Financial plan construction

Financial Plan Construction

Module 5

Module Overview

Introduction to Financial Planning


Financial planning process Component of financial plan Ethical and professional considerations Cash flow planning Personal use asset management Personal Financial Statement Analysis Financial Mathematics Economic environment and indicators

Forms of business ownership/ entity relationships

The Financial Planning process

Establishing and Defining the client- Planner relationship

Gathering Client Data & Goals

Analyzing and Evaluating Financial

Status

Developing and Presenting Financial

Planning Recommendations/

Alternatives

Implementing the Financial plan

recommendations

Monitoring the recommendations

Components of Financial Plan 1. Covering letter

2. Cover page

3. Summary of the plan

4. Client profile

5. Goals of the client

6. Financial statements

7. Assumptions

8. Risk Management & Insurance needs

9. Goal Funding

10. Retirement Planning

11. Tax Planning

12. Asset Allocation – Portfolio Rebalancing

13. Disclosures

14. Disclaimers

15. Risks

16. Cash Flow Projections

17. Recommendations

18. Action Plan

No misleading advertising: size, scope or areas of competence Promotional activities: no material false or misleading communications Representation: no misrepresentation of FPSB, India. Identify personal

opinions Custody of clients documents – extra care to be exercised

Ethical and professional considerations

INTEGRITY

OBJECTIVITY

Act in the interest of the client Limitation in the capacity to advise = disclose upfront Statement of compensation Conflict of interests to be disclosed

Code of ethics

Be informed of the developments in FP Offer advice only in areas of competence Representatives to be reasonably appointed

COMPETENCE

FAIRNESS

Compensation should be fair Identity of the company and representative should be distinctly known Provide clients or employers about outside affiliations Inform about revenue arrangements other than remuneration

Code of ethics

Do not reveal for own benefit –clients data, without his consent, except when allowed

Member, exposed to information about FPSB not to reveal the same To maintain same standards with employers too

CONFIDENTIALITY

PROFESSIONALISM

Show respect to other professionals Maintain professional indemnity insurance Not to misrepresent status of their membership Not to practice any other profession, unless qualified to do so

Code of ethics

Sufficient information to be collected Have access to research for clients needs Develop a proper strategy for the client Recommendations to be made in writing Implementation in a timely manner Changes in investments to be explained

DILIGENCE

COMPLIANCE

Comply with rules of FPSB, Govt. Co-operate with FPSB for any inquiries Comply with all post certification requirements

Maintain effective system of supervision of representative’s activities,

performance

Motives for holding cash Transaction motive: This is the motive of day-to-day routine transactions to

meet daily requirements. You need cash to buy groceries, meet travel daily expenses etc.

Precautionary motive: This is to take precaution against unforeseen events like natural calamities, riots, strike or any other emergencies.

Speculative motive: This is to take part in investment needs like investing in securities - shares, bonds, debentures etc when the right time arises.

Compensation motive: A minimum balance is needed to avail of bank accounts, credit cards, ATM cards, personal loans etc.

An efficient management of cash flows is aimed at generating surplus income bybudgeting or controlling the client’s income and expenditure.

Personal financial planning consists of three general activities:

Controlling day-to-day financial affairs

Choosing and following a course toward medium and long term financial goals Building a financial safety net to prevent financial disasters

Personal use asset management

Home Loan

Lease

Lease Financing

Lease financing enables the renting or leasing of assets rather than buying the assets.

Items like cars, consumer durables, computers or a house may be leased.

Generally leases are of two types: Operating Lease: A short-term lease. The possession of asset returns to

the owner or the lessor at the end of the lease term.

Finance Lease: Here the lessee has an option to buy the asset at the end of the lease tenure. Generally for a longer period.

Personal Financial Statement Analysis

Financial Ratio

Basic Liquidity Ratio = Liquid Assets/ Monthly expenses Expanded Liquidity Ratio = (Liquid Assets + Other Financial Assets)/

monthly Expenses

SOLVENCY RATIOS SOLVENCY RATIOS

LIQUIDITY RATIOS LIQUIDITY RATIOS

Liquid Asset Coverage Ratio = Liquid Assets/ Total Debt Solvency Ratio = Liquid + Other Financial Assets/ Total Debt Current Ratio = Liquid Assets/ Current Liabilities

NET WORTH RATIOS NET WORTH RATIOS

Net worth Growth Ratio = Net Increase in Net worth/ Net worth at the beginning of the year

Financial Ratios

Life Insurance Coverage Ratio = Net Worth + Death Benefits/ Salary

RISK RATIOS RISK RATIOS

TAX RATIOS TAX RATIOS

Effective Income tax ratio = Income tax/ total realized increases in net worth

INFLATION PROTECTION RATIOS INFLATION PROTECTION RATIOS

Inflation Hedge Ratio = Equity, personal and tangible assets / Net Worth

Financial Mathematics Time value of money

Calculation of annuities

Loan repayment schedule

Inflation adjusted interest rates

Rule of 72

Economic Environment and Indicators

Inflation

Monetary and fiscal policy

Key indicators: GDP, Business cycle

INFLATION/ DEFLATION A situation of rising prices.

The most popular measure of inflation in India is change in the Whole Price Index (WPI) over a period of time.

The WPI is an index measure of the wholesale prices of a selected basket of goods and services in the economy.

The WPI is expressed as a percentage with reference to some base year, according to a formula

WPI= (aggregate price for current year/aggregate price for the base year)* 100

An alternative measure is consumer price Index, which is concerned with the consumer market for goods and services. There is a considerable co-movement between these two indices with the CPI tending to follow the WPI with a lag.

Types of Inflation

Demand Pull InflationDemand Pull Inflation

Cost Push InflationCost Push Inflation

Administered PricesAdministered Prices

StagflationStagflation

Result of a steady increase in aggregate demand for goods and services when the economy is unable to adequately fill this demand.

Result of a steady increase in aggregate demand for goods and services when the economy is unable to adequately fill this demand.

Result of a higher cost factor of production being passed along to the consumer

in the form of higher prices.

Result of a higher cost factor of production being passed along to the consumer

in the form of higher prices.

Producers exerting a strong influence on the price of the product because

of a lack of competition.

Producers exerting a strong influence on the price of the product because

of a lack of competition.

Inability to solve the simultaneous problems of economic stagnation and inflation

through the use of monetary and fiscal policies. This occurs when high rates of inflation and high rates of unemployment happen

simultaneously.

Inability to solve the simultaneous problems of economic stagnation and inflation

through the use of monetary and fiscal policies. This occurs when high rates of inflation and high rates of unemployment happen

simultaneously.

Monetary and fiscal policy

Fiscal Policy: controls level of government spending and raises revenue through taxation.

Monetary Policy: controls through regulation of interest rates, the money supply and inflation in the domestic economy.

The Reserve Bank of India (RBI) controls and influences the economy by means of monetary and credit policy.

The Monetary and Credit Policy relate to the attempt to control the money supply and demand-led hence inflation in the economy.

Economic factors: GNP & GDP

Gross National Product (GNP)


Gross DomesticProduct (GDP)


This is the value of output of goods and services produced by Indian companies, regardless of whether

the production is inside or outside the India

This is the value of output of goods and services produced by Indian companies, regardless of whether

the production is inside or outside the India

The value of output of goods and services produced in the country, regardless of whether businesses are

owned and operated by Indians or foreigners.

The value of output of goods and services produced in the country, regardless of whether businesses are

owned and operated by Indians or foreigners.




Gross DomesticProduct (GDP)= - profits on

foreign owned businesses

+profits on

Indian owned businesses

outside India

GDPGDP is the measure of total value of final goods and services produced in the domestic economy each year. The following is often used

GDP= GDP= C + I + G +C + I + G + (X- M) (X- M)

C = personal consumption spending on goods and servicesC = personal consumption spending on goods and services

I = Private sector fixed capital expenditureI = Private sector fixed capital expenditure

G = Government expenditureG = Government expenditure

(X-M)= Net of export receipts (X) and import payments (M) (X-M)= Net of export receipts (X) and import payments (M)

The relationship highlights actual rupee expenditure for goods and services produced in the economy for measuring GDP.

This equation includes all key players involved in the economy – consumers / households, business (private sector) and government.

For living standards to rise in India, GDP must grow at a faster rate than the population. This way, there is greater quantity of goods and services per person.

BUSINESS CYCLES- Phases The recurrent periods of economic growth and recession are business

cycles. They represents a pattern of business expansion and contraction over a

number of years. The global integration of Indian economy has increased the importance of

business cycle for decision-making.

• Expansion/ upswing/ recovery: upturn

in business activity

• Peak/ Boom: over production and

buildup of excessive inventory

• Downswing/ recession: characterized

by a reduction in output and

investment

• Trough: recession bottoms and

production levels off

Forms of business ownership/ entity relationships

Sole Proprietorship Partnership Limited Liability Companies Trust Cooperative Societies

Forms of Business Ownership

Sole Proprietorship

Partnership Co-operative Societies

• Owned by an individual.

• The individual is in charge of all operations.

• The personal property is attached.

• Can be a disadvantage if the owner is unable to continue the business

General Partnership

• Owned by 2 or more partners

• Partners are equally and personally liable for debts.

• The personal property is attached.

• In a limited partnership- Partner’s liability is limited to money invested.

• Limited partner not involved in decision making

• Enterprise owned and controlled by the people working in it.

• Each member has equal control- 1 man 1 vote.

• Anyone who fulfills qualification criteria can join.

• Profits can be retained in business or distributed proportionately

• Member should primarily benefit from business participation

• Interest on loan/ share capital limited in some specific way

Limited Company

• Liability of the stockholders are limited to the amount invested by them.

• Enjoys advantages of perpetual life span.

Forms of Business Ownership

Corporations

• Corporations are chartered

• Incorporation certificate needs to be filed.

• Subject to laws of the state in which they operate

• Continuous life span

• Total worth divided into shares of stock

• Each share represents unit of ownership

Trusts Trade Associations

• Created to hold assets for the benefit of certain persons or entities, managed by a trustee on behalf of the trust

• Founded by persons called Thrusters, settlers and/ or donors, who execute a written declaration of trust – outlines terms and conditions of operation

Professional Associations• Formed to protect

interests of professionals they represent.

• Virtually every trade/ profession has such an association.

• Most of these are registered under The Societies Registration Act- 1860.

• There is a registration fee.

• The memorandum of society will define the objects of the association.

• An association of individuals or companies in a specific business or industry organized to promote common interests.

• A particular sector or class of business may face the same problems- to seek solutions for these, they may form themselves into a trade association.

• CII and ASSOCHAM are some examples

Risk Management and Insurance Planning

Principle of Insurance

Risk: Risk is an uncertain event or condition, which if occurs, would have an undefined or unknown impact on the achievement of objectives.

Classification of risk: There are different kinds of risks, some of which may be insured, according to the nature and possible consequences of the hazard involved.

The following classifications of risk should be noted:

Pure and Speculative risks

Fundamental and Particular risks

Financial & Non-financial Risk


Basic Characteristics of Insurance Risk pooling:

Risk transfer from individual to a pool of the insurance company’s policyholders.

The company charges premium for accepting risk It ‘pools’ premiums from a group of policyholders into a general

fund to fund the death benefits under contract.

Law of large numbers: Larger the pool, more predictable the amount of losses in a given

period. Since not all members of the pool are the same age or in the same

health condition, we can assume not all of them will be making a claim at the same time.


Requirements of Insurable Risks

Sufficient number of homogeneous exposure

The loss must occur by chance

The loss must be definite

The loss must be significant

The loss rate must be predictable

The loss must not be catastrophic to the insurer

Steps in Personal Risk Management

Identify/Analyse loss exposure / risks

Identify/Analyse loss exposure / risks

Determine the technique


Implement the technique


Monitor DecisionsMonitor Decisions





Legal Principle in Insurance

Insurance is a contractual agreement between the insurer and the insured. Should also meet all the requirements of a valid contract:

Offer and acceptance Consideration Legal capacity of parties and Purpose of contract should be legal and not contrary to public interest

Insurance contracts are special type of contracts which have certain additional distinguishing features associated with it.

Indemnity Insurable interest Subrogation Utmost good faith Adhesion Waiver & estoppels Deductible

Life Insurance Term life policy Whole life policy Endowment assurance policy

Human life value

This concept maintains that a person should carry life insurance that is equal to the present value of the capitalized value of his future net earnings.

How to Use This Method Estimate the individual's average annual earned income from the person's

present age to the age of retirement. Deduct the amount that is not allocated to others. Money spent for income

taxes and all other self-maintenance expenses should be deducted in this step. Typically this is a percentage of salary.

Using a reasonable rate of interest, determine the present value of the amounts allocated to others for the working period used in first step.

Annuities

An annuity is any series of payments made or received at regular intervals.

Annuity benefits protect against the risk of outliving one's financial resources.

Life annuity- Insurance company GUARANTEES that the individual will

receive the same payments each year no matter how long they live. Purchased the same way as life insurance.

A person can either purchase the annuity with a one-time large payment or

with smaller yearly premiums before the annuity's payments begin.

Disability insurance

Personal Accident insurance policies It covers any accident caused to the insured by any physical ,violent and visible means resulting into injuries, which may lead to the death of the insured, or results in some temporary or permanent disablement.

It is a benefit policy which pays the insured for an injury from an accidental event. Such injuries may lead to death or disablement of the insured.

These policies commonly provide for payment of benefits on the following contingencies occurring:

1.Death

2.Permanent disablement

3.Permanent total disablement

4.Permanent partial disablement

5.Temporary total disablement

6.Expense for the carriage of the body

7.Education fund for dependent children

8.Medical expense for treatment of injuries

Health Insurance Mediclaim is the most popular health insurance product. The policy is available to individual between 5 and 80 years. Children

between the age 3 months and 5 years can be covered provided one or both parents are covered concurrently

This policy provides for reimbursement of expense incurred for hospitalisation/domiciliary hospitalisation in India for the treatment of any illness or disease or accidental injury suffered during the policy period.

There are other important features associated with the policy.

1. Claim free renewal bonus

2. Discounted family package cover

Domestic insurance

The most popular domestic insurance cover available in the Indian market is the Householders' Insurance policy.

This policy offers a package cover, a kind of an omnibus personal umbrella cover

Risks to your client's house and belongings due to fire, lightning, earthquake, burglary, larceny, theft, electrical or mechanical breakdown of domestic appliances etc. are all covered under the household insurance cover.

Coinsurance clause: This clause, also known as an average clause, is widely used in all household policies.

Coverage: The particular risks covered under each section are:1. Household contents & building (cover for fire and allied perils)2. Household contents (cover for burglary, housebreaking and theft) 3. Jewellery and valuables4. Plate glass5. Breakdown of domestic appliances6. TV, VCR7. Pedal Cycle8. Baggage9. Personal accident10. Third party legal liability & workmen's compensation

Motor vehicles insurance Liability only insurance: This insurance is compulsory as per Motor Vehicles Act,

1988. This policy covers legal liability of driver / owner towards third parties for 1. Bodily injury (unlimited amount as mandated by Motor Vehicles Act)2. Death3. Property damage (Up to Rs. 750,000 per accident, in case of private cars and commercial

vehicles and Rs. 100,000 in case of two wheelers, although Motor Vehicles Act requires a cover of only Rs. 6,000)

The policy also includes cover for legal costs to claimants. The policy has an inbuilt cover for death/ disability of driver / owner caused by accident during the use of the insured motor vehicle up to Rs.200,000 in case of private car and commercial vehicle and Rs. 100,000 in case of two wheelers.

Package insurance: A package insurance policy is what is commonly known as comprehensive policy and has two components:

1. Liability only coverage which is compulsory: SA as per the Act 2. Property damage cover to the vehicle: for the purpose of property damage cover under

package policy, the insured is required to choose a sum insured known as insured's declared value (IDV).

Under 'No fault liability’ of the Act, owner/driver and insurer, is liable to pay compensation to third party for death/injury caused by motor accident, regardless of the fact

whether the accident occurred due to the fault of the driver or not. The amount of compensation, however, under no fault liability is limited to

Rs. 50,000 for death and Rs. 25,000 for-permanent disablement.

Under 'No fault liability’ of the Act, owner/driver and insurer, is liable to pay compensation to third party for death/injury caused by motor accident, regardless of the fact

whether the accident occurred due to the fault of the driver or not. The amount of compensation, however, under no fault liability is limited to

Rs. 50,000 for death and Rs. 25,000 for-permanent disablement.

Travel insurance

People who travel abroad whether for business or for a vacation they are exposed to risks.

To take care of the risks during foreign travel there are two kinds of policies available

1. Overseas Mediclaim cover which is strictly a medical insurance cover

2. Overseas Travel Insurance cover which provides various other covers in addition to medical insurance such as baggage cover, loss of passport cover, personal accident cover, personal legal liability cover etc.

Personal liability insurance

Professional indemnity insurance: Professional Indemnity Insurance is generally granted to professionals such as medical practitioners, surgeons, architects, lawyers, chartered accountants, solicitors etc.

This policy is designed for individual professionals only. Policy indemnifies the legal liability of the insured person or his named

assistants against claims arising out of the professional service rendered, caused by or alleged to have been caused by error, omission or negligence in their service.

The limit of liability can be selected by the insured. Directors and Officers Liability Insurance: Directors and officers

liability insurance provides protection to the directors and officers against

liability to pay compensation on account of their wrongful act.

Retirement Planning And Employee Benefits

1. Defined Benefit Plans: o Usually based on the employees final salary and period of

employment.o Employees contribute at a fixed rate and the employer meets the

balance costs.o The cost of such a scheme is not known till the benefits have been paid

2. Defined Contribution plans:o The contribution rate is a percentage of earnings or may be flat or

tiered on some other considerationo The contribution of both the parties is fixed.

o The benefits to the employee would depend on the value of the accumulated contributions

Types of Benefit Plans

Defined Benefit Plans

Gratuity

Leave Salary

Retrenchment Compensation

Voluntary Retirement Scheme

Nature of Defined Benefits & Tax Issues

Defined contribution plans

Statutory Provident Fund

Recognized Provident Fund

Unrecognized Provident Fund

Employees’ Pension Scheme

Employees’ Deposit Linked Insurance Scheme

Public Provident Fund

Investment Planning

Return

Return is incentives for doing investment.

To part with money, investors require compensation for The time period for which the resources are committed The expected rate of price-rise The uncertainty of the payments in future

Type of returns: Holding period return Annualized return (CAGR) Risk free return

Measurement of return

Historical return: Total return, Average return

Expected return: The expected rate of return is the weighed average of all possible returns multiplied by their respective probabilities.

n

E(R) = ∑Ri Pi i=1Where, E(R) = Expected return from the stock

Ri = Return form the stock under state i

Pi = Probability that the state i occurs n = Number of possible states of the world

Portfolio return: The expected return on a portfolio of securities weighted average of expected return for the individual investment in a portfolio.

Risk

Risk is the volatility of return on the investment.Type of risk: Market Risk Reinvestment Risk Interest Rate Risk Purchasing Power Risk Liquidity Risk Political Risk Exchange Rate risk

Measurement of Risk

Historical risk: Variance: It measures the dispersion of returns around the expected return. Larger the dispersion, more is the risk involved. Standard Deviation: It is a measure of variability of returns of an asset as compared with its mean or expected value. It measures total risk. Beta: The beta coefficient is a measure of systematic risk and should be used for a diversified portfolio.

Expected risk:The variance of a probability distribution is the sum of the squares of the deviations of actual returns from the expected return, weighted by the associated probabilities. σ 2 = ∑ Pi Ri –E(Ri) 2Where, E(Ri) = Expected return from the stock Ri = Return from stock under state i Pi = Probability that the event i occurs n = Number of possible events

Portfolio risk

Covariance: It is a measure of the degree to which two variable move together over time. A positive covariance indicates that variables move in the same direction, and a negative covariance indicates that they move in opposite directions

Correlation coefficient: Covariance is an absolute number and can be difficult to interpret, it is often converted to correlation coefficient.

Coefficient of determination(R2): It is calculated by squaring the correlation coefficient (R). It gives the variation in one variable explained by another.

Standard Deviation: The SD of a portfolio is not the average of the standard deviation of individual stock.

σ = √ (w12 σ1

2) + (w2 2σ2

2) + (2w1w2COV12)

Variance: The square of SD is variance.

The Treynor Measure: Relative measure of the risk adjusted performance of a portfolio based on the market risk (i.e. the systematic risk). Treynor's Index (Ti) = (Ri - Rf)/Bi. Where, Ri represents return on fund, Rf is risk free rate of return and Bi is beta of the fund. In comparing, if Ti >= 0 ,that is good; if <0 , that is not good.

The Sharpe Measure: Relative measure of risk adjusted performance of a portfolio based on total risk (systematic risk+ nonsystematic risk ) Sharpe Index (Si) = (Ri - Rf)/Si Where, Si is standard deviation of the fund. In comparing ,bigger is better

Jenson Model: Alpha,ά, is an absolute measure of performance and measures how well a managed portfolio performed relative to an unmanaged portfolio of equal risk.It determines how much the realized return differs from the required return. The following formula is used to find alpha: ά = Rp- Rf+ (R m- Rf) Beta

The alpha value indicates whether a portfolio manager is superior or inferior in market timing and stock selection. A positive alpha indicates a superior fund manager, and negative alpha indicates an inferior fund manager

Risk Adjusted Return

Equity valuation Valuation of preference share

Valuation of equity share

Single Period Valuation

Multi period valuation

Plough back ratio

Derivative

Forward contract

Future contract

Option: Call & Put

Fixed interest instrument

Valuations Risk associated with fixed interest instrument

Interest rate risk

Reinvestment risk

Credit risk

Types and features of small saving instruments PPF NSC KVP POMIS POTD SCSS Bank deposits

Product knowledge

RELIEF BONDS (TAX-FREE) Issued in March 2003 Tenure –5 years (2008) Interest @ 6.5% (Half yearly) Interest payments –1stJuly & 1st January Compounding –Half yearly Maturity Value –Rs. 1000 becomes Rs.1377

RELIEF BONDS (TAX-FREE) Individuals & HUF (No NRIs) Min –Rs. 1,000 I.T & W.T –Exempt Premature encashment at the end of 3 years timing at the interest payment dates – penalty @ half of the interest due for the last 6 months Discontinued by F.A 2004

RELIEF BONDS (TAXABLE) April 2003 8% Interest (Taxable) 6 years Interest payments –Half yearly (1st February & 1st August) Compounding –Half yearly Maturity Value –Rs. 1000 becomes Rs. 1601 Individuals & HUF (No NRIs) Min –Rs. 1,000 I.T & W.T –Taxable No Premature encashment at the end of 3 years

NATIONAL SAVING CERTIFICATESMinimum –Rs. 100Interest compounded half yearly100 becomes 160.10Six years –no premature encashmentPremature allowed in case of deathEncashment Features:Within a year –only face valueOne year to three years –face value + simple interestMore than 3 years –as per schedule

Public provident fund

15 yearsMin –500, max –70,000Account closure –15 yearsTotal deposits –12 in a yearIn a month may be more than 1Loans: after completion of one year from the end of the financial year of opening of the account and before completion of the 5thyearAmount cannot exceed 40% of the amount that stood to credit at the end of fourth year preceding the year of withdrawal or at the end of preceding year whichever is lowerPremature withdrawal is permissible every year after completion of 5 years from the end of the year of opening the account.

Post office schemes

Kisan Vikas Patra Post Office Monthly Income Scheme Post Office Saving Account RD –Rs. 10 becomes Rs. 728.9 (5 years)

Mutual fund

NAV ComputationThe net assets represent the market value of assets which belong to the

investors, on a given date.

Net assets are calculated as:

Market value of investments Plus(+) current assets and other assets Plus(+) accrued income Less(-) current liabilities and other liabilities Less(-) accrued expenses

Load implication Initial issue expense : Expenses that are incurred in the launch of the fund are called as initial issue expenses. The costs of registration and fund formation Legal and advisory expenses Costs of launching the scheme Advertisement and promotion expenses Distribution costs Commissions to selling agentsSEBI imposes a ceiling of 6% on these expenses.

IIE will be permitted for closed ended schemes only and such scheme will not charge Entry loadIN CES, IIE shall be amortized on a weekly basis over the period of scheme.IN OES, the sales, marketing and other expenses of sales should be met from the entry load and not IIE

Latest changes on Initial Issue Expenses

Wealth cycle for investors

Stage Financial needs Investment preferences

Accumulation stage Investing for long term identified Growth options and long term

financial goals products.High risk appetite

Transition Stage Near term needs for funds as Liquid and medium term investments.

pre-specified needs draw closer Lower risk appetite

Reaping Stage Higher liquidity requirements Liquid and medium term investments.

Preference for income and debt products

Inter Generational Long term investment of

inheritance Low liquidity needs.

transfer Ability to take risk and invest for the long

term

Sudden wealth surge Medium to long term Wealth preservation.

Preference for low risk products

Tax & Estate Planning

Heads of Income

Salary Income from house property capital gain Profits and gains of business and profession Income from other sources

Other Concepts

Clubbing of income Set off & Carry Forward Assessment of individual Trust Property documentation

Agriculture Income Securities transaction tax Fringe Benefit tax Deductions

Salary

Leave salary Gratuity

Pension

Tax treatment of different forms of salary income

Allowance

House rent allowance Entertainment allowance

Special allowance

Fringe benefits tax Treatment of medical facilities Rent free accommodation and accommodation provided at

concession

Perquisites

Income from house property

Computation of annual value Let out house Self occupied house

Deductions admissible

Capital Gain

Understanding capital gainCapital assetTransfer of capital assetsComputation of capital gain Capital gain exempt from tax

Income from other sources

Dividend Winning from lotteries, crossword puzzles, races including

horse race

Income by way of interest on securities

Income, by way of interest on securities, is chargeable under the head "income from other sources", if such income is not chargeable to income-tax under the head, "Profits and Gains of Business or Profession"

"Interest on securities" means:

a) Interest on any security of the Central Government or a State Government;

b) Interest on debentures or other securities for money issued by, or on behalf of a local authority or a company or a corporation established by Central, State or Provincial Act.

For income-tax purposes what is to be charged to tax is the gross amount of interest. Therefore, if the net-interest is given, it has to be grossed up to arrive at the taxable amount. Net Interest can be grossed up as under:

Net interest x 100

100 - Rate of TDS

The rates of T.D.S. are as under:In case of securities listed on a recognized stock exchange – 10% plus surcharge as applicable plus education cess @2%.

Unlisted non-government securities - 20% plus surcharge as applicable.

The rates of T.D.S. are as under:In case of securities listed on a recognized stock exchange – 10% plus surcharge as applicable plus education cess @2%.

Unlisted non-government securities - 20% plus surcharge as applicable.

Any sum received on or after April 1, 2006(gift)

Following condition should be satisfied: The recipient is an individual or a HUF; Any sum of money is received without consideration on or after April, 2007 The aggregate amount of such money received during a financial year from any

person/persons exceeds Rs. 50000

If aggregate amount of such money received by an individual/HUF during a financial year form any person/persons is Rs. 50000 or less, nothing would be chargeable to tax.If aggregate amount of such money received by an individual/HUF during a financial

year form any person/persons is Rs. 50000 or less, nothing would be chargeable to tax.

Provision not applicable in the following cases:1. Money received from a relative 2. Money received on occasion of marriage of individual 3. Money received by way of will/inheritance 4. Money received in contemplation of death of payer 5. Money received form a local authority.6. Money received form any fund, foundation, university, other educational

institution, hospital, medical institution, any trust or institution.7. Money received form a charitable institute registered

Practical Sums

Topic Overview


Cash Flow planning

Ratio analysis

Loan repayment schedule: Detailed sum

Inflation adjusted interest rates

Rule of 72

Ethics and professional conduct

Risk management and insurance planning

Human life value Understanding of insurance plan Indemnity

Retirement planning

Gratuity EPF corpus computation Retirement corpus

Investment planning

Securities market line Covariance Standard deviation Sharpe, Treynor, Jensen Ratios Bond valuation Equity valuation: Gordon, problem based on plough back ratio Basic sums on call and put options and futures

Tax and estate planning

Home loan tax treatment Agriculture Income Assessment of individual Capital gain (comprehensive)

Financial plan construction

Economy & Finance

Transcript of Financial plan construction