6-18 - em - financial planning

8/6/2019 6-18 - Em - Financial Planning

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Power Finance Corporation Ltd.(A Govt. of India Undertaking)

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Communication Skills, Employee Motivation and Morale DevelopmentDistribution Reform, Upgrades and Management (DRUM) Training Program

Financial Planning

Er. S. Varadarajan, B.E.,Deputy Director, Staff Training College

1. Significance of WealthAcquiring wealth is one of the aspects of a successful life. One cannot underestimateor overestimate the importance of money. From cradle to grave, or even womb to tombmoney is required for a happy or at least a comfortable life.

Thiruvalluvar, a world-renowned poet, 2036 years ago had written Thirukural consistingof 1330 couplets. Thirukural deals with every aspect of human life. The first part ofThirukural deals about virtue in 380 kurals; second part about wealth in 700 kurals andthird part about love in 250 kurals. Though the second part in total deals with wealth,Thiruvalluvar refers wealth in the first part also on numerous kurals. Below are fewKurals translated in English covering the significance of wealth.

Kural 247.This world is not for wealth less onesThat world is not for graceless swinesThe meaning of this poem is This world is not for those who are without wealth,likewise that world (heaven) is not for those who are without kindness.

Kural 751.Naught exists that can, save wealthMake the worthless as men of worthThis poem reveals, Besides wealth there is nothing that can change people of no

importance into those of importance.

Kural 752.The have-nothing poor all despiseThe men of wealth are given to praiseThis poem means, All hate the poor; but all praise the rich.

Kural 1047.Even the mother looks as strangerThe poor devoid of characterThis poem means that A person will be regarded as a stranger even by his own motherif that person happens to be of absolute poverty.

Kural 1049.One may sleep in the midst of fireIn want a wink of sleep is rare.Thiruvalluvar speaks about poverty stricken person. He says, A person may sleep inthe midst of fire, but one can not close his eyes in the midst of poverty.

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Inflation robs your purchasing power? A chart showing the cost inflation indexation fromfinancial year 1981-82 to 2004-2005 as announced by Government of India is givenbelow. This table facilitates to calculate Adjustment of Purchase price of a movable /immovable property for payment of Capital Gain Tax.

FinancialYear

Cost InflationIndexation

1993-94 244

1994-95 259

1995-96 281

1996-97 305

1997-98 331

1998-99 351

1999-00 389

2000-01 406

2001-02 426

2002-03 447

2003-04 463

2004-05 480

Assuming the rate of cost inflation index is same as in the past 25 years, a bar chart hasbeen developed for the financial years from 2005-06 to 2030-31 taking the index figureof year 1981-82 as the base for the year 2005-06 which reflects How the inflation robs

the purchase power of a person?.

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FinancialYear

Cost InflationIndexation

1981-82 100

1982-83 109

1983-84 116

1984-85 125

1985-86 133

1986-87 140

1987-88 150

1988-89 161

1989-90 172

1990-91 1821991-92 199

1992-93 223


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Assuming the rate of inflation is same as in the past 25 years

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

2005-06 2010-11 2015-16 2020-21 2025-26 2030-31

Financial Year

CostInflationIndexCon

ver

toRs.inLakhs

1.001.40

3.05

4.26

6.00

1.99

3. Planning

3.1 Basis of financial planning

The average life expectation of a person is 75 to 80 years and the lifecycle is divided into 3 main phases. First phase of 22 years is childhood and young unmarried stage,which is the learning period. The second phase of 38 years (i.e.) up to the age of 60covers young married stage, young married with minor children stage, married with

major children stage, and pre-retirement stage. These 38 years are the earning period.The third phase (i.e.) beyond 60 years, is the post retirement period where the incomecomes down. So beyond 60 years is the rejoicing period of retirement. A person liveswith the support of parent up to 22 years and once he starts earning, he becomesfinancially independent and starts supporting his family. Starting point of earning lineneed not necessarily be at 22, since it depends upon the completion of education. Theending point of earning line will be more or less 60, since your retirement is fixed on 60.One may not like to earn during post retirement period as the reason being he may besatisfied with what he has already earned or his health may not permit. Once a personstarts earning, he has got definite financial commitment towards his marriage, familymaintenance, children school education, housing, Children college education, Childrens

marriage, unexpected medical expenses if any and finally to live in retirement periodwith self support. From beginning to end, earning point i.e. from 22 to 60 years theearning line should be upwards and never be flattened. Beyond 60, earning line maynot be upward, it is more obvious it may come down. So between 22 to 60 years, oneshould have proper planning to handle the money. One should plan to acquire enoughwealth to live comfortably in the post retirement period taking in to account of inflation.

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3.2 Retaining Wealth Till DeathFor a person, a comfortable financial status contributes mental satisfaction, physicalcare, improved family and social harmony. Persons those who had not planned and areapproaching the retirement find financial difficulties as they pass from economicallyproductive state in to economically nonproductive state. Such persons become slowly

dependant to their legal heirs as they are not able to meet out their own essentialrequirement to lead a comfortable life. At later part of their life, they become more andmore isolated from society. Here is the factual story.

At Mumbai, there was one family comprising three members, Mr.Gupta, * his wife and hisonly son Rohan*. Rohan had just finished his studies and had been in well paid job.Just retired Gupta wanted to transfer his dwelling house and all other assets worth asizable amount to his only son. So Gupta along with his wife went to Mr. A.N.Shanbhag, a financial consultant for getting expert opinion. But the financial consultantwas against it. He advised Gupta Your son does not need your money now. And youmust remain financially independent. Make Rohan your nominee or write a will so that

he becomes heir to your assets after both of you passed away. Unfortunately hisadvice had not gone down well with Guptas. The couple stormed out of his office.Shanbhag had other reasons also for his stand. By giving too much money, too soon toones children, they make life too easy for them. To mature they need to work hard,stand on their on own feet, fight their own battles. Nice people can change suddenlywhen they get lots of easy money. There are better ways to shower affection uponchildren.

Mr.Shanbhag had lost contact with Guptas for a decade until he learnt they were in anold age home. When he visited there, Gupta was ailing and looked too old. Guptaasked for an apology from Shanbhag. He narrated what had happened after they left

his office. They had transferred all their assets to Rogan who soon got married.Rogans wife had problems adjusting to her in-laws and so Rogan couple moved out.Later Rogan by now with two children, decided to leave Mumbai. But his parents askedhim to transfer the assets back to them, Rogan refused. Worse, Rogan sold out theGuptas flat and put them in an old age home before leaving. Similar stories with minorchanges are ever common. Now Gupta advises his friends not to commit suchmistakes.

Hence right from middle age, one should take adequate steps to ensure a comfortablefinancial status in old age. They should make it a point to retain their property andwealth in their own name till death and should never lose control of their assets.

3.3. Financial Planning ProcessOnce a person starts earning, the following techniques must be adopted to find theirlife comfortable through out his life span.Start planning as soon as possible

*Names of persons stated to have been Changed

*

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Set measurable financial goalsUnderstand the effect of each financial decisionRe-evaluate financial situation periodicallyBe realistic in expectations

4. Make Your Post-retirement Years Care FreeYou never get late for retirement plan. Warren Buffet once said, Someones sitting inthe shade today because someone planted a tree a long time ago. This is whatretirement planning for most people should aim at. A person should invest during hismost economically productive years so that his post-retirement years are carefree.While it is prudent to start planning for retirement as early as possible, there are peoplewho didnt give their retirement too much thought and wait till the last minute to plan forit. Right from middle age, one should start plan and save for post-retirement life.

Gaurav Mashruwala, Certified Financial Planner, says Instruments selected forretirement planning should fulfill the three criteria of liquidity, growth and regular

income. According to his recommendation, to begin with, people should go in for SIPs(systematic investment plans) in equity schemes. This is because over the last 10years, no equity fund except one has lost money. People in their 50s should not hesitateto invest in equities.

Investment guru Mark Mobius had said, The best time to invest in the stock markets iswhen you have the money to invest. This is because equity as an asset class has themaximum potential to make your money grow while providing liquidity and regularincome in the form of dividends.

Around the age of 50 years or so, individuals should start investing in the following

schemes:

Tax Saving SchemesGovernment Provident Fund Salaried Schemes (GPF)6 years 8% National Saving Certificates (NSCs) - Post Office schemes3-6 years Infrastructure bond issued by PFC, REC, IDBI, ICICI15 years Public Provident Fund Schemes Post Office & BanksEquity Linked Savings Schemes (ELSS) Mutual fundUnit Linked Insurance Plan (ULIP)

Taxable Schemes6 years 8% + 10% Bonus on maturity Post Office Monthly Income schemes8 years 7 months, 8% Post Office Kisan Vikas Patra6 years 8% GOI Savings Taxable BondsThis will ensure that a regular income will start to flow by the time these instrumentsmature and you would have moved to a lower tax bracket ie from retirement.

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Other InvestmentsFixed Deposits Bank /Post office / CompanyReal Estate Plot, Flat, House etc.

4.1 What Investments are ideal for a retiring officer?

Deposits in Bank / Post office / CompanyPost Office Monthly Income Scheme (POMIS)9% Senior Citizens Saving Scheme (SCSS)ELSS Mutual fundPPF account.

4.2 Ideal Age for opening a 15 year PPF account

If the retiring age is 58, the most ideal age for opening a PPF account is 43 so thataccount will mature at the time of retirement. The subscriber can continue to makedeposit even after the period of 15 years for one or more blocks of 5 years without any

loss of benefits. This will pave the way for a regular income after retirement.

5. Moving out of employers accommodation

If a person is living in accommodation provided by the employer, one should try andmove out of that accommodation into ones own house at the earliest before retirement.This is because one is going to go through a transition in ones life and one has to learnto adjust to not going to work and living without the perks that come with the job. In sucha situation, moving out of the employers accommodation slightly before retirement willmake the adjustment process easier.

6. Assets Building and Tax Planning Tips For Young Professionals

Open PPF account and extend it for maximum period that will pave the way for regularincome.

Insure life On Endowment Plan (Longer period and Lowest premium) that reduces thetax liability and cover life risk

Own a dwelling house by availing loan that reduce the tax liability

Take optimum risk and invest 10-20% of annual savings in ELSS (Mutual Fund) along term retirement corpus.

Own a plot that may give capital appreciation

7. Before you buy a Flat / Plot

7.1 Points to be considered before buying individual plot and construction of aresidential building

Check whether seller has right over the property

Check whether the layout has been approved by competent Authority

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Check whether roads and park area have been handed over to the local body through agift deed

Check whether abutting road of the plot has been maintained by the local body or hasbeen handed over to the local body

Verify the plan has been prepared by according to the development control rules.To check whether all documents / certificates have been enclosed before submitting theplan for approval to the local body.

Avoid unauthorized / deviated construction and stay free from the enforcement action

7.2 Before you buy a flatPoints to be considered before buying flat:

Check whether the details of approved plan have been displayed at the site.

Check whether the flat has been constructed as per approved plan

Check whether the promoter or power of attorney has a right to transfer the undividedshares of land.

Verify whether the entire undivided shares of land have been transferred by thelandowner / promoter / power of attorney to you.

Check whether the completion certificate issued by the local body has been obtainedafter the completion of the building.

Source: THE HINDU, Saturday, March 19, 2005; Courtesy: CMDA

8. Income Tax

8.1 Importance of tax planning

Tax planning is an integral part of comprehensive financial planning. It is the duty ofevery citizen to pay taxes but at the same time, every citizen has the legal right to save /reduce taxes by claiming deductions and exemptions announced by the Governmenttime to time. Now Income Tax Act has considerably simplified than in the past and onecan easily plan his taxes on his own instead of consulting a professional chartedaccountant.

Every taxpayer should get down seriously to plan his taxes. There may be pressure ofjob, children to take care of, social activities, household works .the list is endless.

Even professionals who make millions for their companies do not find time to savemoney for his own through tax planning. Making money is not easy. Proper taxplanning will increase your savings thereby improve the efficiency of your investments.

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8.2. Whether 11th hour tax planning will work out?In our curriculum, we were in habit of preparing for examinations normally on 11 th hour(i.e.) in February and March, appearing for examination in April and got through severaltimes with good marks. But the same concept does not work out for tax planning. We

should not postpone our tax planning to closing months like February and March. It isbecause, it is easier to save our taxes by making small payments in every month, ratherthan large payments at the end of the financial year. Tax planning process must becompleted by the end of October or by the latest end November.

8.3 Basis of Investment StrategyLock-in period and safety of the returnReturn before tax / Return after taxWhether interest treated as fresh income in the assessment year it accruesAge and risk perceptionLiquidity

8.4 Tax Rate For Financial Year 2005-2006

(Assessment Year 2006-2007)

Individual Tax%

Women Tax%

Sr. Citizen(Above 65 Years)

Tax%

Up to Rs.1,00,000 Nil Up to Rs.1,35,000 Nil Up to Rs.1,85,000 Nil

Rs.1,00,001-1,50,000 10 Rs. 1,35,001-1,50,000 10 Rs. 1,85,001 - 2,50,000 20

Rs.1,50,001 t - 2,50,000 20 Rs.1,50,001-2,50,000 20 Above Rs.2,50,000 30Above Rs.2,50,000 30 Above Rs.2,50,000 30

8.5 Tax Calculation in brief as per new budget

(1) Gross Salary(2) Less Deduction u/s 80CCE (80C+80CCC+80CCD)(3) Less deduction u/s 24, 80D, 80DD, 80DDB, 80E, 80GG, 80u etc.(4) Gross Taxable Income (1)-(2)-(3)(5) Tax on (4)(6) Add Education Cess @ 2% on (5)(7) Total Tax Payable (5)+(6)

8.6 Deduction under new section 80CCE

Under new section 80CCE, aggregate amount of deductions U/S 80C, 80CCC &80CCD shall not exceed Rs.1,00,000. The details are discussed below.

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a. 80C: Specified Investment schemes applicable for rebate under old sec.88b.80CCC: Pension Plan (Insurance scheme), max Rs.10,000

c.80CCD: Pension Scheme for central Government employees

GPF

PPF

NSC

NSC Interest

80 D Mediclaim

Insurance Premium

Self,Spouse, Children

UTI - ULIP

Home Loan Repayment

Principle

Mutual Fund - ELSS

Infra Bond

Upto Rs.1,00,000

College / School Fees

for any two Children

80 GG

Tax on Employment

TAX PLANNING TIPS

For SC upto Rs.15,000

upto Rs.10,000,

80 DD Medical Treatment of disabled dependent

Max. Rs. 50,000 ND ; Rs. 75,000 SD

Max. Rs. 40,000 < 65 yrs ; Rs. 60,000 >65 yrs

80 DDB Medical Treatment Self/Dependent

Higher Education Loan for 8 Years

80 E Any amount of interest paid on

50 % or 100 % of donation as the case may be

80 G Donation to Charity

HRA Relief

Rs. 50,000 ND ; Rs. 75,000 SD

80 U Own disability

24 Home Loan Repayment

Interest upto Rs.1.5 Lakhs.

80 CCC

Pension Plan

Max Rs.10,000/-

80 C

(Old sec. 88)

80 CCE

Savings

Max.

Rs.1.0 Lakh

80 CCD

Pension Plan

GOI Staff

Deductions

Concessions

Note: ND- Normal Disability; SD- Severe Disability

8.7 Deductions allowed under chapter VIA of the ActDeduction under new section80C:a. Payment of Insurance Premium (viz. LIC)

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b.Contribution to Govt. Provident Fund (GPF)

c.Contribution to Public provident fund (PPF)

d. National Saving Certificate (NSC)

e.NSC accrued interestf.Unit Linked Insurance Plan (ULIP)g. Repayment of Housing loan-Principalh. Mutual fund - Equity Linked Saving Scheme (ELSS)i. Children education fees for any two 2 Children

j. Infrastructure bond issued by ICICI, IDBI, REC, PFC etc.

8.8 Deduction U/S80CCC; LIC Pension plan, Max. Rs.10,000

Under this Sec. an assessee if he has paid any amount out of his income in theprevious year for LIC of India or any other Insurance Company for receiving pensionunder pension plan is allowed for deduction in the computation of his total income notexceeding Rs.10,000. Jeevan Suraksha Pension Plan of LIC of India is a popularoption.

8.9 Deduction U/S

80CCD; Central Govt. Employee Pension plan

As per the provisions under this section where an assessee being an individual

employed by the central Govt. is allowed for deduction of up to 10% salary of amountpaid / deposited in an approved pension scheme of central Govt. and matchingcontribution made by the Govt. to the Pension account of individual.

8.10 Other Concessionsa. Sec.80D: Mediclaim Policy, Max. 10,000

Under this Sec. a deduction up to Rs.10,000 (Rs.15,000 case of senior citizens) for thehealth of the assessee or his spouse or his dependent parent or dependent children isallowed in respect of premium paid by cheque towards health insurance policy, likeMediclaim.

b. Sec. 80DD: Payment towards medical treatment of disabled dependant

Under this section where an assessee incurred any expenditure for the medicaltreatment of a dependant being a person with disability is allowed a deduction of a sumof Rs.50,000 from his gross total income. Where dependant is a person with severe

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State Blood Transfusion CouncilArmy central Welfare FundIndian Naval Benevolent FundAir force Central Welfare fundThe Andra Pradesh Chief Ministers Cyclone Relief Fund - 1996

The National Illness Assistance FundThe Chief Ministers Relief Fund or Lieutenant Governors Relief Fund in respect ofany state or union territory as he case may beThe National Cultural Fund set up by the central GovernmentAnd any other fund set up and declared by central Government for welfare measures

f. 80GG: Deduction on House Rent Allowance

Case 1. Assessee not receiving HRA: Under this section if an assessee has not beenin receipt of house rent allowance specifically granted to him that qualifies for exemptionunder section 10(13A). The assessee is expected to file declaration in specified form

( Form No.10 BA).

Case 2. Assessee receiving HRA: An assessee is entitled to a deduction in respect ofhouse rent paid by him in excess of 10% of his total income subject to a ceiling of 25%thereof or Rs.2,000 per month, whichever is less.80U: Handicapped assessee

A physically handicapped or mentally retarded individual or a totally blind is allowed fordeduction under this section. Deduction for sum of Rs.50,000 is allowed for person withdisability. A higher deduction of Rs.75,000 shall be allowed for persons with severe

disability. The medical authority shall certify both the cases. A new certificate iswarranted in the cases where the period stipulated expires to reassess the condition ofdisability.

h. U/S 24:Reduction of Income Tax Liability through Housing Loans:

A loss from house property is allowed to be set off against other sources of income.Accordingly, on a self occupied house property, where interest payments are madetowards a housing loan, set off of interest payment of up to Rs.1,50,000 annually isallowed if the construction is completed in three years (For loan availed on or after01-04-1999). This amount of interest paid would lead to a reduction in income since theloss would be negative figure. Availing housing loan one can bring down Gross TaxableIncome below the cut-off limit say Rs.1.5 Lakhs or Rs.2.5 Lakhs and thus one can enjoyhigher tax.

8.12 Health Insurance:

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Mediclaim Insurance is a hospitalisation benefit policy offered by public sector generalinsurance companies. The policy takes care of medical expenses followingHospitalisaton / Domiciliary Hospitalisation of the insured in respect of the followingsituations:In case of sudden illness,

In case of an accidentIn case of any surgery which is required in respect of any disease which has arisenduring the policy period.

Most working individuals tend to ignore their health insurance. Since medical expenseswill only go up with age, it is advisable to take a health insurance a few years beforeone retires and pay the premiums regularly.

8.13 Make money work for you and not work for moneyHow can you make money work for you?

Simple, by regularly saving and investing. Whenever you earn, first pay yourself. Investat least 10% of your gross income. Over a period of time your investments will grow andstart generating returns. Soon you will reach a stage where return from investments areenough to take care of routine expenses. Moment you reach that stage you are on fasttrack. Your investment will generate return to take care of your life style and your freshnew earnings will increase your investment corpus. Now you are not working for money.Your investments are working for you.

There are other set of people. They first earn than spend and lastly save. They willalways remain slave of money. When they earn more they spend more. If they do notearn more they probably will borrow. People who cannot control expenses and save

become slave of money. They will have to keep working for money whole of their life.These people even end up paying higher tax. This is because all governments give taxbenefits to savers, no government gives tax benefit to spenders. Being spenders firstthey work for paying taxes.

Another important thing rich do is to create assets. Others create liabilities. Definition ofasset is different for financial planning perspective. Any cash outflow which haspotential to generate returns either immediately or in distant future is an asset. Richinvest in income generating assets. On the other hand majority of people create liability.

An investment is like sowing a seed. Initially you need to water it but soon it startsfending for itself and grow. The rich sow seeds of assets and later make the assetswork for them. The others sow the seeds of liabilities and work for them.

Authors StanceInvestment strategy varies from person to person which depends upon ones income,age, family size, number of breadwinners in the family, family commitments and so on.

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What discussed above is only for guidance. So, reader and his auditor are the bestjudges for his investment.

Remember one golden rule in life, earn-save-spend. People who follow this willeventually make money their slave.

Note: Investment and income tax data are as on 31-012006. These data are subject tochanges announced by Govt. of India time to time.

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Bibliography

a. Investor India, Bajaj Capital Publications Various Issuesb. Financial services and stock exchange by Dr.V.Balu Ph.D.c. How to save Income Tax through tax planning by R.N.Lakhotia & Subash Lakhotia

d. The Hindu News paper Various Issuese. Active Aging HL Dhar, Director Research, Medical Research Centre, BombayHospital, Mumbai, 400 0201

f. Readers Digest March 2005g. http://economictimes.indiatimes.com/articleshow/1380879.cmsh. Government of Indias Circular No. / 2005 [F.No. 275 /192 / 2005 IT (B)], 30th

November 2005

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