan types must complement the tax filing status and deductions.
Tax planning entails developing and putting into practise various techniques to
reduce the amount of taxes paid over a specific time period. Minimising tax obligations
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might give a small firm more money for spending, investing, or expansion. Tax planning
might therefore function as a source of operating capital. Planning your taxes is not a
way to lessen your tax load. In reality, investing in government securities helps save
money. Savings lower inflation by reducing luxury. Only investments in government
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securities and bonds of priority industries that benefit the country as a whole are eligible
for tax breaks. As a result, tax savings enable the federal and state governments to
raise money for investments, which in turn boosts government revenue.
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Your financial strategy must include tax planning. You can minimise your tax liability
with effective tax preparation. This is accomplished by lawfully utilising all tax breaks,
credits, refunds, and allowances while making sure that your investments are in line
with your long-term objectives. r
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Objectives of Tax Planning
1. Reduction of Tax Liability: The primary goal of tax planning is to lower the tax
owed in order to leave the earner with sufficient surpluses from revenues for future
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investments in his company as well as his personal and social requirements. This is
only achievable if he carefully plans his tax affairs and takes use of the deductions,
exemptions, and other reliefs allowed by the relevant laws. He can achieve this by
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keeping current with the numerous tax law exemptions that are available and the
requirements needed to qualify for them.
2. Reduced Litigation: Taxpayers and tax administrators are always at odds with one
another. Both the tax collectors and the taxpayers make an effort to collect the
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least amount of tax possible. Sometimes, this leads to drawn-out legal disputes.
Actually, tax avoidance, not tax planning, is the primary cause of litigation. When a
taxpayer seeks to lower his tax obligation by exploiting a gap in the law, and the tax
administrator disagrees with the assessment under which the taxpayer is requesting
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exemptions, deductions, or relief, it leads to litigation. Good tax planning is always

based on the explicit language of the law or in accordance with its requirements. In
this scenario, the likelihood of litigation are minimised.
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3. Productive Investment: Good planning helps taxpayers manage their finances

responsibly and minimises transfers of funds to the government for waste,
ostentation, and growth, which helps the government collect more taxes from those
who have worked hard to earn their money.
4. Cost savings: Tax incidence is included in the cost of production. Reducing tax
(c
planning lowers overall expenses. More sales, more money made, and more taxes
are collected as a result.

5. Healthy Growth of Economy: A nation’s economy depends on the development of

Notes
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its inhabitants for it to grow in a healthy way. When people save money through tax
planning strategies, the economy expands, but when they save money through tax
evasion, black money is created, which is clearly bad.
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6. Employment Generation: The money saved through next planning is typically used
to launch a new project or expand the firm. This expands the company’s employment
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options. Furthermore, because tax regulations are so intricate, the majority of
taxpayers find it difficult to adequately organise their finances. Therefore, such
individuals require the services of chartered accountants, financial consultants, and
similar individuals join the business concern either as employees or supply their
O
services as private professionals. Therefore, tax planning is not just a necessity for
taxpayers, but also for the government and society at large.
It would be advisable to start by learning about the structure of the tax regime in
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the nation as a first step toward comprehending income tax law in India. The majority
of the government’s income comes from taxes. Both carrying out development projects
and paying for government expenses are done with the money raised. Every person
has a fundamental responsibility to arrange their taxes properly, and they should do it
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on a regular basis. The tax planning process essentially consists of three parts. These
three actions in tax preparation are:
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(a) Determine your taxable income for each category, including salary, real estate,
business and profession, capital gains, and other sources.
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(b) Determine the amount of tax due on gross taxable income for the entire fiscal
year (i.e., from 1st April to 31st March).
(c) You have two options once you’ve determined the amount of your tax liability:
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Pay your taxes (No tax planning required)

Utilise wise tax planning to reduce your tax.
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Rightfully, the majority of people select option two. Depending on your age, social
obligations, tax brackets, and personal preferences, you must weigh the benefits of
various tax-saving strategies and choose an investing strategy that will minimise or
completely eliminate your tax payment.
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Every individual has the fundamental right to take advantage of all tax breaks
offered by the government. Therefore, with careful tax planning, not only is the amount
of income tax owed minimised, but also a better future is secured thanks to the
mandatory savings in extremely secure government programmes.
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Importance of Tax Planning

1. The least gains would result from no tax planning.
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2. It is more trustworthy because tax avoidance and evasion are bad ways to reduce
taxes.
3. Companies have been given incentives by the government through tax legislation,
thus planners have the advantage of using these incentives.
(c
4. It is necessary to devote enough time to tax planning since when profits rise,
corporate tax rates rise along with them.

5. Inflation-related tax burdens, both direct and indirect, are lessened.

Notes
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6. It aids in effective budgeting for capital expenditures. preparing for sales promotions,
etc.
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7. Because of tax planning, it is now able to access accumulated profits, reserves, and
surpluses and claim such expenses as revenue expenditures.
8. Saving taxes today can be compared to the government taking out an interest-free
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loan that is not repaid.
Limitations
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●● An assessee is not permitted to assert a claim for rectification of error, in an
appeal, or in a revision if he has not already made use of any exemptions,
deductions, or relief to which he is entitled before the assessment is finished.
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●● Before making any decisions regarding minimising tax burden, it is important
to take into account other economic circumstances, direct tax laws other than
the Income Tax Act, and other economic laws. The range of tax planning is thus
constrained by this.
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●● Occasionally, a choice made for tax reasons favours certain family members at the
expense of others in terms of their individual property or income rights. The family
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may get agitated and unbalanced as a result of this. Therefore, it is necessary to
limit tax reduction to a specific amount due to social, moral, and psychological
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ramifications.
●● The Direct Tax Laws Act or the Finance Act both routinely change the direct tax
laws. Making long-term plans is made more difficult as a result.
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●● If certain requirements are met, tax incentives are permitted. Sometimes it is quite
challenging to meet those requirements, making it impossible for taxpayers to take
advantage of the benefits.
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2.1.8 Tax Evasion and Tax Avoidance

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Fig: Tax Evasion

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The act of avoiding taxes is referred to as tax evasion. The word “tax evasion”
refers to any unlawful actions made by a person, business, trust, or other entity to

dodge paying taxes. Tax evasion typically entails taxpayers purposefully lying to the tax
Notes
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authorities or hiding their genuine financial situation from them in order to lower their tax
liability. This includes dishonest tax reporting (such as declaring less income, profits or
gains than actually earned; or overstating deductions).
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The typical definition of tax evasion is the deliberate decision to not pay the
required income taxes. This act of not paying taxes can be accomplished by simply
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deciding not to file an income tax return or by opting not to include information
regarding taxable income on the filed return. Tax evasion can always be seen as fraud,
and it frequently results in harsh penalties.
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Importance of Tax Evasion
Tax evasion is crucial for a variety of reasons:
(i) It decreases tax collections, which has an impact on the taxes compliant taxpayers
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pay and the public services that are provided to the general public.
(ii) When people and businesses adjust their behaviour to cheat on taxes, it results in
resource misallocations.
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(iii) Because of its existence, the government must spend money on efforts to discover
noncompliance, gauge its scope, and punish those who engage in it.
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(iv) Tax evasion changes the distribution of income in an unpredictable way; until they
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are detected, tax cheats pay less in taxes than upstanding citizens. Evasion may
exacerbate sentiments of injustice and disdain for the law, starting a vicious cycle that
feeds on itself and encourages greater evasion. It has an impact on macroeconomic
statistics’ correctness.
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(v) More generally, without acknowledging the presence of tax evasion, it is impossible
to comprehend the true effects of taxation.
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Common Methods of Tax Evasion

The failure to pay taxes on time has two consequences. The first is tax evasion,
while the second is tax avoidance. The distinction between the two is that although
tax evasion is the act of not paying taxes when they are actually due, tax avoidance
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essentially involves finding a loophole that exempts you from paying taxes and is not
legally unlawful. These are a few methods by which persons can evade or avoid paying
taxes.
1. Failing to pay the due: The simplest method of tax evasion is failing to make the
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required payment. Even when the government demands payment, they simply
refuse to do so. Whether voluntarily or involuntarily, a person who engages in this
type of tax evasion won’t pay the tax before or after the deadline.
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2. Smuggling: When certain commodities are transported from one place to another,
across national or state borders, a tax or fee may need to be paid. However, some
people might relocate these commodities covertly in an effort to completely evade
taxes or avoid paying them altogether.
(c
3. False tax returns: When someone files their taxes, they may occasionally provide
false or inaccurate information in an effort to either reduce or avoid paying the tax

that is due. Since the full picture is not given and they might actually be paying less
Notes
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in taxes than they should, this is also tax evasion.
4. False financial statements: A person’s or a company’s tax liability may be determined
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by the financial transactions they made during the assessment year. The tax may
be reduced if fictitious financial records or accounts books are presented, ones that
show incomes lower than what was actually generated.
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5. Using fake documents to claim exemption: Using false documentation to claim
exemption: In order to provide particular groups or members of society a little
more financial freedom to advance, the government may have granted them
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certain privileges and exemptions. Members who don’t genuinely qualify for these
privileges occasionally have paperwork made to substantiate their membership in
the organisation, allowing them to claim exemptions for which they are not eligible.
6. Not reporting income:One of the most popular ways to evade taxes is not declaring
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income, it may be said. In this situation, people simply won’t disclose any money they
get throughout a fiscal year. They successfully evade taxes because they haven’t
paid any and haven’t recorded any revenue. The most straightforward illustration
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of this would be a landlord who has maintained tenants while concealing from the
authorities that he has rented the property and is in fact making money from it.
7. Bribery: There may be instances where a person is unwilling to pay the full amount
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of taxes that are owed. In such a situation, he or she might actually offer officials a
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bribe in order to prevent them from paying the tax and to make it “disappear.”
8. Keeping money abroad: Swiss bank accounts are a common topic of conversation.
Offshore accounts are ones that are kept outside of the country and do not disclose
information about their use to the income tax department, allowing the owner of the
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money to avoid paying any and all taxes owed on it.
Remedies to Overcome (Reduce) Tax Evasion

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The following are the solutions to stop (reduce) tax evasion:
(i) Reducing Tax Rate: The government will encourage people to avoid tax evasion
and invest in a variety of investment vehicles offered in India itself, such as DTC,
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tax deductions offered by Provident Funds, Post Office Schemes, etc. by lowering
the tax rate on individual income and income earned after investments.
(ii) Robust Surveillance System: The government should put in place a strong
surveillance system that will monitor any suspicious trade or transaction activity and
m
will have full ability to monitor tax defaulters, among other things.
(iii) Simplified Tax Laws and Filing Procedures: The current tax code and filing procedure
are extremely complicated and challenging for the average person to comprehend
)A
and utilise all of the available deductions. Everyone will find it easier to pay their
taxes if the tax code is simplified.
(iv) Annual disclosure of all assets held by government personnel will in some way
prevent them from engaging in criminal activity and force them to pay taxes on
all legitimately obtained money. Additionally, this will result in the loss of national
(c
resources and compel others to perform their jobs fully and legally.

(v) Transparency in Government Expenditure: To ensure that every rupee sent by

Notes
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the government reaches the grassroots level, there should be transparency in
government expenditure at every level. This will stop upper-class officials, legislators,
bureaucrats, contractors, etc. from vaporising a sizable sum of money. The Indian
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Comptroller and Auditor General should conduct audits of all government offices
(CAG). One of the most significant of these events was the bringing expenditures of
the ministry of defiance.
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(vi) The Government May Issue Special Bonds: The Government may issue special
bonds in order to entice black money hoarders to invest in them by offering them
protection from legal action.
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(vii) Enacting Strict Anti-Corruption Laws: Since tax evasion stems from corruption, tax
evasion will be significantly decreased if corruption is eliminated. And in order to
effectively reduce corruption, a strong law like LOKPAL is required, one that has the
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authority to investigate every government employee and set a maximum amount of
time for each case before rendering a decision, as opposed to the current system,
which takes years and still is unable to punish offenders.
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(viii) Ban & Surveillance on Illegal Trade & Practices: Trades like smuggling of
commodities, drugs, baiting on cricket & various other activities like election polls,
flesh trade are one of the major causes of tax evasion as this activities are illegal
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they are not viable to pay taxes on this and thus they evade taxes. Surveillance on
these activities will reduce tax evasion and crime as well.
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Tax Avoidance
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Fig: Tax Avoidance

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Tax avoidance is the use of legal strategies to reduce an individual’s or a

company’s income tax liability. The usual method for achieving this is by taking all legal
deductions and credits. Putting tax-beneficial investments first, such purchasing tax-
free municipal bonds, is another way to accomplish this. Tax avoidance is not the same
)A
as tax evasion, which relies on unethical practises including fabricating deductions and
underreporting income.
Avoidance Tax comprises scenarios where people decrease or eliminate their tax
liability by engaging in one or more legal transactions. Refunds, credits, benefits, and a
(c
variety of other entitlements are just a few of the ways the income tax department offers
people ways to avoid paying taxes. The numerous forms of tax evasion include:

(a) Legal entities

Notes
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(b) Country of residence
(c) Double taxation
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(a) Legal Entities: One strategy people use to avoid paying taxes is to set up legal
entities. By establishing a legally distinct entity to which they transfer their property,
individuals can use this method of avoidance tax to lawfully postpone paying their
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personal taxes. The created legal separate organisation is frequently a foundation,
corporation, or trust. The properties are given to the trust or business, and as a
result the earnings are the property of this company, not the owner. Normally, people
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must pay personal taxes on their income and property; but, by moving their assets
to a legally distinct company, they can avoid personal taxes while still being subject
to other taxes, such as corporate taxes. If the entity is set up in a country that is
regarded as offshore, the foundation, company, or trust can also avoid corporate
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taxes in order to pursue tax avoidance.
(b) Country of residence: People also use their country of residence as a means of tax
avoidance. In order to reduce the amount of taxes they must pay, a corporation or
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individual using this tax avoidance strategy relocates their tax domicile to a country
that is considered a tax haven. In order to avoid taxes, the person can use this
strategy to start travelling frequently.
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(c) Double taxation: When a government imposes taxes, it often does so without taking
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into account the resident nation of the business or individual. This is known as
double taxation. Many governments have entered into bilateral agreements to
prevent double taxation with other nations in order to prevent people from paying
taxes twice—once in the country where the money was earned and again in the
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country where they reside. Due to their ability to prevent double taxation, taxpayers
benefit from this.
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Difference between Tax Evasion and Tax Avoidance

It is important to distinguish between tax avoidance and evasion. The distinction
between the two will aid a person in avoiding confusion.
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Tax Avoidance Tax Evasion

(i) Tax avoidance is the practice of avoiding Tax evasion occurs when the payment of
tax payment while still adhering to legal tax is evaded by dishonest or illegal ways.
requirements but doing so in a way that
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subverts the intent of the law.

(ii) Tax avoidance is accomplished by utilising Tax avoidance is done by using dishonest
legal loopholes. methods.
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(iii) Tax avoidance is accomplished by Tax evasion is an illegal method of

following the law, not by doing so with collecting taxes, and offenders risk
malicious intent. punishment.
(iv) Before the tax due begins, tax avoidance When someone intentionally avoids
is done, which resembles tax planning. paying taxes, they are committing flagrant
(c
fraud.

2.1.9 Wealth Tax and Gift Tax

Notes
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Wealth Tax in India
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A wealth tax of 1% was required to be paid by an individual, a Hindu Undivided
Family, or a business on incomes over 30 lakh annually under the terms of the Wealth
Tax Act, 1957. This tax was imposed on the net wealth of extraordinarily rich people,
businesses, or HUFs at the end of a specific fiscal year (defined as the total value of
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assets less the total value of debts or liabilities as of the valuation date).
Wealth taxes were implemented with the intention of raising the amount of direct
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taxes owed by wealthy individuals in order to decrease wealth disparities throughout
India and ensure that they contributed more to the country’s tax income.
Wealth Tax Rules
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Who is subject to wealth tax, who must pay it, and how is it applied?
One of the important factors used to determine whether a person was subject to
wealth tax was their residential status. Indian citizens living abroad have to pay wealth
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tax on their international holdings. Non-resident Indians and foreigners, however,
were only required to pay wealth tax on their assets located in India. A non-resident
Indian who moves back to India would not have his assets exempt from wealth tax.
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Additionally excluded are NRIs’ assets that they acquire within a year on their return.
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Assets that were subject to wealth tax:
◌◌ On assets like real estate and gold, wealth tax was due. The wealth tax did
not apply to “productive assets” like stocks, mutual funds, and securities.
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◌◌ Boats, yachts, and aeroplanes were subject to the wealth tax.

◌◌ One residential property is free, however more than one of your own homes
would be subject to wealth tax. However, if a property is used for business
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purposes or is rented out for 300 days or more each year, wealth tax is not
imposed on it.
◌◌ A car’s market value is taxed, with the exception of when it is utilised in a car
rental business.
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◌◌ Ornaments made of gold, platinum, and silver were subject to the wealth tax.
Additionally, wealth tax is imposed on cash in hand over Rs. 50,000.
◌◌ Transferring assets to the spouse if a taxpayer was required to pay wealth tax
would not result in evasion of the levy since assets would still be regarded as
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the taxpayer’s property even if they were gifted.
Wealth Tax Exemptions

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Uncovered assets
●● Shares, bonds, mutual fund units, and units of gold deposit schemes are examples
of investment securities.
●● Under 500 square metre homes or lots
(c
●● Using homes as a location of employment

●● homes that are rented out for at least 300 days every year
Notes
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●● vehicle rentals
●● Business stock-in-trade assets
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Why was the Wealth Tax repealed?
The following are the justifications for India’s removal of the wealth tax:
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●● Simpler and easier tax system: By removing the wealth tax, the government has
lessened the possibility of some taxpayers abusing the wealth tax act’s loopholes.
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●● Straightforward tax processes: With regard to the intricate structure of Indian tax
regulations, the Indian government wished to boost transparency and streamline
processes for simpler tracking.
●● Costly allocation: Benefits were much outweighed by the expense of collecting
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wealth tax. Furthermore, wealth tax does not account for a sizable share of India’s
collection of direct taxes.
●● Increased revenue: Since 2015, the government has amassed income of
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over 9000 crore as a result of the wealth tax’s repeal and replacement with an
additional surcharge.
●●
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Administrative burden: To determine their net wealth, each taxpayer must value
their assets in accordance with the Wealth Tax Rules. Taxpayers were required
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to obtain a valuation report from a registered valuer for specific goods, such as
jewellery, which slowed down the tax collecting process.
●● Limiting the expansion of the tax base: Given that more people file income tax
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returns than wealth tax returns, the Indian government seeks to include more
people in its tax net.
●● Better reporting: In order to comply with the surcharge system of collection,
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taxpayers must provide more data in their income tax returns, including a list of
their assets and obligations.
●● Eliminates leakage: Tax officials can match up stated wealth and declared income
by using information about the assets that taxpayers provide in their income tax
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forms. Because of this, tax officials can make sure that there is no tax “leakage.”.
Gift Tax
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)A
Fig: Gift Tax
Gift Tax in India

(c
Indian culture has a long history and many different traditions related to it.
Numerous religions, including Buddhism, Sikhism, and Hinduism, have their roots there

as well. In addition, India is a nation with a diverse culture where every occasion is
Notes
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cause for celebration and an opportunity to express love and affection to close family
and friends. On several occasions, including Diwali, Raksha Bandhan, Christmas, and
New Year’s, gifts are given and received. Additionally, some individuals view gifting as
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a status indicator. Little did you know, though, that after a certain threshold, these gifts
become taxable, and the recipients must pay income tax on the presents they receive.
As a result, the Government of India implemented the Gift Act-governed Gift Tax in April
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1958. It was created with the intention of levying tax on recipients and givers of gifts in
particular circumstances. Understanding the taxes that apply to gifts in India is crucial if
you want to prevent any additional unanticipated tax outflows.
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Gift Tax Act
By passing the Gift Act of 1958, presents that are in the possession of the recipient
are subject to tax. But in 1988, it was formally terminated. It was then reintroduced six
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years later under section 56(2) (V) of the Income-tax Act of 1961 for taxing presents
in the recipient’s possession. Therefore, gifts received by anyone are taxed in the
recipient’s hands under the head “Income from other sources” at standard tax rates,
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according to the law as amended in 2017.
Section 56(2)(x) of the Income-tax Act, 1961, deals with the provisions pertaining to
gift tax. The table below provides a quick summary of these provisions:
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Kind of gift covered Monetary threshold Quantum taxable
Any monetary amount Sum > 50,000 complete amount of money received
without restriction
Any immovable property, Stamp duty value* > Rs The property’s worth for stamp duty
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including real estate, 50,000

buildings, etc., without
regard
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Any immovable property Stamp duty value* Value of the Stamp Duty less any
obtained with insufficient exceeds consideration by deductions
compensation > Rs 50,000 Example 1: Rs. 75,000 in consideration
for Rs. 2,000,000 in stamp duty.
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The taxable amount is Rs. 1.25 lakhs

(stamp duty value is greater than Rs.
50,000 than consideration).
Figure 2 Example 1: If the consideration
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is Rs. 1,60,000, the taxable gift is Nil

since the stamp duty value is not more
by Rs. 50,000 than the consideration.
Anything other than Fair market value *(FMV) FMV of such property
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immovable property, > Rs 50,000

such as jewels, shares,
drawings, etc.
Any asset other than FMV exceeds FMV Without regard (The same
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physical property in consideration by > Rs example can be used to illustrate

exchange for payment 50,000 immovable property.)

*Value adopted by the stamp duty authorities for stamp duty purposes
Notes
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Provisions Relating to Stamp Duty
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The provisions under Section 50C are comparable to the provisions relating to
taking the stamp duty value into account. Let’s briefly go over the provision for gift tax
purposes below:
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1. The stamp duty value must be taken into account when calculating gift tax for
immovable property. However, the cost of stamp duty may be higher for a number of
reasons, one of which may be the length of time between the agreement setting the
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consideration and the date of registration. Therefore, if the following criteria are met,
stamp duty value as of the date of the agreement determining the consideration
must be taken into account for gift tax purposes:
◌◌ The dates of such agreement and registration are distinct;
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◌◌ The consideration is paid in full or in part on or before the date of the
agreement for transfer using a bank draught, account payee check, or
electronic transfer through a bank account; and
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2. In addition, the tax officer is required to refer the valuation to a valuation officer (VO)
if the taxpayer has questioned or disagreed with the stamp duty value established
by the stamp duty valuation authority in accordance with Section 50C. The VO is
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then required to call for records, give the taxpayer a chance to be heard, and pass
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an order in writing of the value he has determined. A lower stamp duty value or value
determined by VO must be adopted for gift tax purposes.
Exemptions from Gift Tax

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As previously indicated, some specific gifts received by anybody from anyone are
subject to gift tax. Here are a few exclusions from this, though.
Category of donee(recipient of Category of donor Occasion

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gift) covered
Individual (It would be important Any lineal ascendant or descendant NA
to point out that while a gift from of oneself or one’s spouse, spouse
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a defined relative is not taxable of any of the relatives listed here,

for the donee, the income from brother and sister of oneself and
such gifts may occasionally be one’s spouse, brother or sister of
taxable to the donor. Examples one’s parents or parents-in-law.
include clubbing provisions and
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the considered owner concept in

real estate.)
Individual Any Person Marriage of
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individual
Any person Any person In a will or by
inheritance
Any person Individual thinking about the
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death of the payer

or the donor

Any person Panchayat, Municipality, Municipal NA

Notes
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Committee and District Board,
Cantonment Board are examples of
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local authorities.
Any person f r o m a n y t r u s t o r i n s t i t u t i o n NA
mentioned in Section 10 as well
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as any fund, foundation, university,
other educational institution, hospital,
other medical institution, or both
(23C)
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Any person any trust established for charitable NA
or religious purposes under section
12A or section 12AA
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A n y i n s t i t u t i o n f o u n d e d f o r Any person NA
charitable, religious, educational,
or philanthropic purposes and
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recognised by the designated
authority. This includes any fund,
trust, university, hospital, or other
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educational institution. See Section
10(23C)(iv)(v)(vi) and (via) for
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more information.
Members of HUF HUF Any capital
asset allocation
following a HUF’s
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full or partial
separation
Trust founded or maintained only Individual NA
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for the benefit of an Individual’s

relative
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2.1.10 Capital Gains Tax - Overview

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Fig: Capital Gains

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Any profit or gains resulting from the transfer of a capital asset are referred to as
“capital gains.” When a capital asset is sold or transferred, the proceeds from the sale
are subject to capital gains tax in the year of the transfer. The difference between the
cost of purchasing a capital asset and the cost of selling that same item represents
Notes
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capital profits. The difference between the cost of acquisition and the fair market value
on the date of sale or transfer of the asset is, technically speaking, the capital gain.
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Sections 45 to 55A of the Income-tax Act, 1961 Deal with Capital Gains
Unless otherwise specified in Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G,
54GA, and 54H, Section 45 of the Act states that any profits or gains resulting from
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the transfer of a capital asset that occurred in the previous year shall be chargeable to
income-tax under the head “Capital Gains” and shall be deemed to be the income of the
prior year in which the transfer occurred.
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There may be some uncertainty as to whether “Capital Gains,” a capital receipt,
can be subject to income tax. It should be emphasised that under the Income-tax Act,
the standard accounting rules for distinguishing between capital receipts and revenue
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receipts are not generally applied. According to Section 2(24)(vi) of the Income-tax Act,
“Income” includes “any capital gains payable under Section 45(1).” The fact that capital
gains cannot be taxed as income in the absence of a particular provision in Section
2(24) may not be out of place at this point.
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Consider the situation where a person holds shares of a company that
appreciate in value every year. Because the shares are increasing in value, no
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capital gains tax will be assessed in this situation. The only time the capital gains tax
will be applied is if the person chooses to sell the shares for more money than they
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were originally purchased for.
Classification of Capital Gains

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Depending on how long a person has owned a capital asset, there are two
categories of capital gain.
1. Short-term Capital Gain (STCG)

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2. Long-term Capital Gain (LTCG)

The kind of the capital asset affects this categorisation as well. Let’s examine this
classification in more detail using the type of capital asset as our basis.
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1. Short-term Capital Gain (STCG): A gain that results from holding shares or equity
mutual funds for less than a year before selling them is referred to as a short-term
capital gain. The only need in this case is that a securities transaction tax (STT) be
paid on the sale of the shares or equity on a recognised stock exchange (such as
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the BSE or NSE). The gain would be categorised similarly to other capital gains if
the sale of the shares was off-market (that is, not on a stock exchange). As long as
both sales take place in the same financial year, a short-term capital loss from the
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selling of shares can be adjusted against a short-term capital gain from the sale of
other shares.
2. Long-term Capital Gain (LTCG): A gain that results from holding shares or equity
mutual funds for longer than a year before selling them is referred to as a long-term
capital gain. There is no income tax imposed on long-term capital gains realised
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from the sale of stocks or equity mutual funds. In this instance, the long-term capital
gain is tax-free.

What is Capital Gains Tax In India?

Notes
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A capital gain is, to put it simply, any profit or gain that results from the sale of a
“capital asset.” You must pay tax on this gain or profit since it falls under the category of
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“income” in the year that the transfer of the capital asset occurs. This is referred to as
capital gains tax, which may be immediate or delayed.
An inherited property is not subject to capital gains taxes because there is not a
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sale, only a transfer of ownership. The Income Tax Act expressly exempts property
received as a gift through an inheritance or will. However, capital gains tax will be
charged if the inheritor chooses to sell the asset.
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Tax Rates – Long-Term Capital Gains and Short-Term Capital Gains
Tax Type Condition Applicable Tax
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Long-term capital gains regarding the selling of equity 10% over and above Rs 1
tax (LTCG) shares or equity-oriented fund lakh
units
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Long-term capital gains Aside from when selling equity 20%
tax (LTCG) shares or equity-oriented fund
units
tax (STCG)
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Short-term capital gains In the absence of Securities Your income tax return will
Transaction Tax (STT) include the short-term capital
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gain, and the taxpayer will
be taxed at the applicable
income tax slab rates.
Short-term capital gains Whenever STT is appropriate 15%
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tax (STCG)
How Are Short-Term Capital Gains Calculated?

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Step 1: Begin by taking all relevant factors into account.
Step 2: Subtract these items:

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◌◌ expenditure that was made solely and exclusively for this transfer
◌◌ Cost of purchase
◌◌ Cost of the upgrade
Step 3: This sum represents a recent capital gain.
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How Are Long-Term Capital Gains Calculated?

Step 1: Begin by taking all relevant factors into account.
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Step 2: Subtract the following
◌◌ expenses that were paid solely and exclusively for this transfer.
◌◌ Indexed Cost of Improvement
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◌◌ Indexed Cost of Improvement

Step 3: Subtract the exemptions allowed by Sections 54, 54EC, 54F, and 54B from
Notes
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the final number.
Deductible Expenses
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A. When selling real estate, the following costs are deducted from the sale price:
◌◌ commission or brokerage fees paid for finding a buyer
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◌◌ The cost of stamps
◌◌ Travel costs associated with the transfer - these could be incurred after it has
taken place
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◌◌ Where property has been inherited, expenses incurred in connection with the
will and inheritance,
◌◌ getting a succession certificate, and executor charges may occasionally be
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permitted.
B. Sale of shares: You may be allowed to deduct these expenses:
◌◌ Broker’s commission related to the shares sold
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◌◌ STT or securities transaction tax is not allowed as a deductible expense
C. The location of the jewellery sale: In cases where a broker’s services were used
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to find a buyer and jewellery was sold, the cost of the broker’s services may be
deducted.
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2.1.11 Computation of Capital Gains
Profits made from the selling of capital assets are referred to as capital gains.
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Long-term and short-term capital gains are the two categories. Short-term assets are
those held for less time, whilst long-term capital assets are those held for 36 months or
more.
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When you sell a capital asset for more than you paid for it, you make a capital gain.
Any investment product, including mutual funds, stocks, or a piece of real estate (land,
a house, etc.), is considered a capital asset. Any rise in value when you sell one of
them is referred to as a capital gain. Similar to this, a capital loss is experienced when
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the value of an asset relative to its acquisition price decreases.
Only when you sell the asset for more money than you paid for it at purchase do
you realise a capital gain.
An inherited property cannot be used to offset capital gains. Because an inherited

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property is simply transferred ownership rather than being sold, this is the case.
However, if you decide to sell the property you inherited, capital gains tax will apply.
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Tax on Capital Gains

The nature of capital gain determines how tax is calculated.
●● Tax on short-term capital gains is calculated differently than tax on long-term

capital gains. Gains from short-term investments are added to overall income, and
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the income tax is then computed according to your tax band.

●● Long-term capital gains tax calculation is a little more challenging. Inflation is

Notes
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taken into account when calculating tax on long-term capital gains since long-term
capital assets are kept for extended periods of time.
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Capital Gains Formula for Calculation
● Tax on Short-Term Capital Gains: The calculation for short-term capital gains is as
follows:
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◌◌ Short-term capital gain= full value consideration - (cost of acquisition + cost of
improvement + cost of transfer).
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● Long-term Capital Gains Tax: The following calculation should be used to determine
the amount of long-term capital gains tax due:
◌◌ Long-term capital gain = full value of consideration received or accruing -
(indexed cost of acquisition + indexed cost of improvement + cost of transfer),
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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.
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Indexed cost of improvement = cost of improvement x cost inflation index of the
year of transfer/cost inflation index of the year of improvement.
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Capital Gains Rate: Each year, a different rate is used to compute capital gains.
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Long-term capital gains are taxed at a rate of 20.6% for individuals (including education
cess). Under the capital gains tax, no deductions are available.
The tax bracket that the individual is in determines the amount of short-term capital
gains tax that is due.
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Capital Gains Shares: The rates for long-term and short-term capital gains tax are
different in the case of shares and stocks. The capital gains rate for the 2016–2017
fiscal year is as follows:
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Stocks and mutual funds are taxed at 15% on short-term gains.
Debt mutual fund short-term capital gains are taxed according to the taxpayer’s
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income tax bracket.
Tax rates on long-term capital gains from debt mutual funds are 20% with
indexation and 10% without.
Finance Minister Nirmala Sitharaman announced the implementation of long-

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term capital gain tax on sales of equity shares over Rs. 1 lakh on February 1st, 2020.
According to the Union Budget 2020, the capital gains rate is as follows:
Equity share long-term capital gains are subject to a 10% tax without any
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indexation relief.
The rules governing long-term capital gains (LTCG) on the sale of equities are left
unchanged in the Interim Budget 2020.
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Tax Exemptions on Capital Gains

The government offers a number of exemptions that may be used to offset capital

gains. Here is a list of every exception that can be used in relation to capital asset
Notes
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gains.
● A person is entitled to a tax exemption on profits made under Section 54 of the
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Income Tax Act if they are entirely used to purchase another home. The seller has
two years from the date of the sale of his prior property to purchase a new home or
three years from that date to build a new home.
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● A person is eligible for a tax exemption under Section 54 EC if they invest their whole
capital gain in bonds issued by the National Highway Authority of India (NHAI) or the
Rural Electrification Corporation (REC). The exemption amount under Section 54
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EC is capped at Rs. 50 lakh.
● If you are unable to identify the ideal home to purchase and develop a clear strategy
within two to three years, you can still avoid paying taxes on your capital gains.
Gains can be invested in any public sector bank’s Capital Gains Accounts Scheme
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(CGAS) to achieve this. Then, a tax exemption claim can be made for this sum.
You must invest this money, though, within the time frame specified by the bank,
otherwise the deposit will be considered a capital gain and subject to tax.
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● If you sell agricultural land that is beyond the boundaries of a civic body, no tax is
due on the capital gain that results from that sale.
●
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If you are unable to identify the ideal home to purchase and develop a clear strategy
within two to three years, you can still avoid paying taxes on your capital gains.
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Gains can be invested in any public sector bank’s Capital Gains Accounts Scheme
(CGAS) to achieve this. Then, a tax exemption claim can be made for this sum.
You must invest this money, though, within the time frame specified by the bank,
otherwise the deposit will be considered a capital gain and subject to tax.
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● If you sell agricultural land that is beyond the boundaries of a civic body, no tax is
due on the capital gain that results from that sale.
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Capital losses can be used in tax calculations to reduce the impact of taxes on
capital gains. However, only long-term benefits may be offset by long-term capital
losses. Both short-term and long-term capital gains can be offset by short-term capital
losses.
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Let us understand the computation of capital gain with the help of an example.
Example:
Compute the taxable Capital Gain of Mrs. Sakshi for the assessment year 2019-
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2020
Particulars Amount (Rs.)

)A
Cost of Jewellery (purchased in the financial year 2008-2009) 1,82,000

Sale Price of Jewellery (sold in 2017) 17,50,000
Expenses on Transfer 17,000
Residential house purchased in 2017 15,00,000
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Solution:
Notes
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Calculation of Total Taxable Capital Gain of Mrs. Sakshi for the previous year 2018-
2019 (Assessment year 2019-2020)
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Particulars Jewellery
Sale Consideration 17,50,000
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Less: Expenses on Sale 17,000
Net Sale Consideration 17,33,000
Less: 4,49,556
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(1,82,000*289/117)
Long Term Capital Gain
Less: Exemption u/s 54F (12,83,444*15,00,000/17,33,000) 12,83,444
11,10,886
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Taxable Long Term Capital Gain 1,72,558
2.1.12 Basis of Classifying Short-term and Long-term Capital Asset
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Short-term capital gain is defined as “capital gain deriving from the transfer of a
short-term capital asset” in Section 2(42B) of the Act.
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“Long-term capital gain” is defined in Section 2(29B) as “capital gain deriving from
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the transfer of a long-term capital asset.” “Long-term capital asset” is any asset that is
not a short-term capital asset, according to Section 2(29A) of the Act.
The terms “Short Term Capital Gains” (STCG) and “Long Term Capital Gains”
(LTCG) refer to the capital gains that result from the transfer of short-term and long-
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term assets, respectively (LTCG). The method of calculating gains, the tax due on the
gains, and the way in which losses are treated varies for STCG and LTCG, therefore
identifying profits as STCG and LTCG is a crucial step in calculating income under the
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heading of capital gains..
Description of Asset Before AY 2017-18 AY 2017-18 onwards

Securities (other than units), a short-term capital asset that a short-term capital asset that
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units of equity-oriented funds, has been held for less than has been held for less than
units of UTI, and zero-coupon a year. a year.
bonds listed on recognised
stock exchanges
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if kept for more than a year, a if kept for more than a year, a
long-term capital asset long-term capital asset
Unlisted shares, Land and if held for less than 36 months, if held for less than 24 months,
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Building or Both a short-term capital asset a short-term capital asset

if held for more than 36 if held for longer than 24
months, a long-term capital months, a long-term capital
asset asset
Unlisted securities other than if held for less than 36 months, Short term capital asset if held
(c
shares, units of debt-oriented a short-term capital asset for less than 36 months
funds, and

Long term capital asset if held Long term capital asset if held
Notes
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for more than 36 months for more than 36 months
Immovable properties such Short term capital asset if held Short term capital asset if held
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as land, building and house for less than 36 months for less than 24 months
property
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Other remaining capital Short term capital asset if held Short term capital asset if held
assets for less than 36 months for less than 36 months
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2.1.13 Various Deductions Under Income Tax Act, 1961
Citizens’ income taxes make up a sizable portion of the government’s revenue.
Taxes must be paid in order for the economy to run smoothly. Taxation has benefits
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while being an unpleasant expense frequently.
Income tax deductions are a benefit provided by the tax authorities that assist
people in reducing their taxable income and, as a result, their tax outlay in any given
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fiscal year. These deductions take the shape of expenditures or investments the
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taxpayer made during the course of the tax year. Deductions foster a good saving habit
as well.
But which tax deductions under the income tax are best for you?
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The investments made under Section 80C of the Income Tax Act, 1961, are among
the most often used provisions of income tax deductions. These are often made in
Public Provident Fund (PPF), National Pension Scheme (NPS), Equity Linked Savings
Scheme (ELSS) funds, etc. With these kinds of deductions, you can both reduce your
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tax liability and increase the return on your investment.
Types of Income Tax Deductions:

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1. Section 80C life insurance premiums

The premium you pay for a life insurance policy on yourself, your spouse, or your
children is deductible from your taxable income, as are the maturity proceeds you
get. A deduction of up to Rs. 1,50,000 may be requested.
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2. Public Provident Fund (PPF)

PPF is the best option for you if you have a low risk tolerance and want to generate
a high, consistent return. PPF is a legally required long-term investment with a 15-
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year lock-in period. After five years from the initial investment, you can choose to
withdraw some money.
3. Equity Linked Savings Plan, third (ELSS)
These equity-oriented investments, commonly referred to as mutual funds, have a
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three-year lock-in period that is required. These provide tax exemption from your
annual taxable income of up to Rs. 150,000 in accordance with Section 80C of the

Income Tax Act. Additionally, the earnings at the end of the employment period are
Notes
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regarded as long-term capital gains and are subject to tax at 10%
4. The National Pension Plan (NPS)
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If you have a poor appetite for risk, this is one of the various deduction kinds you
could take into account. Throughout your career, you make regular contributions to
a pension account. You can take out a set amount of the corpus after retirement.
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After you retire, you will get the leftover sum as a monthly pension. For both your
contribution and your employer’s contribution, you may claim a tax deduction of up
to Rs. 150,000.
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5. Standard Deduction
Only salaried individuals are eligible for the standard deduction under the previous
tax system, which is set at Rs. 50,000.
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6. Donation to charity
Declarations of finished charitable contributions made before December 31 each
year are eligible for a tax credit under Section 80G.
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7. Certificate of National Savings (NSC)
Tax deductions for investments in NSC are available up to Rs. 150,000. In this
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cumulative method, the interest generated is taxed, though.
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8. Mortgage
Section 80 EEA allows first-time homebuyers to deduct Rs. 1,50,000 off their house
loan interest payments. The key point in this situation is that the buyer shouldn’t
already be the owner of a home.
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9. Rental Fee
Salary taxpayers who do not own a home at their place of employment and do not
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receive HRA are eligible for this deduction. The least expensive of the following
alternatives is the maximum tax deduction:
10% of the total adjusted salary less the rent paid
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◌◌ Rs. 60,000/- pa
◌◌ 25% of the total adjusted income
10. Bank Fixed Deposits
Tax deductions are available for fixed deposit investments done with scheduled
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banks for a minimum of five years. The interest accumulated on the fixed deposit,
however, will be taxed.
11. Interest on education loan
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You may deduct the interest paid on an education loan under Section 80E. This
loan can be used to pay for higher education for your partner, kids, or a student over
whom you have legal custody. From the year you begin repaying the loan, you have
eight years to take use of this deduction.
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12. Tuition Fees

Section 80C allows you to deduct the cost of your children’s tuition. Any two children

must pay the price for full-time enrollment in an Indian university or institution. Any
Notes
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donations or development costs are not included in this. a kind of deduction that
promotes learning!
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These kinds of deductions are frequently provided with the intention of promoting
education.
13. Post Office Time Deposit
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These five-year deposits are deductible from taxes. However, the interest is entirely
taxable.
14. Preventive Health Check-ups
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According to section 80D of the Indian Income Tax Act, 1961, you are eligible for a
tax deduction for the amount (up to Rs. 5000) that you spend on preventive health
checkups for yourself or your family members.
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15. Senior Citizen Savings Scheme (SCSS)
These senior citizen-targeted banking programmes are deductible from taxes under
Section 80C. The interest derived from these programmes is taxable, nevertheless.
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2.1.14 Recent Tax Saving Schemes
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Fig: Savings Schemes recently
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Even though we all try to reduce our taxes in India, very few of us are successful.
The problem can be a lack of information or difficulties making the optimal decision
for your financial plans. To assist you in comparison and decision-making, we have
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included a list of the top tax-saving investment options available in India in this post.
You must make sure that your goal is more than just tax savings while figuring out
how to save money on taxes in India. The objective must be to save on income taxes
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while also making the best possible investment choice.
1. Unit Linked Insurance Plan (ULIP)

● In India, one of the most significant investment programmes is the ULIP Life
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Insurance Plan. In the event of one’s passing, it makes sure that their family would
be financially secure. The taxpayer can profit from the income tax act benefit by
buying a life insurance policy.
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● The premium for a life insurance policy can be written off up to Rs. 1.5 lakh under
section 80C of the Income Tax Act of 1961. Furthermore, income from the policy’s
maturity is tax-free according to section 10(10D). If the premium is less than 10%
of the amount assured, the income is tax-free. When the insurance beneficiary’s
nominee receives the money, the same applies as exempted tax in the hands of the
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nominee.

● The taxpayer may deduct 20% of the tax paid on the premium paid under section
Notes
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80C of the Internal Revenue Code of 1961. Additionally, these circumstances hold
true:
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1. On or before March 31, 2012, the taxpayer purchases a life insurance policy.
2. He is the only named insured on the insurance, not their spouse or child.
If the life insurance policy is bought after 1 April 2012, the tax deduction for the
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premium paid is up to 10% of the amount assured.
2. ELSS Mutual Funds
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● Equity Linked Savings Schemes are mutual fund investment plans that place a
significant portion of their equity in these investments. The statutory lock-in period
for the fund is also the shortest of all the investment products at 3 years.
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● Under section 80C of the income tax act, investments in ELSS funds are eligible for
a deduction of up to Rs. 1.5 lakh. The amount deposited via a systematic investment
plan (SIP) as well as a lump sum investment are both eligible for the deduction.
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There is always some risk associated with ELSS funds because they invest a
substantial amount in equities.
● ELSS funds offer tax savings in addition to financial appreciation. As a result,
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investors find it to be one of the most effective tax-saving strategies.
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● Generally speaking, taxpayers who are ready to take some risk and want to claim tax
deductions of up to Rs 1.5 lakh under Section 80C rules may think about investing
in ELSS. These mutual funds have an equity focus and allocate at least 60% of their
portfolio to stocks and securities linked to the stock market. Because of this, it’s
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essential to hold onto the funds for a long time in order to benefit from the returns.
3. Public Provident Fund (PPF)

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Fig: Public Provident Fund
● Taxpayers have always favoured the Public Provident Fund as a means of reducing
their tax burden. The fact that PPF qualifies for exempt-exempt-exempt tax status
(c
is one of the main causes of this popularity. Your PPF accounts can be opened at a
bank or post office.

● Section 80C of the Income Tax Act allows taxpayers to deduct the amount of
Notes
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investments they made during the fiscal year. The highest deductible amount is
Rs. 1.5 lakhs. The interest and maturity amount of PPF are tax-free because it falls
within the exempt category.
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● PPF accounts have a 15-year lock-in period and give investors the following choices
when the account reaches maturity:
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1. Withdrawal of proceeds from the account
2. Continue for another 5 years
4. Sukanya Samridhi Yojana (SSY)
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● The Sukanya Samriddhi Yojana has grown to be one of the most significant tax-
saving programmes. As a part of the Beti Bachao Beti Padhao campaign, the Indian
government introduced it in 2015. The general populace was significantly impacted
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by it. The programme allows for a fixed income investment, which the taxpayer
can use to invest their regular contributions while still earning interest. Sukanya
Samriddhi Yojana investments are additionally eligible for a deduction under section
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80C of the income tax statute.
● The scheme’s interest rate is set on a quarterly basis by the Indian government and
is due at maturity. A 21-year lock-in period is included in the plan, and it will mature
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after that time has passed. For a period of 15 years, an annual minimum deposit
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of Rs. 250 must be made. Account termination will occur if the required minimum
payment is not made within a year. Along with the initial Rs. 250 deposit, you must
also pay a penalty of Rs. 50 to have the account reactivated.
● The requirements to open a Sukanya Samriddhi account are listed below for this
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tax-saving choice:
1. This programme only provides benefits to girl children.
2. No girl child may be older than ten years old. A one-year grace period is
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offered, allowing the parent to invest before the girl kid turns 10 years old.
3. The investor must provide evidence of the daughter’s age..
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5. National Savings Certificate

● A national savings certificate is a government-sponsored fixed income investment
programme aimed at investors with low and moderate incomes who want to make
investments and earn respectable returns. It is thought to be a low-risk investment
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that is equally safe as the Provident Fund. Investors can make investments based
on their financial situation and investing preferences.
● Section 80C of the Income Tax Act allows for a deduction of up to Rs. 1.50 lakh for
)A
investments in NSC. Along with the benefit of tax exemption, it offers the investor
total capital protection and interest that is guaranteed. The following are some
elements of the NSC tax-saving option:
1. Guaranteed interest of 6.8% each year.
(c
2. Section 80C allows you to claim a tax benefit up to Rs. 1.5L.

3. You can put down as little as 1 rupee (or multiples of Rs. 100). You are free to
Notes
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increase your investment as needed.
4. At maturity, the investor will get the full maturity value, which will then be
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subject to taxation in the hands of the taxpayer.
5. There isn’t a way to leave early. In the event that you need a loan from a bank
or NBFC, you can use the same as collateral security.
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6. Tax-savings Fixed Deposit
One of the most secure methods of tax savings is fixed deposits. In terms of risk
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and returns, it is less risky than equity investments. The interest rates are set by the
banks and are influenced by several factors. Some characteristics of a tax-saving fixed
deposit are listed below:
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1. Investments in tax-saving fixed deposits are deductible from taxable income
under section 80C.
2. a minimum 5-year lock-in term
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3. Seniors are eligible for higher interest rates on their investments.
4. In a joint account, the principal account holder may benefit from a tax
deduction when determining their taxable income.
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5. Fixed-income tax-saving investments do not permit early withdrawal. Investors
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do have the option of making an early withdrawal when the five-year lock-in
period expires, though. Premature withdrawal rules and regulations differ from
bank to bank.
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7. Senior Citizen Savings Scheme

An income tax reduction programme for senior citizens living in India is known as a
Senior Citizen Savings Scheme. The programme offers one of the highest rates among
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the numerous savings plans and is accessible for investment through banks and post
offices.
Depositors can invest from as little as Rs. 1000 and in multiples of that amount.
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If the investment is less than Rs. 1 lakh, the scheme also offers the option of cash
investments. The contributions paid to the programme mature after five years. The
depositors can choose to prolong the maturity time by an additional three years.
Investments in the Senior Citizen Savings Scheme are eligible for a deduction from
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taxable income of up to Rs. 1.5 lakhs under section 80C. If the interest is greater than
Rs. 50,000, it is completely taxable and eligible for a tax deduction. A Senior Citizens
Savings Scheme account’s deposits are compounded and paid out yearly.
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8. School Tuition Fees

Section 80C of the Income Tax Act of 1961 allows for a deduction for the cost of
children’s school expenses. Along with other investments like PPF, NSC, ELSS, etc.,
this tax-saving alternative is accessible under section 80C. Any registered university,
(c
college, school, or other educational institution that charges tuition is eligible for a
deduction of up to Rs. 1.5 lakh.

Additionally, only tuition costs are eligible for a deduction under the income
Notes
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tax laws. Even if paid to such an institution, any other cost, such as a contribution or
development fee, is ineligible for the deduction.
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According to the income tax statute, both parents are eligible to claim a deduction
up to the full amount of what they each paid. Therefore, if the total sum paid by the
parents is Rs 1 lakh, of which the father has paid Rs 40,000 and the mother has paid
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Rs 60,000, both may be eligible to receive the money according to the individual
payments they made.
9. National Pension Scheme ( NPS )
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The National Pension Scheme, also known as NPS, is a well-liked investing option
that reduces income taxes. It is a tax-saving choice open to both public and private
sector workers. It enables the depositor to generate a regular monthly income as well
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as a corpus for retirement. The depositor’s money is invested in a variety of plans,
including equities markets.
NPS accounts come in two different varieties: Tier-1 and Tier-2. A tier-1 account is
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locked in until the subscriber turns 60 years old. Under sections 80CCD(1) and 80CCD,
the subscriber’s donations to tier-1 are tax-deductible (1B). Since Tier-2 accounts are
voluntary, subscribers may take their money out whenever they choose. Contributions
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made to tier-2 accounts, however, are not eligible for a tax deduction.
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According to section 80CCD, a person may invest in NPS and claim a deduction
of up to Rs. 1.5 lakh. An additional deduction of up to Rs. 50,000 was provided for NPS
payments made by individual taxpayers under a new sub-section 1B that was also
implemented.
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10. Health Insurance Premium under Section 80D

For the following contributions, you may claim a tax advantage of up to Rs. 25,000:
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1. Payment made to maintain health insurance coverage for oneself, one’s spouse, or
one’s dependent children.
2. any payment made to the government’s central health programmes.
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3. The central government may declare any other programme eligible for a deduction.
Medical insurance is regarded as the safest form of investment to cover one’s
medical crises. Due to this, the taxpayer is able to benefit in two ways. In the first
place, having insurance coverage in the event of a medical emergency. Second, the tax
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benefit for purchasing an investment product under the Income Tax Act.
In addition to the aforementioned, a further deduction for the parents’ insurance is

)A
allowed, up to a maximum of Rs. 25,000 for those under 60 and Rs. 50,000 for those
over 60. The maximum deduction permitted by this clause if the individual and the
parent are both over 60 years old is Rs. 1,00,000.
11. Repayment of an Education Loan

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A tax benefit is offered by the income tax act upon loan repayment in the form
of a tax deduction under section 80E of the act. You must keep in mind that the loan
borrower has access to this tax-saving option. Once an educational loan has been
taken out, the interest paid on the loan is eligible for a tax deduction for up to eight
Notes
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years, or until the interest is paid off, whichever comes first.
Either the parent or the child may claim the deduction, depending on who is
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responsible for paying the EMI on the student loan. Only if you obtain the loan from
a financial institution and not a family member are you eligible for the section 80C
deduction. You may begin claiming the tax deduction in the year that repayment begins.
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From the date of completion, the income tax authorities grant the borrower a
moratorium period of up to one year before requiring repayment of the loan. This gives
the taxpayer enough time to organise their finances and file for the deduction once they
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begin loan repayment.
For instance, the tax deduction would only be allowed for the first five years of the
taxpayer’s repayment of their student loan. The taxpayers should take advantage of
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this benefit because it can be claimed under section 80E for a maximum of 8 years.
Borrowers should be aware that their payback period may be longer than 8 years, but in
that event, they will no longer be eligible for the tax deduction under Section 80E.
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12. Rent paid and no HRA received
Typically, you receive HRA as a salary benefit and consider HRA to be a significant
tax-saving strategy when submitting income tax returns. It is possible, nonetheless, for
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it to not be paid as part of the employee’s wage. In this situation, the taxpayer would not
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be able to claim the benefit even though they are paying the rent because the regular
HRA deduction is not available. A taxpayer must also request a tax credit under section
80GG in such circumstances.
Section 80GG was added in order to give the taxpayer benefits even when HRA
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is not received. According to this clause, a taxpayer may deduct the cost of rent even if
they do not receive HRA. The following requirements must be met for this:
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◌◌ The person either works for themselves or is paid.

◌◌ At any point throughout the year for which a deduction is being claimed under
section 80GG, HRA has not been received.
◌◌ No residential accommodation at the location where you are presently
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residing is held by you, your spouse, or the HUF of which you are a member.
You must submit form 10BA for the payment of rent if you want to claim a
deduction under section 80GG. Under this clause, the lesser of the following will be
regarded as a deduction:
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◌◌ Rs. 5,000 per month.

◌◌ 25% of the total income, less deductions allowed under sections 80C to 80U,
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long-term capital gains, short-term capital gains under section 111A, and
income under sections 115A or 115D.
◌◌ 10% of income less the actual rent
13. Interest paid on home loan

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You must meet the following requirements in order to deduct the interest portion of
a mortgage from your taxes:

● For the purchase or building of a house, a home loan is required.

Notes
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● Within five years after the end of the fiscal year for which the loan was obtained, the
house must be built.
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● Section 24 allows for a deduction of up to Rs. 2 lakh for the interest paid as part
of the loan. In the case of a self-occupied property, this is relevant. There is no
maximum amount that can be claimed for interest on a rented property.
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● The pre-construction interest paid on a mortgage taken out during a pre-construction
period may be written off as a tax deductible. Starting in the year when the property
is purchased or the building is finished, the deduction is available in five equal
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instalments. The upper limit is Rs. 2 lakh, though.
14. Savings Bank Account Interest
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In accordance with the 1961 Income Tax Act, interest from savings bank accounts
is eligible for deductions. Hindu undivided families and individuals are both eligible to
claim the tax deduction for interest generated under section 80TTA. Taxpayers who are
not elderly citizens are eligible for this deduction. The Senior Citizen Exemption under
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Section 80 TTB is applicable.
Section 80TTA allows for a maximum deduction of Rs. 10,000. The assessee’s
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total interest earnings from his or her savings bank account are subject to a maximum
of Rs. 10,000. Any interest that exceeds Rs. 10,000 is subject to taxation as “Income
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from Other Sources”. The tax rate will be in accordance with the relevant tax slab rate.
For example, the total interest earned by Amit from his savings bank account was Rs.
15,000. The entire exemption permitted under section 80TTA in this situation is Rs.
10,000, and the remaining Rs. 5,000 will be subject to taxation as “income from other
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sources.”
Section 80 TTB for older citizens went into effect on April 1st, 2018. According to
section 80 TTB, senior citizens may deduct up to Rs. 50,000 from their entire gross
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income, or a defined sum.
15. Medical Expenses Towards Disabled Dependent

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A taxpayer may claim a deduction under the terms of section 80DD if they are
caring for dependents who are disabled. This tax advantage will assist the individual
who is caring for a dependent disabled family member in lowering their tax obligation.
Section 80DD states that disabled dependents can be a spouse, child, parent, or
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sibling (brother or sister). A crippled dependant may be a part of the Hindu Undivided
Family (HUF) in the case of HUF. A deduction under section 80U should not have been
taken in order to claim tax benefits under section 80DD. A few of the disabilities are
listed below:
)A
◌◌ Blindness
◌◌ Low vision
◌◌ Hearing impairment
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◌◌ Mental illness
◌◌ Autism

The following medical expenses are deductible from your income for tax purposes:
Notes
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◌◌ any investment made in a dependent individual with a disability’s medical
care, nursing, education, or rehabilitation.
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◌◌ Any sum paid as a premium for a particular insurance plan made just for
certain situations, so long as the plan complies with the legal requirements.
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16. Treatment of Specified Diseases u/s 80DDB
Taxpayers who have developed illnesses including cancer, neurological conditions
like dementia, motor neuron disease, parkinson’s disease, AIDS, etc. are eligible for a
O
deduction under section 80DDB. All of these diseases have high treatment costs, and
section 80DDB allows for a deduction for those costs.
For the medical care of a dependent who is afflicted with a specific ailment,
individuals or HUF may deduct expenses under section 80DDB. The maximum
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deduction is £40,000, whichever is higher (whichever is lower). In the case of senior
citizen taxpayers or dependents, this cap is increased to 1 lakh.
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17. Donations made to Charitable Institutions:
In relation to the amount paid by the taxpayer to an authorised charitable
organisation, Section 80G allows for a tax deduction. Donations to these groups should
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be sent via check or online transfer. Cash transfers worth more than Rs 2,000 are not
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eligible for this section’s deduction. To make a tax deduction claim, it is crucial to obtain
a stamped receipt from the organisation where the donation was made.
The tax deduction under section 80G might be either 50% or 100% of the donation
amount, depending on the type of organisation to which a donation has been made.
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However, the same is limited to 10% of the taxpayer’s adjusted gross income. It is
possible to define an adjusted gross total revenue as:
◌◌ the gross total income (sum of income under all heads) less the amount
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deducted under Sections 80CCC to 80U (but not Section 80G),

◌◌ plus any long-term capital gains,
◌◌ less any exemptions from income, and less any income referred to under
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Sections 115A, 115AB, 115AC, 115AD, and 115D relating to non-residents

and foreign corporations.
To qualify for a tax deduction, donations can generally be put into one of four
categories.
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a) 100% tax-deductible donations with no upper limit, such as those made to the
Central Government’s National Defence Fund.
)A
b) Contributions that are eligible for a 50% deduction without any upper limit,
such as those made to the Prime Minister’s Drought Relief Fund or the
Jawaharlal Nehru Memorial Fund.
c) Donations with 100% deduction subject to 10% of adjusted gross total
income. The donation must be towards a Government or any approved local
(c
authority, institution, or association to be utilized for the purpose of promoting

family planning

d) Donations with 50% deduction subject to 10% of adjusted gross total income
Notes
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such as any institution which satisfies conditions mentioned in Section 80G(5).
2.1.15 Service Tax
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https://blog.ipleaders.in/service-tax-on-educational-courses/
The Central Government of India imposed a tax known as the “Service Tax” on the
services rendered by service providers. The Finance Act of 1994 created this indirect
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tax. For transactions that took place on or after June 1, 2016, it was set at 15%. To take
advantage of the many services provided by service providers, the tax had to be paid to
the government. The tax in that situation was paid by the service providers, but it was
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afterwards recovered from the customers or recipients of the taxable services.
Service Tax in India
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In India, the Finance Act of 1994’s Section 65 implemented the service tax. The
services that were subject to the service tax were gradually raised beginning in 1994
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with the release of the budget for that year, which went into force on July 1, 1994. They
were expanded to include amenities offered by air-conditioned dining establishments,
short- and long-term housing, guest residences, etc.
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Additionally, the service tax was levied against businesses as well as individual
providers in accordance with the regulations. Individuals have to pay tax in cash;
businesses might pay it on an accrual basis. However, the tax only had to be paid
if the value of the services was greater than INR 10 lakh in a single fiscal year. This
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improvement to the service tax rules were not applicable to Jammu and Kashmir.
Service Tax Exemptions in India

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According to the former legislation, service tax was paid in India on all services
with the exception of those that were on the negative list, or another set of services. All
service providers, including in the public and commercial sectors, were required to pay
service tax, but the following were the main exemptions:
m
◌◌ If a small-scale service provider’s revenue from taxable services does

not exceed INR 10 lakhs during the same fiscal year, he may qualify for an
exemption.
)A
◌◌ Receivers are exempt from paying service tax on certain goods and services
when there is written evidence of their value, evidence that no credit duty
has been paid on the goods or materials, and evidence that the goods and
services were received from a service provider in accordance with CENVAT
Credit rules.
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◌◌ The services provided to diplomatic missions, their officers, and the members
of their families are likewise exempt from the application of the service tax.

◌◌ Other non-taxable services include port services, containerized transport

Notes
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services, and goods transport services that have been used or received by
exporters to export goods. Here, the service tax that was paid by an exporter
on these services is then reimbursed to the exporter.
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◌◌ Services rendered to both the United Nations and international organisations
are not subject to taxation.
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◌◌ Services rendered to SEZ developers or a SEZ unit are tax-exempt.
Service Tax Payment

Using G.A.R.7 or the formerly TR6 Challan, service tax payments can be made.
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The service tax may be paid at branches of specified banks. If you need a list of
recognised banks and their branches to pay the tax, the local service tax office or even
the central excise office can help. By using the e-payment capability, you have still
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another method of paying the service tax.
2.1.16 Comprehensive Illustration on Personal Taxation
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Ajay, a software engineer who is 27 years old, resides in Mumbai. He enjoys his
newfound financial freedom during his free time. His first employment, and he knows
nothing about taxes or savings. But as January draws to a close, Ajay overheard his
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buddies discussing Section 80C and how it has allowed them to pay no taxes. Ajay’s
yearly salary is Rs. 6,60,000. Here are the specifics of his pay.
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Salary components Monthly Annually
Basic salary 30,000 3,60,000
House Rent Allowance 15,000 1,80,000
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Special Allowance 10,000 1,20,000

Total 6,60,000
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When Ajay checked his pay stub, he discovered that his employer had been taking
a TDS deduction from his monthly salary of Rs 2,988. This will equal Rs. 35,860 for the
entire year. Ajay doesn’t know how much tax he must pay or whether he can save any
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tax because he has been too busy enjoying his new life to think about it.
Ajay could start by calculating his total annual revenue. In addition to his pay,
Ajay also received Rs 2,500 in interest from his savings account. He checked his bank
statement and saw this sum. He learned from his online FD statement that the Rs
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50,000 fixed deposit his father had made him make will yield him Rs 3,500 in interest till
the end of March 2020. Ajay consults his Form 26AS since he is unsure if any TDS has
been taken from his interest income. Details of every tax deduction and deposit made
)A
against Ajay’s PAN are contained in Form 26AS. He discovered his employer had been
deducting TDS of Rs 2,988 per month up until January.
Here is Ajay’s total Income

(c

Income from salary Rs. 6,60,000

Notes
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Income from other sources Rs. 6,000
Savings Bank account interest Rs. 2,500
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Fixed Deposit interest Rs 3,500
Gross Total Income Rs 6,66,000
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Tax deducted or TDS till the end of January 2020 Rs 29,880
(Rs 2,988*10)
Ajay also revealed he lives in a rented accommodation in Mumbai along with 4
O
other roommates and his share of rent is Rs 10,000. If Ajay can organise rent receipts
from the landlord and get his PAN number, he can claim an exemption on HRA. If Ajay
can submit the rent receipts well in time, to his employer – his employer will be able to
adjust his tax calculations.
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Ajay’s HRA exemption
HRA exemption shall be least of the following:
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HRA received (A) Rs. 15,000
50% of the basic salary Rs. 15,000
Rent paid less 10% of the basic salary r
Rs. 7,000
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HRA exempt (lower of the above) (B) Rs. 7,000
HRA taxable (A)-(B) Rs 8,000
Let’s check out Ajay’s updated tax calculation now.

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The updated tax calculation by Ajay
Income from salary Rs 5,76,000

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Basic salary Rs 3,60,000

Taxable portion of HRA Rs 96,000
Special allowance Rs 1,20,000
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Income from other sources Rs 6,000

Gross total income Rs 5,82,000
Deduction under section 80C Rs 1,50,000
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Deduction under section 80TTA Rs. 2,500

Total income Rs 4,29,500
Tax payable Rs. 8,975
)A
Less: Rebate under section 87A (for total income Rs. 8,975
up to Rs 5 lakh)
Tax payable NIL
Ajay won’t owe any tax on the reimbursement he received under section 87A if he
(c
can successfully claim Rs. 1,50,000 under section 80C. With this deduction, his taxable

income for the AY 2020–21 does not exceed Rs 5 lakh, making him eligible for a rebate
Notes
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under section 87A.
Ajay must nevertheless submit an income tax return because his gross total
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income exceeds the Rs 2.5 lakh basic exemption threshold. Ajay might also ask for a
return of the TDS of Rs 29,880 that was taken from his pay. Ajay makes a section 80C
claim for Rs. 150,000. For him, the deduction under Section 80C is worth 12% of his
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basic salary, or Rs 43,200. He only needs to take into account this amount because it
has already been deducted from his income; no additional payment is necessary.
Ajay invests Rs 50,000 in ELSS because he wants to try his hand at investing in
O
stocks and finds the market returns to be promising. He registers for a PPF account and
deposits Rs 57,580; the total is Rs 1,50,780. Under section 80C, there is a maximum
deduction of Rs. 1,50,000. Ajay therefore requests a deduction of Rs 1,50,000 under
section 80C.
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Deduction under section 80C available to Ajay
EPF contribution @ 12% of basic salary Rs 43,200
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Subscription to ELSS Rs 50,000
Contribution to PPF Rs 57,580
Total
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Eligible deduction
Rs 1,50,780
Rs 1,50,000
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)A
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Case Study
Notes
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With the aid of its information technology advancements and its pool of resources,
in
Synergy Inc. has been forging ahead audaciously. Due to the vast prospects the
continent offers for both profit and expansion, international companies have their
eyes on the Indian market. India’s investment patterns have improved over the years,
and deregulation efforts have made substantial headway. India has taken an active
nl
part in the G-8 and G-20, signing DTAAs (Double Taxation Avoidance Agreements/
Treaties) with a number of tax haven nations. This has improved India’s reputation as
an emerging economic powerhouse and “lookout destination” for investment. India was
O
placed third in a September 2011 Bloomberg Global Poll, ahead of the United States of
America, while World Report 2011 ranked India as the ninth most desirable investment
destination (US).
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However, it is said that the current Synergy Inc. Tax case, which has been circling
the courts since 2010, has damaged the very same reputation. Many multinational
corporations are reportedly reconsidering their investment plans in India in light of the
court’s apparent decision in the tax authorities’ favour. They are reportedly doing this
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while taking into account how the decision will affect taxation. India came placed at
number 132 in the World Bank’s Doing Business Report 2011, behind neighbours like
Nepal and Bhutan. This is a result of formal challenges faced by start-up businesses
and investment firms both in India and abroad. r
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Cross-border trade and investment in a nation are significantly influenced by
tax laws. Major investment destinations via Foreign Direct Investment (FDI) or
other channels include tax havens, nations with open borders, and DTAA nations.
The tax case involving Synergy Inc. raises an intriguing issue about the taxability of
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a non-resident firm acquiring shares of a resident company by means of an indirect

transaction. This case is historic because it represents the first instance in which the
tax authorities have attempted to tax a business by tracing the source of the acquisition.
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While the “corporate veil” has been lifted in the past, this case provides a unique
illustration of how the Indian tax authorities went to great lengths to interpret the current
tax statutes in order to include a multinational corporation like Synergy Inc. in its tax
jurisdiction.
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Hutchison Telecommunications International Ltd (HTIL), which owned a stake

in Hutchison Essar Ltd (HEL), which managed the company’s mobile operations in
India, sold the controlling interest and share of CGP Investments Holdings Ltd (CGP)
in Cayman Island to Synergy International Holdings BV, based in the Netherlands and
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controlled by Synergy UK, for a price of $11.01 billion. HEL owned a share in CGP
Holdings, in which Synergy acquired a majority position in 2007 after purchasing 52% of
HEL’s stake.The Madras High Court held on September 8 that the transaction between
)A
two or more offshore organisations is subject to capital gains tax under applicable
income tax legislation in India if the underlying assets are located in India. The Court
used the nexus rule, which says that a state can tax someone by establishing a link
between them and the jurisdiction that wants to tax them. When the court read Sections
5(2), 9(1), and 195 and considered how the corporation was treated as an Assessee in
(c
Default (AID) under Section 201(1) of the Income Tax Act, it concluded that Vodafone
was required to collect tax at source (TDS). Vodafone has now filed an appeal with the

Supreme Court asking for a rehearing of the ruling, which holds them responsible for
Notes
e
paying a record sum of RS. 12,000 crore to the tax authorities.
On the subject of taxing non-resident entities, Synergy Inc. highlights important
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issues. Major acquisitions like SABMiller- Foster and Sanofi Aventis-Shanta Biotech will
be directly impacted by the ruling. Sesa Goa, AT&T, and General Electric are examples
of prior transactions that are comparable. In exchange for selling its stake in Cairn India
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to Vedanta Resources for between $6.65 billion and $8.48 billion, the British company
Cairn Energy has already agreed to pay tax in both India and the UK. The tax obligation
could be between $868 million and $1.1 billion, depending on the magnitude of the
stake sale. The ruling will undoubtedly make major investors and M&As in India wary,
O
but it won’t have a significant impact on stopping foreign investment in a developing
economy like India. When the case is heard by the Supreme Court in its final stages,
the issue of judicial propriety still needs to be resolved. According to what has
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happened in the lower courts, the Supreme Court is not likely to overturn the decision of
the Madras High Court.
The Indian subcontinent is being closely watched by the rest of the world,
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especially now that it is starting to play a more prominent role in both socioeconomic
and political spheres. According to the United Nations Conference on Trade and
Development (UNCTAD), India is expected to surpass the US by December 2012 to
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take the second-best spot for FDIs, of which M&As make up the majority.India plans
to update its taxation laws and make significant regulatory adjustments. Important
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features of the proposed Direct Tax Code would have a significant effect on investments
in India. India’s standings in the World Bank’s “Doing Business” Report have improved
in terms of how many regulatory adjustments have been made in the past year. This
demonstrates that the nation is prepared to leave a lasting impression on the world by
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positioning itself as a “Must Invest” location.
India now has the chance to develop a template for other nations that adhere to the
principles of source-based taxation as a result of the Synergy Inc. tax case. As noted by
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economist Amartya Sen in his book “The Argumentative Indian,” it is a good moment to
celebrate India, which is supposed to have once held a third part of the global market.
Questions
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1. Study and analyse the case.

2. Write down the case facts.
3. What do you infer from it?
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Summary
● The part of your gross income that the IRS considers to be taxable is known as
)A
taxable income.
● Both earned and unearned income are included in it.
● Due to deductions, taxable income is typically lower than adjusted gross income.
● To guarantee that these factors work together to enable you to pay the least amount
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of taxes, tax planning involves analysing a financial condition or plan.

● Timing of income, size, timing of purchases, and budgeting for expenses are all
factors in tax planning.

Notes
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● IRA retirement savings and tax gain-loss harvesting are two examples of tax
planning tactics.
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● The illegal non-payment or underpayment of actual tax responsibilities owed are
both examples of tax evasion.
● Whether or not tax forms were submitted to the IRS, the IRS can nonetheless
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evaluate whether or not tax evasion occurred.
● The government body must be able to prove that the taxpayer intentionally avoided
paying taxes in order to establish tax evasion.
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● Tax avoidance entails finding lawful (within the law) ways to lessen taxpayer duties,
whereas tax evasion is against the law.
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● The net fair market value of a taxpayer’s assets is taxed under a wealth tax.
● A wealth tax is imposed on the net fair market value of a taxpayer’s total or partial
holdings of various asset classes, such as cash, bank deposits, stocks, fixed assets,
private automobiles, real estate, pension plans, money funds, owner-occupied
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homes, and trusts.
● When a capital asset is sold, the rise in value is known as a capital gain.
● r
All assets, including investments and those bought for personal use, are subject to
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capital gains.
● The gain must be reported on income taxes, whether it is short-term (lasting less
than a year) or long-term (lasting more than a year).
● Unrealized gains and losses show a rise or fall in the value of an investment but are
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not regarded as capital gains that are subject to taxes.

● When the value of a capital asset declines relative to the item’s acquisition price, a
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capital loss is experienced.
Glossary
● Capital Gains: When a capital asset is sold, its value increases, and this is referred
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to as a capital gain. Simply put, a capital gain happens when you sell an asset for
more money than you paid for it initially.
● Wealth Tax: A wealth tax is a charge based on the market worth of the taxpayer’s
possessions. Although the United States has generally depended on collecting
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annual income to raise money, several industrialised nations elect to tax wealth.
● Tax Evasion: Tax evasion is an illegal practice in which a person or organisation
knowingly fails to pay their actual tax obligations. Tax evaders are typically faced
)A
with serious penalties and criminal prosecution.

● Tax Avoidance: Any legal strategy employed by a taxpayer to reduce the amount
of income tax due is known as tax avoidance. Tax avoidance strategies can be
used by both individual and corporate taxpayers to reduce their tax obligations. Tax
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avoidance techniques include using tax credits, deductions, income exclusions, and
loopholes.
● Gift Tax: A person who transmits anything of value to another without obtaining
something of comparable worth in exchange is subject to the gift tax, which is a

Notes
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type of federal tax. Anything of significant value, such as huge sums of money or
real estate, qualifies as a gift, and the tax can be applied even if the donor had no
intention of doing so.
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● Service Tax: Service tax is a tax that the government imposes on service providers
on a limited number of service transactions, but which is really paid for by the clients.
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It was established by the Finance Act of 1994 and is categorised under Indirect Tax.

1. A tax imposed on the earnings of an individual throughout the year, including wages,
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salaries, dividends, interest, and other income is known as ___________.
a. Personal Tax
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b. Sales Tax
c. Income Tax
d. Service Tax
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2. The portion of your gross income that is used to determine your tax liability for a
certain tax year is known as ________.
a. Income Tax
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b. Non- Taxable Income
c. Taxable Income
d. Accrued Income
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3. ___________ is the unlawful failure to pay taxes or failure to pay them in full, usually
by making a false or no disclosure to the tax authorities, such as by overstating
deductions or by declaring less income, earnings, or gains than what was actually
received.
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a. Tax Avoidance
b. Tax Evasion
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c. Tax Reference
d. Tax Slabs
4. Any legal strategy employed by a person to reduce their income tax liability is known
to be as _________.
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a. Tax Evasion
b. Tax Saving
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c. Tax Avoidance
d. Tax Slabs
5. _________ is a tax imposed on the total or market worth of an individual’s assets.
a. Gift Tax
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b. Wealth Tax

c. Income Tax
Notes
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d. Property Tax
6. _________ is a tax on any profit or gain resulting from the sale of a capital asset
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in the year in which the transfer of the capital asset occurs since it falls within the
category of income.
a. Income Tax
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b. Property Tax
c. Liability Tax
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d. Capital Gains Tax
7. __________ is a fee that the government imposes on service providers on specific
service transactions, but which the customers ultimately pay.
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a. Wealth Tax
b. Service Tax
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c. Concession Tax
d. Income Tax
8. Any asset that has been in the possession of a taxpayer for less than 36 months
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following the first transfer is known as _________.
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a. Short Term Capital Assets
b. Long Term Capital Assets
c. Fixed Assets
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d. Current Assets
9. The evaluation of a financial condition or plan to make sure that all components work
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together to allow you to pay the least amount of taxes is said to be as __________.
a. Time Management
b. Corporate Planning
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c. Financial Planning
d. Tax Planning
10. Gift vTax is levied if the total amount of presents you receive during the year is more
than _______
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a. Rs. 25,000
b. Rs. 75,000
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c. Rs. 50,000
d. Rs. 1,00,000
11. B & Co. paid A & Co. Rs. 2 lacs as compensation for the early termination of the
agency contract and the amount received is known as _________.
(c
a. Capital Receipt and Taxable

b. Capital Receipt and Non- Taxable
c. Capital Expenditure
Notes
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d. Revenue Receipt and Taxable
12. ________is not an investment that saves taxes.
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a. Mutual Funds
b. Public Provident Funds
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c. Fixed Deposits
d. Insurance Plans
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13. ________ is a certificate that an employer provides to his employees that attests to
the amount of tax withheld by the employer from an employee’s salary.
a. Form 15
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b. Form 16
c. Form 12
d. Form 20
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14. A corporation that was formed outside of India but had its headquarters and primary
management location entirely in India the year before would be regarded as
__________.
a. Non- Resident
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b. Resident but Not Ordinarily Resident
c. Resident and Ordinarily Resident
d. Resident
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15. Incomes that are excluded from the assessee’s overall income are referred to as
__________.
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a. Exempt Incomes
b. Taxable Incomes
c. Non- Taxable Incomes
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d. Capital Gains
16. ______________ f the entire amount payable at the time of a partial withdrawal
from the National Pension Scheme as described in section 80CCD is exempt.
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a. 25%
b. 30%
c. 40%
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d. 100%
17. In India, the highest administrative authority for income tax is _____________.
a. Finance Minister
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b. CBDT
c. Director of Income Tax

d. President of India
Notes
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18. Both the year that income is earned and the year that it is taxable are referred to as
___________.
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a. Previous Year, Assessment Year
b. Assessment Year, Assessment Year
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c. Assessment Year, Previous Year
d. Previous Year, Previous Year
19. Interest on Gold Deposit Bonds and LA-issued Bonds is ____________.
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a. Taxable
b. Exempt
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c. Partly Taxable
d. Non- Taxable
20. Section 30 states that ____________ incurred for a structure utilised for a business
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or profession are not eligible for a deduction.
a. Capital Revenue
b. Insurance of Building r
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c. Repairs of Building
d. Capital Expenditure
Exercise
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1. What are the points to be considered while planning for Tax Considerations?
2. Explain the Heads of Income Tax.
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3. What is the difference between Tax Evasion and Tax Avoidance?

4. Discuss the importance of Tax Planning.
5. Explain individual tax slabs in detail.
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6. What are the various Deductions Under Income Tax Act, 1961?
7. Explain the method of computation of Capital Gains.
8. What are the recent tax saving schemes in India?
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9. Explain the concept of Service Tax in detail.

10. How to compute the taxable income?
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Learning Activities
1. Compute the taxable income of a company with the help of an example.
2. How to compute Capital Gain Tax? Explain with the help of an example.
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Check your Understanding- Answers

1. a 2. c

3. b 4. c
Notes
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5. b 6. d
7. b 8. a
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9. d 10. c
11. a 12. c
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13. b 14. d
15. a 16. a
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17. b 18. c
19. b 20. d
Further Readings and Bibliography:
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1. Tax-Free Wealth: How to Build Massive Wealth by Permanently Lowering Your
Taxes by Tom Wheelwright
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2. Sampath Iyengar’s law of Income Tax by A C Sampath Iyengar
3. The law and practice of Income Tax by Aravind P Datar
4. Commercial’s Direct Taxes Law & Practice by Dr. Girish Ahuja & Dr. Ravi
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Gupta – 13th edition
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Module - III: Liability Planning and Investment

Notes
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Fundamentals
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● Concept of Life Insurance
● Why Should One Buy Life Insurance and how Much Life Insurance is Right for you?
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● Health Insurance - Overview, Plans and Decisions
● Basic Principles of Property Insurance
● Homeowner’s Insurance and Automobile Insurance
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● Other Property and Liability Insurance
● Investment Planning in Securities Markets
● Investing in Stocks and Bonds, Mutual Funds and Real Estate
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● Investment Avenues as per Client Profiling
Introduction r
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An insurance policyholder and an insurance company enter into a contract known
as a life insurance plan wherein the insurer agrees to pay a predetermined amount
following the expiration of the policy or upon the death of the insured party in exchange
for a premium. Financial security is provided to you and your family through life
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insurance. A few insurance plans additionally provide extra add-ons, like critical illness
coverage, accidental death coverage, and others. Life insurance is crucial for protecting
your loved ones’ finances, and its significance cannot be overstated.
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In the event of your death, life insurance pays your dependents. This sum of
money substitutes the income you gave and can be applied to any expense, including
funeral costs, daily living costs, college tuition, mortgage payments, and other regular
bills and outgoings. Financial security for your family is safeguarded by this benefit.
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3.1 Life Insurance

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Fig: Life Insurance

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When a family’s primary breadwinner passes away suddenly, life insurance is

intended to be an effective and efficient way to prepare for negative financial effects.
An individual’s demands may change during the course of their lifetime. His needs

change depending on where he is in the life cycle. Customers’ demands, preferences,

Notes
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and expectations are significantly impacted by changes in the economic and social
environment. A product must meet the demands and expectations of consumers in
order to be marketable. The success of an insurance firm depends on how successfully
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its goods and services satisfy consumer demands. Products must be differentiated in
order to appeal to as many clients as possible with a variety of needs. Maximum and
minimum face values, also known as the sum assured, principal and supplemental
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policy benefits, embedded or inbuilt policy options, potential inclusion of riders to
increase flexibility and death benefits, available premium payment methods, policy
term, settlement of the policy that may be arranged, and other policy provisions are
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all features that are used to distinguish between products. These features collectively
make up the life insurance product design.
3.1.1 Concept of Life Insurance
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A life insurance policy is an agreement between an insured and an insurance
company under which the insured promises to pay a uniform rate of premium at
predetermined intervals, and the insurer agrees to pay a predetermined sum upon
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the occurrence of the event, which could be the insured’s death or the passing of a
predetermined number of years. Thus, in return for premium payments, the insurance
company pays a one-time amount to the beneficiaries, known as the death benefit,
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in the event that the insured passes away. Life insurance is a contract between the
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policyholder and the insurance company that provides that, in the event of the insured’s
passing, the insured’s family will receive a certain amount. The death benefit is given in
exchange for a certain payment.
Features of life insurance :

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1. Outcome of a contract
2. Payment of premium
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3. Payment of sum assured

4. Insurable interest
5. Financial help
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6. Encourages saving.
There are two basic types of Life Insurance plans -
1. Pure Protection
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2. Protection and Savings

What is a Pure Protection Plan?
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A Pure Protection plan is created to safeguard the future of your family by giving
them a lump sum payment while you are away.
What is a Protection and Savings Plan?
A protection and savings plan is a financial strategy that provides the advantages
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of a life cover while assisting you in making long-term financial plans for things like
buying a home, paying for your children’s school, and other things.

Advantages of Life Insurance

Notes
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There are various benefits of having a life insurance cover.
1. Peace of Mind/ Financial Security - The greatest sense of security comes from
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having life insurance. This is because if someone were to pass away, their family
and loved ones would have a safety net in place for money. All of us have some bills,
but having enough life insurance protects your loved ones or debts from being paid
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off in the event of your passing.
2. Wealth Creation - You can also build wealth with some life insurance policies. These
policies, in addition to providing life insurance, invest your premium in a variety of
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asset classes to produce superior risk-adjusted returns that outperform inflation and
increase your corpus.
3. Tax Savings - Plans for life insurance include two tax advantages. The Income Tax
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Act’s Section 80C allows for a tax deduction on the premiums paid. Accordingly,
your annual premium payment of up to 1.5 lakh will be subtracted from your gross
income, reducing your tax liability. The maturity insurance plans could be completely
tax-free when taken separately. The Income Tax Act’s Section 10(10D) governs this
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tax relief.
4. Buy Young, Save More - You may lock in affordable premium rates for life insurance
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policies while you’re still young. The premium for the same insurance will be
significantly more if you purchase it as an older person as opposed to when you
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were younger.
5. Death benefit -The nominee for the policy receives the entire sum guaranteed in the
terrible event that the policyholder passes away, provided that the premiums have
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been paid in full. The nominee may use the cash obtained from the term insurance
for whatever purpose, including paying off debt, covering the cost of their children’s
education, or other expenses. This includes paying off regular bills as well as loans
and other obligations.
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Disadvantages of Buying Life Insurance

1. Life insurance can be expensive if you’re unhealthy or old
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If you’re young and in good health, life insurance is most economical. Life insurance
companies will charge you more for coverage if your medical history contains
anything that can potentially increase your risk of dying young because your rates
are based on your medical profile, family medical history, and age. Additionally,
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life insurance may be beneficial to your loved ones but expensive for you if your
health is so poor that your medical expenses are already a substantial strain on your
resources.
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2. Whole life insurance is expensive no matter what age you get it

Term life insurance offers excellent value. However, whole life insurance is
significantly more expensive, frequently costing hundreds of dollars per month.
Even if you do receive coverage out of it, that is simply too much money for the vast
majority of Americans.
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Since whole life insurance covers you for the rest of your life and you are certain to
pass away while it is in force as long as you have been paying your payments, it is

significantly more expensive. When a person retires, has no dependents, owns their
Notes
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home outright, and has no outstanding debt, they typically don’t require as much life
insurance. Therefore, you won’t get as much value out of the additional years you
spend paying whole life insurance premiums after reaching retirement age.
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3. The cash value component is a weak investment vehicle
In addition to providing life insurance protection in the event that you pass away, the
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cash value feature of whole life insurance is a terrific strategy to make yourself save
money for retirement. Although the fees associated with cash redemption make it
less than ideal, the rate of return is generally lower than simply investing the money
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in a Roth IRA.
4. It’s easy to be misled if you’re not well-informed
Regarding life insurance, there are numerous inquiries: When can you cash out the
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value? What happens if you pass away, but the life insurance company disputes
the details of how you died? If you had one joint at your cousin’s summer BBQ,
would you be willing to pay more? Exist any businesses that bill customers less than
others for the same risk factor?
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A less-than-honest life insurance salesman may easily sell you a policy with more
coverage than you require because there are a few aspects of it that aren’t clear-cut.
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Before you sign on the dotted line, do your homework and consult with an insurance
broker like Policygenius. To make sure you get the right level of coverage from an
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insurer that will charge you the least, Policygenius agents don’t receive commission
on the products they sell.
Life Insurance Corporation of India (LIC)

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On July 1st, 1956, LIC was created, and on September 1st, 1956, it started to
operate. In addition to investing in nearly every sector of the economy, including the
public, private, co-operative, and joint sectors, LIC also receives a sizable portion
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of insurance premiums. As a result, it has grown to become one of the largest term
lending institutions in the nation. The purpose of LIC’s establishment was to promote life
insurance throughout the nation and mobilise savings for purposes of fostering national
development.
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3.1.2 Why Should One Buy Life Insurance?

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Fig: Life Insurance

.A worthwhile investment is life insurance. Anyone who has financial obligations

Notes
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will find the advantages of purchasing life insurance appealing. A life insurance policy
serves as a safety net for your loved ones in the event that the only source of income
passes away, enabling them to cover costs like a loan, childcare, school, healthcare,
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and numerous other regular expenses. The people you care about the most can be
financially protected with the help of life insurance.
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Reasons you Need to Buy Life Insurance
1. Looking after your loved ones even after you’re gone: This is the component of
life insurance that needs to be considered the most. Even after you pass away,
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your family will always be reliant on you, so you don’t want to let them down. Life
insurance could come to the rescue for your surviving dependents, whether it’s to
replace lost income, pay for your child’s school, or guarantee your spouse gets the
much-needed financial security.
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2. Dealing with Debt: In a time of need, you don’t want your family to be burdened by
debt. If you choose to purchase the appropriate life insurance policy, any unpaid
debt—including a mortgage, vehicle loan, personal loan, or credit card debt—will be
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paid off.
3. Helps achieve long- term goals: It would assist you in achieving long-term objectives
like saving for retirement or purchasing a home because it is a tool that keeps you
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invested for the long run. It also gives you access to a variety of investment choices
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that go along with various policy possibilities.
Some insurance plans are linked to specific investment products that offer dividend
payments dependent on performance. To fully understand the potential risks and
rewards if you choose an investment-linked insurance, be careful to read the fine
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print.
4. Life Insurance supplements your retirement goals: Who wouldn’t want their retirement
funds to continue to grow till they retire? You may make sure you have a consistent
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source of income each month by implementing a life insurance plan. An annuity is

similar to a pension plan in that you can enjoy a consistent monthly income even
after retirement by making regular payments into a life insurance product.
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5. Buying Insurance is cheaper when you’re younger: Every millennial does not require
life insurance. Insurance is not something you should prioritise if you don’t have an
emergency reserve or if you’re still dependent on your parents’ financial support.
However, you should start thinking about getting a life insurance policy if you do have
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dependents or if you have cosigned a loan with your parents (or any other member
of your family or acquaintance), whether it be a student loan or a home loan. In
addition, single people pay substantially less for coverage. Insurance salespeople
may try to convince you to buy a policy you don’t actually need.
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6. Your business is also taken care of: Life insurance is not just for you and your
loved ones. Some insurance plans also cover your company. If you run a company,
your business partner can easily buy out your stake in the company. Your business
partners will sign a buy-sell agreement, and the money will be sent to the nominees
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of the deceased partner without giving them ownership of the business. A term
insurance policy and a life insurance policy are the two different types of life
insurance.

We are all aware of the death benefits that these insurance plans offer, but little is
Notes
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known about the range of choices they present that could improve your financial
situation.
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7. Tax- saving purposes: No matter what kind of insurance plan you get, you could
save taxes. In accordance with Sections 80C and 10(D of the Income Tax Act of
1961, respectively, the premium you pay for an insurance policy may be eligible for
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a maximum tax benefit of Rs. 1.5 lakh as well as tax-free proceeds upon death or
maturation.
8. A tool for forced savings: You pay a monthly premium that is greater than what it
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would cost to insure you if you chose a traditional or unit-linked policy. This small
amount of extra income is invested, growing in value. You can then opt to sell the
money or take a payout from it, borrow money against the insurance, or both.
9. You may not be qualified for it later: Life insurance policies are subject to risk. If you
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unexpectedly get unwell, you might not be able to purchase a life insurance policy.
You may be in good health right now, and paying a premium for life insurance may
seem like an additional financial burden. It is essential to purchase one early in life
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because it is still valid even if your health declines later. You can add certain riders
or benefits to your new or existing policy, according to insurance firms.
10. Peace of Mind: Death cannot be avoided. The least you can do for your family in
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the wake of tragedy is to ensure their financial stability. Even if it’s a modest policy,
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you know you’ve done everything you can to assist them in getting through a trying
moment.
3.1.3 How Much Life Insurance is Right for you?

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Although most individuals may not want to think about death, it is unavoidable, just
like taxes. But if you have family members who depend on your income, it’s crucial to
make sure you have the proper financial resources in place, including life insurance.
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Life insurance can make it easier for individuals left behind to manage daily living
expenses by helping to pay for funeral and burial costs, settle outstanding debts, and
cover funeral and burial costs.
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What would be the perfect level of coverage for me? is a crucial question that goes
unanswered most of the time. In the simplest terms, the answer to this question resides
with the person in question. Since they are the ones looking to get life insurance, they
must carefully consider their financial requirements and desires.
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It’s crucial to have life insurance since it will safeguard your loved ones and enable
you to leave them a non-taxable inheritance in the event of your passing. Additionally,
it serves as payment for personal loans like your auto loan and your home. When you
leave your employer’s insurance and begin a new one, your personal life insurance
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continues. As a result of this insurance, your family will be able to keep their standard of
living even when their financial situation is tighter.
Minimum amount of Life Insurance you Need

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You might require a significantly different minimum level of coverage than someone
else. Financial experts frequently advise buying coverage equal to 10 to 15 times your
annual salary, although your own amount may be higher or lower. Here are a few of the
most crucial factors to take into account when deciding on a minimum quantity of life
Notes
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insurance.
Debt
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Existing debts, such as credit card debt, personal loans, mortgages, vehicle loans,
and college loans, may be settled with the help of life insurance. If you owe any of these
bills, your insurance should cover the full amount needed to settle them. You ought to
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borrow a bit more to pay off any additional interest or fees as well.
Income Replacement
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The need to replace income ranks among the top considerations for life insurance.
You can start looking around once you know the required face value of your insurance
coverage. You can find out how much insurance you’ll need using one of the many
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online insurance estimators available.
Insuring Others
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Obviously, you care about other people in your life, and you might wonder if you
should consider insuring them. Generally speaking, you should only cover those whose
demise would result in a loss of money for you. Even though it is emotionally painful,
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losing a child does not result in a financial loss because raising children is expensive.
However, it does result in a situation where there are both emotional and monetary
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losses when a spouse who earns a living passes away.
In that instance, use his or her salary to complete the income replacement
computation. This also applies to business partners that you are financially connected to.
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3.2 Health Insurance

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Fig: Health Insurance
A sort of insurance that effectively pays for your medical bills is referred to as
“health insurance.” A health insurance policy, like other policies, is an agreement
between an insurer and an individual or group in which the insurer agrees to provide
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a specific level of health insurance coverage in exchange for a specific “premium” and
subject to the terms and circumstances outlined in the policy.

Health insurance is a legal agreement that commits an insurer to covering all or

Notes
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a portion of a person’s medical expenses in return for a premium. More specifically,
health insurance often covers the insured’s out-of-pocket costs for prescription drugs,
medical procedures, and occasionally dental care. Health insurance can either pay the
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healthcare provider directly or compensate the insured for costs related to illness or
damage.
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3.2.1 Health Insurance - Overview
Both people and groups can purchase health insurance. The cost of the individual
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policy premium is higher than the cost of the group coverage, nevertheless. Ownership
of a personal policy belongs to the individual. Unlike group plans, which have the
sponsor as the policy’s owner and enrolled participants as its beneficiaries. To make
up for the shortcomings of your individual insurance, you can benefit from group health
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insurance. The group plans are a great way for people without insurance or who are
uninsured for one reason or another to get coverage.
Plan your needs carefully though before purchasing a health insurance policy.
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By doing this, you can avoid purchasing costly and potentially ineffective insurance
coverage.
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The Need for Health Insurance in India
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Even if the adage “Health is Wealth” is true, leading a sedentary lifestyle makes
maintaining good health seem like a distant hope. Some of the most significant causes
include an increase in the risk of lifestyle diseases, poor diet, and pollution. The need
for a health insurance policy arises since health problems might strike at any time,
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regardless of your exercise regimen.
In India, only 27% of individuals have access to health insurance, according to a

joint analysis by FICCI and KPMG. Furthermore, this figure is proportionate to the size
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of our population. It’s time the remaining 73% made a point of highlighting how crucial
health insurance is in India.
If you’re still debating whether you should purchase health insurance coverage or
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not, simply review the advantages of doing so in India.
Accidental coverage, hospitalisation coverage, and emergency medical care

coverage are three key advantages of purchasing a medical insurance policy. With a
family floater plan, additional family members may receive the benefits. Here is a brief
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summary of the main advantages:
● Pays off the Medical Expenses – Anybody’s money account might be depleted
nowadays by both significant and little medical procedures. You can respond to
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medical emergencies successfully if you have health insurance coverage in place.

The insurance provider will cover your medical bills and aid you in maintaining your
funds.
● Best Medical Services - The middle class in India may access some of the best
medical facilities by having a medical insurance coverage in place. Choose a network
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hospital that is accepted by the insurer, then receive cashless care. Although it won’t
give cashless therapy, you can also receive treatment from a non-network provider.

However, the insurer will pay back the expenses.

Notes
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● Tax Exemption - A health insurance policy provides the insured with medical benefits
as well as tax advantages. The upper limit is INR 25,000 as per Section 80D of the
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Indian Income-tax Act of 1961. The premium you pay for yourself, your spouse, and
your kids is deductible from taxes. The maximum is INR 50,000 if you are a senior
citizen paying a premium for parents. According to the provisions of Section 80D
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of the Income Tax Act, a deduction of up to Rs. 80000 is permitted for very senior
citizens and Rs. 60000 for senior citizens for the total expenses incurred for the
medical treatment of the specified diseases for an individual as well as a Hindu
undivided family. There are several further restrictions on this deduction.
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● Composure -Medical emergencies cause stress on an emotional and financial level
when everyone is managing their busy schedules. However, if you have health
insurance, you may spare yourself the headache of hopping from one thing to
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another. As long as your insurance has you covered, you may relax and enjoy your
peace of mind.
● Handles Medical and Hospital Expenses Effectively- When an illness first appears,
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the affected person and his or her family must deal with the loss of comfort, money,
and good health. Particularly, the family members frequently experience high
levels of debt and stress due to the rapidly rising medical bills and other healthcare
charges. r
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However, a medical insurance policy will relieve you of the financial stress because
it pays for hospitalisation costs such as doctor fees, medical bills, room rent,
discharge formalities, and other costs.
● Provides Better Treatment and Care to Patients- Any person may find themselves
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in financial difficulty if they choose to receive medical care from a private, super-
specialty hospital.
Furthermore, it poses a risk to the patient’s life because insufficient funds may
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prevent them from receiving the right care and help from a doctor while they are sick.
If you have sufficient health insurance, you can get the greatest care without
putting a strain on your family’s finances, and all of this can be a thing of the past.
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Benefits of Health Insurance

Health insurance is now required in the modern world. Due to the high cost of
healthcare, particularly in the private sector, it is crucial that you and your family are
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covered by affordable health insurance coverage. Therefore, having health insurance

can come in handy in an emergency, particularly if the family’s breadwinner is in the
hospital. If there were a medical emergency, it would make you feel less anxious.
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1. Comprehensive Coverage: By purchasing a policy online, you can address health-

related issues and receive the greatest medical care without worrying about costs.
The following healthcare costs are often covered by health insurance plans:
In-Patient Hospitalisation Expenses: These are the costs incurred for an admission
to the hospital lasting at least 24 hours. The majority of health insurance policies
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will pay for the costs associated with in-patient hospitalisation, such as rent for the
room, nursing and boarding costs, cost of medications, ICU/ICCU costs, etc.

Pre-Hospitalisation and Post-Hospitalisation Expenses: The costs incurred a

Notes
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specified number of days before and after the hospitalisation are referred to as
pre-hospitalization and post-hospitalization expenses. These often include costs for
trips to the doctor, x-rays, medical records, etc.
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Ambulance Expenses: The costs of an ambulance ride to deliver a patient to the
closest hospital are frequently covered by health insurance plans. Typically, there is
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a cap on the amount of ambulance fees that are covered; this can be confirmed with
the insurance provider.
Daycare Expenses: Costs associated with daycare are those that don’t necessitate
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a hospital stay of at least 24 hours. These include chemo, radio, cataract, dialysis,
sinuplasty, and other treatments. As stated in the policy paperwork, health insurance
plans only cover you for a certain number of daycare operations.
Domiciliary Hospitalisation Expenses: Hospitalisation costs for patients treated at
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home when a hospital stay would have been necessary are known as domiciliary
hospitalisation costs. The terms and circumstances of this coverage are detailed in
the policy document for the majority of health insurance policies.
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2. Cashless Treatment: In most cases, insurance companies have partnerships with
hospitals that provide cashless care to the insured in the event of hospitalisation.
These hospitals are referred to as network hospitals. These hospitals cover the costs
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of the insured person’s medical care. This implies that you can receive treatment
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at these facilities without having to pay anything for the associated medical costs;
instead, the insurance provider will pay you back for those costs when you file a
claim. Keep in mind that if the claim is submitted in line with the policy’s terms and
conditions, it will be approved.
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3. Portability Benefits: The option to port health insurance permits policyholders to

move their current health insurance plan to a different health insurance company. It
protects clients from being taken advantage of by insurance providers, giving them
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freedom and better options in the event that they are dissatisfied with their current
health insurance policies.
4. Financial Security Against Rising Medical Costs: It is crucial to acquire a trustworthy
health insurance policy on time given the escalating cost of medical care in India.
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The policy not only provides extensive coverage but also guards against the cost
of emergency hospitalisation even while prices are rising. It not only relieves your
tension but also looks after your health.
5. Tax Benefits Under Section 80D of the Income Tax Act, 1961: The government
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promotes health insurance by offering tax deductions on the premium paid for them,
under Section 80D of the Income Tax Act, 1961.
6. No Claim Bonus: No Claim Bonus (NCB) is a benefit provided by insurance
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companies to policyholders in exchange for their not filing any claims throughout the
policy year. No Claim Bonus, also referred to as a cumulative bonus, is applicable to
both individual and family floater health insurance plans. However, keep in mind that
the amount of coverage you can increase through the No Claim Bonus is limited.
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7. Lifetime Renewability Benefit: The policyholder can renew their health insurance
without any upper or lower age restrictions thanks to the lifetime renewability
advantage. The lifetime renewability benefit alleviates the strain on finances in
the event of a medical emergency, particularly for elderly people and parents. The
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Insurance Regulatory and Development Authority of India (IRDAI) has provided
rules to the insurance companies so that they may include this benefit in their health
insurance plans.
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3.2.2 Health Insurance Plans
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Health insurance policies either pay a predetermined amount directly to the insured
or reimburse them for their medical expenses, such as procedures, hospital stays, and
other similar costs related to diseases or injuries. A health insurance plan provides
protection for the customer’s potential future medical costs.
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In this contract, the insurance provider and the client both agree to guarantee
reimbursement or compensation for medical expenses in the event that the latter
sustains an injury or illness that necessitates hospitalisation in the future. Most of the
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time, insurance companies have agreements with a network of hospitals, guaranteeing
that patients there would receive payment-free care.
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Types of Health Insurance Plans
● Cancer Insurance Plans - An insurance policy that offers financial protection against
the costs of various forms and stages of cancer is known as a cancer insurance
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plan. Upon the diagnosis of cancer, the plan may provide substantial lump sum
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payouts.
● Critical Illness Plans - A type of health insurance known as a “critical illness plan”
offers funding for the treatment of serious critical illnesses like cancer, heart attacks,
kidney and liver problems, paralysis, and more. Plans for critical illnesses provide a
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large sum assured that may be enough to meet the expenditures of such illnesses.
On the first diagnosis of a serious illness, they also offer lump sum payments without
requiring the claimant to show any hospital expenses.
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● Individual Health Insurance Plans - A person is covered by this basic health insurance
programme. Age, gender, and health status all have an impact on the coverage and
sum assured.
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● Family Floater Insurance Plans - These health insurance policies provide umbrella
coverage that combines all family members’ policies into one. All family members
pay the same premium and total amount assured under these plans. They can be
employed to pay for expenses such as hospital stays, surgeries, room rentals, and
more.
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● Personal Accident Insurance Plans -A health insurance that pays for accident-
related medical expenses is called personal accident insurance. These policies
provide coverage for the life assured and provide a payout to cover costs such as
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ambulance fees, emergency surgery charges, doctor visits, and more.
Kinds of Health Insurance Plans
Health Insurance Plans for Family

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Today, being able to afford medical treatment depends on your family’s financial
stability. Family health insurance offers protection for every member of your family from

medical costs incurred in an emergency, either on an individual or floater sum insured

Notes
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basis. An extensive network of cashless hospitals, speedy claim processing, and a
selection of family health insurance plans are all provided by Policybazaar.com.
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Health Insurance Plans for Senior Citizens
Older people are more prone to certain diseases and health conditions as
compared to younger people. The treatment of old age-related health problems is not
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only expensive but also long-term.
Critical Illness Insurance
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Critical illness insurance covers severe, protracted illnesses that call for pricey
medical care. On payment of an additional fee, the majority of health insurance policies
offer critical illness riders that assist the insured in covering astronomical hospitalisation
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and treatment costs.
Health Insurance for Parents
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Do you intend to get your parents health insurance? Well, the Indian insurance
market is currently overrun with healthcare plans created especially for seniors or
parents who are over 60. Additionally, a lot of insurance companies offer family
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healthcare floater plans that are especially created for households with senior
individuals.
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3.2.3 Health Insurance Decisions
The administration of the Certificate of Need (CON) programme, creation of the
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Statewide Health Care Facilities and Services Plan, gathering, analysing, and reporting
on health care data, as well as reviewing and reporting on hospital financials, are some
of the main responsibilities of Health Systems Planning (HSP).
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The law gives HSP the right to compile and study substantial volumes of hospital
financial, billing, and discharge data. Hospital utilisation, demographic, clinical, charge,
payer, and provider statistics are among the data that are gathered, confirmed,
evaluated, and reported on, in addition to hospital costs and revenues, uncompensated
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care volumes, and other financial data. The office creates a biennial utilisation analysis
and an annual report on acute care hospitals’ financial soundness based on these data
analyses.
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Steps Involved in Systematic Planning of Health Insurance

1. Situational analysis
Situational analysis is the first stage in the operational planning process. It is the
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stage where you need to:

◌◌ Obtain trustworthy information from locals who will benefit from any initiatives
on the causes of the community’s health issues.
◌◌ Determine the community’s health state and the geographical locations of the
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affected demographic groups.

◌◌ Learn what and who is now being done to address the issues that have been
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identified.
◌◌ Examine how well specified needs have been met in the past, and think about
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how you could work with others in the neighbourhood to meet current needs.
SWOT analysis
SWOT analysis is a tool that can help you analyse situations more easily in your
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planning process. SWOT stands for:
S = Strengths
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W = Weaknesses
O = Opportunities
T = Threats.
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The SWOT analysis is used to determine an organisation’s or project’s internal
strengths and weaknesses as well as the external opportunities and threats it
confronts.
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The optimal time to do a SWOT analysis is following a progress review and after
finishing an environmental scan. The procedure can be carried out for the community
and the Health Post.
2. Problem identification r
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A perceived discrepancy between something’s current state and its ideal state is
what we refer to as a problem. To determine the health issues that exist in the
community, data regarding the underlying causes of difficulties with health must be
gathered. People who will benefit from the interventions should also be included in
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the information collected.

3. Prioritisation
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The ability to prioritise tasks is one of the critical talents you require. You pick what
is most important to work on initially when you set priorities.
You can find it challenging to decide because you believe every issue is important.
Applying a set of selection criteria that offer a benchmark by which something may
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be judged is one method of determining priority issues.

4. Setting objectives
You must be clear on the goals you and your work group are working toward in
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order to plan properly. You’ll need to assess the work that needs to be done and
decide what should come first. The actions to be taken to achieve predetermined
goals, such as those in the strategic plans established by the larger health service,
are included in objectives. The local environment and community resources must,
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however, serve as the foundation for your aims.
There are two important reasons for setting objectives:

A clear objective is essential to create a definite plan.
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Results can be assessed thanks to objectives. When a program’s objectives are

unstated or unknown, its results cannot be assessed.

5. Reviewing your objectives

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By tracking the results, you must regularly examine your goals and, if required,
make adjustments to how you are operating. Your community-level strategy is
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not determined by the health sector strategic plan, but the vision and overarching
objective are. Changing it if it doesn’t seem to be functioning is an option.
6. Identify and sequence activities
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You should identify all the tasks at this stage, order them correctly based on priority
and scheduling, and have a clear idea of the goal you are aiming to achieve. Since
this is the factor that will affect your overall sequencing, it is important to identify
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any dependencies, i.e. which activities cannot start until others have been finished.
Determine which tasks might be completed simultaneously.
7. Identify the resources
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You need to think about the resources that will be required to finish your health
project’s activities at this moment. You should be able to more accurately estimate
the resources you will require once you have defined the tasks that must be
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completed and the order in which they must be completed. Staff, housing, power,
equipment, and supplies are some of the resources you’ll need to carry out an
action plan. Calculating resources also requires taking into account time, talent,
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and knowledge. The common denominator of all of this is cash. Your budgets will
provide an overview of the financial resources you will require to implement your
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action plan.
8. Prepare action plans and schedules
You now need to develop a practical action plan with respect to the objectives you
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have set.
9. Monitoring
Monitoring is a technique by which you can check that everything is continuing to go
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according to plan.
Monitoring, in the context of the action plan, addresses questions such as:
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◌◌ Are outputs being achieved within the timeframes?

◌◌ Are resources being efficiently and effectively used?
◌◌ Have you maximise the use of resources?
◌◌ Are you doing what you said you would do and if not, why not?
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◌◌ Are you collaborating with other services?

You must decide what data needs to be collected before you begin your
monitoring. Don’t merely gather data for the sake of having it; you need to have a goal
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or a rationale for doing so. The inquiries to make are:
◌◌ What sort of information do we need?

◌◌ How will we use the information?
◌◌ How can it be collected with the least possible trouble?
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◌◌ Who will collect it?

◌◌ Who will analyse it?

3.3 Property and Liability Insurance

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Fig: Property and Liability Insurance
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Property Insurance
A collection of policies that offer property owners liability insurance or coverage
for their property’s protection are together referred to as property insurance. Property
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insurance offers financial compensation to the owner or tenant of a building and its
contents in the event of damage or theft, as well as to a third party in the event that
person sustains injuries while on the property.
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Even if you rent your space, you’ll still require content protection. The majority of
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plans include coverage for inventory, office equipment, furniture, fixtures, and other
goods kept in your building or off-site. You have the option of insuring those products
for replacement cost or for actual cash value (ACV), which only covers the property’s
depreciated worth.
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Liability Insurance
The purpose of liability insurance is to shield the company from financial harm
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even if it is found to be at fault for someone else’s property damage, injury, or loss of
reputation or health. When a claim is made against a business, the insurance company
usually pays the damages, defence costs, and settlement fees.
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In today’s culture, liability insurance has become crucial for both individuals and
organisations. Specific legal responsibilities that a homeowner, motorist, professional,
business leader, or even a firm itself may accrue in the course of regular operations
are covered by liability insurance. When a company releases a product into the
market, there is always a risk. To cover the possibility of being sued for malpractice,
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professionals such as doctors, accountants, real estate brokers, insurance agents, and
attorneys should have liability insurance.
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The salient features of Liability insurance are:

1) Regarding this class of insurance, there is no precise sum insured; rather,
there are simply liability limits, such as a limit per accident, a limit per person,
and a limit per time.
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2) For the purposes of liability insurance, there is no identifiable precise subject

matter insured. The insurance is solely purchased to cover potential liabilities

Notes
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related to the insured’s line of work.
3) The claimant is always someone else and not the insured.
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4) The claim is limited to the legal liability that the litigant or claimant third party
must prove against the insured. Such a liability needs to be legally enforced.
5) Claims may still be filed even after the coverage has expired.
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3.3.1 Basic Principles of Property Insurance
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Let us understand the principles of Property insurance in detail.
1. Principle of Utmost Good Faith

The essential tenet of an insurance contract is that both parties should operate in
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good faith toward one another, which requires that they communicate the terms and
circumstances of the contract in a clear and straightforward manner.
The Insured should disclose all relevant facts, and the Insurer must provide correct
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information about the contract.
2. Principle of Proximate Cause

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This is also known as the “nearest cause” principle of “Causa Proxima.” When a
loss has two or more causes, this rule is applicable. The closest reason for the
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property’s loss will be determined by the insurance company. The business must
make restitution if the insured property’s damage was the proximate cause. No
payment will be provided by the insured if the reason is not one that the property is
covered against.
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3. Principle of Insurable interest

According to this principle, the insured person must have an insurable interest in the
subject matter. According to the definition of an “insurable interest,” the object for
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which the insurance contract is signed must both bring about some financial gain for
the insured and result in financial loss in the event of damage, destruction, or loss..
4. Principle of Indemnity
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This idea states that as insurance is only purchased to cover losses, the insured
is not permitted to benefit from the insurance policy. To put it another way, the
insured should only receive compensation that is equal to the real loss and not
more. The indemnification principle’s goal is to reinstate the insured in the same
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financial situation as before the loss happened. The principle of indemnity is closely
adhered to in the case of property insurance, but not in the case of a contract for life
insurance.
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5. Principle of Subrogation
A party acting in place of another is known as subrogation. According to this theory,
the insurer, or corporation, acquires ownership of the property after the insured, or
person, has received compensation for the loss he suffered regarding the subject
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matter of the insurance.

Subrogation allows the insurance company the ability to sue the party that caused
the loss for the full amount.
6. Principle of Contribution
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The contribution concept is in effect when an insured person purchases multiple
insurance policies covering the same risk. It states the same thing as the indemnity
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concept, namely that the insured cannot profit by claiming the loss of a single subject
matter from multiple policies or businesses.
7. Principle of Loss Minimisation
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According to this idea, the insurer has a duty to take the appropriate actions as an
owner to reduce the loss to the insured property. The fact that the subject matter is
insured does not, according to the concept, excuse the owner from being careless
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or negligent.
3.3.2 Homeowner’s Insurance
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Homeowners insurance is a type of property insurance that protects against losses
and damages to a person’s home, as well as to the furnishings and other belongings
inside. In addition to providing liability protection against mishaps in the house or on the
property, homeowners insurance.
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Four types of occurrences on the insured property are often covered by a home’s
insurance policy: interior damage, outside damage, loss or damage to personal goods,
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and injury sustained while on the premises. The homeowner will be required to pay a
deductible, which is effectively the insured’s out-of-pocket expenses, when a claim is
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made for any of these occurrences.
Every homeowners insurance policy has a liability limit that establishes how much
coverage the insured would have in the event of an unexpected event.
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● Homeowners insurance policies often cover theft or loss of property, interior and
exterior property damage, and personal liability for damages to third parties.
● Actual cash value, replacement cost, and extended replacement cost/value are the
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three fundamental types of coverage.

● The insurer’s risk that you’ll make a claim is a major factor in determining policy
premiums; they gauge this risk based on the history of claims involving the home,
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the neighbourhood, and the condition of the home.

● Get bids from at least five different insurance providers when looking for coverage,
and be sure to check with any insurer you currently work with—current customers
frequently receive better discounts.
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What a Homeowner’s Policy Provides

Although they are infinitely customizable, a homeowner’s insurance policy has
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certain standard elements that provide what costs the insurer will cover.
1. Damage to the Interior or Exterior of Your House

Your insurer will pay you compensation if your home sustains damage from fire,
hurricanes, lightning, vandalism, or other insured disasters, allowing you to repair
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or even fully rebuild your home. Floods, earthquakes, and poor property upkeep
are typically not covered, and if you want that kind of protection, you might need
supplementary riders. The same rules that apply to the main home also apply to
standing garages, sheds, and other structures on the property, which may need to
Notes
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be protected separately.
2. Hotel or House Rental While Your Home Is Being Rebuilt or Repaired
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Although it’s unlikely, it will surely be the best insurance you’ve ever bought if you do
end up having to leave your house for a while. Additional living expenses insurance
coverage will pay for your rent, hotel stays, dining out, and other incidentals you
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incur while you wait for your house to be habitable once more.
3.3.3 Automobile Insurance
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Fig: Motor Insurance
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Motor insurance is a type of insurance that protects the policyholder from monetary
losses brought on by accidents or other damages to the insured vehicle. A complete
motor insurance coverage compensates for both individual losses and damages to third
parties and third-party property.
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In general, it is a cover for motorised vehicles that includes coverage for fire, theft,
impact, collision, and third-party liability. The following things may be covered in full or in
part by insurance:
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1. The insured party, first

2. the covered car
3. External parties
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For your safety and the safety of others, the government has prioritised motor
insurance. Additionally, the annual premium you pay is negligible in comparison to the
advantages it offers in the case of mishap.
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Types of Motor Insurance in India

1. Private Car Insurance Policy
The Indian government mandates that all private vehicles owned by individuals have
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this type of motor insurance. Private auto insurance safeguards the car against harm
from a variety of sources, including theft, fire, accidents, and natural catastrophes. It

also safeguards the owner against bodily harm. Additionally, it shields the third party
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from any harm or losses.
2. Two-Wheeler Insurance Policy
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The Government of India requires two-wheelers like scooters and bikes to be
insured under a two-wheeler insurance policy. The two-wheeler is covered for
damage brought on by mishaps, catastrophes, fire, theft, and other events, as well
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as for third-party losses and injuries. Additionally, it comes with required and optional
personal accident insurance for the owner, rider and passengers.
3. Commercial Vehicle Insurance
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All vehicles that are not utilised for personal purposes are covered by a commercial
vehicle insurance policy. Every car utilised for business reasons is covered by this
sort of insurance. The vehicles covered by this insurance include trucks, buses,
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heavy commercial vehicles, light commercial vehicles, multi-utility vehicles,
agricultural vehicles, taxis/cabs, ambulances, auto-rickshaws, and so forth.
Framework for Premium Fees The insurance premium may be set by the insurance
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firm in line with a framework of rules (tariff) established by the government, or it may be
imposed by the government depending on the regulations. Physical damage coverage
prices are frequently more flexible to be set by the insurer than mandated liability
coverage prices.
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When an insurance premium is not required, it is often determined by an actuary
using calculations based on statistical data.
Several elements, including the features of the car, the coverage chosen
(deductible, limit, covered risks), and the use of the car (commute to work or not,
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predicted annual distance driven).
Insured’s Declared Value (IDV)

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(a) For vehicles that are under 5 years old, the IDV must be calculated by subtracting
the percentage of depreciation indicated in the tariff from the sticker price of the
specific make and model of the vehicle.
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(b) If a vehicle is older than five years old or an outmoded model, it must be insured for
the current market value that the insurer and the insured have agreed upon.
What is not payable under the policy?
◌◌ War perils, Nuclear perils

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◌◌ Consequential loss, depreciation, wear and tear, mechanical or electrical

breakdown
◌◌ Damage suffered due to driving the vehicle under the influence of intoxicating
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liquor or drugs
◌◌ Claims arising outside the specified geographical area
◌◌ Claims arising when the vehicle is driven by a person without valid driving
licence
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◌◌ Contractual liability

3.3.4 Other Property and Liability Insurance

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1. Public Liability Insurance
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This insurance covers the sum that the insured is legally required to pay as
compensation to third parties in the event of an accident involving death, physical injury,
loss, or damage to property. With the previous approval of the insurance carrier, the
costs and expenses incurred in defending the lawsuit are also reimbursable subject to
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a few restrictions. Under a single policy, many units located in various places may be
insured.
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The benefit of a retroactive period on continuous policy renewals allows claims
submitted in later renewals but relating to earlier periods following the policy’s initial
commencement to also become payable.
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There are three types of Public Liability Policies.
1) Public Liability Non Industrial Risk - For offices, hotels, cinema houses, hospitals,
schools etc.
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2) Public Liability Industrial Risk - For godowns , warehouses and factories.
3) Public Liability Insurance Act 1991 - This is a mandatory policy to be taken by
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owners, users or transporters of hazardous substance as defined under Environment
(Protection) Act 1986 in excess of the minimum quantity specified under the Public
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Liability
2. Product Liability
This includes many kinds of legal obligations resulting from the sale or supply
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of products. One of the strict legal liabilities is the product liability policy, which is an
indemnity contract. Only then will the insurers agree to defend the insured if he is
proven legally accountable. Moral responsibility of the insured is excluded from
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coverage.
This policy provides coverage for any amounts (including defence costs) for which
a) the insured is held legally responsible as a result of an accident involving a

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third party’s unintentional death, bodily injury, or illness.

b) the inadvertent deterioration of third-party property.
3. Professional Indemnity
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Professionals such as doctors, engineers, chartered accountants, architects,

and others are given the coverage in order to protect themselves from responsibility
resulting from errors and omissions made while providing their services.
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The policy provides coverage for any amounts that the insured professional may be
required by law to pay as compensation to a third party as a result of any mistakes or
omissions made while providing professional services. Subject to the overall maximum
of indemnity chosen, legal fees and costs incurred in the defence of the lawsuit are also
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payable with the insurance company’s prior consent.
There are no other types of claims covered. Liability resulting from unlawful
behaviour or behaviour that violates a law or ordinance is not covered.
Other types of liability insurance extend to cover the third party liability e.g. motor
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third party liability, pedal cycle, television , etc.
4 Contractual Liability
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Contractual liability is any obligation that one may contractually transfer to
another. In certain situations, an employer may hire a contractor to complete specific
tasks, and the contractor may then subcontract those tasks to another party. If a claim
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for damages is made, the employer (Principle or Contractor) may be added as a co-
defendant in a lawsuit against the contractor or subcontractor, as the case may be. The
principal contractor may also be the subject of a separate lawsuit. To prevent this from
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happening, the contractor or subcontractor may be obliged to indemnify the principal
contractor against any negligent acts committed by third parties.
5 Employer-employee Liability
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Employers are subject to the law of negligence with regard to employment
not protected by the Workmen’s Compensation Act. Unorganised labour, such
as agricultural labour or employment for a daily wage, is not covered by this act.
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Employers have a responsibility to ensure that their employees are safe at work, warn
them when something is dangerous, or hire people who are competent enough to do
the job. If they fail in any of these responsibilities, they may be held liable. The policy
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protects employers from their legal obligations in the event that workers pass away,
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suffer physical harm, or develop occupational diseases as a result of their job.
Other Property Insurance

Travel Insurance
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Fig: Travel Insurance
One of the most crucial purchases a traveller can make when deciding to go
somewhere is travel insurance. Simply because of the variety of dangers that it covers,
travel insurance has a special significance when travelling internationally. A travel
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insurance policy often includes coverage for aircraft delays, medical risks, and travel
risks. This checklist offers some explanations if you’re not sure why you need travel
insurance.

A lot of businesses that sell tickets or vacation packages offer their customers the
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chance to buy travel insurance, commonly known as travellers insurance. Some travel
insurance policies cover loss or damage to baggage, rented vehicles, and even the cost
of paying a ransom.
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Travel insurance is frequently offered as a bundle deal and can cover a variety of
situations. Trip cancellation or interruption insurance, baggage and personal effects
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insurance, medical expenditure insurance, and accidental death or flight accident
insurance are the four basic forms of travel insurance.
Marine Insurance
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The Marine Insurance Act of 1963 defines a contract of nautical insurance as “an
agreement whereby the insurer commits to indemnify the insured, in the manner and
to the extent therefore agreed, against losses incidental to marine adventure.” It could
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protect against the loss or damage of cargo, freight, or ships.
The movables subject to maritime risks are included in the definition of marine
insurance in Section 2 (C&F) of the Marine Insurance Act, 1963. Movables are items
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that can be moved, such as cash, priceless securities, records, etc.
Industrial Insurance
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Industrial insurance is a policy that protects an employee in the event that they
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sustain an injury at work that keeps them from working and making money. Although
offered in all 50 US states, the characteristics vary from one to the next.
Industrial insurance is the business of providing life insurance, with premiums due
at intervals of no longer than two months in each case to collectors the insurer sends to
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each policyholder’s home or place of employment.
Agricultural Insurance
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Agricultural Insurance Program, National The National Agricultural Insurance

Scheme (NAIS) is a government-sponsored crop insurance programme that has been
in place in the nation since the Rabi 1999–2000 growing season. Its goal is to support
farmers financially in the event that their crops fail due to natural disasters, pests, or
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illnesses. The Implementing Agency of the Scheme is the Agriculture Insurance

Company of India (AIC) Ltd. Regardless of the size of their holding, the programme
is open to all farmers, including those who have loans and those who do not. All food
crops (cereals, millets, and pulses), oilseeds, and annual commercial/horticultural crops
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for which past production data are available for a sufficient number of years are all
intended to be covered.
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Financial Insurance
Businesses typically buy financial insurance, which is a sort of insurance coverage.
It offers protection against damages brought on by a contract partner failing to fulfil their
duties. Additionally, it can defend against a variety of additional commercial financial
damages.
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Financial insurance guards against a variety of losses, including those from

unexpected, significant reductions in stock prices or a business partner going bankrupt,

in addition to protecting against the financial repercussions of a party in a contract

Notes
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failing to fulfil their duties.
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3.4 Stocks and Bonds
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Fig: Stocks and Bonds
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What are Stocks?
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Stocks are financial instruments that reflect a portion of the issuing company’s
ownership. Investors receive them in the shape of stock certificates.
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What are Bonds?
A corporate or governmental body may issue bonds to investors as a fixed

obligation to pay. They are typically repaid as of a set maturity date and may contain
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periodic coupon payments.
Comparing Stocks and Bonds

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Stocks are ownership shares in a company, but bonds are a type of debt that the
issuing body guarantees repayment of at some point in the future. To establish a proper
capital structure for a corporation, a balance between the two sources of finance must
be reached. Here are the main distinctions between stocks and bonds in further detail:
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Priority of Repayment
In the case of a company’s liquidation, the holders of its stock have the final say
over any remaining cash, whereas the holders of its bonds may have a much higher
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priority depending on the bond’s terms. This indicates that investing in equities is riskier
than in bonds.
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Periodic Payments
Dividends are an option for a firm, but it is typically required to make periodic
interest payments to bond holders for very defined amounts. Although this is not a
typical feature, certain bond agreements permit their issuers to postpone or cancel
interest payments. Investors will be less eager to pay for a bond if it has a delayed
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payment or cancellation clause.

Voting Rights
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On some corporate matters, such as the election of directors, stockholders have
the right to cast ballots. Bondholders are not allowed to vote.
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3.4.1 Investment Planning in Securities Markets
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Fig: Investment planning in securities market
Aligning your financial objectives with your available investing resources is

the process of investment planning. It is the primary element of financial planning,
ensuring that your savings are put to use and that you increase your income through
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investments. In order to guide you on the types of investment vehicles you can use to
multiply your financial assets and achieve these goals and objectives, it is important to
first determine your financial goals and objectives. In order to maximise the return on
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your assets, having a plan for your investments provides you a sense of direction and
purpose. Planning your investments also enables you to select the optimal investment
approach to achieve your financial objectives.
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Benefits of Investment Planning

The importance and benefits of investment planning are stated below:
● Family Security: From the perspective of ensuring the safety of your family,
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investment planning is crucial. The family’s investment will ensure the financial
security of the other members even in the event that something were to happen to
the working member.
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● Effectively manage income: Using an investing strategy, it is relatively possible to

effectively manage a person’s income and expenses. Managing income enables
one to control other expenses, tax obligations, etc.
● Investment planning aids in helping us comprehend our existing financial status.
Financial knowledge makes it simple for someone to assess an investment or
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retirement plan.

● Savings: You should put your money into highly liquid investment vehicles. In an
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emergency, money can be easily withdrawn from those investments.
● Standard of living: In difficult times, the savings generated by the investment are
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quite helpful. For instance, the death of the family’s breadwinner has a significant
impact on the level of living. At that point, the working person’s investment turns into
a valuable source of revenue for the family.
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Investment planning in Securities Market
This step influences how long your financial plan will last and how quickly you
will reach your financial objectives. You can invest in a variety of financial products to
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help you reach your objectives. At this point, it is advisable to speak with a financial
counsellor because every investment portfolio has advantages and disadvantages
that vary depending on your financial objectives. Taxes are another concern that can
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prevent your investment from increasing at the appropriate rate. Among the popular
investment types are:
Debt Securities
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Debt securities, also known as fixed-income securities, are a representation
of borrowed money that needs to be repaid, with terms defining the sum borrowed,
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the interest rate, and the maturity date. In other words, debt securities are financial
instruments that can be traded between parties, such as bonds (such as government or
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municipal bonds) or certificates of deposit (CDs).
Debt instruments, such as bonds and certificates of deposit, typically require the
holder to pay periodic interest payments, the principal amount owed, as well as any
other contractual obligations that may be specified. These securities are typically sold
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for a set period of time before being redeemed by the issuer.
Equity Securities
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Shareholders’ ownership interest in a corporation is represented by equity

securities. To put it another way, becoming a shareholder of an organisation requires
making an investment in its equity capital.
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If a company files for bankruptcy, the equity holders can only split the interest
that is left over after all obligations have been met by the holders of debt security.
Companies regularly pay dividends to shareholders who share in the earned profits
from their main company operations, but debt holders do not get dividend payments.
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Derivative Securities
Financial instruments known as derivative securities have a value based on
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fundamental factors. Assets like stocks, bonds, currencies, interest rates, market
indexes, and goods are examples of variables. Utilising derivatives is primarily done
to weigh risks and reduce them. It is accomplished through gaining access to difficult-
to-reach assets or markets, providing favourable conditions for speculation, and
providing insurance against price fluctuations. In the past, derivatives were employed
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to guarantee stable currency rates for items that were transacted abroad. International
traders required an accounting system to fix the exchange rates of their various national
currencies.
There are four main types of derivative securities:

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1. Futures
Futures, often known as futures contracts, are agreements between two parties
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to buy and deliver an item at a predetermined price at a later period. Futures are
exchanged on an exchange with standardised contracts. The parties engaged in a
futures transaction must acquire or sell the underlying asset.
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2. Forwards
Although forwards, or forward contracts, are comparable to futures, they are
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exclusively traded in retail settings. The terms, amount, and method of settlement
for the derivative must be agreed upon by the buyer and seller prior to the creation
of a forward contract.
The risk incurred by both sellers and buyers is another distinction from futures.
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When one party declares bankruptcy, there is a chance that the other won’t be able
to defend its rights, which could mean losing the value of its position.
3. Options
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Options, or options contracts, are comparable to futures contracts in that they
involve the purchase or selling of an asset between two parties at a defined price at
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a future date. The main distinction between the two types of contracts is that, in the
case of an option, the buyer is not obligated to carry out the action of purchasing or
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selling.
4. Swaps
In a swap, one type of cash flow is exchanged for another. For instance, a trader
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can change from a fixed interest rate loan to a variable interest rate loan using an
interest rate swap, or vice versa..
Hybrid Securities
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As the name implies, a hybrid security is a kind of security that combines features
of both debt and equity securities. Hybrid securities are frequently used by banks and
other organisations to raise capital from investors.
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Similar to bonds, they often make a greater interest payment promise at a set or
variable rate until a specific future date. The frequency and timing of interest payments
are not guaranteed, unlike with bonds. Even better, an investment may be cancelled at
any time or converted into shares.
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3.4.2 Investing in Stocks and Bonds

Bonds can have hazards, including interest rate risk, even though they are typically
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a safer investment than stocks. Bond prices may be significantly impacted by interest
rates. Bond prices typically fall as interest rates do, and vice versa. Bond default is a
further risk to be aware of.
Each stock and bond has a unique level of risk, and they react to developments
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in the financial markets differently. They could also be important components of your
mutual funds.

You might benefit if you put some of your money in various investment types in
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case some of them don’t work out.
Both stocks and bonds have advantages and disadvantages of their own.
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Furthermore, the structures, payouts, returns, and hazards of each asset class are
radically different. Building a strong investment portfolio that endures over time requires
an understanding of the variables that differentiate these two asset groups apart from
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one another.
Buying Stocks Instead of Bonds: An Overview
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Stocks are essentially ownership holdings in publicly traded businesses that allow
investors to take part in the expansion of a business. However, there is a chance
that the value of these investments would decrease, and they might even become
worthless. In either case, the investment’s profitability is mostly dependent on stock
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price changes, which are inextricably linked to the expansion and success of the
business.
How Much Stocks should be in the Portfolio?
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A well-diversified portfolio has a wide variety of investments from different asset
types. In general, you can accept more risk if you have a longer time horizon (i.e.,
are younger). Consequently, a portfolio with 80–90% of its weight in stocks and the
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remainder in bonds or other assets is manageable. However, it is advised to cut your
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allocation to stocks and increase your commitment to lower-risk bonds as your time
horizon gets shorter.
Why Do Stocks Typically Perform Better Over Time Than Bonds?

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Due to the equity risk premium that investors enjoy over bonds over time, stocks
typically perform better than bonds. Investors in stocks expect this amount in exchange
for accepting the added risk that comes with investing in equities. A strengthening
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economy is beneficial for stocks as well. Corporate earnings increase along with GDP,
and stock prices reflect this, although bond prices often do not (which are essentially
loans).
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3.4.3 Investing in Mutual Fund and Real Estate
Investment in Mutual Funds

A mutual fund consists of a variety of stocks and bonds. By joining your funds
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with those of other investors to purchase a mutual fund, you can hire a professional
manager to choose certain stocks on your behalf (as a group). All mutual funds are
set up with a specific investment strategy in mind, and their main areas of focus can
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be almost anything: large stocks, small stocks, bonds issued by governments, bonds
issued by companies, bonds and stocks, bonds and bonds, stocks in particular
industries, stocks in particular countries, etc.
The main benefit of a mutual fund is that it allows you to invest your money without
requiring the time or expertise that are frequently required to make wise investment
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decisions. Giving your money to a professional should, in theory, result in a higher

return than selecting your own choices. In actuality, there are a few things to know
about mutual funds before selecting one.
Advantages of Investing in Mutual Funds

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1. Diverse and widespread investment across several industries.
2. Capital growth without needing to keep an eye on the performance trajectories of
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several scrips.
3. Since the funds are handled by knowledgeable, experienced fund managers who
have access to the most up-to-date, extensive information on the stock market and
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specific scrips, there won’t be any rash decisions made regarding the purchase or
sale of shares or securities.
4. Liquidity through mutual fund buyback agreements or after a specific lock-in term,
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listing on various stock markets.
5. All dividends and capital gains are reinvested, increasing the overall return.
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6. Absence of papers
7. Tax advantages on monetary investments, returns, dividends, and capital gains.
Drawbacks of Mutual Funds
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Mutual funds have disadvantages, and they might not be suitable for everyone.
1. No promises: Risk exists in every investment. No matter how well-balanced the

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portfolio is, if the value of the stock market as a whole decreases, so will the value
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of mutual fund shares.
2. Fees and commissions: To meet their ongoing costs, all funds levy administrative
fees. In addition, some funds impose ‘loads’ or sales commissions to pay brokers,
financial advisors, or financial planners. If you purchase shares in a Load Fund, you
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will be required to pay a sales commission even if you don’t work with a broker or
other financial advisor.
3. Taxes: The majority of actively managed mutual funds typically sell between 20
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and 70% of the securities in their portfolios in a given year. Even if you reinvest the
money you made, if your fund generates a profit from its sales, you will have to pay
taxes on the income you receive.
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4. Management risk: When investing in a mutual fund, you rely on the manager to
select the best investments for the fund’s portfolio. You could not get as much return
on your investment as you anticipated if the manager does not perform as well as
you had intended. Of course, since index funds don’t employ managers, investing in
them means avoiding management risk.
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Investment in Real Estate

Real estate investing makes money through a variety of strategies by using real
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estate properties as an investment vehicle. Owning real estate, generating cash flow
from rental revenue, and selling the asset for more money thanks to appreciation are all
straightforward ways to do it.
Real Estate Investing

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There are numerous ways to invest in real estate. A person can first buy a home
with capital. They can either work alone on this or start a fund with others in their

network. Similar to locating and purchasing a property for habitation, but with the added
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benefit of receiving rental income from residents.
A real estate investment trust is another option for investing money. These are
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publicly traded businesses that own and manage properties. As a result, shares can be
purchased and sold just like any other stock. If they don’t have a lot of money to put up
the required equity in an investment property, this is fantastic.
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However, they link investors wishing to participate in real estate projects with real
estate developers and operators. If someone has the time and skills to patch up an
asset, they can even buy, renovate, and sell real estate for a profit.
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Any auxiliary revenue a person can generate from their home is another way to
profit from real estate.
Which is the better investment choice between real estate and mutual funds?
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Consistency
Consistency is one of the key factors you should think about before making an
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investment in real estate. Many investors think that making real estate investments
would always pay off in the long run. These investments are, in actuality, rather
inconsistent. Even after development in the neighbourhood, a property’s real estate
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value may decrease. Assume you make an investment in a piece of real estate on the
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outskirts of the city that will likely be developed shortly. Over the coming years, the
property’s value might increase, with the development factor having a significant impact.
However, a developed area’s characteristics, such as increasing traffic or difficult

access to the city, can cause the value to decline with time. On the other hand, during
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the past few years, mutual funds have given returns that have outperformed inflation
and have generally demonstrated higher stability. Although there is a risk associated
with mutual funds, that risk can be minimised by investing in low-volatility, moderate-risk
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mutual funds like debt funds or hybrid funds.
Performance
Real estate investment performance currently lags below mutual fund investment
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performance. As a result of the similar returns produced, real estate investments are
increasingly regarded as being somewhat similar to fixed deposits. Mutual funds, on
the other hand, have emerged as a popular choice for investors looking to build wealth
despite inflation. Comparing mutual funds’ returns to real estate investments, which
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underperform during inflation, we can see that the power of compounding in mutual
funds helps provide higher returns.
Litigation
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A shareholder would never want to see his or her investments involved in a lawsuit
or other legal proceeding. The investor may find it tiresome if the debate drags on
for a long time. Additionally, there may be situations in which an investor must spend
additional, arduous cash while the dispute is in progress. The value of the property
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will decrease as a result, and your investment returns will also suffer. Legal action or
a disagreement involving mutual funds is extremely uncommon because of their strict
regulation and monitoring by the Securities Exchange Board of India (SEBI).

Monitoring
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Due to the difficulty to track the profitability of the investments, real estate is
frequently viewed as risky. If you have invested in a real estate property with partners,
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failing to keep track of your investments might potentially lead to issues down the
road. However, you may occasionally track your mutual fund investments online, as
well as the performance of your funds. In the end, this reduces the likelihood of any
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disagreement or legal action.
Returns
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Compared to investments in real estate, mutual fund investments produce returns
that are often higher. Compared to mutual funds, which give returns ranging between
14% and 19% annually depending on the type of investment, real estate can offer rates
of return that can range from 7% to 11% annually. Investors are able to achieve high
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returns that offset the effects of inflation and build wealth as a result.
Investment
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When investing, the amount of money available is always crucial. While investing
in mutual funds only costs a small amount, purchasing real estate requires a significant
outlay of cash. It’s possible that the majority of us don’t have enough money on hand
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to invest in real estate. Mutual funds, on the other hand, provide us the advantage of
being able to invest in modest or large quantities, depending on our level of financial
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stability. A little amount from your bank account, which will be automatically deducted
each month, can be set aside for mutual fund investments under a Systematic
Investment Plan (SIP).
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Tax Implications
You receive tax exemptions for both real estate and mutual fund investments.
However, mutual funds have an advantage since most investors view these funds as tax-
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saving investments. You may be entitled for tax benefits on investments made in mutual
funds up to a limit of Rs 1,50,000 under Section 80C of the Income Tax, 1961. Taxes can
be avoided as a result for investors. You can reduce your tax burden by investing in real
estate, but only through indexation. By taking into account the effect of inflation on the
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real estate value of your property, indexation assists in reducing your taxes. However,
compared to mutual funds, real estate offers significantly fewer tax exemptions.
Liquidity
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Liquidity is one of the primary advantages that investors look for in their
investments. Investors should be able to liquidate their money and investments as soon
as possible. Real estate cannot be easily sold because there is no market that permits
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you to close the transaction right away. It takes a long time to do it. When facing a
financial crisis, you might not be able to sell your investments. However, mutual funds
give you the option to sell your assets through an online market anytime they require
cash. One of the main reasons why people participate in mutual funds is liquidity.
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Power of Compounding
Over time, investments in mutual funds produce high returns. This is because real

estate does not benefit from the power of compounding on your money. For instance,
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if you invest Rs 2,000,000 in mutual funds with a 20-year term and a 14.9% annual
return, the total returns at maturity might reach Rs 32.17 lakh. Invest in mutual funds to
take advantage of compounding and earn returns that outpace inflation.
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Ease of Investing
There are numerous steps and documents to complete when investing in real
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estate. Investors also have additional costs like CERSAI fees, stamp duty, registration
fees, etc. For investors, the process can be quite time-consuming and difficult.
Contrarily, buying mutual funds is a simple process. Starting to invest merely requires a
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short amount of time. You only need to invest through a SIP post, and the money will be
automatically withdrawn from your bank account each month. Additionally, there are no
additional costs associated with these investments.
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3.4.4 Investment Avenues as per Client Profiling
The stock market, debentures or bonds, money market instruments, mutual funds,
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life insurance, real estate, precious metals, derivatives, and non-marketable securities
are a few different paths and investment options. All are distinguished based on their
unique characteristics, such as risk, return, period, etc.
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One should match the product’s risk profile with his or her risk profile while
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choosing an investment channel. Understanding one’s own risk tolerance should be
of the utmost importance. While certain investments have the potential to produce
superior inflation-adjusted returns than others, they typically come with a larger risk.
Additionally, a potential investor needs to be aware that all investment goods

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can be divided into two categories: financial assets and non-financial assets. The first
category includes market-linked investments like equities and mutual funds as well as
fixed income investments like bank fixed deposits and public provident funds, but the
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second category—which includes physical investments in gold and real estate—is more
common in India.
Avenues of Investing Money in India

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There are multiple investment options to choose from in India:
1. Fixed Deposits
One of the most well-liked types of investments in India is considered to be fixed
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deposits. They are regarded as a low-risk choice and offer a fixed rate of return for
a specific time period.
Banks provide FDs. The interest rate varies and fluctuates from one deposit to
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another. The majority of financial institutions allow loans and overdraft facilities
against FDs, despite the fact that they have a lock-in term.
2. Mutual Funds
When you invest in mutual funds, you fund a mechanism that gathers money from
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various participants and invests it in a variety of assets. Equity funds invest in

equities, debt funds invest in fixed-income instruments, and hybrid funds invest in

both. Mutual fund schemes differ depending on the type of assets they concentrate
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on. Systematic Investment Plans allow investors to make one large investment or to
allocate a specific amount on a regular basis (SIPs). The performance of the fund
may affect the returns you get.
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3. Recurring Deposits
Recurring Deposits (RDs) enable investors to save a particular amount over time,
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much like FDs do. For a set period of time, you can deposit a set amount with a bank
each month. FDs and RDs both have low risk and guarantee returns.
4. Public Provident Fund
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The PPF is a long-term savings plan supported by the Indian government with a 15-
year lock-in period. PPF investments, however, are tax deductible and also rather
secure. Every three months, the government typically modifies the PPF interest
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rate. Upon fulfilling specific requirements, investors are also qualified for partial
withdrawals and loans against the PPF.
5. Employee Provident Fund
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A retirement savings plan designed exclusively for salaried workers is the EPF.
Employees make monthly payments from their paychecks, and the company also
makes a matching contribution to the corpus. Section 80C of the Income Tax Act of
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1961 permits a tax deduction for EPF contributions, and the ultimate sum received
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after maturity is tax-free.
6. National Pension Scheme
The Indian government created the NPS retirement pension programme. You can
create a corpus through regular investments that will enable you to get a consistent
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pension after you retire. After retirement, investors may also take partial distributions
from the fund.
7. Stocks
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Buying stocks entitles the investor to ownership in a company through the purchase
of shares. In the future, as the business expands, it might be profitable. Capital
growth is aided by long-term stock investment. However, trading on the short term
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can be hazardous.
Types of Investors
1. Pre-investors
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This is a general word for those who haven’t started investing yet. It covers friends,
relatives, and close personal contacts but excludes all professional investors. These
are folks that are new to investing but may have money they are willing to put into
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your company.
Early-stage businesses might only be able to obtain pre-investment finance from
close personal contacts. You most likely lack concrete evidence or any other reliable
indicators that your company will be successful in the long term at this stage of
the business lifecycle. Pre-investors are putting their money into you because they
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know you, believe in you, and trust you.

2. Passive Investors
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Passive investors adopt a buy-and-hold strategy that they anticipate will pay off
in the long run and restrict the amount of hands-on management they individually
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provide to the assets they own. A passive investor will defer to the operational and
financial decisions made by the management team rather than taking an active part
in the management of a firm.
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Investors who don’t hold a majority stake in the company they invest in frequently
find themselves in this situation. The majority of the time, passive investors put their
money into businesses run by management teams they respect and look to for
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advice.
3. Active Investors
Hands-on portfolio management is a hallmark of active investors. These are
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investors that wish to make decisions about how their investments are managed.
Active investors in the context of private equity may bring in fresh personnel to
support management teams and assertively make structural changes to the way a
company operates.
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Based on their own knowledge and experience, active investors seek for chances to
make changes to the business’s operations, finances, and management. Therefore,
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active investing typically entails higher risk, but it can also result in greater profits
when done successfully.
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Case Study
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Investment
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Starlit invests in order to achieve both short- and long-term objectives, including
the acquisition of a home, a luxury car, the education of their siblings, and retirement.
Purchases of an iPhone for the spouse or an LED TV for the house are examples of
short-term goals. Regardless of your goals, long-term or short-term, you must carefully
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choose your investment vehicle. Let’s examine which investment vehicle will perform
the best and be chosen over others in the brand-new year of 2011.
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Let’s use Bhuvan as an example, who has opted to take out a home loan with
an EMI of Rs. 20,000 each month. His goal is to put enough money into a reliable
investment vehicle that will generate a return comparable to his EMI. In this manner,
the burden of making EMI payments won’t fall on his salary. In this case, choosing an
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appropriate and trustworthy investment vehicle is crucial.
If Bhuvan decides to invest in an index ETF, the expected yearly return is Rs.
20,000 x 12 = Rs. 2,40,000. An Index ETF can often provide returns at a rate of 12%
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annually. This suggests that in order to earn a return of Rs. 2,40,000 per year, you must
invest fund equal to Rs. 2,40,000/ 12*100 = Rs. 20,00,000.
Prior to beginning your investment process, it is essential to write out and arrange
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your investment goals. This is because your objectives will last longer. Since you
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have the choice of investing in stock, your average outcomes are probably going to
improve over time. You can choose to invest only in debt-linked programmes, which
offer modest returns, if you have short-term objectives. When opposed to equities, the
risk level associated with debt-linked investment vehicles is noticeably lower (shares).
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But the amount of risk might be significantly decreased if one can make long-term
investments in equity.
Therefore, while investing for the long term, it is always advisable to choose
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equities as your investment vehicle (more than three to five years). A debt-linked plan
can, at best, return 7%–8%, whereas an equity-linked investment vehicle can return
12%.
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Question
1. Stress the value of setting investing goals before deciding on a course of action.
2. Remark: When investing for the long term, it is always advisable to choose stock as
your investment vehicle (more than three to five years).
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Summary
● Health insurance is a sort of insurance protection that covers the insured’s medical
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and surgical costs.

● A health insurance plan’s rules governing in- and out-of-network treatments,
deductibles, copays, and other factors can make it difficult to choose one.
● The Affordable Care Act has made it illegal for insurance providers to refuse to cover
(c
patients with preexisting diseases since 2010, and it also permits kids to remain on
their parents’ health plan until they are 26 years old.

● Two governmental health insurance programmes that cater to older people and
Notes
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children, respectively, are Medicare and the Children’s Health Insurance Program
(CHIP). Certain disabled adults are also covered by Medicare.
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● Homeowners insurance is a type of property insurance that protects a person’s
house and other belongings from losses and damage.
● Interior damage, external damage, loss or damage to personal items, and injuries
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sustained while on the premises are typically all covered by the policy.
● Every homeowners insurance policy has a liability limit that establishes how much
coverage the insured would have in the event of an unexpected event.
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● A home warranty or mortgage insurance should not be confused with homeowners
insurance.
● When you have auto insurance, you are safeguarded from monetary losses in the
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event of an accident or other damage to the vehicle.
● Most states mandate that you carry minimum liability insurance limits, and some
also call for other coverage types like uninsured motorist insurance.
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● In contrast to deductibles, which you pay when you make a claim, premiums are
the sums you pay on a monthly, biennial, or annual basis to maintain your auto
insurance coverage.
●
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To discover the finest coverage for your automobile at the lowest cost, it’s crucial to
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browse around for the best car insurance quotes.
● A group of policies known as property insurance provide either liability protection or
property protection.
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● Homeowners insurance, renters insurance, flood insurance, and earthquake

insurance are just a few examples of the various types of property insurance.
● Replacement cost, real cash value, and extended replacement costs are the three
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categories of property insurance coverage.

● Liability insurance offers defence against lawsuits brought by victims of accidents
and/or property damage.
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● Liability insurance pays for any court fees and judgments that the insured party
might be held accountable for.
● Intentional harm, contractual liabilities, and criminal prosecution are examples of
provisions that are not covered.
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● Automobile insurance coverage, companies that make products, and people who
work in the legal or medical professions frequently need liability insurance.
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● Liability insurance includes coverage for things like commercial responsibility,

workers’ compensation, and personal liability.
● Real estate is something permanently affixed to or constructed on land, whether it
be created naturally or artificially.
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● Real estate can be divided into five primary categories: residential, commercial,
industrial, raw land, and special use.

● Buying a house, a rental property, or land is a real estate investment.

Notes
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● REITs and pooled real estate investments are two options for indirect real estate
investment.
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Glossary
● Liability Insurance: Liability insurance is a type of insurance that shields an insured
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party against lawsuits brought about by injury to third parties and property damage.
Any legal fees and payouts that an insured party is accountable for in the event that
they are held legally liable are covered by liability insurance policies.
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● Property Insurance: A collection of policies that offer property owners liability
insurance or coverage for their property’s protection are together referred to as
property insurance. Property insurance offers financial compensation to the owner
or tenant of a building and its contents in the event of damage or theft, as well as to
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a third party in the event that person sustains injuries while on the property.
● Automobile Insurance: Car insurance is essentially a contract that you and an
insurance provider enter into, whereby you agree to pay premiums in exchange for
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protection against monetary losses resulting from an accident or other damage to
the car.
● Homeowner’s Insurance: Homeowners insurance is a type of property insurance
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that protects against losses and damages to a person’s home, as well as to the
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furnishings and other belongings inside. In addition to providing liability protection
against mishaps in the house or on the property, homeowners insurance.
● Health Insurance: Health insurance is a legal agreement that commits an insurer
to covering all or a portion of a person’s medical expenses in return for a premium.
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More specifically, health insurance often covers the insured’s out-of-pocket costs for
prescription drugs, medical procedures, and occasionally dental care.
● Securities Market: On the basis of supply and demand, it is where trades of securities
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like stocks and bonds are conducted. Price is determined by the securities markets,
and participants may be both professionals and amateurs.
● Bonds: Bonds can have hazards, including interest rate risk, even though they are
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typically a safer investment than stocks. Bond prices may be significantly impacted
by interest rates. Bond prices typically fall as interest rates do, and vice versa. Bond
default is a further risk to be aware of.
● Stocks: A security that denotes ownership of a portion of the issuing company is
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referred to as a stock, also known as equity. Shares, which are units of stock, entitle
its owners to a percentage of the company’s assets and income based on how
many shares they possess.
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● Real Estate: Real estate is referred to as the land as well as any permanent,
whether natural or man-made, structures or improvements related to the property,
such as a house. One type of real property is real estate. It contrasts from personal
property, such as cars, yachts, jewels, furniture, and farm equipment, which is not
permanently affixed to the land.
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Notes
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1. __________ covers the cost of medical care for diseases or injuries and pays the
medical care provider directly on your behalf or reimburses your medical expenses.
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a. Life Insurance
b. Health Insurance
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c. Term Insurance
d. Liability Insurance
2. _____________ refers to a group of insurance policies that provide liability or
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property protection.
a. Property Insurance
b. Liability Insurance
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c. Homeowner’s Insurance
d. None of the above
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3. The next, and most crucial, step after choosing the appropriate insurance provider
is to _____________.
a. Find the Right Coverage Amount
b. Finding the right plan
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c. Afford a Health Plan
d. Look for Discounts
4. _____________ states that as insurance is only purchased to cover losses, the
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insured is not permitted to benefit from the insurance policy.

a. Principle of Insurable interest
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b. Principle of Utmost Good Faith

c. Principle of Proximate Cause
d. Principle of Indemnity
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5. When the insurer has an obligation to take the required actions as an owner to
reduce the loss to the insured property, it is known to be as ___________.
a. Principle of Loss Minimisation
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b. Principle of Contribution
c. Principle of Subrogation
d. Principle of Proximate Cause
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6. _____________ is essentially an agreement between you and an insurance provider

where you agree to pay premiums in return for protection against financial losses
resulting from an accident or other damage to the vehicle.
a. Health Insurance
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b. Liability Insurance

c. Automobile Insurance
Notes
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d. Travel Insurance
7. __________ is an interconnected system that allows for the transformation of real
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assets into financial assets while also creating the necessary circumstances to
attract fresh capital through the issuance of new securities.
a. Financial Market
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b. Securities Market
c. Primary Market
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d. Secondary Market
8. Long-term investment alternatives that provide a constant stream of cash flows
based on the specified interest rate are viewed as being less hazardous overall as
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__________.
a. Equity
b. Mutual Funds
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c. Bank Fixed Deposits (FDs)
d. Bonds or Debentures
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9. _________ is a well-known investment product with a 15-year maturity period. The
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benefit of compounding tax-free interest is significant, particularly in later years.
a. Mutual Funds
b. National Pension System (NPS)
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c. Public Provident Fund (PPF)

d. Gold
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10. ____________ products offer a certain sum of money in the event that the life
insured passes away during the policy’s term or is rendered incapacitated due to an
accident.
a. Life Insurance
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b. Health Insurance
c. Term Insurance
d. Car Insurance
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11. In the event that interest rates rise, the corporate bond’s fixed interest rate will
_______.
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a. Return to the Corporation

b. Remain Unchanged
c. Decrease in Value
d. Increase in Value
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12. Companies favour private placement because it is _________.

Notes
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a. Cost Effective
b. Time Effective
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c. Access Effective
d. All the above
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13. The fundamental tenet of Insurance is ____________.
a. Probabilities
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b. Large numbers
c. Sharing the risk
d. All of the above
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14. A group of mutual funds under a single management are referred to as ________.
a. Fund Families
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b. Fund Syndicates
c. Fund Complexes
d. Fund Conglomerates
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15. The investor can view the company through the ___________-
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a. Syndicate Offer
b. Prospectus
c. IPO
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d. Shelf Rule
16. The best way to assess portfolio risk is to use __________
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a. Weighted Average of Individual risk

b. Expected Value
c. Portfolio Beta
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d. Standard Deviation
17. ______________ are a type of investment whereby an asset management firm
invests the funds collected in both debt and equity.
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a. Equity Funds
b. Debt Funds
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c. Money Market Funds

d. Hybrid Funds
18. Money set aside that can be used to pay for unforeseen charges are known as
__________.
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a. Emergency Spendings
b. Emergency Savings

c. Emergency Fraud
Notes
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d. Emergency share
19. The official name of NAV is __________.
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a. Net asset Value
b. National Asset Value
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c. Net Assessment Value
d. National Asset Variation
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20. A mutual fund’s ability to distribute investments over a variety of stocks and industries
by combining the funds of numerous participants is known as ________.
a. Professional Management
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b. Affordability
c. Profit
d. Diversification
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Exercise
1. Explain the concept of Life Insurance in detail.
2.
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State the reasons why one should buy Life Insurance.
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3. What is Property Insurance? Discuss its principles.
4. State the difference between Life Insurance and Health Insurance.
5. How does investing in the Securities market work?
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6. Discuss different Health Insurance Plans.

7. What do you understand by the term Liability Insurance?
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Learning Activities
1. What do you prefer? Life Insurance or Health Insurance.
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2. Which is the best investment avenue and why?
Check Your Understanding- Answers

1. b 2. a
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3. b 4. d
5. a 6. c
7. b 8. d
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9. c 10. a
11. c 12. d
13. d 14. a
(c
15. b 16. a

17. d 18. b
Notes
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19. a 20. d
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1. Managing Life Insurance by Shridhar Kutty
2. Insurance Industry in India: Features, Reforms and Outlook by Uma Narang
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3. Securities Laws & Capital Markets (SLCM) by N.S. Zad, Divya Bajpai
4. Property and Liability Insurance Principles by Barry D. Smith
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Module - IV: Tax Planning and Retirement Planning

Notes
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● Effective Tax Planning
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● Calculating and Filing Taxes (with Illustration) and Tax Return Forms (with Example)
● Concept of Risk Assessment of Individual
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● Introduction to Portfolio Management
● An Overview of Retirement Planning and income generated after retirement
● Estimating Future Retirement Needs
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● Liability Management
● Anticipation of Expenses
● Investment for Major Goals (House, Family, Education and Medical Goals)
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● Reverse Mortgage (Role, Significance and Growth)
Introduction r
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Retirement is the stage of life at which one decides to leave the workforce behind
forever. The majority of industrialised nations, including the United States, have a
national pension or benefits system in place to augment retirees’ wages, and the usual
retirement age in these nations is 65.
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efficient refers to a strategy that minimises your tax burden. An individual investor’s
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4.1 Tax Planning

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Fig: Tax Planning

Notes
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efficient refers to a strategy that minimises your tax burden. An individual investor’s
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Tax planning is the review of one’s financial condition from the perspective of
tax efficiency in order to optimise how one plans their money. Tax planning enables a
taxpayer to take full use of all available tax exemptions, deductions, and perks in order
to reduce their overall tax burden for the fiscal year. Tax planning is a legitimate method
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of lowering income tax obligations, but care must be taken to avoid tax evasion or
avoidance on the part of the taxpayer.
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Tax Planning in India
Indian taxpayers can choose from a wide variety of tax-saving choices. These
choices offer a wide range of exclusions and deductions that aid in lowering the overall
tax burden. Taxpayers who qualify may take advantage of deductions from Sections
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80C to 80U. The sum of the tax liabilities is reduced by these deductions. When tax
planning is carried out within the restrictions imposed by the appropriate authorities, it is
entirely legal and even prudent. But it’s against the law to use dishonest means to avoid
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paying taxes, and you risk fines. There are several techniques to reduce your tax bill,
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including tax evasion, planning, and avoidance.
4.1.1 Effective Tax Planning

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1. Stagger investments
March’s rush should be avoided. Most of us wait until January, when offices typically
send out a note requesting information on investments that save on taxes. Then,
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we attempt to condense the entire year’s tax savings into three months, which is
typically a major financial drain. So, for the next three months, say goodbye to
comforts and indulgences and hello to asceticism.
2. Make affordable annual commitments
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Agents and brokers who sell insurance are skilled at persuasion. And chances are
that you’ll jump at the chance when they approach you in February and explain how
much tax you will save by purchasing an insurance or pension plan.
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However, avoid the urge to write a check right away and consider whether you
actually need the item. Check your finances and budget if you don’t need it but are
still eager to acquire it for the tax benefit to see whether you can afford to keep the
investment.
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3. Buy insurance only if you need it

Yes, Section 80C provides tax benefits for premiums paid for life insurance
contracts. Likewise, health insurance premiums paid fall under IRS Code Section
80D. However, insurance is not the best tax-saving technique if you are already well
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protected.
Sadly, the majority of taxpayers view insurance more as a tax-saving tool than as

a death benefit. Even if you purchase insurance for the wrong reasons, it is a good
Notes
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idea if you are underinsured. After all, the main purpose of insurance is to safeguard
your loved ones’ finances in the event of your untimely passing. The fact that it is
referred to as a tax savings plan does not change the core idea.
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Similar rules apply to health insurance, for which Section 80D benefits may be
claimed. Yes, everyone needs health insurance, but if you already have enough
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coverage or can’t afford the regular rates, it doesn’t make sense to sign up for it only
to discontinue it after a year or two.
4. Understand post tax yield
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Prior to the repeal of this clause, annual income and interest received on securities
like NSCs and bank fixed deposits were combined and subject to tax. Therefore,
when performing your tax planning, be aware of the tax implications and avoid being
seduced by investments with bigger yields.
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Consider alternatives like the PPF (public provident fund), which offers tax-free
interest income, as well as Ulips and tax-planning mutual funds, which offer similar
benefits.
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5. Look at the big picture
Any financial planner’s advice might not be to prioritise a long-term debt plan. But
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by fully utilising the withdrawal option provided by a long-term debt instrument like
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the PPF, you can get the most out of it.
Ways to make Tax Planning effective

1. Using Section 80’s benefits
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The clause that allows people to claim tax deductions the most frequently is this
one. This provision states that if a person’s yearly wage is less than $150,000, they
are entitled to tax deductions.
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A person can, however, potentially get a bigger tax break if they fund a National
Pension Scheme account.
The National Pension Scheme, or NPS, is a retirement plan that encourages those
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in the working sector to save aside money for their retirement. According to this,
because the return rate is about 12%, one gets a sizable return on their investment.
2. Investing in ULIPs
Unit Link Insurance Plans (ULIPs) are unique insurance plans that also serve as a
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means of reducing taxes. These programmes combine life insurance with investing.
A large amount of the money invested in ULIPs goes toward a life insurance plan,
and the remaining sum is added to an equity-based fund. As a result, it’s one of the
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best tax-saving advice because a person can enjoy tax returns and exemptions
while getting the best of both worlds.
3. Investing in mutual funds
One of the simpler methods of lowering taxable income is certainly investing in
(c
mutual funds. This is particularly true for those who engage in equity linked savings
schemes (ELSS). On the basis of Section 80C, this plan is eligible for tax deductions.

Comparing it to other tax-saving choices like Private Provident Funds and Bank
Notes
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Fixed Deposits, it offers a shorter lock-in duration of only three years. Eight years
must typically pass after choosing one of these options.
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Not only that, but this money is not subject to taxation. According to research, joining
this scheme can result in savings of up to Rs 46,000. Comparatively speaking to
other funds, it also has the potential to offer the best returns.
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4. Attaining tax deductions on salaries
The majority of assets that qualify for this tax reduction are temporary ones. For
instance, a rental home. An individual may claim tax deductions under Section 10 if
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they are currently paying rent for the home they now reside in (13A). This specifies
that a person may claim tax deductions if they must pay rent for the home they live
in but must keep records for the payment.
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A tax-saving plan known as an HRA is typically provided by one’s employer. It is
computed by subtracting 10% of the person’s take-home wage from the actual rent
they pay. If a person lives in a metro area, 50% of their wage may be deducted from
taxes. People who reside in other cities are eligible for 40% of the pay.
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5. Reduce taxes by engaging in charitable endeavours
Tax deductions are another benefit of charitable giving. This tax-saving measure
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attempts to promote charitable giving and other altruistic endeavours. Donations to
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the National Relief Funds are also included in this tax reduction.
Section 80G contains the relevant information. The deductions range from minuscule
to nearly 100%. But it does depend on several things, like charity or other financial
circumstances..
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4.1.2 Calculating and Filing Taxes (with Illustration)

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Calculate Income Tax

1. Calculate your gross income
Write down your annual gross income first. This will include all of your compensation,
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including House Rent Allowance (HRA), Leave Travel Allowance (LTA), and any
additional benefits you may be eligible for, such as food vouchers and mobile phone
reimbursements.
Next, remove the exemptions from the salary components that were provided. The
two main exemptions you receive are LTA, or leave travel allowance, and HRA, or
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house rent allowance..

Keep in mind that you can only receive HRA if you rent your home and can provide
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genuine rent receipts as proof. To claim HRA benefits, you can quickly fill up and
obtain a rent receipt from the ETMONEY website, sign it with your landlord or
landlady, attach a revenue stamp, and submit it. HRA is entirely taxable if you live
on your own or with your parents. Additionally, the lowest of the following amounts
is used to determine your tax exemption under HRA:
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HRA obtained from a company

◌◌ Actual rent paid less 10% of the monthly minimum wage

Notes
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◌◌ 50% of the taxpayer’s base salary if they reside in a large city
◌◌ 40 percent of the taxpayer’s basic salary if they reside in a non-metropolis
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2. Remove deductions to determine your net taxable income
With tax deductions, you can invest, save, or spend money on specific things to
further lower your taxable income.
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The first is the Rs. 50,000 Standard Deduction (described in the preceding section),
which is available to everyone without requiring them to invest in or spend money
on any specific products.
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Next, subtract any investments and Section 80-eligible costs.
You can deduct up to Rs 1.5 lakh for a variety of investments and expenses under
Section 80C, the largest pool for deductions. Some of the most popular ways to
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claim this deduction are investments in PPF, ELSS Mutual Funds, EPF, Sukanya
Smriddhi Yojana, and premiums paid for term insurance. Additionally, if you have a
home loan, you can use this area to claim a deduction for the principle that you paid
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back throughout the year. Additionally, your EPF, which is a benefit of your income,
falls under this heading.
In addition to the Rs 1.5 lakh deduction allowed by Section 80C, if you invest in NPS,
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you may deduct an additional Rs 50,000 under Section 80CCD(1B). In addition, if
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you paid premiums for your family’s and your parents’ health insurance coverage,
you can deduct that sum under Section 80D.
Under Section 24 of the Income Tax Act, the interest component of the EMI paid for
the financial year on a home loan may be deducted up to a maximum of Rs 2 lakh.
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Once more, this is in addition to the deduction for the principal amount provided
under Section 80C.
3. How to determine your net taxable income
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You can determine the total income on which you must pay tax based on your tax
slab by deducting all allowable deductions from your gross taxable income. Senior
persons pay a separate slab rate. The tax rate is zero for anyone over 60 with a net
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income of up to Rs 3 lakh. Additionally, there is no tax on income up to Rs 5 lakh for

really elderly people who are over 80. Basically, your age and net income determine
the tax rates that apply to you.
4. Determine Your Taxes
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Taxes are now paid on a person’s net taxable income.

You pay no tax on the first Rs. 2.5 lakh of your taxable income.
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You must pay 5%, or Rs. 12,500, on the following Rs. 2.5 lakhs.
You must pay 20% of the next 5 lakhs, or Rs. 100,000.
When your taxable income reaches Rs. 10 lakhs, you must pay 30% of the total
amount.
(c
Step 5: Streamline your net tax

Refund under Section 87A: Tax rebates are a type of tax benefit offered by the
Notes
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government to those with incomes below a certain threshold. If your total taxable
income after deductions is less than Rs. 5 lakh, you are eligible to apply for a Rs.
12,500 rebate under Section 87A.
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The health and education cess of 4% can now be added to your tax amount if your
taxable income exceeds Rs 5 lakh to determine the total amount you will pay.
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People with very high incomes, defined as those making between Rs. 50 lakh and
Rs. 1 crore, must pay a 10% surcharge. Additionally, a 20 percent fee is applied to
income between Rs 1 and Rs 2 crore.
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Illustration:
Ankush earns a gross salary of Rs 15 lakh per year from an MNC in Mumbai.
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His net pay is Rs 12.5 lakh once all exclusions from it, such as the HRA and regular
deductions, have been taken off.
He received Rs 10,000 in interest income from his bank account last year.
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Additionally, his aggregate EPF and ELSS mutual fund contributions exceed Rs 1.5
lakh. In addition, he has a health insurance policy for himself and his wife for which he
pays an annual cost of Rs. 15,000 and has deposited Rs. 20,000 in NPS.
Income Tax Calculation r AY 2020-21

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Gross Salary Rs. 15,00,000
HRA and LTA - Rs. 2,50,000
Standard deduction - Rs. 50,000
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Net salary Rs. 12,00,000

Income from other sources Rs. 10,000
Gross taxable income Rs. 12,10,000
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Deduction under Section 80C (ELSS + EPF) - Rs. 1,50,000

Deduction under Section 80CCD(1B) for NPS - Rs. 50,000
Deduction under Section 80D for health insurance premium - Rs. 15,000
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Deduction under Section 80TTA for interest on bank account - Rs. 10,000
TOTAL INCOME Rs. 9,85,000
Now let’s see how much money he has to pay as taxes this year
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Tax rate Amount

Up to ` 2.5 lakh 0
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5% on ` 2.5 lakh (` 5 lakh – ` 2.5 lakh) Rs. 12,500

20% on ` 4.85 lakhs (` 9.85 lakh – ` 5 lakh) Rs. 97,000
As you can see, tax deductions can significantly reduce your tax liability. And
there are several excellent options that can assist you in accomplishing this while also
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assisting in lowering financial stress.

4.1.3 Tax Return Forms (with Example)

Notes
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Taxpayers submit information about their earned income and the relevant tax due
to the Income Tax Department on income tax returns. Taxpayers can quickly determine
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their tax liability, request refunds for overpaid taxes, and schedule tax payments with
the aid of an income tax form.
Depending on the category and source of income of the taxpayer, there are various
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sorts of income tax return forms. ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6, and ITR 7 are
examples of such forms. However, before selecting a tax return form to file, one should
exercise caution. We therefore present this article detailing the numerous income tax
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forms and who is eligible for each form in order to decrease the likelihood of errors.
Form ITR-1
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The Sahaj form is another name for this one. Individual taxpayers ought to file an
ITR 1. This form is not available for use with ITR returns for any other taxpayer.
Who should submit a form for this?
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◌◌ The following people are eligible to use this form:
◌◌ a person who receives income via a pension or salary.
◌◌
◌◌
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a person whose income is entirely dependent on a single piece of real estate.
a person with no source of income from businesses or capital gains.
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◌◌ a person who does not have any overseas assets and does not receive any
foreign income.
◌◌ an individual who earns up to Rs. 5000 through agriculture.
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◌◌ a person who earns money through various sources, such as fixed deposits,
other investments, etc.
◌◌ any person who does not receive any revenue from winning the lottery, horse
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racing, or other prizes.

◌◌ Those who wish to combine their income with that of their spouses or minor
children.
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Who may not submit this form?
◌◌ Any other assessee falling under one of the following categories is ineligible to
submit an ITR 1.
◌◌ one with a salary higher than Rs. 50 lakhs.
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◌◌ individuals earning more than Rs. 5000 from agriculture.

◌◌ applicants with business and capital gain income.
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◌◌ if a person makes money from multiple residential residences.

◌◌ An individual cannot apply for ITR 1 if they are a director of a firm.
◌◌ One is not permitted to select this form if they have ever invested in unlisted
equity shares during the fiscal year.
◌◌ overseas assets owned by residents who generate income from them.
(c
◌◌ people who don’t live there and RNOR (residents not ordinarily residents).

◌◌ This form cannot be used to file IT returns by a person who is liable for income
Notes
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assessments for other people. Tax deductions are made in this situation in
terms of the other individual.
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ITR-2 Form
Those who earn their income from the sale of assets or properties are eligible for
ITR 2 income tax. People with revenues originating from countries other than India may
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also utilise this form. Additionally, HUFs are able to file income tax returns by requesting
an ITR 2 form.
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Eligibility requirements for submitting tax returns using the ITR 2 form
◌◌ The following kinds of people may apply for ITR 2 forms:

◌◌ people who earn money through a wage or pension.
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◌◌ one whose source of income is from the sale of an asset or piece of property,
or capital gains.
◌◌ if a person’s income might originate from more than one residential property.
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◌◌ Those who have overseas assets and derive their income from sources
outside of India.
◌◌ a person who earns more than Rs. 5000 per year through agriculture.
◌◌ r
people that have money coming in from winning the lotto, etc.
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◌◌ if a person serves as a director for a business.
◌◌ RNOR and non-residents.
Categories ineligible to submit this form applications
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◌◌ This form should not be used for income tax returns by all taxpayers. For your
ease of understanding, we have grouped these people in the following area.
◌◌ This type cannot be chosen by people whose total income includes any profits
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or gains from a business venture or other vocation.

◌◌ those whose combined income is less than Rs. 50 lakhs.
ITR-3 Form
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ITR 3 applications can be made by individual taxpayers or HUFs who are partners
in a company but do not conduct any business on its behalf. The eligibility requirements
of the said form should be thoroughly reviewed by taxpayers looking for the meaning of
ITR 3.
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Who is eligible for this form?
The following types of applicants are qualified to submit an ITR 3.

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◌◌ earnings from stock shares that are not publicly traded.

◌◌ People who are continuing their career or business are qualified.
◌◌ Company director.
◌◌ earnings from a home, a pension, a job, or other sources.
(c
◌◌ a partner who receives compensation from the company they work for.
Who may not submit this form?

◌◌ ITR 1 and ITR 2 eligible taxpayers fall under a certain group. In a similar vein,
Notes
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certain taxpayers filing IT returns shouldn’t use this form. Some of the people
who are not qualified to fill out this form are listed below.
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◌◌ anyone whose firm generates less than Rs. 2 crores in revenue.
◌◌ One cannot apply for ITR 3 if they do not receive income from a firm-run
business.
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◌◌ If the taxable income from the firm is paid out in the form of a salary, bonus,
commission, remuneration, or interest, the taxpayer may file an ITR 3. Any
additional sources of revenue from the firm are not eligible.
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ITR-4S Form
ITR 4, sometimes referred to as Sugam, allows those who operate a business
and receive revenue from it or from other sources to submit their IT returns using this
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form. They can combine this money with any windfall earnings to apply for this form.
Additionally, this form can be used to file an ITR for taxpayers who work as doctors,
store owners, designers, retailers, agents, contractors, etc.
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Group of taxpayers who are qualified to use this form
For individuals who are used to the eligibility, ITR 4 meaning is straightforward.
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Here are a few of the prerequisites.
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◌◌ those who make a living through enterprises.
◌◌ one who receives money from a single-family residence.
◌◌ taxpayers who do not receive income from selling assets or capital gains.
◌◌ A person may file Form ITR 4 if his or her agricultural income is less than Rs.
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5000.
◌◌ people who don’t own assets or properties outside of India.
◌◌ a candidate whose revenue is derived from India.
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◌◌ This form is also applicable to companies whose revenue is based on a

presumed arrangement covered by Sections 44AD, 44ADA, and 44AE of the
Income Tax Act.
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Taxpayers who are unable to use this form
◌◌ Some people are not eligible to apply for the ITR-4S form to file tax returns.
These classifications are listed below.
◌◌ foreign asset owners.
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◌◌ company executives.
◌◌ a person whose income comes from abroad.
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◌◌ a taxpayer’s total income is greater than Rs. 50 lakhs.

◌◌ This form cannot be used by an applicant who has carried forward losses
under any income head.
◌◌ Shareholders of unlisted equity.
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◌◌ a resident who is not typically a resident and a non-resident.

◌◌ those who make a living from multiple residential properties.

◌◌ being able to sign for any account outside of India.

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◌◌ If a taxpayer is an assessee for the purpose of determining whether to deduct
taxes from another person’s income.
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◌◌ LLPs, or limited liability partnerships, cannot avail this form.
ITR-5 Form
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Businesses such as trusts and businesses must choose this form in order to file
ITR. ITR 5 refers to forms that are acceptable for LLPs or partnership firms. One must
have a thorough understanding of both the taxpayers who are and are not eligible to
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use ITR 5 in order to fully comprehend its implications.
Taxpayers who are qualified to file Form ITR 5
The aforementioned organisations may submit IT returns using this form.
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◌◌ LLPs (Limited Liability Partnerships).
◌◌ cooperative organisations.
◌◌ local government.
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◌◌ BOIs (Body of Individuals).
◌◌ artificial judges and attorneys.
◌◌ Firms. r
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◌◌ AOPs (Association of Persons).
◌◌ Insolvent estate of the deceased.
◌◌ investing money.
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◌◌ Trusts in business.
Body types that cannot choose this form
The following individuals are ineligible to submit an ITR 5: Anyone submitting an

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ITR 1; Hindu Undivided Families (HUFs).
◌◌ any business.
◌◌ ITR 7 filers are not permitted to file this form.
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◌◌ Candidates with capital gains income.
ITR-6 Form
An income tax return form designated for use by businesses is known as an ITR 6.
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Companies may only electronically file income tax using this form.
Who may submit ITR 6?

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◌◌ The organisations and income sources that qualify for this form are listed
below.
◌◌ all businesses, excluding those claiming Section 11 protection.
◌◌ income derived from real estate.
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◌◌ business earnings.
◌◌ income derived from several sources.
Who is unable to file ITR 6?
The companies and revenue sources that are ineligible to file IT returns using the
Notes
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ITR 6 form are specified in the section that follows.
◌◌ Organisations covered by Section 11 are eligible for tax exemptions because
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the money they make is used for charitable or religious purposes.
◌◌ earnings derived from capital gains.
◌◌ Any person or HUFs.
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ITR-7 Form
The ITR 7 form must be used to file income tax returns for people or businesses
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who are required to do so by Sections 139(4A), 139(4C), 139(4D), 139(4E), or 139(4F).
Organisations or individuals who may submit ITR 7
The businesses providing returns under the aforementioned sections may submit
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ITR 7, as was previously noted. An explanation of each section and the requirements is
provided below.
◌◌ People who receive income from assets held in trusts or other types of total
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legal obligations for charitable or religious purposes are required to file IT
returns in accordance with Section 139(4A) using this form.
◌◌
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Political parties must file returns under Section 139(4B) if their total earned
income exceeds the non-taxable threshold.
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◌◌ The following entities should file returns in accordance with this Section
139(4C) by using the ITR 7 form:
◌◌ news source
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◌◌ Establishments covered under Section 10 (23A)

◌◌ Research associations in science
◌◌ Institutions or organisations covered by Section 10 (23B)
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◌◌ any healthcare organisations, colleges, universities, schools, finances, etc.

◌◌ Provision 139(4D): Returns that colleges, universities, and other institutions
are required to file in accordance with this section. However, they are exempt
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from other Section 139 restrictions and do not have to present the return of
income and losses (4D).
◌◌ Business trusts are allowed to file returns under Section 139(4E) without
including revenue or loss disclosures.
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◌◌ Investment funds as defined in Section 115UB are required to file returns

under Section 139(4F). It is not essential to submit returns of income or losses
in accordance with any of this section’s provisions when filing returns.
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Taxpayers who cannot file Form ITR 7
One must select the ITR form for which they are eligible among ITRs 1 through 7.
Similar to this, some individuals and organisations cannot choose ITR 7. Following are
a few of them:
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◌◌ people who receive capital gains.

◌◌ Any salaried person or HUF as defined by ITR 1.

◌◌ ITR 7 cannot be used to file IT returns for those who qualify for ITR 5.
Notes
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Additionally, according to the finance ministry, the deadline for filing an ITR has
been moved up to May 31, 2021. As a result, those who intend to file tax returns must
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understand the differences between forms ITR 1 and 7. By doing so, they will be able to
select the proper form and save themselves the headache of having to file again.
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4.1.4 Concept of Risk Assessment of Individual
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Fig: Risk Assessment
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Personal risk assessment is the procedure used to identify risks, specify the
dangers connected to those risks, and decide the best strategy to get rid of or control
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the risk. In order to identify all of the situations, procedures, and equipment that may
be harmful, personal risk assessment necessitates doing a complete evaluation of the
workplace. After identifying the risks, you determine how likely they are to materialise
and how serious they are likely to be. The next step is to decide what actions can be
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made to limit the harm.
Personal risk management is the practice of assessing the risks in your

environment, including your house and daily activities, and making plans to address
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them. Businesses understand that taking risks is about the only thing that is certain
in business. Between 2002 and 2004, corporate risk management had a 25% rise
in board-level oversight, according to a global assessment of financial institutions by
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Deloitte. The assessment of a company’s vulnerability to risk identification is known as

risk management in the business sector.
Due to the fact that risk takes the form of a decision, a business may be able to
recognise it quickly. Other times, a business may be exposed to dangers without even
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being aware of them. The majority of businesses put time and resources into adopting
changes and insuring exposures as part of their risk management strategies.
Why is risk assessment important?

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Risk evaluations are crucial because they are a crucial component of a

management strategy for occupational health and safety. They aid in: Raising people’s
awareness of risks and hazards.
◌◌ Decide who might be at risk (e.g., employees, cleaners, visitors, contractors,

(c
the public, etc.).

◌◌ Find out if a control programme is necessary for a specific hazard.

Notes
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◌◌ Check to see if the current control measures are sufficient or if more needs to
be done.
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◌◌ Avoid illnesses or injuries, especially if you can, during the design or planning
stages.
◌◌ Prioritise the risks and preventative measures.
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◌◌ with any applicable legal requirements.
How is a risk analysis carried out?
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An expert or team of experts who are knowledgeable about the situation being
investigated should conduct assessments. Supervisors and employees who work on
the process under evaluation should be included, either as members of the team or as
sources of information, as they have the most familiarity with the operation.
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To do an assessment, you should generally:
◌◌ Determine dangers.
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◌◌ Determine the possibility and magnitude of harm, such as an injury or illness,
from occurring.
◌◌ Think about both routine operational circumstances and unusual occurrences
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like maintenance, closures, power outages, emergencies, severe weather, etc.
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◌◌ Review the Safety Data Sheet (SDS), manufacturer literature, information
from recognised organisations, test findings, workplace inspection reports,
and records of workplace events (accidents), including details on the nature
and frequency of the occurrence, illnesses, injuries, near misses, etc.
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◌◌ Understand the minimum legislated requirements for your jurisdiction.

Use the hierarchy of risk control strategies to determine the steps that
must be taken to reduce the risk or remove the hazard.
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Check to see if the danger is appropriately controlled or if the hazard has

been removed.
Make careful to keep an eye on the control to ensure its effectiveness.
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Any records or papers that may be required should be kept. Documentation

may include specifics of the method used to evaluate the risk, a summary
of any evaluations, or specifics regarding the findings reached.
When doing an evaluation, be sure to consider things like the techniques and
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methods utilised in the substance’s preparation, use, handling, and storage.
● both the actual and potential exposure of workers (e.g., the number of workers who
may be exposed, the kind and frequency of such exposure).
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● the steps and methods required to limit such exposure using engineering safeguards,
work habits, and facilities and practises for cleanliness.
● The task’s duration and frequency (how long and how often a task is done).
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● The location where the task is done.

● The equipment, supplies, and other items used in the process, as well as how they
Notes
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are used (e.g., the physical state of a chemical, or lifting heavy loads for a distance).
● Any potential linkages with nearby activity and whether the task might have an
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impact on others (e.g., cleaners, visitors, etc.).
● The duration of the product’s, process’s, or service’s life (e.g., design, construction,
uses, decommissioning).
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● the workers’ educational background and training.
● How someone would respond in a specific circumstance (e.g., what would be the
most common reaction by a person if the machine failed or malfunctioned).
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It’s crucial to keep in mind that the assessment must consider both the workplace’s
current status and any prospective future circumstances.
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The employer and the health and safety committee (if applicable) can decide
whether a control programme is necessary and to what extent by determining the level
of risk associated with the hazard.
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4.2 Retirement Planning
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Fig: Retirement
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Planning for retirement is making preparations for your future so that you can
continue to achieve all of your objectives and desires on your own. Setting your
retirement goals, calculating how much money you will require, and making investments
to increase your retirement savings are all included in this.
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In a financial setting, retirement planning refers to the distribution of funds for

retirement. This typically refers to saving money or other assets in order to have a
reliable income in retirement. Retirement planning is to achieve financial independence,
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making it optional rather than necessary to be gainfully working.
● Assessing readiness to retire given a chosen retirement age and lifestyle, or whether
one has enough money to retire, is the goal of the retirement planning process.
● Identify strategies to increase retirement preparation.
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4.2.1 Introduction to Portfolio Management

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Fig: Portfolio Management
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Portfolio management is the process of controlling a person’s investments, such
as bonds, stocks, cash, mutual funds, etc., to ensure that he makes the most money
possible within the allotted time frame.
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Money managed by a person under the knowledgeable direction of a portfolio
manager is referred to as portfolio management.
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Portfolio management is the term used to describe the art of managing a person’s
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investments.
Retirement income management is the process of ensuring that your retirement

savings will provide an amount of income that will meet your demands and prevent you
from outliving your assets. Setting up and maintaining a portfolio that is appropriate for
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you is where to start.
One of the most crucial variables in figuring out how to handle those assets during
retirement is the quantity of money you have when you start your retirement.
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With wise spending, a sizable portfolio may create enough income to prevent
you from ever having to touch your capital. If that applies to you, your retirement
investments may begin with a mix of bank products like CDs and Treasury bonds to
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protect your principal, combined with dividend-paying stocks and bonds.
Types of Portfolio Management

Additionally, there are three forms of portfolio management:
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1. Active Portfolio Management: In an active portfolio management service, as the

name implies, the portfolio managers actively participate in the purchasing and
selling of stocks to ensure that individuals make the most money possible.
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2. Passive Portfolio Management: In this method, the portfolio manager works with a
fixed portfolio that is created to reflect the state of the market.
3. Discretionary portfolio management services: In this type of service, a client gives
a portfolio manager permission to handle all of his or her financial demands. The
(c
portfolio manager receives funds from the investor, who then handles all of his
investment-related needs, including paperwork, filing, and other administrative

tasks. When managing a client’s portfolio discretionarily, the portfolio manager is

Notes
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completely free to make decisions on the client’s behalf.
4. Non-Discretionary Portfolio Management Services: In non-discretionary portfolio
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management services, the portfolio manager can only advise the client on what is
good and bad for him, but the client retains full discretion to make his own judgments.
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4.2.2 An Overview of Retirement Planning
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Fig: Retirement Planning
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Planning for retirement entails getting ready for living following a paid employment
period in terms of both finances and all other facets of one’s existence. The non-
financial aspects include lifestyle decisions including how you spend your time in
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retirement, where you live, when you entirely stop working, and other things. Planning
for retirement holistically means giving each factor equal weight.
Various life stages place different amounts of emphasis on retirement planning.

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Planning for retirement when you’re young usually only involves saving enough money.
It may shift in the midst of the career to establishing precise income/asset goals and
taking the necessary actions to achieve them. When you retire, decades of savings will
start to pay off.
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Goals for Retirement Planning

Planning for retirement must begin long before retirement; the earlier, the better.
There are various general guidelines that can give you a sense of how much money
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you should save, but your “magic number,” the sum you need to retire comfortably, is
extremely individualised.
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Reevaluating Risk
You should reevaluate your level of investment risk as you approach retirement,
especially the potential for investment losses. One of the most important criteria in
determining risk is your timetable. It’s a good idea to reevaluate if a larger percentage
of your assets are held in higher-risk securities than is prudent because you might not
(c
have as much time as you once did to recover from market downturns.

Asset Management
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Maintaining a certain mix of investments in your portfolio that you believe will
deliver the return you desire at a level of risk you are ready to accept is one strategic
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approach to investing during retirement. Making such a portfolio and distributing your
risk is a procedure that is known as asset allocation.
Because different economic conditions tend to have distinct effects on the
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performance of various investment categories, such as stocks, bonds, and cash, asset
allocation is crucial. You may frequently smooth out the ups and downs of your overall
portfolio by distributing your investment principle over a variety of different securities.
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Gains from the Sale of Your Investments
There are other ways to use your investments to generate retirement income
besides receiving investment income. If your investments are worth more than you paid
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for them, you can potentially make money by selling them.
Even if taxes shouldn’t be the main factor in investment decisions, you should think
about the ramifications of selling investments you have in taxable accounts. In addition
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to paying commissions to a broker to handle the transaction, you can also be required
to pay capital gains taxes on the sale’s profit.
Maintaining Your Principal r

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Spending should be controlled if you want your money to last as long as you need
it to. Don’t overspend during your first few years of retirement, according to experts.
They also advise you to be ready to reduce frills if your retirement portfolio experiences
losses in a particular year. The prudent management of the annual withdrawals you
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make from the principal of your retirement account is the other key to extending your
retirement income.
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4.2.3 Income Generation After Retirement

Retirement is the bright spot at the end of a lifetime of working and saving. Most
of us picture it as a period of leisure and enjoyment during which we can savour the
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results of our labours. We imagine having a reliable source of income without having to
commute to a job every day.
It’s a fantastic idea, but during our working years, earning money without working
sometimes seems hazy. We are aware of what we want, but we are not really certain
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how to get it. So how precisely are you going to convert your nest money into a
consistent income during your retirement years? It may be beneficial to create a
detailed plan based on these sources of income.
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Ways of Income Generation after Retirement

Bank Fixed Deposits
Seniors 60 years of age and above receive somewhat greater returns on fixed
deposits from banks. The rates are currently between 5.6% and 6% for the majority of
(c
banks, having dropped significantly when the RBI started cutting rates to counteract

the COVID-19’s economic impact. Bank FDs are a bad choice for generating post-
Notes
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retirement income due to their tax inefficiency and low yields.
Bonds
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Retirement investors can receive consistent profits from business and government
bonds with AAA ratings. Even some AA-rated high yield bonds might be worth looking
at, but only after consulting a reputable financial counsellor. Bonds, however, prevent
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you from moving your money until they mature, and doing so could put a retiree at
danger of interest rate volatility. Retirement investors would be better to put their money
into bond funds with modest maturities between 3 and 5 years.
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SCSS
The SCSS, or Senior Citizens Savings Scheme, is a 5-year investment with a fixed
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return that is backed by the government. At the conclusion of the fifth year, the retiree
has the option of extending the tenure at the rate in effect at the time. Unfortunately, the
SCCC has a hard cap of Rs. 15 lakhs, which means the greatest amount of money that
might be earned at the present rate of 7.4% per year (better than FDs) would be Rs.
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9,250 per month. The retiree is completely taxed on interest income received from the
SCSS.
Post Office Monthly Income Scheme r

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The POMIS is a savings programme sponsored by the government with a fixed
interest rate that is now 6.6% per year. The interest is entirely taxable to the retiree and
is distributed monthly, as the name suggests. A retired couple can earn up to Rs. 4,950
per month from the POMIS because the maximum investment limit is just Rs. 4.5 lakh
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under a single name and Rs. 9 lakh under joint ownership. The POMIS is a deficient
retirement income generation solution because to the inefficient tax system and low
cap. In addition, the returns aren’t substantially higher than a fixed deposit for senior
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citizens.
Annuities
Private life insurers produce a wide variety of annuities, and the range of choices
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might be perplexing. It’s vital to remember that annuity returns are taxable, and that
the gross income would probably (depending on the plan and product) vary from Rs.
6500 to Rs. 8500 annually. In all fairness, annuities do offer the consolation of a lifetime
income, but their net “returns” under a reasonable lifespan estimate typically come in at
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less than 7%.
Mutual Funds
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An effective and beautiful solution to the issue of generating post-retirement

income may be found in a well-structured mutual fund portfolio. Retirees must take
into account that, with a long-term horizon, taking a 10-15% exposure to high growth
equities mutual funds may not be the best course of action rather than completely
avoiding risk. Retirees would do better to choose SWPs (Systematic Withdrawal
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Plans) from debt mutual funds rather than impulsively investing in MIPs, whose profits
are taxed at a rate of 28.33% at source. As a result, there would be tax benefits and a
source of revenue that is entirely predictable.
Rental income
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Especially if you invest in residential real estate, owning a rental property may be
a great method to make money in retirement. It also needn’t be too difficult to do so.
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Despite the fact that managing the property will take some work, over time it might bring
in serious cash.
Because you can make more money that way, it can be a good idea to plan ahead
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when buying rental property. Over time, rents often increase, providing you with a larger
buffer against expenses like a mortgage. Furthermore, as time passes, you can lower
your mortgage payment or refinance it, providing you more room for manoeuvre in
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terms of your spending and more cash for retirement.
A New Part-time job or Side Business

If you have no other choices, you can think about taking a temporary part-time job
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when you really need the money. You might also think about turning a long-standing
pastime into a side business to earn some money using your invaluable experience.
While many people envision retiring and never having to work again, many others
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discover that retirement is very different from what they had anticipated. For these
reasons, some people do make the decision to go back to work, even if it’s just to leave
the house a few days a week and interact with others.
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4.2.4 Estimating Future Retirement Needs
One must choose their retirement age and expenses. then use the current inflation
rate to compute the cost of expenses in the future. After taking into account the current
investments, determine the amount needed to invest in the goals.
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Basing Your Needs on Current Income

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It is not beneficial for persons who are just starting their professions to estimate
their retirement needs using current income. If you’re in your twenties or thirties, you
probably have an entry- or mid-level income in your sector. A career shift can cause
your income to temporarily decline, which would have an impact on your savings plan.
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If you don’t know what your pre-retirement income will be in the future, it might be
challenging to estimate how much you’ll need in your senior years.
What if You’re a Saver?
The “replace your income” maxim’s assumption that you spend the majority of your
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income is another drawback. It suggests that if you save 10% to 15% of your salary
for retirement and potentially another 10% to 15% for other non-retirement types of
savings, you will spend between 70% and 85% of your income.
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Prioritise Spending Rather than Income

It’s a good idea to base your retirement planning on your spending habits rather
than your income.
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Most likely, your spending in retirement will differ from your current consumption. At
that time, you might not be making a mortgage payment. You might not have to support
your children any longer because they may be adults and living on their own. You won’t
have to pay for things like daycare, professional dress, or transportation relevant to your
Notes
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job.
But you’ll also have expenses that you might not have to pay for right now. The
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expense of prescription drugs and medical care may increase. You could also want to
hire someone else to undertake the housework you normally do yourself, like raking
leaves, cleaning the gutters, or shovelling snow. You might decide to take more trips or
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utilise your retirement to pursue interests you were unable to pursue while working.
Multiply Current Annual Spending by 25
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You can use the following general guideline to determine how much money you’ll
need in retirement: Multiply 25 to the amount you currently spend annually. To be able
to securely withdraw 4% of that sum each year to live on in retirement, your savings
must be that much.
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If you have been slow to save
If you start saving later in life, don’t give up. Putting more effort into saving is the
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best approach to make up for a late start.
The more you should save and diversify your retirement investments each month
as you get older. Don’t invest too much of your assets in equities under the mistaken
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assumption that you need riskier investments to make up for decades’ worth of lost
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savings. Risk has two sides. If your investments deteriorate, you won’t have as much
time to recover.
Redefine Retirement
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For a variety of factors, people are working later in life. If you had a late start and
need to earn more to make up the difference between what you have and what you
need, think about a few choices before you “technically” retire.
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You could start a second job in an area you’ve always been passionate about or
use your decades of knowledge to work part-time as a consultant for a few years while
your money continues to grow. If taking a pay decrease keeps you on pace to satisfy
your savings needs, start a new journey in a new field for a few more years.
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Redefine Your Lifestyle

You may not have started saving late, but you just don’t have the extra funds
available to create a portfolio that represents your current level of expenditure. You
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might need to change your mind about the kind of retirement lifestyle you want. There
are several methods to save expenses while leading an active lifestyle.
It could be wise to scale back. Instead of staying in your current house, consider
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retiring to a state without income taxes. You may go one step further and retire in a
country with a cheaper cost of living abroad.
There are many strategies for maximising retirement. To determine what makes the
most sense for you, you simply need to experiment with the numbers.
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4.2.5 Liability Management

Notes
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Fig: Liability Management
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The practice of liability management by banks involves keeping a balance between
the maturities of their assets and liabilities in order to maintain liquidity, enable lending,
and maintain sound balance sheets. Liabilities in this sense include funds borrowed
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from other financial institutions as well as money held in deposit accounts.
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●● Liability management is the process of controlling the use of resources and cash
flows to lower the company’s risk of suffering losses due to late payments on
liabilities.
●● A strategy of balancing opposing factors that can boost firm profits is part of well-
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managed assets and liabilities.

●● The asset-liability management technique is often used to manage the loan
portfolios of banks, which may include demand deposits, lines of credit, as well as
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fixed-term products like CDs and loans.

●● Liability management is another tool defined-benefit pension plans can employ
to prevent cash flow problems when it comes to meeting their present and future
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obligations.
The Banking Industry

Banks act as a middleman in the financial system, accepting deposits for which
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they are liable to pay interest (liabilities) and providing loans for which they are
compensated with interest (assets). Bank assets also include securities portfolios
in addition to loans. Banks must control interest rate risk because it might cause an
imbalance between assets and liabilities.
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Liability Management in Pension Plans

When an employee retires under a defined benefit (DB) pension plan, they will get
a fixed, predetermined pension benefit; nevertheless, the employer assumes the risk
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that the assets invested in the pension plan may not be sufficient to cover all benefits.
The quantity of assets needed to fund benefits under a defined benefit plan must be
anticipated by businesses.
A percentage of an employee’s salary is deducted by future retirement plans,

Notes
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which will then pay it out at the appropriate rate when the employee retires. Benefit
programmes like future retirement plans deduct money from employees’ paychecks
and pay it back in the future at the appropriate rate when the employee retires. These
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organisations must therefore make sure they have the resources necessary to cover
these responsibilities.
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4.2.6 Anticipation of Expenses
The following inquiries may help you create a more thorough and precise list of
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expenses when evaluating your retirement budget:
◌◌ How long does your mortgage have left?

◌◌ Have you had any plans to relocate or downsize your main residence?
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◌◌ How will the costs of your health insurance alter once you retire?
◌◌ Have you taken into account the elevated out-of-pocket medical expenses
that frequently come with ageing?
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◌◌ Do you have all the insurance you require, or do you still need to set aside
money for premiums on long-term care insurance, for example?
◌◌ When you have extra time to dedicate to your hobbies or travel, will you spend
more on those things? r
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As you plan your retirement expenditures, it’s crucial to list and group your
projected typical monthly expenses.
Travel
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Many retirees are anxious to travel to all the places they never had the opportunity
to visit when they were employed. Ask for senior and AARP discounts, travel during off-
peak hours, and take advantage of last-minute specials.
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Entertainment
Because they have eight or more extra hours each day to fill, retirees are more
likely to spend more money on entertainment. Make preparations for volunteer work
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before you retire, get your library card out, and look for free or inexpensive activities to
avoid picking up pricey hobbies.
Housing
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In retirement, housing is probably going to be your major expense, but there are
several strategies to drastically cut your monthly housing costs. By paying off your
mortgage, you may be able to reduce your monthly expenses to only taxes, insurance,
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and upkeep. Another choice is to move to a substantially less expensive property,

freeing up home equity to boost your retirement fund.
Your retirement finances may be improved by relocating to a region with lower

living expenses. Your heating, cooling, maintenance, and tax costs might be decreased
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if you moved into a smaller home in a less costly location.

Socialising
Notes
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At work, there are many opportunities for social contact. But dining out or
hosting guests at your home are common forms of socialising in retirement. Look for
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inexpensive activities you can do with your friends and family.
Health Insurance Premiums
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Retirement expenses may increase for those whose health insurance premiums
are employer-subsidised.
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Taxes
Although senior persons frequently qualify for additional tax advantages, some new
taxes have an impact on retirees. Your retirement funds will require you to pay income
tax on each withdrawal after years of postponing taxes.
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Household help
As you get older, you might need to hire help for yard labour you used to do on
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your own, including raking leaves and shovelling snow. Many elders may require
assistance with physically taxing household duties and home maintenance.
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Budget busters include purchasing regular visits or gifts for the grandchildren. You
should plan for bequests in your retirement budget and set aside funds for presents.
Spending money on pricey toys and lessons should be avoided in favour of spending
time with your grandchildren.
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Food
If you’re ready to give up pricey convenience foods and put in the effort to prepare
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healthy meals at home, you can save money on food in retirement. Although you might
be tempted to spend more on pricey dining out and extended lunches with friends now
that you are retired, you may have more free time.
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Emergencies
Even after you retire, you still need an emergency fund. You will still need to
replace broken appliances, restore your car, and do home maintenance. To prevent
blowing through your retirement funds too rapidly, you must have an emergency
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fund. Your retirement draw-down approach shouldn’t be altered each time something
goes wrong. Make sure you have money set aside in your retirement plan to cover
unexpected costs.
)A
Leaving a legacy
Many retirees choose to leave financial bequests to their children, grandchildren, or
other heirs as well as priceless possessions like furniture, jewellery, or other antiques.
You could want to compile family photos or write a memoir. Consider whether you want
(c
to donate to worthy causes as part of your plans. To ensure that your ideas are carried
out, make sure that your wishes are expressed in writing clearly.

4.2.7 Investment for Major Goals (House, Family, Education and

Medical Goals) Notes
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When we are young, we observe our family members exchanging coins or notes
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for various items we enjoy. This is when our relationship with money begins. When
we receive our first allowance or are compensated for a chore, money’s power and
authority increase. These early encounters help you develop lifelong behaviours and
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attitudes.
Depending on age, income, and outlook, investment objectives can be divided into
three categories. Age can be split into three distinct categories: young and beginning,
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middle-aged and establishing a family, and old and independent. These categorisations
frequently fall short of the mark at the proper age, forcing middle-aged people to
consider investing for the first time or forcing elderly people to adhere to strict budgets
and develop the discipline they lacked as young adults.
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One of the objectives we work toward is living comfortably after retirement, which
includes retirement planning. Retirement, however, just adds a comma to the list of
daily costs, not a full stop. Therefore, experts advise that you continue setting and
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attaining financial goals even after you retire.
Investing goal for House after Retirement

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Fig: Investing goal for House after Retirement
When it comes to investing their hard-earned money in a property with the hope of
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receiving a high return in the form of a monthly rental or earning a significant profit by
selling the property at a premium, real estate investment is one of the common options
available to people. Real estate is generally thought to be a good investment, but it
cannot be included in retirement income programmes. This is no longer the case due
)A
to the advancement of technology, and one may now be certain of receiving a fixed
income throughout retirement thanks to property investment.
These days, folks looking to save money for retirement might consider investing
in real estate. Those wishing to diversify their savings might think about including
(c
real estate in their retirement plans. Real estate investments have both positive and
negative aspects.

One can always think about choices like investing money in a real estate
Notes
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investment trust or mutual fund or adding tangible property, such as an apartment
complex. According to experts, income-producing real estate is a crucial component of
a successful retirement portfolio.
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Even though real estate might present lucrative investment prospects, a home
shouldn’t be bought just for that purpose. Finding another place to live should not be
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necessary when selling an investment item because housing is an inherent cost of life.
When budgeting for housing costs, retirees shouldn’t take the investment potential of
ownership into account.
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A homeowner would need to purchase low and sell high—buying and selling
properties opportunistically—in order to actually employ a property as an investment.
However, if one sells a home to make a profit when prices are high, they run the risk of
being priced out of the market if values rise further. Those on a fixed income, like the
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majority of seniors, might not be able to buy another home or apartment and will instead
have to deal with a landlord.
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Investment goal for Family after Retirement
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Fig: Investment goal for Family after Retirement
Including your family in your retirement plan and other areas of your yearly financial
planning frequently necessitates major change. For instance, your retirement strategy
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will look quite different if you’re married than if you’re single. You must take your
spouse’s requirements and retirement goals into account in addition to your own. One’s
retirement objectives and strategies for achieving them will frequently have to take into
account saving for children’s college, taking care of ageing parents, and even helping
)A
out extended relatives.
● When family members and critical life events are taken into account, finances might
vary considerably.
● Planning becomes even more challenging if you are responsible for supporting your
(c
parents or children financially or in another way.

● Saving for college, providing care for ageing parents, and the actual timing of
Notes
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retirement are important issues or milestones to plan for or address when discussing
retirement with families.
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● Families should employ certain critical tactics, such as funding retirement accounts
before budgeting for education and procuring long-term care and life insurance for
ageing parents.
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● You should evaluate these demands and determine what might need to be adjusted
when creating an annual financial plan—or updating existing ones.
Investment goal for Education after Retirement
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Fig: Investment goal for Education after Retirement
Many parents desire to pay for their children’s college education, but they are
pulled in different directions by competing financial obligations. Saving for college can
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be a difficult task, especially if you have several kids.
Separate education portfolios for each child are preferable. The approach for the
first and second child should be the same, but, assuming the age gap between them is
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not too great.
Keep separate portfolios for investing in higher education for each child. You
could, among other things, invest in large-cap funds, children’s unit-linked insurance
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plans, gold exchange-traded funds (ETFs), and diversified equity mutual fund schemes
(mainly large-cap).
Investment for Medical goals after Retirement

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(c
Fig: Investment for Medical goals after Retirement

One of the major costs a retiree may encounter in their golden years is health care.
Notes
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Despite saving and planning during their whole working lives, many people are not
emotionally or financially ready for the high cost of medical bills in retirement. It’s crucial
to comprehend and prepare for rising medical expenditures whether you’re just starting
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your job, nearing retirement, or have already begun your transition out of the workforce.
The amount of money that will be coming in each month and the total cost of your
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expenses will determine your overall retirement budget.
You must enrol in a health insurance plan while you are still working since
healthcare expenses are increasing at a startling rate. This will assist mitigate the
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effects of unforeseen costs and act as a financial safety net. You can also speak with
a financial counsellor before buying an after-retirement health plan to choose a health
insurance that will protect you from a variety of illnesses and medical issues.
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Yes, the majority of medical expenses can be covered by insurance, but that is
insufficient. It’s possible that your insurance won’t fully cover the expense if a member
of your family has a chronic condition that necessitates continuing care. Therefore, it is
essential to create a separate emergency fund with liquid assets that can be used in a
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crisis for such situations.
4.2.8 Reverse Mortgage (Role, Significance and Growth)

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Fig: Reverse Mortgage
A reverse mortgage gives you the chance to turn some of your home equity into
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cash if you own your house and are at least 62 years old. In the simplest terms, a
reverse mortgage enables you to borrow against the equity in your home without having
to pay it back throughout your lifetime as long as you are still residing there and haven’t
sold it.
)A
The home equity in a property can be released as a single payment or over the
course of several payments using a reverse mortgage, which is a loan available to
seniors. The homeowner’s need to pay back the loan is postponed until either they pass
away, sell their house, or move out (for example, into an elderly care facility).
(c
Some fundamental characteristics of reverse mortgage products are revealed by

the definition analysis.

● The homeowner has no duty to repay the loan until the house is his primary
Notes
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residence, and
● The loan is only offered to older persons who own a home.
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● The homeowner has no duty to repay the loan until the house is his primary
residence, and the loan is only offered to older persons who own a home.
Once the owner passes away or vacates the property, restitution is due. This is
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accomplished by selling the home and paying off the debt using the sale profits. So,
a homeowner who applies for a reverse mortgage may get payment in the manner
described below.
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●● A one-time payment at the start (can be used for home improvement health
expenses etc)
●● A one-time payment at the start (can be used for home improvement health
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expenses etc)
●● Monthly payments for a set period of time
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●● Monthly payments for a set period of time
●● Establishing a credit line with or without adding interest to the balance owed.
●● A mix of the aforementioned
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To meet the needs of the borrowers, several lenders have released programmes
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that are different from those mentioned above.
1. One of these strategies is called a “home reversion” or “sale and lease back,” in
which the homeowner sells the property but retains the right to live there as long
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as it serves as his primary residence. The money could be utilised for household
improvements, medical needs, etc.
2. Interest-only mortgage: The borrower receives a lump sum and only makes interest
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payments over the course of the loan. The selling of the house recovers the principal.
3. Mortgage Annuity/Home Income: The loan is utilised to buy the homeowner an
annuity. The benefit is that the annuity will continue even if the homeowner vacates
the property until his death
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4. Shared Appreciation Mortgage: This offers loans with interest rates below those of
the market. In exchange, the lender receives a pre-agreed portion of any increase
in the property value over the whole amount of the loan.
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Significance of Reverse Mortgage

1. Assists in ensuring your retirement
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Reverse mortgages are a great option for retirees who have accumulated significant
wealth in their houses but little in the way of cash savings or investments. With the
help of a reverse mortgage, you can convert an otherwise unusable asset into cash
that you can use for retirement costs.
2. You may remain in your house
(c
You can continue to live in the property and still receive cash from it, so you don’t
have to sell it in order to liquidate your asset. This implies that if you had to relocate,

you wouldn’t have to worry about perhaps downsizing or being priced out of your
Notes
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community.
3. You’ll pay off your current mortgage
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A reverse mortgage can be obtained even if your house isn’t completely paid off.
In fact, you are able to pay off an existing mortgage with the money from a reverse
mortgage. This makes money available to use for other expenses.
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4. You Won’t Be Owed Taxes
The money you get from a reverse mortgage is regarded by the IRS as a loan
advance rather than as income. In contrast to conventional retirement income, the
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funds aren’t taxed.
5. You’re Secure If the Balance Is More Than Your House Is Worth
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Your home’s worth might in some circumstances turn out to be lower than the entire
amount payable on the reverse mortgage. For instance, this may occur if housing
prices decline. If this happens, the remaining balance is not a concern for your heirs.
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Growth of Reverse Mortgage
Given the current circumstances, finding a product that can assist these individuals
in resolving some of these issues is always a positive development. All of these issues
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are addressed by reverse mortgages and equity release solutions.
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No matter their income, every Indian strives to establish a home for themselves
during their working lives. He or she will have the chance to make money from that
home thanks to a reverse mortgage. As long as the successors agree to repay the loan,
the borrower may transfer title of the property to them as well.
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Such a product lessens the burden on the government’s obligation to provide old
age security, hence the government must also support the project.
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The market for such products has grown significantly in these economies as a
result of this arrangement. The markets in the UK and the USA are two such examples.
Case Study on Retirement Planning

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Take a look at how much Mr. Sumit Gupta would be required to do after retirement.
He is a 32-year-old married man who intends to retire at age 60 and anticipates living
until 85. His investing returns are estimated to be 12% annually. 6% is the inflation rate.
His outgoings per month total INR 50,000. Additionally, he spends INR 1,000,000 a year
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on his health and travel. It is expected that his spending will decrease to 75% of his
present expenses after retirement and that he does not currently have any retirement
investments.
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Current Age 32
Retirement Age 60
No. of years to retirement (T) 28
Life expectancy 85
(c
No. of years after retirement (N) 25

Expected rate of return [R] 12%

Notes
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Inflation rate (i) 6%
Return after inflation adjustment (r) 5.66%
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Currently monthly expenses Rs. 50,000
Health and vacation Rs. 1,00,000
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Current expense per annum RS. 7,00,000
Inflation adjusted expense per annum at retirement Rs 4,020,443.82
75% expenses Rs. 3,015,332.87
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Corpus needed on retirement Rs. 45,407,579.33
One time investment Rs. 1,515,610.73
Yearly investment Rs. 167,994.16
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Monthly investment Rs. 14,738.06
At the time of his retirement, Mr. Sumit Gupta would require Rs. 4.54 Cr. To obtain
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the desired sum at the time of retirement, he can make a one-time investment of Rs
15.15 lakhs, a yearly commitment of Rs 1.67 lakhs for the following 27 years, or a
monthly investment of Rs 14.7 lakhs for the entire 27 years and 11 months. In addition,
he has early retirement plans. The monthly investment is therefore on the lower end.
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Summary
● A tax return is a document submitted to a taxing authority that lists earnings, outlays,
and other pertinent financial data.
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● Taxpayers compute their tax liabilities, set up tax payments, and request refunds for
overpaid taxes on their tax returns.
● Tax returns must typically be filed yearly.
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● Risk assessment is the process of examining prospective occurrences that could

lead to the loss of a loan, investment, or asset.
● Before starting a new project, business, or investment, organisations, governments,
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and investors all do risk analyses.

● In quantitative risk analysis, risk is assigned a numerical value using simulations
and mathematical models.
● A person’s subjective judgement is a key component of qualitative risk analysis,
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which uses it to create a theoretical model of risk for a specific scenario.

● Even while a stock’s historical volatility cannot predict its future performance,
excessive volatility often denotes a riskier investment.
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● Building and managing a portfolio entails selecting investments that will satisfy an
investor’s long-term financial objectives and risk tolerance.
● In order to outperform the overall market, active portfolio management involves
systematically buying and selling stocks as well as other assets.
(c
● By replicating the structure of a certain index or indexes, passive portfolio

management aims to mirror the returns of the market.

Notes
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● Retirement planning is the process of developing a financial plan that includes
saving, investing, and finally disbursing funds for one’s own support in retirement.
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● Retirement planning considers future costs, responsibilities, and life expectancy in
addition to assets and income.
● It is never too early to begin retirement planning, nor is it ever too late (although
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earlier is preferable).
● The traditional retirement age was 65, and most individuals lived for an additional 15
to 20 years after that (on average).
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● How long you expect to live in retirement and how much money you’ll need each
year to live comfortably will determine how much money you should set aside for
retirement.
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● As retirement approaches, investors should make a number of decisions, including
aggressive debt reduction, maxing out retirement plan contributions (including
catch-up payments), and reassessing asset allocation to take into account changing
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risk tolerance and time horizons.
● The process of controlling the use of assets and cash flows to lower the firm’s risk
of loss from failing to pay a liability on time is known as liability management.
●
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A method of balancing opposing elements is part of well-managed assets and
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liabilities, and it can boost business profits.
● The asset-liability management technique is often used to manage bank loan
portfolios, which may include demand deposits, lines of credit, and fixed-term assets
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with fixed maturities like CDs and loans.

● Liability management is another tool defined-benefit pension plans can employ to
avoid running out of money to cover their current and future obligations.
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● For seniors aged 62 and over, a reverse mortgage is a sort of house loan.
● Homeowners can use reverse mortgage loans to turn their home equity into cash
income without having to make monthly mortgage payments.
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● Reverse mortgages might be excellent financial choices for certain seniors, but they
can also be bad choices.
● Before borrowing, be sure you are aware of how reverse mortgages operate and
what they entail for you and your family.
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Glossary
● Reverse Mortgage: Like a conventional mortgage, a reverse mortgage loan enables
)A
home owners to borrow money while utilising the value of their home as collateral.
When you take out a reverse mortgage loan, just as when you get a regular
mortgage, the title to your house stays in your name.
● Liability Management: The practice of liability management by banks involves
(c
keeping a balance between the maturities of their assets and liabilities in order to
maintain liquidity, enable lending, and maintain sound balance sheets.

● Retirement: Retirement is the stage of life at which one decides to leave the
Notes
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workforce behind forever.
● Retirement Planning: Retirement planning identifies desired levels of retirement
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income as well as the steps and choices needed to get there. Identification of
income sources, estimation of expenses, implementation of a savings plan, and risk
and asset management are all aspects of retirement planning.
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● Portfolio Management: The process of choosing and managing a set of investments
to fulfil the long-term financial goals and risk tolerance of a client, a business, or an
institution is known as portfolio management.
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● Risk Assessment: To evaluate the potential of loss on an asset, loan, or investment,
risk assessment is a broad term used across various industries. In order to decide
if a particular investment is viable and the best process(es) to manage risk, risk
assessment is crucial.
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● Tax Return: A tax return is one or more forms submitted to a taxing body that include
earnings, outlays, and other crucial tax data. Tax returns give taxpayers the option
to determine their tax liability, plan out their tax payments, or ask for refunds for any
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taxes they have paid in excess of what is required.

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1. In order to calculate Income Tax and Taxable income, the first step is to ___________.
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a. Calculate your gross income
b. Calculate net taxable income by removing deductions
c. Calculate net taxable income
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d. Consolidate your net tax

2. ____________ helps businesses, governments, and investors determine the
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likelihood that a negative event will have a negative impact on a project, investment,
or the economy.
a. Financial Assessment
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b. Risk Assessment
c. Market Assessment
d. Securities Assessment
3. An individual who earns up to Rs. 5000 through agriculture is required to fill
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_________.
a. ITR-1 Form
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b. ITR- 6 Form
c. ITR- 3 Form
d. ITR- 7 Form
4. Individual taxpayers or HUFs who are partners in a business but do not conduct any
(c
business on its behalf are qualified to apply for __________.

a. ITR-1 Form

b. ITR-4 Form
Notes
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c. ITR-3 Form
d. ITR-2 Form
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5. ___________ implies making preparations for your future so that you can continue
to achieve all of your objectives and desires on your own.
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a. Tax Planning
b. Financial Planning
c. Risk Planning
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d. Retirement Planning
6. The process of choosing, prioritising, and managing an organisation’s programmes
and projects in accordance with its strategic goals and ability to carry them out is
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known as __________.
a. Retirement Management
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b. Portfolio Management
c. Financial Management
d. Risk Management
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7. __________ is the procedure used by banks to maintain a balance between the
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maturities of their assets and liabilities in order to preserve liquidity, ease lending,
and keep their balance sheets in good shape.
a. Financial Management
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b. Tax Management
c. Risk Assessment
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d. Liability Management
8. _____________ are costs associated with the project that have not yet been
incurred but will in the future.
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a. Direct Costs
b. Indirect Costs
c. Anticipated Costs
d. Individual Costs
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9. The bond issued by corporations that is subject to default risk is categorised as a

___________.
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a. Default Bonds
b. Risk Bonds
c. Zero Risk Bonds
d. Corporation Bonds
(c
10. The interests of ________ should be the first consideration for financial managers.
a. Stakeholders
b. Board of Directors
Notes
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c. Shareholders
d. The Vice President of Finance
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11. “Working capital” in finance is equivalent to ___________.
a. Fixed Assets
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b. Total Assets
c. Current Assets
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d. Current Assets minus Current Liabilities
12. Precious metal investments fall under the ______ asset class.
a. Real Assets
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b. Monetary Assets
c. Fixed Assets
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d. Current Assets
13. Utilising the deductions, exemptions, or reliefs permitted by the Act and Rules to
reduce tax burden is known as ___________.
a. Tax Evasion r
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b. Tax Planning
c. Tax Avoidance
d. Tax Management
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14. An assessee paid an insurance premium to cover the risk of losing stock or supplies
essential to the operation of his business or line of work. Such expenses will be
regarded as _______.
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a. Revenue Expenditure
b. Capital Expenditure
c. Deferred Revenue Expenditure
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d. Illegal Expenditure
15. Tax Avoidance is considered to be as __________.
a. Illegal
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b. Immoral
c. Lawful
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d. All the above

16. __________ are the financial instruments that derive their value from anything other
than their fundamental value.
a. Bonds
(c
b. Shares
c. Commercial Bills

d. Derivatives
Notes
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17. ____________ is not a means of funding for a business.
a. Common Stock
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b. Treasury Stock
c. Preferred Stock
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d. Bonds
18. _____________ does not directly increase the economy’s capacity for production.
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a. Current Assets
b. Fundamental Assets
c. Financial Assets
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d. Real Assets
19. _____________ is best suited for people who just retired with lump-sum payments
like bonuses, leave encashments, gratuities, and other similar gains.
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a. Deferred Annuity Retirement Plan
b. Immediate Annuity Plan
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c. Public Provident Fund
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d. National Pension Scheme
20. To calculate _________________, the price per ratio is divided by the cash flow per
share ratio.
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a. Divided to Stock ratio

b. Cash flow to price ratio
c. sales to growth ratio
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d. price to cash flow ratio
Exercise
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1. Discuss the steps involved for effective Tax Planning.

2. What do you understand about the concept of Risk Assessment for Individuals?
3. Explain different ITR forms.
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4. How can an individual generate income after Retirement?

5. Discuss the ways to invest in family, health and education after Retirement.
)A
6. What is the concept of Reverse Mortgage? Discuss its role and significance.
7. How do you explain the concept of Liability Management?
8. What is the importance of effective Tax Planning?
Learning Activities
(c
1. Explain ITR- 5 Form in detail.

2. Which is the best Retirement scheme and why?

Notes
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1. a 2. b
3. a 4. c
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5. d 6. b
7. d 8. c
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9. d 10. c
11. c 12. a
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13. b 14. a
15. b 16. d
17. a 18. c
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19. b 20. b
Further Readings and Bibliography
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1. The New Rules of Retirement: Strategies for a Secure Future by Robert C.
Carlson
2. Retirement Income Planning: The Baby-Boomers 2022 Guide to Maximise
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Your Income and Make it Last by Mark J. Orr
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3. Financial Planning: A Ready Reckoner by Madhu Sinha
4. Asset and Liability Management Handbook by Gautam Mitra (Editor), Katharina
Schwaiger (Editor)
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Module - V: Recent Trends and Developments in

Notes
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Personal Financial Planning
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● Recent Developments in Financial Sector - Overview
● Disruptive Trends in Personal Financial Planning - Overview
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● Use of Information Technology in Personal Financial Planning
● Concept of Re-Wired Investor
● Science vs. Human-Based Advice
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● Analytics and Big Data
● Holistic and Goals-Based Advice
● Democratisation of Investment Solutions
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● New Investment Environment
Introduction r
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A segment of the economy known as the financial sector is made up of businesses
and institutions that offer financial services to wholesale and retail clients. This industry
group includes a wide range of businesses, such as banks, investment organisations,
insurance providers, and real estate companies.
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Personal financial planning is a methodical process whereby a person makes the

most of their current financial resources by properly managing their money in order
to best meet their financial goals and objectives. Join me as I take you on a brief but
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fascinating journey to discover the significance of personal financial planning.
The goal of financial sector growth is to reduce system “costs” that are incurred.
Financial contracts, markets, and intermediaries came into being as a result of this
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process of lowering the expenses of learning about something, carrying out a contract,
and conducting a transaction.

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)A
(c
Fig: Financial Planning

Having a financial plan is crucial because it enables us to achieve our objectives.

Notes
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Every person must be aware of the necessity of managing their finances. To further
understand why, let’s look at an example.
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Every person puts forth a lot of effort to acquire money to save for their family’s
future needs, yet simply holding it is insufficient. The secret to guaranteeing one’s
financial future is to invest any money that has been saved in sensible and viable
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investment possibilities. Depending on their income, expenses, and risk tolerance,
various people have varying needs.
● It is a detailed strategy that looks far into the future.
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● It is accessible to anyone, not just wealthy people.
● You are protected from life’s unexpected events with a financial plan.
● Your income, savings, investments, expenses, debt, and insurance are all included.
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● It aids you in eliminating debt and saving money for a down payment, an emergency
fund, and retirement.
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Steps in Personal Financial Planning
1. Identify the objectives of your own financial planning
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It’s frequently the most difficult to start your own financial plan. The big questions,
such as where you see yourself in five, ten, or thirty years, are part of the process.
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You’re prompted to reflect on your personal values. Thinking about the kind of life
you want to lead in the future while avoiding getting caught up in the details is one
of the greatest approaches to these difficult concerns.
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2. Prioritise your goals

Now that you have an idea of the kind of life you’d like to build-up to over the next
thirty years, it’s important to prioritise your savings goals to match the different stages
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of your life. Taking the example of saving for a future with a mortgage, children, and
retirement, your priorities may look like this:
◌◌ Save for a downpayment on a home
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◌◌ Save for supporting your children throughout their lives

◌◌ Save for retirement
It’s better to start saving as soon as you can because early retirement involves
substantial financial planning. In this situation, saving for an early retirement starts
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the moment you are debt-free. However, you can start saving for your global vacation
that you’ll take pleasure in in retirement once you’ve accumulated a sizable sum in
your pension fund and are still making monthly contributions to it.
)A
3. Set up a budget
Once you know where you’re going, it’s critical to carefully assess your existing
financial status. In order to determine the requirement of your fixed costs, personal
financial planning requires you to develop a budget based on all of your incomings
and outgoings. How to make a budget is as follows:
(c
◌◌ Record all of your earnings and outgoings for a 30-day period.

◌◌ All of your costs should be divided into variable and fixed costs. Your rent,
Notes
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auto insurance, and energy and gas bills are examples of fixed costs. Your
flexible expenses, or variable costs, include money spent on groceries, nights
out, and visits to the hair salon.
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◌◌ Consider your variable costs and look for places where you might save
money. Use a budgeting tool if you want to make this process simpler.
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◌◌ Set aside a portion of your variable expenses that you could use to contribute
to a savings account each month.
◌◌ Every month, review your budget and make any required adjustments. The
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amount you can afford to save each month will inevitably fluctuate. Accept
that these ups and downs are all a part of the personal financial planning
process rather than feeling discouraged because you briefly veered from your
budgeting goals.
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Importance of Personal Financial Planning
1. Knowing your financial objectives helps you direct your investments toward achieving
them.
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2. By concentrating your assets, you may make sure that you make profitable
investments at the right time. It also guarantees that your wealth is protected.
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You can be confident you’re on pace to reach your financial objectives by building
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wealth.
4. Being financially secure means you are ready to deal with life’s expected and
unforeseen ups and downs, such as a sudden illness, retirement, etc.
5. Last but not least, sound financial planning makes sure that your investments are
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inflation-proof.
5.1.2 Recent Developments in Financial Sector - Overview

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Fig: Recent Developments in Financial Sector
Financial stability, employment creation, and poverty reduction are all facilitated by
resilient, transparent, and efficiently operating capital markets. WBG collaborates with
(c
governments and the corporate sector to improve financial stability and develop nations’
crisis management capabilities.

To increase the liquidity, several actions can be taken, such as operating in short-
Notes
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term money market products. The Reserve Bank of India, Public Financial Institutions,
and numerous other financial institutions started the operations. The government made
significant changes to the money market in the beginning of the 1990s, as follows:
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◌◌ Deregulation of Interest Rates.
◌◌ Liquidity Modification Facility
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◌◌ Electronic Transactions involving Money Market Mutual Funds (MMMFs)
◌◌ Creation of the CCIL Development and Promotion of New Market Instruments,
including MMMFs, Commercial Papers, and Certificates of Deposit.
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Reforms were required because there was too much micro regulation and
structure, which hindered financial innovation and raised transactional and operational
expenses. The financial system had an excessive amount of prudential regulation.
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The effectiveness of the capital markets and the financial system was decreased
by the underdeveloped debt and money markets, as well as by outdated institutional
and technological systems. In order to improve the efficiency and efficacy of the various
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components of the financial sector, the Government of India was forced to implement
the financial system reformation process.
Creating productive, efficient, and profitable financial companies was one of the
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primary changes the Indian government brought to the financial industry.
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◌◌ giving financial institutions operational and functional freedom,
◌◌ Developing the banking industry in accordance with global norms
◌◌ allowing controlled foreign direct investment in the private sector,
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◌◌ promoting financial stability in the midst of the national and global crisis,
◌◌ Interest rate market determination helps the price discovery process, which
facilitates effective resource allocation.
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Consumers generally search for companies that offer personal finance services,
such as financial planners, when selecting a bank or other financial institution.
Customers are searching for banks that enable them to remotely manage their
accounts and take charge of their own financial health via online platforms and mobile
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apps as money management activities progressively move online.
5.1.3 Disruptive Trends in Personal Financial Planning - Overview

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The ability of advisers to produce exceptional investment performance for their

clients is becoming more difficult because of a complex investment environment that
is marked by rising levels of uncertainty and escalating costs of risk to investors and
WM firms alike. Changes in the demographics brought on by the ageing of advisors
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and the impending wealth transfer from baby boomers to their children will strain many
long-standing client/advisor relationships and offer opportunities for new businesses to
overtake old ones in market share gains. The extent of disruption in the WM industry is
finally further compounded by rising regulatory requirements, novel business models,
and altering competitive dynamics.
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1. A Re-Wired Investor
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Rewired investors are members of a new generation with modern ways of thinking,
expectations, and standards for investing. Baby boomers, Generation X, and
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Generation Y make up this new generation of investors. Investors with rewired
brains view advice differently from earlier generations.
These investors anticipate a distinct degree of communication from their advisors.
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Compared to earlier investor generations, they are less trusting of authority. Rewired
investors are here to stay and will probably have an impact on other investment
classes as well.
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2. Human Advice Vs Science
Technology has a great deal of potential to significantly alter the nature and delivery
of financial advice. In recent years, as technology has impacted every industry,
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many wealth managers have made “wealth advisory” a core component of their
offerings. Such businesses use sophisticated algorithms to use client data.
Offering individualised financial strategies, services, and asset allocation are these
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sophisticated algorithms. The different investing tools are made available to the
consumers after the models and algorithms have been developed and evaluated.
These technologies function with the least amount of human involvement,
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transitioning from human-based advising to model-based, scientific counsel.
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However, a lot of experts think that neither science-based guidance nor robo-
consulting will totally replace the need for human interaction in financial advisory.
3. Big Data Analytics
Data about consumers is being collected in exponentially greater amounts. Big data
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is transforming a wide range of sectors as a result. The top wealth management

companies are putting a lot of money into creating cutting-edge analytics and data
management technologies.
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For the purpose of providing important business insights, the majority of wealth
management companies continue to use MIS and reporting tools. The wealth
manager’s insights revolve around client categories, products and how widely
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they are used, and the efficacy of development and training initiatives. The wealth
management sector is probably going to start creating its own algorithms soon to
support the clients’ real-time investment choices.
4. Goal-Based, Holistic Advisory Services
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Financial advisors have traditionally engaged in on-the-ground rivalry with one

another, but that has suddenly altered. Traditionally, financial advisors concentrated
on giving investment advice on matters such as stock selection, mutual fund
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allocation, and portfolio allocation. Wealth managers have had trouble persuading
clients that they can provide greater returns up until this point.
The current wealth management trends have shown, however, that advisory
services now are more individualised. Since there are a few financial modelling
tools and programmes, it can be challenging for wealth management businesses
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to demonstrate their superiority. Investors of today think that their wealth managers
offer comprehensive, goal-based advising services.

Additionally, they want the success of the investments to be judged on the basis of
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meeting the objectives of the clients by a particular date rather than just surpassing
market benchmarks. The transition from traditional consulting to goal-based, holistic
advisory is costing wealth management firms a significant amount, as is the training
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of their staff in this area.
5. Democratised Investment Solutions
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These days, retail investors want to have access to the same high return assets that
richer investors favour. It doesn’t feel right to the new-age investors to be treated
as inferior investors. Retail investors additionally anticipate having the same level of
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access to assets as wealthy investors.
Certain wealth management companies give regular investors access to services
including sophisticated and institutionalised trading and investing methods, as well
as automated trading and investment strategies created by qualified hedge fund
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managers.
The option to diversify portfolios into exotic asset classes is something that certain
wealth management companies are providing to investors. Wealth management
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innovation is now more focused on the democratisation of investment options.
5.1.3 Use of Information Technology in Personal Financial Planning

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Fig: Use of Information Technology in Personal Financial Planning

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When the “robo-advisor” appeared to be on the rise and posing a danger to the
financial services industry a few years ago, there was a lot of doubt and discussion in
the air. At the time, reports regarding robo-advisors gained popularity, leaving advisors
unsure of the function and future of human advisors. After a few years, this perceived
threat has transformed into a huge opportunity to better serve our industry and clients.
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I think technology will revolutionise financial planning firms’ ability to better serve
their clients in the following areas:
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1. Always on
The beauty of technology is that it is “always on,” and access to investment
information is simple, forthcoming, handy, and available 24/7/365. Thanks to
technology, the days of having to wait literally days to access statements or basic
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information are over.

2. Seamless
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The use of technology enables more relevant and involved client-advisor interactions.
With human advisors present to guarantee that all investment consequences are
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appropriately presented to the client, technology enables a variety of investment
outcome-based scenarios to be rapidly constructed. All of this may take place in
a single, seamless client session, keeping everyone involved and focused on the
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successful client outcomes that are the ultimate purpose of financial counselling.
3. Simplicity
Investing can occasionally be difficult and challenging. With the use of technology, it is
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possible to quantify and simplify investment results in ways that are understandable
to the common person. Do clients actually understand the significance of phrases
like PE ratios, Sharpe ratios, and volatility, or would they rather know how their
money is performing and where they stand with their investments?
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4. Best of both
Accuracy, speed, and efficiency that come with technology all contribute to better
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customer results and experiences. Although equally significant, the human touch is
insufficient on its own. These days, the profession can give a client the best of both
worlds in a single client engagement.
5. Cost transparency r
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Even though costs are one of the main factors influencing investment outcomes,
relatively few consumers are able to calculate their investment’s Effective Annual
Cost (EAC), which includes platform fees, asset manager fees, and adviser fees.
Technology can tie everything together and provide you with immediate knowledge
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of your whole investment charge structure.

6. Administration and compliance relief
Since the financial services sector is heavily regulated, there can occasionally be
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some friction when it comes to the adoption of financial products. Anecdotal data
reveals that the paperwork and administrative requirements to onboard clients play
a significant role in the reason why approximately 56% of paid adults, according to
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Finscope’s 2016 research, do not have a retirement savings vehicle.

With the help of technology, you can comply with the Financial Intelligence Center
Act (FICA) and link to everything from a tax-free savings account to a retirement
annuity or endowment product via your smartphone or computer. This decreases
the entrance barriers for beginning to invest.
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7. Outcome tracking
To try to achieve a certain investing goal should be the driving force behind creating
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a financial strategy.
With the use of technology, clients and advisors can periodically assess their
progress toward attaining their specific investment goals. When their investments
stray, they will be able to act right away to put them back on track.
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With the correct technology and tools, what was formerly answered by a complex
financial spreadsheet can now be monitored daily.

8. Time
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Time is undoubtedly a limited resource in today’s demanding world. Technology
allows both clients and advisors to reclaim their time. Automation enhances the entire
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investment process, including the creation of investment plans, records of guidance,
and annual reviews, as well as administrative FICA, forms, and compliance. saving
time for everyone.
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Since financial planners have long used technology in their firms, automated
guidance models and products are no longer a danger to their operations but rather
a business enabler.
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5.1.4 Concept of Re-Wired Investor
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Fig: Re- Wired Investor
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When we talk about the “Re-wired Investor,” we’re referring to a new generation of
investors who have different standards, thought patterns, and expectations. Gen X and
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Gen Y2 investors are part of this new generation of investors, along with baby boomers
who have been inspired by their younger counterparts.
Compared to past generations, the Re-wired investor views advice differently

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and anticipates interacting with her advisors in a different way. Nine new “mentalities,”
with six possible ramifications for WM businesses, have been identified by us. For
instance, investors now prefer to be viewed as distinct people (“Just me”) with particular
objectives and interests rather than as members of a sector. They desire guidance that
is specific to their individual situation.
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They also want to maintain control over their financial situations, comprehend the
advice they are given, and make the crucial choices on their own. They are hesitant to
spend money on luxuries, and they feel more at ease doing their own research.
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Compared to earlier investor generations, the Re-wired Investor is less trusting

of authority. She respects her classmates’ knowledge. She would therefore probably
seek advise from a variety of sources at once, often beginning with her friends and
coworkers before moving on to experts and financial consultants. She expects to be
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able to access advice anywhere and at any time, through multiple channels and
devices as part of a cohesive, rich digital experience. Her expectations are shaped

by her interactions with non-financial digital firms (e.g., Google, Facebook, Amazon),
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smartphones, and other digital devices.
Risk is now seen differently by The Rewired Investor; she now sees risk as
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downside rather than fluctuation. As a result, advisors have been forced to place
greater emphasis on capital markets and hedging techniques that aim to safeguard
against losses than on conventional portfolio allocations that aim to reduce risk by
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diversification.
The Rewired Investing is most likely here to stay, and she will most likely become
more influential over the rest of the investor class. In order to “win the battle” for the Re-
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wired Investor—the investor of the future—WM firms and their advisers should modify
their product offerings and service delivery paradigms.
5.1.5 Science vs. Human-Based Advice
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Fig: Science vs. Human-Based Advice

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Robo-advisers (automated investing platforms that manage your money using

an algorithm) are designed to provide you with the advice you need to increase your
wealth without any of the drawbacks associated with hiring a real person to help you,
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such as the costs associated with working one-on-one with an expert.
A robo-adviser can make a lot of sense if you’re new to the market, don’t have
much money to invest, and want to join a systematic, passive investment plan that can
help you build wealth over time.
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Typically, they are less expensive to utilise than a personal advisor. Lower entrance
requirements (such as low or no minimums needed to open an account) make it simpler
to get going sooner. That’s a significant benefit when the huge advantage of investment
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is concerned.
Much like it has other businesses like tax preparation, taxi booking, and lodgings, to
name a few, technology is poised to significantly alter the nature and delivery of financial
advice. Numerous “robo advisors” have surfaced during the previous five years.
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These businesses use sophisticated algorithms to create personalised financial

plans and asset allocations using data from client surveys. They also assist investors

in locating pertinent information among the ever-expanding pool of studies, interviews,

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and market commentary. Some companies have also developed tools and algorithms
that produce real-time trade and investment suggestions based on the background and
preferences of specific investors.
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The transition from human-based, one-on-one advice to scientific, model-driven
guidance can be highlighted by making investing and trading instruments available to
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consumers with little to no human participation once the models and algorithms have
been developed and evaluated.
Robo advisers are becoming more and more common and have found momentum
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in the market, but there is still a lot of room for expansion. The ability of the current
generation of robo advisers to produce a significant bottom line and earn a profit for the
Venture Capital companies that support many of them has yet to be demonstrated.
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But robo advisors have the potential to seriously disrupt the business. For
starters, their firms are founded on a sound premise: some types of advice, particularly
investment advice like asset allocation or fund/stock choosing, may be produced and
provided efficiently using technology. The Re-wired Investor of the future, whom we
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previously described, is particularly drawn to this strategy since they are tech-savvy
and desire more control over their financial lives. Although robo advisers have not yet
had the distribution and investor access to grow quickly, this may be about to change:
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Current incumbent WM businesses with substantial financial resources and broad
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distribution skills are either building internal capabilities or collaborating with some of
the top robo advisers. Established and well-funded businesses with access to huge
investor pools could accelerate the adoption of new types of science-based advice and
set new standards for the rest of the industry.
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Benefits of Robo Advice

● A robo-adviser can make a lot of sense if you’re new to the market, don’t have much
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money to invest, and want to join a systematic, passive investment plan that can
help you build wealth over time.
● Typically, they are less expensive to utilise than a personal advisor. Lower entrance
requirements (such as low or no minimums needed to open an account) make it
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simpler to get going sooner. When it comes to investment, when time is of the
essence, that is a tremendous advantage.
● Robo-advisers also speed up the process of opening an investing account since
they use algorithms to decide what to do rather than consulting a human adviser on
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the best course of action.

● This, in principle, takes away all room for human error. After all, algorithms are
designed to be impersonal, objective, and unaffected by anything outside their
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computations.
● This sounds terrific when it comes to your investments, and it may be if you never
have complex queries that are challenging to quantify in a formula or have no need
to actually speak with someone who can assist you comprehend your assets and
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the best financial decisions to make.

● Negative aspects of robot advisor

● The fact is, we are all human. We make emotional and irrational decisions (even
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when an investing robot is telling us what the “right” thing is to do). A difficulty may
arise if there is no other person around to guide us through difficult concepts or
dissuade us from making snap judgments.
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● If you’re putting off investing or are simply unsure of what to do, robo-advisers are a
wonderful place to start.
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● It might not make sense to stick with this method in the long run, though, as your
portfolio expands, your time horizon for your greatest goals (such retirement or
financial freedom) shortens, and your financial life becomes more complicated.
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● The reason you are investing cannot be discussed in-person with a robo-adviser.
Because a robo cannot understand your goals, values, or dreams, it is impossible
for it to offer you advice or coaching on what to do in crucial situations where you
must make decisions that are far more difficult than “what should my asset allocation
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be?” A robot cannot understand your goals, values, or dreams. As a result, it is
impossible for it to offer you a plan, guidance, or coaching.
● When you want to invest but lack investment skills or know where to begin, robo-
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advisers are wonderful tools to use. Simply starting something is more crucial than
picking the best solution right away because time is your most valuable resource to
use.
●
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It might be time to think about working with a human adviser, financial planner, and
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fiduciary who can make sure you stay on the right track toward how you want your
life to look both now and in the future as your money grows and your life becomes
more complex and nuanced.
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5.1.6 Analytics and Big Data

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Fig: Analytics and Big Data
Big data analytics is the frequently challenging process of poring over large
amounts of data to find information that might assist businesses in making quick,
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educated decisions about their operations, such as hidden patterns, correlations,

market trends, and client preferences.

While the majority of WM companies currently use fairly basic analytics based
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on MIS and reporting systems to deliver key business insights about client segments,
advisor books, product penetration, and training programme effectiveness, we
anticipate seeing companies develop more descriptive and predictive analytics that
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combine internal and external, structured and unstructured data to create more
comprehensive and insightful client profiles. Businesses will be able to evaluate
existing or possible new clients’ tendency to buy specific products and services, as
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well as their lifetime value, investment style, and risk tolerance thanks to this improved
understanding. The WM sector will probably eventually also produce its own brand of
real-time algorithmic analytics to support investment choices.
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Four different categories of analytical skills
1. Algorithmic capabilities: Tracking activity (often in digital environments) and

adjusting your company’s responses in real time
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2. Predictive capabilities: Establishing data driven guidance for decisions in the
face of uncertainty
3. Descriptive capabilities: Providing a better understanding of business impact
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and customer response
4. Capabilities for reporting and MIS: Monitoring regular financial and operational
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Advanced analytics will have an impact on most WM key processes.
1. Business Performance Management: a) Monitor business outcomes and important

factors (client segments, advisor books, product penetration, etc.); b) Disclose and
monitor advisors’ inclination to use different tools and approaches.
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2. Client Acquisition: a) Use internal and external data (social media, TP databases) to
construct in-depth prospect profiles b) Create client leads and map relationships.
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3. Client Retention: a) Use channel and social data to assess customer sentiment and
risk in real time (instead of surveys); b) Use external/internal data to understand
customer interests, relationships, and personality to build the optimal client/advisor
fit and boost connectivity and stickiness.
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4. Client Sales: a) Use external data sources to create Net Worth and Share of Wallet
profiles for current clients b) Calculate the lifetime value of each client c) Measure the
propensity of each client to purchase different funds or types of advice d) Correlate
transaction and channel data with market events to determine the client’s true risk
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tolerance
5. Client Recommendations: a) Tailor portfolio allocations using data from client
surveys and other sources; b) Rebalance portfolios in real time and produce trading
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and investment ideas depending on client preferences and market occurrences. c)

Use cognitive computing to provide Q&A functionality and offer person-to-machine
advice.
6. Supervision: a) To identify appropriateness issues, compare personality and
investment profiles with trading and investment activity and client behaviours.
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Analytics, from descriptive to predictive, are essential for retaining customers and
expanding a firm. We provide the information management solutions you require

to take advantage of your data, which is your most precious business asset, in
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order to gain consumer insight, safeguard your business, and create new revenue
prospects.
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7. Sort and evaluate all the data: a) Allow your company to handle and analyse all
of your data with the efficiency and profitability you require, free from underlying
infrastructure, forever.
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8. Proactive business protection: a) To foresee, identify, and mitigate security issues,
gain visibility into users, networks, data, and applications.
9. Meet business SLAs and expectations for near-real-time performance : a) Running
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queries 50x–1,000x faster than older data warehouse solutions allows you to gain
insights into your data in almost real time.
10. Data may be stored and analysed without extra movement or expense: a) To store
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and backup your cooler business data, pick HDFS and other cloud object storage
while utilising the same advanced analytics tools you use for your hottest business
data.
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11. High-quality machine learning predictions for business: a)Utilise efficient MPP
distributed algorithms via SQL to perform all data preparation and advanced model
generation on huge datasets with minimal data movement.
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12. The most recent innovations combine preferred tools: a)Be assured that not only
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are your investments safe, but you can always incorporate new technologies.
We are committed to integrating open source into our designs and have an open
architecture.
13. Locate and address root causes more quickly: a) Utilising predictive analytics, assist
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IT in finding insights buried in system silos to discover failure root causes more
quickly and enhance operational performance.
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5.1.7 Holistic and Goals-Based Advice

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Fig: Holistic and Goals-Based Advice
The solutions to difficulties people face in the actual world and the solutions to
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their queries are provided by holistic advice. Results include borrowing, protection and
insurance, and investments and pensions (the three major financial product families).

Goals-based advice consists of offering recommendations to the client regarding

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the tactics, choices, behaviours, and efforts; tracking progress and making adjustments
as needed to keep on track so that the client will have a greater chance of achieving
their specific predefined SMART goal.
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An all-encompassing goals-based approach develops a unique strategy to meet
your goals by taking into account assets, markets, spending, liabilities, time horizons,
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and income requirements. Strategies that are based on goals include much more
than just an investment strategy. Additionally, they might increase your chances of
succeeding by being more comprehensive and integrated.
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The foundation for advisor competition has changed: Financial advisers used to
concentrate on offering customers investment advice (such as portfolio allocation, stock
selection, and mutual fund selection) and try to persuade them that they could provide
them with greater investment results.
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However, with most WM firms, including the smaller RIAs, having access to
essentially the same products, tools, and models, investment advice has now largely
been commoditized, at least for mass market or emerging wealthy clients. Additionally,
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research has shown that advisors typically fail to produce returns for their customers
that are higher than the market average and that stock pickers typically underperform
market indices over the long term. As a result, it might be challenging for the majority of
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financial advisors to demonstrate how their services are unique based on their expertise
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in investing.
The need for assistance has increased rather than decreased as consumers’
lives have become more complicated and the investing environment has grown more
uncertain. Consumers need guidance on how to fund these multiple goals over time,
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how to make trade-offs between them, how to use the full strength of their personal
balance sheet, and how to manage to the right mix of assets and liabilities over time
as they try to achieve multiple goals, such as maintaining a certain lifestyle, purchasing
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a second home, paying for children’s education, retiring with confidence and ease,
funding rising healthcare costs of ageing parents, etc.
To satisfy investor requirements, WM firms and their advisers should switch to

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comprehensive, goal-based advice, and instead of surpassing market benchmarks,

measure performance by accomplishing clients’ goals within set timelines. Along with
avoiding the commoditization of financial advice, this is a strategy to increase the
breadth of assistance that advisers offer, from wealth management to investing.
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The importance of life circumstances in comprehensive financial planning
People generally consider the costs associated with accomplishing their financial
goals—such as purchasing a home, covering a child’s education, or setting up money
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for retirement—rather than how doing so would improve their life. Prior to choosing
an investment, people might get better results if they revisit the planning process,
evaluate their current life challenges, and consider their future ambitions. Perhaps
more importantly, people may find greater significance in their financial decisions if life
circumstances are at the forefront of decision-making.
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Indeed, how people handle their possessions is significantly influenced by their

values. This is one way a comprehensive approach to “financial life planning” enables

people to more accurately analyse their objectives and needs, set important priorities,
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and steer clear of bad investments.
Financial objectives will alter as life circumstances and priorities change, which is
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inevitable. Only those who approach planning holistically can quickly determine which
aspects of their financial lives are currently going well and which may be impeding their
ability to maintain financial security.
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Goals-based wealth management’s main element: collaborating with one advisor
It takes both art and science to create a strategy that takes into account your
particular position and links your aspirations for your life to your financial objectives.
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To reach this level of planning, you must rely on the advice of a single knowledgeable
advisor—someone who will take the time to get to know you and your situation and who
will put together the right mix of vehicles, strategies, and, when necessary, additional
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planning experts—to help you achieve your goals, whatever they may be.
The Advantages Of Goal-based Guidance
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The following are some of the key advantages of this strategy:
● Clients have a clearer sense of purpose; Clients may concentrate on attaining their
objectives rather than being distracted by market volatility; improved communication
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between the customer and advisor that digs deeper into the true motivations of the
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client;
● A sense of accomplishment when the client and the adviser meet and can cross
goals off the list as they are achieved; a financial plan that is focused on the client’s
goals and contains techniques that are suited for their priorities and time frames.
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Goal-based advice is a process that never ends. The goals of clients will evolve
over time as new objectives are introduced and current objectives are modified or
abandoned as conditions change.
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You may create the groundwork for a deeper long-term relationship with clients and
an evaluation process that centres on what matters most to them by developing a goals
discovery approach that is based on the psychology of deeper engagement.
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Six Guidelines to help Clients Develop More Intelligent Goals

1. Assisting customers in identifying and expressing their beliefs and objectives: The
emotional connection to the client’s goals will be strengthened through a discussion
of their values, which will also open up possibilities for goal expansion. A discussion
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on life insurance and estate planning might result in goals being made to attain
achievements in these areas if the client’s family welfare is one of their fundamental
values.
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2. Look into the client’s resources: Assure clients that they have the best possible
chance of achieving their stated objectives. This will entail making sure they have
enough cash and other resources.
3. Check to see if there are any alternate strategies: If the value or aim doesn’t feel
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right or there aren’t enough resources, think about trying another strategy. You
might be able to think of something else than the stated objective. Be mindful that

some clients can mistakenly believe that adopting a different strategy entails giving
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up rather than offering them a different route to attain their objectives.
4. Put the goals in writing: According to research, the likelihood of achievement
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increases significantly if clients commit to their goals in writing and frequently review
them.
5. Encourage client accountability: Richard H. Thaler and Cass R. Sunstein recommend
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using techniques like nudges in their book, Nudge and Behavioural Coaching, to
assist clients in overcoming their resistance to implementing goal recommendations.
These operate well with people who acknowledge the significance and necessity of
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the action and who might require reminders to ensure that duties are completed.
Use strategies that involve smart heuristics (mental shortcuts) for clients who
are unsure of how to determine whether a suggestion or action is crucial. These
strategies are less about getting things done and more about guiding clients toward
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goal attainment by engaging them in more meaningful conversations.
6. Celebrate the client’s accomplishments: When clients see their efforts recognised,
they are more likely to stick to the plan. In review meetings, give concrete feedback
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to make sure clients are following the plan and keeping on track.
5.1.8 Democratisation of Investment Solutions

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Fig: Democratisation of Investment Solutions
The process of transferring authority over the finance industry from financial
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institutions to the general people is known as “democratising finance.” Democratisation

can occur on a variety of levels, including opening up to high-net-worth individuals
access to services and products that were previously solely available to institutional
investors and the mass affluent.
The democratisation of investments, which was largely fueled by technological

(c
innovation, also resulted from stricter investor protection rules. Many banks switched

from strictly product-focused recommendations to standardised guidance based on

Notes
e
various product packages as a result of increased product and charge transparency.
Additionally, many banks were forced to broaden their customer base and product
offerings in an effort to diversify their revenue sources away from commissions and
in
toward ongoing advising fees.
Retail banks and asset managers need to use technology and hybrid models
nl
to aggressively undercut traditional wealth management providers and provide
straightforward but alluring investment solutions across their existing client base in
order to capitalise on the sizable and expanding affluent and HNW segments. Clients
in markets with a dearth of well-established wealth management companies may find
O
these products particularly alluring. Asset managers will use direct channels to gain new
clients by utilising their better investment expertise.
In response to increasing demand for return and access to best-in-class investment
ty
solutions, which were formerly the exclusive domain of commercial or high net-worth
investors, a number of start-up businesses have joined the market in the last five years.
● By adopting automated trading methods created by hedge fund managers or
si
by mimicking the trading strategies of professional portfolio managers, several
companies give mass market investors access to sophisticated, institutional-like
trading strategies.
●
r
Some companies let investors diversify their portfolios by including unusual asset
ve
groups. For instance, lending platforms let investors lend money to specific borrowers
at a predetermined interest rate. Crowdfunding companies enable investors to
combine their equity investments. Both kinds of businesses essentially act as a hub
for connecting funders and those in need of money.
ni
● Last but not least, some companies give retail investors access to analytics directly,
enabling them to do their own empirical research and test their own theories, much
like institutional investors have long done.
U
Large, established WM companies have, in general, paid little attention to these

start-ups and the skills that they are aggressively developing thus far. The number of
start-ups devoted to that goal, however, is an indication that innovation is moving in
ity
the direction of democratising access to investment options. Because their clients will
probably want it, incumbents should follow.
Wealth management businesses will experience more competition as digitization

lowers entry barriers, leading to the commoditization of formerly differentiating
m
capabilities. Previously, it would have been prohibitively expensive to give this level of
customisation.
But because of technological advancements, wealth management companies will

)A
be able to build highly customised portfolios in a fraction of the time and money it takes
now. Advisory and discretionary goods will continue to be distinguished as in the past.
(c

5.1.9 New Investment Environment

Notes
e
in
nl
O
ty
Fig: New Investment Environment
si
Investors make such decisions in an environment where higher (lower) returns are
correlated with higher (lower) risk when they decide to invest in either stocks or bonds
r
or when they attempt to make an investment in a portfolio of assets in any market or
ve
across markets (i.e., international investing).
The term “Investment Environment” broadly refers to all types of investment

opportunities (i.e., diverse financial and real assets), investment vehicles or alternatives
in the market that are available to an investor, financial markets, investment process,
ni
market structure that enables purchasing and selling of investments, regulatory set up
that fosters an enabling environment to invest, and market intermediaries.
Investment environment refers to changes in the national and global economies

U
that have an effect (positive or negative) on asset prices or values of various asset
classes as well as associated risk.
The financial crisis and its aftermath have had a significant impact on investors and
ity
wealth managers in a number of important ways. Investors currently have to manage a

market with three lows and two highs:
1. Low interest rates compared to historical norms, which make it difficult for investors
to make money on their deposits and other short-term investments;
m
2. Low inflation rates for the foreseeable future (with deflationary risk), which has
compelled investors to reevaluate long-held beliefs about the appreciation of
financial and real assets;
)A
3. Global economic growth rates that are low or slowing down, which makes it harder
to locate profitable investments without taking on significant risk;
(c

4. High levels of financial leverage by individual investors and pressure to de-lever

Notes
e
personal balance sheets will force many to scale back their bets. 5. High levels of
volatility across financial markets has called into question long-held beliefs about
the wisdom of diversification, of long-only strategies, and market timing.
in
5. Investors now have far less sense of direction than they did previously. Widely
contrasting scenarios and predictions made by research analysts, market
nl
economists, and others, including recipients of the Nobel Prize in Economics, only
serve to further exacerbate the misunderstanding. They frequently simply believe
that long-term techniques will no longer be effective. For WM businesses and
advisors, this uncertain environment has numerous significant ramifications. For
O
illustration:
a) When conducting “What If” analyses, advisors will need to take into account
several, diverging market scenarios. This is crucial for gaining and keeping
ty
the trust of investors, but it calls for careful consideration and new levels of
modesty.
b) Firms will develop increasingly sophisticated research and modelling
si
capabilities to support scenario analyses. Bringing some traditionally
institutional offerings to regular investors may be necessary to achieve this
Advisors will need to be proactive in reaching out to clients during times of
r
volatility and proactively rebalance portfolios.
ve
Firms will also need to develop new product offerings for managing their
clients’ cash and other short-term assets and support their value in real terms.
e) Advisors will need to create investment strategies that would thrive in a
deflationary environment or, at the very least, would enable investors to
ni
quickly unlock long positions and switch to more defensive positions;

f) Companies will need to continue producing structured notes that allow
U
investors to place bets on macro trends and market indices while protecting
investors against downside;
g) Hedging and risk management will be at a premium with capital markets
capacity;
ity
There are seven elements of the investment environment that one should be aware
of:
1. Assets and investment vehicles: There are a wide range of current asset classes
m
available to investors, including stocks, corporate bonds, government bonds (such

as US Treasury Bills, which are typically very safe in terms of default risk), municipal
bonds, money market instruments (which are short-term, highly marketable, and
typically very low risk), derivatives, currencies, real estate, and commodities.
)A
Additionally, an investor has a variety of investment vehicles to pick from, including

mutual funds, hedge funds, and exchange traded funds (ETFs).
2. Financial markets are a place where buyers and sellers of assets (such stocks, bonds,
currencies, and derivatives) can transact with one another. The prices of various
(c
asset classes are decided by market forces, which is a prominent characteristic

of such marketplaces. Financial markets often feature open pricing, specific rules

governing trade, expenses, and fees, as well as a wide range of financial goods.
Notes
e
There are many different types of financial markets, including primary and secondary
stock markets, bond markets, money markets, cash or spot markets, derivatives
markets (options, futures, swap agreements, etc.), foreign exchange and interbank
in
markets, and over-the-counter (OTC) markets.
3. Market structure: The same term is used to describe the layout of the financial
nl
markets, which include the debt, equity, mortgage, foreign currency, and derivatives
markets. The stock market in the US is the one that is most frequently monitored,
but from the perspective of economic activity, the debt market is quite significant
since buyers and sellers are key factors in establishing interest rates.
O
4. Market intermediaries: These companies are the same as primary dealers, brokers,
financial consultants, stock exchanges, investment banks, commercial banks (banks
participate in the money and capital markets), insurance and pension companies,
ty
and investment banks.
5. Investment process: This describes the steps necessary to build an investment
portfolio based on determining an investor’s investment objectives and risk profile,
si
asset allocation policy, or how an investor’s investments are diversified among
different asset classes, which has a significant impact on a portfolio’s overall
performance, implementing an investment strategy, and rebalancing a portfolio (that
r
is consistent with an investor’s chosen or desired investment strategy).
ve
6. Regulation of the financial markets is a crucial component of the investment
environment. In nations like the US, the UK, and others, trading in the financial
markets is governed by a variety of laws to guarantee that investors and traders
have enough information to make informed investment-related decisions and to
ni
avoid fraudulent activity.

For instance, in the US, the Securities and Exchange Commission (SEC) and
the Commodity Futures Trading Commission are the two government entities
U
responsible for general regulatory control of financial markets. Exchanges also have
their own regulating bodies. The two most prominent instances of financial market
regulation are the regulation of the stock and corporate bond markets.
7. Economy: Changes in GDP, inflation, interest rates, the budget deficit, and monetary
ity
policy both domestically and globally have a significant impact on asset prices and
the volatility that results (prices of financial assets, particularly stock prices are often
very volatile).
Additionally, asset allocation is the most crucial choice in the field of asset
m
management and has a big impact on portfolio performance. Additionally, the

construction of numerous forward-looking macroeconomic scenarios and the
analysis of both the domestic and global economies form the key foundation for
)A
decisions on asset allocation and related investments.
Summary
●● A segment of the economy known as the financial sector is made up of businesses
and institutions that offer financial services to wholesale and retail clients.
(c
●● An economy is in good shape if its financial sector is strong.

●● Loans and mortgages account for a sizable amount of the financial sector’s
Notes
e
earnings, and an environment with low interest rates is ideal for it.
●● The sector is made up of a wide range of sectors, including banking, investing,
in
insurance, and real estate organisations.
●● Make some notes about your financial condition and goals before you decide on
your strategy.
nl
●● Value investing needs long-term commitment from investors as well as careful
stock selection and extensive due diligence.
●● Growth-oriented investors need to keep an eye on the leadership teams and
O
economic news.
●● Stocks in an uptrend are purchased by momentum investors, who afterwards may
decide to sell them for a loss.
ty
●● The process of making consistent market investments over time is known as
dollar-cost averaging.
●● Much like it has other businesses like tax preparation, taxi booking, and lodgings,
si
to name a few, technology is poised to significantly alter the nature and delivery of
financial advice.
●● r
Numerous “robo advisors” have surfaced during the previous five years.
ve
●● These businesses use sophisticated algorithms to create personalised financial
plans and asset allocations using data from client surveys.
●● They also assist investors in locating pertinent information among the ever-
expanding pool of studies, interviews, and market commentary.
ni
●● Some companies have also developed tools and algorithms that produce real-time
trade and investment suggestions based on the background and preferences of
specific investors.
U
●● Once the models and algorithms have been developed and evaluated, customers
can access investing and trading tools with limited human intervention,
emphasising the shift from human-based, person-to-person advice to science-
ity
based, model-driven advice.

●● While the majority of WM companies currently use fairly basic analytics based on
MIS and reporting systems to deliver key business insights about client segments,
advisor books, product penetration, and training programme effectiveness, we
m
anticipate seeing companies develop more descriptive and predictive analytics

that combine internal and external, structured and unstructured data to create
more comprehensive and insightful client profiles.
)A
●● Businesses will be able to evaluate existing or possible new clients’ tendency to

buy specific products and services, as well as their lifetime value, investment style,
and risk tolerance thanks to this improved understanding.
●● Financial advisers used to concentrate on offering customers investment advice
(such as portfolio allocation, stock selection, and mutual fund selection) and try to
(c
persuade them that they could provide them with greater investment results.

●● However, with most WM firms, including the smaller RIAs, having access to
Notes
e
essentially the same products, tools, and models, investment advice has now
largely been commoditized, at least for mass market or emerging wealthy clients.
in
●● Additionally, research has shown that advisors typically fail to produce returns for
their customers that are higher than the market average and that stock pickers
typically underperform market indices over the long term.
nl
●● As a result, it might be challenging for the majority of financial advisors to
demonstrate how their services are unique based on their expertise in investing.
Glossary
O
● Investment Strategy: A set of guiding principles is referred to as an investing strategy.
Depending on your risk tolerance, investing style, long-term financial goals, and
availability to funds, there are various investing strategies you can use.
ty
● Financial Sector: A segment of the economy known as the financial sector is made
up of businesses and institutions that offer financial services to wholesale and retail
clients. This industry group includes a wide range of businesses, such as banks,
si
investment organisations, insurance providers, and real estate companies.
● The Re-wired investor: A new generation of investors has distinct perspectives on
guidance that bring new mindsets and expectations to the WM sector, affecting how
r
older investors use wealth services and make purchases.
ve
● Science vs. Human-Based Advice: With the emergence of Robo Advisors, novel
combinations of advice models based on science and people have evolved.
● Analytics and Big Data: Big data and advanced analytics are poised to disrupt the
ni
WM sector by introducing new strategies for interacting with clients, managing client
relationships, and controlling risks.
● Holistic, Goals-based Advice: Investors value comprehensive guidance on how to
U
accomplish numerous, frequently competing goals using a variety of investing and

finance strategies.
● Democratisation of Investment Solutions: The same asset classes and investment
methods as HNW or institutional investors are demanded by retail investors.
ity

1. The first financial reforms in India, when several economic sectors were made
accessible to foreign financial institutions, occurred in the year ________.
m
a. 1995
b. 1992
)A
c. 1998
d. 1991
2. _________ are members of a new generation with modern ways of thinking,
expectations, and standards for investing.
(c
a. Share Market Investors

b. Risk Averse Investors

Notes
e
c. Secondary Market Investors
d. Re-Wired Investors
in
3. Customers may easily perform online transactions thanks to the influence of
_________ on financial services, which improves confidence in the financial sector,
enables the growth of information technology, and initially results in a faster and
nl
more effective service.
a. Information Technology
O
b. Tax Planning
c. Retirement Planning
d. Risk Planning
ty
4. As part of the liberalisation process, the _________ has granted licences to private
sector banks.
a. State Bank of India
si
b. Reserve Bank of India
c. Oriental Bank of Commerce
d. World Bank
r
ve
5. The top wealth management companies are making significant investments in
developing cutting-edge _____________ management tools.
a. Science v/s Human
ni
b. Robo Advisor
c. Re-Wired Investor
U
d. Analytics and data

6. The __________ method develops a unique strategy to meet your goals by taking
into account assets, markets, costs and liabilities, time horizons, and income
requirements. Strategies that are based on goals include much more than just an
ity
investment strategy.
a. Holistic and Goals-Based Advice
b. Big Data Analytics
m
c. Human Advice Vs Science

d. None of the Above
)A
7. ________ has multiplied as more women and millennials enter the workforce.
a. Adoption of New Technology
b. Increased Longevity
c. Growth in Workforce Diversity
(c
d. Increase in the Value of Certain Stocks

8. ___________ are becoming increasingly important for managing unpredictable risk

Notes
e
and financing infrastructure like roads, power plants, schools, hospitals, and homes.
a. Primary Market
in
b. Capital Market
c. Secondary Market
nl
d. Tertiary Market
9. A small loan amount provided to low-income families or other organisations is
referred to as __________.
O
a. Cash Credit
b. Micro Credit
c. Rural Credit
ty
d. Simple Credit
10. _____________ efficiently distributes savings to the final consumers in an economy,
si
either for consumption or investment in real assets.
a. Economic system
b. Banking system
c. Financial system
r
ve
d. Market system
11. Financial instruments traded on centralised markets incur transaction expenses are
classified as ________.
ni
a. Flexible Costs
b. Low transaction Costs
U
c. High Transaction Costs

d. Constant Costs
12. ___________ is not an element that supports the viability of microcredits.
ity
a. Dynamic Incentives
b. Peer Monitoring
c. Regular Payment Schedules
m
d. Collaterals
13. The financial management role has grown _______________ and complex.
)A
a. More Demanding
b. Less Demanding
c. Outdated
d. Time Consuming
(c

14. When diversifying effectively, __________ can be avoided.

Notes
e
a. systematic risk
b. unsystematic risk
in
c. portfolio risk
d. total risk
nl
15. The capacity to quickly transform an asset without affecting its pricing is referred to
as _________.
a. Scalability
O
b. Liquidity
c. Marketability
ty
d. Minimal risk
16. ______________ is used to define cutting-edge technology that aims to enhance
and automate the provision of financial services.
si
a. Financial Technology
b. Marketing Technology
r
c. Information Technology
ve
17. ____________ includes all available investment opportunities as well as the market
setup that makes it possible to acquire and sell these investments.
ni
a. Economic Environment
b. Social Environment
c. External Environment
U
d. Investment Environment
18. ___________ refers to how the equities, debt, foreign currency, mortgage, and
derivatives markets are organised within the financial sector.
ity
a. Assets and Investment Vehicles

b. Market Structure
c. Financial Markets
m
d. Market Intermediaries
19. The foundation for greater investor pleasure and stellar ___________ is a
comprehensive wealth overview combined with goal-based investment.
)A
a. Financial Management
b. Marketing Management
c. Wealth Management
(c

20. The ideal plan for how to actually collect your money in the first place and other
Notes
e
aspects of wealth management and ________ are equally important.
a. Tax Management
in
b. Financial Management
c. Marketing Management
nl
d. Revenue Management
Exercise
O
1. What are the recent developments being made in the financial sector?
2. How use of Information Technology helps in Personal Financial Planning?
3. Explain the role of Disruptive Trends in Personal Financial Planning.
ty
4. How does the concept of Re-Wired Investor help in Personal Financial Planning?
5. What do you understand about the New Investment Environment?
si
6. Explain Narasimham Committee.
7. Discuss a traditional numbers-based approach.
8. How increased focus on the Customer helped Financial Planning trends in the year
of 2021? r
ve
Learning Activities
1. What do you prefer between a Re-wired Investor and Science vs. Human-Based
Advice?
ni
2. According to you which is the best Disruptive Trends in Personal Financial Planning?

U
1. d 2. c
3. a 4. b
5. d 6. a
ity
7. c 8. b
9. b 10. c
11. b 12. d
m
13. a 14. b
15. c 16. a
)A
17. d 18. b
19. c 20. a

(c
1. The Intelligent Investor Rev Ed.: The Definitive Book on Value Investing by
Benjamin Graham

2. The Million-Dollar Financial Advisor: Powerful Lessons and Proven Strategies

Notes
e
from Top Producers by David J. Mullen Jr
3. Financial Freedom with Financial Control: Guide for Busy Businessmen to
in
Increase Profit, Develop Strong Cash Flow Model and Automate Accounts with
Finance by Jagmohan Singh
4. Financial Sector of India by R.K Uppal
nl
5. Financial Intelligence: How to To Be Smart with Your Money and Your Life by
Kevin D. Peterson
O
ty
r si
ve
ni
U
ity
m
)A
(c

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Financial Planning

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Member Secretary : Ms. Rita Naskar

1.3.5 Post Office Instruments

1.3.8 Certificate of Deposits

Module - II: Basics of Taxation 82

2.1.2 Planning for Tax Considerations

2.1.4 Computation of Tax Implications Heads of Income Tax

2.1.7 Tax Planning

Module - III: Liability Planning and Investment Fundamentals 151

3.3.1 Basic Principles of Property Insurance

3.3.3 Automobile Insurance

3.4.1 Investment Planning in Securities Markets

Case Study on Investment

Module - IV: Tax Planning and Retirement Planning 192

4.1 Tax Planning

4.1.3 Tax Return Forms (with Example)

5.1.7 Holistic and Goals-Based Advice

5.1.9 New Investment Environment

Module - I: Introduction to Personal Financial Planning

● Concept of Personal Financial Planning

financial planning frequently covers a wide range of financial topics, including

Financial planning include assessing a client’s overall financial situation and

1.1 Personal Financial Planning

Amity Directorate of Distance & Online Education

The phrase “personal finance” refers to managing your finances as well as

●● Restraint—This is the last, most important big-picture company management skill

money than they bring in.

1.1.1 Concept of Personal Financial Planning

needs like overdrafts and mortgages.

How do I plan my own finances?

Amity Directorate of Distance & Online Education

Need of Personal Financial Planning

1. Budgeting or Cash Flow Management

budgeting for costs.

3. Making Investments More Efficient

enough research on financial items, many people frequently engage in haphazard

Amity Directorate of Distance & Online Education

8. Set SMART financial objectives

9. A Plan for Your Long-Term objectives

Scope of Personal Financial Planning

1. Personal Financial planning guarantees the availability of sufficient finances inside

likelihood of uncertainties for business. Personal Financial planning done properly

Amity Directorate of Distance & Online Education

3. Personal Financial planning helps businesses avoid unnecessary expenses by

It is impossible to emphasise the value of financial preparation, particularly in

variables that contribute to the same.

increase but sources of income decrease.

Making a financial plan can help you relax because

and downs, such as retirement and concealed illnesses.

A novel approach to personal finance planning

Amity Directorate of Distance & Online Education

extensive vacation, advanced career training, and financial independence

The Steps in the Personal Financial Planning Process

for your financial planning tasks.

Step 2: Create financial objectives

Step 3: Determine Additional Courses of Action

● Maintain your current path of action.

● Alter the current circumstance.

Amity Directorate of Distance & Online Education

● Notes: Try a different strategy.

Step 5: Put together and carry out a financial action plan

an insurance agent’s services to get home insurance.