FINANCIAL PLANNING

INTRODUCTION FOR ALL THE ANSWERS:

Financial planning is the process of successfully meeting financial needs of life through proper
management of management of finances.

It is your roadmap to financial Wealth and Sustainable wealth creation.

Financial Planning is the process of framing policies, objectives, plans, procedures, programmes and
budgets regarding the financial activities of a concern. Therefore this project ensures adequate and
effective financial and investment policies.

1) FINANCIAL PLANNING BENEFITS:

"By scientific Asset Allocation."Basic aim of Financial planning is to get sufficient fund at specific time
for defined financial goal, not to get Super high return.

Financial Planning Benefits:

• Save and invest more for your goals: Investors who are able to save and invest
more will be able to create more wealth. Saving and investing according to a
financial plan instils a greater sense of purpose in your journey for financial well-
being and financial independence in the long term. The most important aspect of
a good financial plan is goal linkage with investments. We have emotions
attached with goals like buying your own home, children’s higher education,
children’s marriage, leaving a estate for your loved ones etc. The emotional
attachment makes your more committed to your financial plan. This is
the significance of financial planning.
• Disciplined investing: Discipline in investing e.g. sticking to your SIP
irrespective of market conditions, adhering to your asset allocation, regular re-
balancing etc., are essential in achieving success. You are likely to be more
disciplined if you are investing according to a plan.
• Helps you reduce debt / be debt free: Cost of debt can be a huge burden on
your savings and harm your long term financial interests. If you invest according
to a financial plan, you can fund big ticket spending e.g. vacation, buying /
upgrading your vehicle, bigger down payment for home purchase etc. from your
investments and reduce your debt burden.
• Better risk diversification: Asset allocation and risk diversification is a critical
component of a financial plan. If you do not have a financial plan, you may invest
in assets that give higher returns in bull markets and this may increase the risk
in your portfolio. One of the benefits of financial planning is to protect your
financial goals from the vagaries of capital markets.
• Improve lifestyle in a sustainable way: Despite rising disposable incomes,
average household debt in India is rising. This shows that investors are funding
their lifestyles through credit cards, personal loans etc. Debt funded lifestyle
improvements may not be sustainable. Sometimes it is seen that, parents spend a
bulk of their savings on their children’s higher education and then compromise
 on lifestyle to save for their retirement. If you practise goal based investing, you
can improve your lifestyle in sustainable way, without relying on debt or
compromising on other financial goals.
• Save taxes: Having an investment plan can help you save taxes under section
80C and also invest in the most tax efficient investment options according to
your financial goals and asset allocation.

2) BUDGETTING- MEANING, ADVANTAGES AND

DISADVANTAGES
MEANING - A budget is defined as a detailed financial plan for a particular accounting year. It is a
written document which is expressed in monetary terms and represents all economic activities of a
business organization. It is an ongoing process as it needstobe revised, adjusted, updated and
monitored at regular intervals when there is a change in the prevailing conditions.

Budgets can be classified on various basis i.e.

Master Budget

On the basis of capacity: Fixed Budget and flexible budget.

On the basis of function: Sales budget, production budget, purchase budget, cash budget, etc.

On the basis of time: Long term, short term, and current budget.

Advantages of Budget

• Management and control: A budget provides a strategic plan of action. It

creates a caution over the expenses that can be borne by the institution or an
individual. It, therefore, helps to check and make decisions on the basis of their
capacity.
• Evaluation of policies: A budget allows an evaluation of the goals and policies
which are set as guidelines for taking further decisions over the spending.
• Capital reinforcement: With a good budget a company or an individual can
make the best use of their available resources and capital wherever they can
be applied for more productivity and profit.
• Promotes competition: A budget can help in effective competition between
organizations and individuals if they are well aware of their financial status as
well as are able to make an adequate estimation on their activities and
operations to earn profits.
• Systematic and organized: The approach of a budget is very systematic and
disciplined which ensures a successful study and implementation of the plans
and actions of the company or individual.
• Constructive: A budget does not allow any of the resources or money to go
wasted as it provides a guideline to follow to make use of them constructively.

Disadvantages of Budget

• Inaccurate and unrealistic: A budget is based on assumptions and judgments.

If there is any change in the business plan or implementation the whole
prediction over the budget plan will get affected. The results of a budget plan,
therefore, are always unpredictable and can be inaccurate sometimes.
 • Inflexible: A budget is formed depending on certain policies of an institution or
goals of an individual that leads to decision-making. However, if there is any
need to review the financial status considering any change in the market there
is no way the budget can be altered.
• Finance oriented: The budget does not support the interests and requirements
of the people. It is more profit-oriented which is more quantitative while the
needs of the people are more qualitative in nature.
• Time-consuming: The process of planning a budget Or budgeting is a time-
consuming affair. It needs to consider all possible aspects of an organization
or an individual before ensuring any expenditure or spending towards a
particular goal.
• Conflicts: The failure of a budget plan can result in a lot of arising tensions and
rifts within the company that ultimately get reflected by the inefficient running
of the organization

3) FORECASTING – MEANING, ADVANTAGES AND

DISADVANTAGES
MEANING - Forecasting is essentially a process of analyzing the past
and present business movements and trends to obtain some idea or
clues regarding future trends and business movements. Forecasting is
looking into the future so that we can accordingly plan for it.

However, forecasting is not a haywire process. It is a systematic

approach with well thought-out, scientific methods and procedures. It
involves a thorough and proper analysis of data and facts with the
help of both quantitative and qualitative techniques.

Advantages of Forecasting
1] Assists in Planning
One of the biggest advantages of forecasting is that it enables the
manager to plan for the future of the organization. Planning and
forecasting actually go hand in hand. Without an idea of what the
future hols for the company, we cannot plan for it. Thus, forecasting
plays a very important role in planning.
2] Environmental Changes
When done correctly, forecasts should be able to point out the
upcoming changes in the environment. This means that it can allow
the company to benefit from such environmental changes. When the
changes are favorable to the company it can expand and grow its
business. And in conditions that are adverse, it can plan and prepare
to protect itself.

3] Identifying Weak Spots

Another advantage of forecasting is that it will help the manager
identify any weak spots, or ignored areas that the organization may
have. Once attention has been drawn to these areas, the manager can
put into effect effective controls and planning techniques to rectify
them.

4] Improves Co-ordination and Control

Forecasting requires information and data from a lot of external and
internal sources. This information is collected by the various
managers and staff from various internal sources. So almost all units
and verticals of the organization are involved in the process of
forecasting. This allows for better communication and coordination
amongst them.

Limitations of Forecasting
Along with the benefits, there are also some limitations of
forecasting. Let us take a look at a few of them,

1] Just Estimates
The future will always be uncertain. Even if use the best of
forecasting techniques and account for every aspect imaginable, a
forecast is still just an estimate. One can never predict future events
with 100% success. So even the best-laid plans may amount to
nothing. This will always remain one of the biggest limitations of
forecasting.

2] Based on Assumptions
The basis of any forecasting method is assumptions, approximations,
normal conditions, etc. This makes these forecasts unreliable. So one
must always keep in mind the inherent limitations of forecasting and
be cautious in being over-reliant on them.

3] Time and Cost Factors

The data and information required to make formal forecasts are
generally a lot. And the collection and tabulation of such data involve
a lot of time and money. The conversion of qualitative data into
quantitative data is also another factor. One must be careful that the
time, money and effort spent forecasting must not outweigh the
actual benefits from such forecasts.

4) PROCESS OF FINANCIAL PLANNING

FPSB’s Financial Planning Process is a collaborative, iterative approach that

financial planning professionals use to consider all aspects of a client’s financial
situation when formulating financial planning strategies and making
recommendations. Scroll down to learn about each part of the process.
The financial planning process includes the following methods:

• Establish and define the relationship with the client.

The financial planning professional informs the client about the financial
planning process, the services the financial planning professional offers,
and the financial planning professional’s competencies and experience.
The financial planning professional and the client determine whether the
services offered by the financial planning professional and his or her
competencies meet the needs of the client. The financial planning
professional considers his or her skills, knowledge and experience in
providing the services requested or likely to be required by the client. The
financial planning professional determines if he or she has, and discloses,
any conflict(s) of interest. The financial planning professional and the
client agree on the services to be provided. The financial planning
professional describes, in writing, the scope of the engagement before
any financial planning is provided, including details about: the
responsibilities of each party (including third parties); the terms of the
 engagement; and compensation and conflict(s) of interest of the financial
planning professional. The scope of the engagement is set out in writing
in a formal document signed by both parties or formally accepted by the
client and includes a process for terminating the engagement.

• Collect the client’s information.

The financial planning professional and the client identify the client’s
personal and financial objectives, needs and priorities that are relevant to
the scope of the engagement before making and/or implementing any
recommendations. The financial planning professional collects sufficient
quantitative and qualitative information and documents about the client
relevant to the scope of the engagement before making and/or
implementing any recommendations.

• Analyze and assess the client’s financial status.

The financial planning professional analyzes the client’s information,
subject to the scope of the engagement, to gain an understanding of the
client’s financial situation. The financial planning professional assesses
the strengths and weaknesses of the client’s current financial situation
and compares them to the client’s objectives, needs and priorities.

• Develop the financial planning recommendations and present them

to the client.
The financial planning professional considers one or more strategies
relevant to the client’s current situation that could reasonably meet the
client’s objectives, needs and priorities; develops the financial planning
recommendations based on the selected strategies to reasonably meet
the client’s confirmed objectives, needs and priorities; and presents the
financial planning recommendations and the supporting rationale in a
way that allows the client to make an informed decision.

• Implement the financial planning recommendations.

The financial planning professional and the client agree on
implementation responsibilities that are consistent with the scope of the
engagement, the client’s acceptance of the financial planning
recommendations, and the financial planning professional’s ability to
implement the financial planning recommendations. Based on the scope
of the engagement, the financial planning professional identifies and
presents appropriate product(s) and service(s) that are consistent with
the financial planning recommendations accepted by the client.
 • Review the client’s situation.
The financial planning professional and client mutually define and agree
on terms for reviewing and reevaluating the client’s situation, including
goals, risk profile, lifestyle and other relevant changes. If conducting a
review, the financial planning professional and the client review the
client’s situation to assess progress toward achievement of the objectives
of the financial planning recommendations, determine if the
recommendations are still appropriate, and confirm any revisions
mutually considered necessary.

5) WHY SAVING IS IMPORTANT?

Saving money helps navigate tricky situations, meet
financial obligations, and build wealth.
Saving money is vital. It provides financial security and freedom and secures you in a
financial emergency. By saving money, you can avoid debt, which relieves stress.
However, despite knowing the importance of savings, we often lose sight of it and
spend more of our money in the present.

Why is saving money important?

Saving money is vital for many reasons. Some of them include:

Emergencies

Having money set aside for emergencies helps you in a testing situation. An
emergency fund provides financial security in times of need. It can help you avoid
using credit cards or taking out high-interest loans. Navigating through a financial
emergency in good shape serves as a useful reminder of the value of preserving
money.

Big purchases

Since the goal is to save money rather than spend it, you might not consider that
expensive purchases are one of the important reasons for saving money. However,
there are a variety of reasons you would wish to save funds to purchase expensive
items.

These expenditures could include a new car or household equipment, such as a

refrigerator, washer and dryer, or television. However, these larger purchases can be
costly. If you do not have the cash up front, you might have to use a credit card,
which can be tricky to use. While we may think about them often, big purchases are
the reasons savings are important in the long run.

Accumulating wealth

If you want to focus on building wealth, you must save money. When you do so, you
develop excellent financial practices and increase your cash reserves. It also helps
you invest, which is the only way to build actual long-term wealth.

You might begin by saving money in an interest-bearing bank account. It will allow
your money to earn interest. There are different types of savings accounts you can
put your money into if your goal is accumulating wealth. You can have a look at what
IDFC FIRST Bank offers in terms of savings accounts to get the best rates in the
market. You can earn up to 6% per annum and get monthly interest credited to your
savings account.

Understanding the importance of savings is necessary today. If you wish to know

about accounts that are geared towards savings, such as the minor savings account
or the women’s savings account, you can head over to the IDFC FIRST Bank
webpage, where you can read up on all the savings accounts available and what they
offer.

6) STEPS IN PERSONAL FINANCIAL PLANNING PROCESS

The correct investment strategy and sound financial advice will determine how you live today and
in the future. There are six stages to develop a financial plan and to carry out personal money
management. From beginning to end, a certified financial planner professional guides you through
the financial planning process - keeping in view your current financial situation and economic
background.

1) Identify your Financial Situation

The first stage of the financial planning process constitutes assessment on what is happening in
your life right now and how you can change your financial situation. The key areas to reflect are:

Household budgeting –This is an important area as after calculating the monthly costs spent at
home, you’d be able to figure out how much you are left with to save or invest.

Family commitments and Living Expenses – Are you single or married? Do you have children?
What are their living and lifestyle expenses?

Tax Standing and Strategies – How do you manage taxes? Are you living or working abroad?
Current investments or saving reserves – How much savings or debts you have right now?

Other Financial obligations – These may involve some miscellaneous costs you might be
planning ahead for future such as:

• A wedding or property purchase

• Emergency funds to cover for household catastrophes
• Family Funds reserve in case something happens with your job or you
• Is your retirement just around the corner?

This step serves as a foundation for developing your plan and gives you a good reference point to
achieve your short as well as long term financial goals.

2) Determine Financial Goals

Experts say when you have identified your goals; you’re most likely to achieve them. Highlighting
the financial goals serves as an important aspect of financial planning. Subjected to what phase in
life you have reached, these goals could be:

• Get married and initiate a family

• Purchase or pay off a property
• Ensure your children get a good education
• Make your reserves and investments tax proficient
• Get retirement with enough income on hands to enjoy life ahead

The sole purpose of this step is to differentiate your needs from your wants. Apart from these, the
goals or objectives may range from spending your entire income into developing a long lasting
investment program for future financial security. However, you must select which goals you need
to pursue.

3) Identify Alternatives for Investment

After a thorough understanding of your financial needs has been taken and all the appropriate
financial goals have been cemented down, next thing is the investment alternatives or specific
recommendations from your financial planner.

By taking a good look at your short, medium and long term goals, an integrated investment strategy
would be developed based on your set requirements. Furthermore the objectives would be looked
upon again and it will be analyzed how far you are down the road to achieving your short and long
term financial goals. Taking in account your timeframe, cash flow, risk tolerance, current insurance
coverage, tax strategies and investment goals, a range of ideas and financial planning alternatives
would be presented in order to determine which one suits you the best. This will help you produce
more actual and satisfying decisions.
4) Evaluate Alternatives

The proposed recommendations are then further assessed. This is your chance to discuss the
alternatives face-to-face and take necessary actions bearing in mind your current situation,
financial standings and personal interests. If you have any concerns regarding your financial
planner’s recommendations, those can be altered and revised. Alternatives can be closed down
based on the decisions you make. For instance:

The idea to carry on your education attests you cannot do a full time job. Decision making thus
stands as an ongoing process which works side by side with your personal and financial situation
so lost opportunities as a result of your decision making should always be kept in mind while
analyzing the alternatives.

Risk Evaluation

While evaluating the options you might end up having uncertain ideas. For instance, choosing your
career over studies involves risk. How can you ensure if it’s rewarding in your future?
Other financial decisions involve a comparatively low degree of risk such as saving your money in
a savings account or purchasing some object of great value with it. The option of losing that object
is low in such scenarios.

Thus while making financial decisions; finding out risks and evaluating them is tricky. You need to
collect data based on your experience and the experiences of others as well. Decision-making
process will require you to frequently update your knowledge politically, economically and socially
so you can make informed decisions.

5) Put Together a Financial Plan and Implement

Once you are content with the recommendations and feel good to proceed, the implementation of
the plan would be carried out. This step of financial planning process can be considered as an
action plan where you will pick ways to achieve your short, immediate or long term goals. Often
taken as the toughest step for some people, but makes a huge difference in the long run!
The key thing to consider here is to carry it out as early as you can. The longer it’s left unattended,
the longer it will take you to grow your wealth – ultimately a great shortfall in your savings when
you retire.

6) Review, Re-evaluate and Monitor The Plan

Financial planning is an on-going and dynamic process and it’s unlikely that your financial condition
will remain same throughout your life. You need to assess your financial decisions periodically as
changed personal, economic and social factors will require you to alter your decisions to fit into
your new situation.

As you progress through the different phases of your life, you financial needs will be reflected and
financial process will serve as a tool to let you adjust to these changes. Monitoring your plans will
help you prioritize your decisions and make necessary adjustments that will bring your financial
needs and goals in line with your current life situation.
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7) HEALTH INSURANCE MEANING AND BENEFITS

A health insurance policy extends coverage against medical expenses incurred owing to
accidents, illness or injury. An individual can avail such a policy against monthly or annual
premium payments, for a specified tenure. During this period, if an insured meets with an
accident or is diagnosed with a severe ailment, the expenses incurred for treatment purposes
are borne by the insurance provider.

What are the Benefits of Health Insurance Plans?

1. Hospitalisation Expenses
Any medical condition requiring urgent hospitalisation is covered under
standard health insurance plans. However, claims are only entertained,
provided the disease has not been previously diagnosed when the
insurance plan was not availed.
Hospitalisation expenses incurred under the following situations are also
extended by renowned insurance providers:
• Treatment Against Critical Illness
• Accident and Illness Related Hospitalisation Coverage –
2. Pre and Post Hospitalisation Charges

Pre hospitalisation expenses such as diagnosis expenses, and doctors’

fees etc. can be covered by a health insurance plan.
Expenditures post-release such as medication, routine check-ups,
injections, etc. are also reimbursed by most insurance companies.
Compensation funds against the same can be extracted as a lump sum
amount, or by producing respective bills.
3. No Cap on ICU Room Charges
Health insurance policies also cover ICU bed charges. An insured
individual can also choose to stay in a private room, costs of which can be
billed against the respective insurance provider, up to a specified amount
or total insured amount, at the discretion of the insurance company.
4. Cover Against Mental Illness
Hospitalisation in due course for psychiatric treatment is also covered
under such health insurance policies. With rising rates of mental health
issues in India and globally, this facility allows individuals to seek
professional help for a well-rounded life.
5. Bariatric Surgery Costs
Only specific insurance providers agree to bear all expenses incurred for
surgeries aiming to help individuals overcome their obesity problems.
Obesity often lead individuals to develop other related complications such
as heart problems, diabetes, high blood pressure, etc. This promotes the
overall wellbeing of individuals in the long run.
Such features of a comprehensive health insurance policy are adept at
meeting all major medical expenses an individual might face. At slightly
higher premium charges, additional benefits in the form of higher coverage
facility are offered by major institutions.
6. No Room Rent Capping
Room rent of hospital rooms is covered under such health insurance policy,
allowing insured individuals to recover with comfort. Total amount
disbursed in such cases are specified by an insurance company
beforehand.
7. Daycare Procedures
Expenses incurred for daycare treatment at hospitals such as dialysis,
cataract, tonsillectomy, etc. are covered under most health insurance
plans.
8. Road Ambulance Charges
A standard health insurance policy covers any ambulance expenses
incurred during times of medical emergency. This poses a significant
benefit as premium hospitals often charge substantial amounts for
transportation.
9. Refill Sum Insured
Under such health insurance policy, you can make claims amounting up to
the sum insured twice a year, provided the medical conditions are different
each time.
10. No Claim Bonus
For every non-claim year, insured individuals are extended discounts or a
higher sum insured (at no additional cost) in the succeeding years, that can
help to reduce their premium charges payable annually or to extend their
sum insured coverage.
11. Daily Hospital Cash Cover
Daily cash allowance is provided by stipulated institutions, enabling
individuals to make up for the loss of pay during times of hospitalisation.
12. 0% Co-payment
Renowned insurance companies cover the entire medical bills generated
during the treatment procedure of an insured individual, up to the sum
insured amount. Zero co-payment mitigates the financial liability of a
patient, allowing him/her to focus solely on recovery.

13. Zone upgrade Facility

Given rising medical costs in metropolitan cities, you can opt for zone
upgrade add-on cover to secure all financial requirements for treatment in
premium hospitals located there.
If you hail from Zone B or Zone C cities, you can avail a zone upgrade
cover with a health insurance policy from certain insurance providers like
Digit, which allow you to get quality treatment from Zone A cities without
any additional financial burden.
14. Domiciliary Care
Coverage against all expenses incurred for home hospitalisation is covered
under comprehensive health insurance policies. This includes medication,
nurse fees, injections etc. payable for comprehensive treatment of a
patient.

8) LIFE INSURANCE MEANING:

A life insurance policy is a contract between the policyholder and the insurance
company, with the promise that the insurer will pay a pre-decided amount to the
nominee in exchange of premiums. The pre-decided amount could be the maturity
amount paid after the policy tenure gets over or the death benefit paid if the
unfortunate happens during the policy term. In a nutshell, all the benefits of a life
insurance policy are tied to the payment of premiums, which is why one should opt
for a premium that can be easily serviced. A life insurance policy works only if the
policyholder has paid all premiums regularly. Precisely, life insurance policies are
best known for providing life cover to the policyholder.

DIFFERENT TYPES OF LIFE INSURANCE POLICIES:

1. Term Life Insurance Plan

Term insurance is the most popular one in life insurance category. It has a specific
period and expires at the end of the term. The best things about a term plan are
the premiums are quite affordable. These plans can be bought by people who have
just started their career as the premiums are low. Some of the best term life
insurance plans offer critical or terminal illness cover – that means the policyholder
will be paid a lump sum amount on diagnosis of life-threatening diseases to help
them cover the medical expenses.

Learn more about Term Insurance Plans.

2. Whole Life Insurance Plan

As the name suggests, it is a policy that covers you till you turn 99. That means, you
can be protected till you are 99 years of age. Whole life insurance plans have a
death benefit along with cash value. The life insurance policy’s cash value will grow
over time and can be withdrawn by the policyholder when it accumulates enough
value. Or, it can also be withdrawn if the policyholder opts for a loan on the life
insurance policy.

3. Unit Linked Insurance Plans

ULIPs are investment plus insurance plans so that you can enjoy best of both the
worlds. This is a type of life insurance policy that offers life cover along with
investment opportunities. Most of the ULIPs have a lock-in period of 5 years, hence,
it can be considered as a long-term investment plan. It function as per market
dynamics and you should understand your risk appetite before buying a ULIP.

4. Endowment/ Saving Plans

This is a type of life insurance policy that offers you a life cover along with an
avenue for savings. If you buy the best saving plan, you can save regularly over a
period and this will lead you to get a lump sum amount at maturity. Buying an
endowment or saving plan is beneficial if you have long-term financial goals such
as funding your child’s education, buying a new house, or spending a carefree
retirement life.

5. Money Back Policy

Money back policy is a type of life insurance policy that gives money-back at
regular intervals. A percentage of the Sum Assured is paid back at intervals during
the policy tenure. These life insurance plans offer Survival Benefits, which are paid
out during the plan tenure and at maturity. If the policyholder passes away when
the policy is in force, the entire Sum Assured is paid to the beneficiaries irrespective
of the Survival Benefits already paid.
6. Child Insurance Plan

Child insurance plans are life insurance policies that are opted to safeguard the
future of your child. Along with providing a life cover, it helps in building an
education fund to support your child’s dreams and aspirations. Child plans are
investment plus insurance plans designed to assist you in creating wealth for your
child’s future needs. You can invest in these plans right when your kid is born to
build a strong financial cover.

7. Retirement Plans

These life insurance policies help you build a retirement corpus so that you can
enjoy your post-retirement life. You can make your spouse the beneficiary to your
life insurance plan.

9) BENEFITS OF RETIREMENT PLANNING:

Retirement planning is an essential part of financial planning. An increase in average

life expectancy increases the need for retirement planning. Planning for retirement
not only ensures an additional source of income but also helps in dealing with
medical emergencies, fulfil life aspirations and be financially independent.

Benefits of planning retirement

Stress-free life
This is the most significant outcome of retirement planning. Retirement
planning helps to lead a peaceful and stress-free life. With having
investments that earn regular income during retirement leads to a worry-
free life. Retirement is the age where one has to relax and reap the benefits
of all the hard work.
Money works for you
In the younger days, everyone runs after their 9-5 jobs. Everyone works to
earn money and have a good living. However, retirement days are the days
where one cannot work any longer. Therefore, it is the time when the
money one earned should do all the work. To achieve this, one has to start
their investments towards retirement at a very young age. Starting small
also helps in generating significant returns in the future. Hence a retirement
fund should be a well-diversified portfolio, that’ll have the capacity to
generate returns during retirement.
Tax benefits
Retirement planning also helps in tax saving. For example, investments
in PPF and NSC qualify for tax exemption under Section 80C of the
Income Tax Act. These are long term investments suitable for retirement.
There are a variety of investment options available for retirement planning
at the same time also qualify for tax saving.
Cost-saving
Planning for retirement at a young age will help in reducing the cost. For
example, in an insurance policy the premium amount to be paid will be
lesser when the policyholder is younger. While getting insurance during
retirement becomes costly.
Inflation beating returns
Investing in retirement will help in earning inflation-beating returns. Holding
money in a bank savings account will not generate high returns. In other
words, the interest earned will not be enough to lead an uncompromised
retirement. Therefore, proper investment planning will help one to generate
significant returns in the long term. Also, it is important to start investing
early. This helps in averaging out the impact of market volatility.

10) BENEFITS OF RATIO ANALYSIS:

Ratio Analysis helps the internal and the external stakeholders in

understanding and comparing the numbers presented in the Income
Statement, Balance Sheet and the Cash flow statement thereby drawing
conclusions on the performance of the company in a given period of time,
so as to develop company strategy for the upcoming period and the
investment strategy from the perspective of a given investment policy
statement.

1. Efficiency

Ratios such as the inventory turnover or sales turnover ratios help in

understanding how well the company is using its assets and resources to generate
sales or using up inventory. If these ratios are higher, that means the company is
highly efficient, however, if these ratios are falling over time, then it could imply
that the inventory is building up, the product is getting obsolete, marketing or
sales strategy is lacking and so on.
2. Solvency

These ratios are helpful in analyzing whether the assets owned by the company
are sufficient to meet the short and long term viability of the company. These are
looked by the debt rating agencies such as the S&P and the Moody’s to present
how risky is the company for investment. These include coverage ratios, current
ratio, quick ratio and so on.
3. Liquidity

This is the ratio that implies how much a company has invested in cash and near-
cash securities and is helpful in analyzing how much money could the company
generate at a short notice to fulfill an unforeseen event. However, a very high
investment in liquid assets can also imply that the company is missing out on
greater interest from the investment in less liquid securities. Therefore a right
level of liquidity is desired.

4. Market Performance

Ratios such as the P/E ratio, P/Sales ratio, P/BV ratio, EV/EBITDA and so on help in
understanding whether the company is over or undervalued in comparison with
its peer group and should an investor include the stock at the given level of risk
involved. Further, it also helps the management to understand how a company’s
performance reflects the share price and what kind of future strategy should it
adopt.
5. Profitability

Ratios such as the Gross Profit Margin, Net Profit Margin, Return on Equity help in
understanding how much is it worth investing in the company. If the Net Profit
margin is very low but the Gross Profit Margin is very high, this implies that the
overheads of the company are a little on the higher side and the company should
look into these to find out if there is an area of improvement.
6. Planning

Once the management has the ratios in front of them, they can develop future
strategies such as capital expansion related investments or whether leasing is a
better option than buying a fixed asset. Combining the information with the
future market expectations helps the management in developing a long term
expansion plan which is executed in phases over time.
7. Budgeting

Operating expenses and other annual expenses and investments are also planned
based on the ratios, for example, if the inventory turnover ratio is very high, the
management can place bulk orders and build up inventory to reduce ordering cost
if the expectation of demand remains unchanged

11) NOTES ON DIVIDEND TAX:

Source of dividend
You can receive dividends from the following sources –
From a domestic company in whose shares you have invested
From a foreign company in whose shares you have invested
From equity mutual funds if you have chosen the dividend option
From debt mutual funds if you have chosen the dividend option

Recent Changes, Updates in Tax on

Dividend Income
Previously i.e, up to Assessment Year 2020-21, if a shareholder gets dividend from a
domestic company then he shall not be liable to pay any tax on such dividend as it is
exempt from tax under section 10(34) of the Act subject to Section 115BBDA which
provides for taxability of dividend in excess of Rs. 10 lakh. However, in such cases,
the domestic company is liable to pay a Dividend Distribution Tax (DDT) under
section 115-O.
The Finance Act, 2020 has abolished the DDT and moved to the classical system of
taxation wherein dividends are taxed in the hands of the investors. So now, dividend
income will become taxable in the hands of taxpayers irrespective of the amount
received at applicable income tax slab rates.

Tax on Dividend Income

Taxability of dividend will depend upon whether dividend receiver deals in
securities either as a trader or as an investor. The income earned by the person from
the trading activities is taxable under the head business income. Thus, if shares are
held for trading purposes then the dividend income shall be taxable under the head
income from business or profession. Whereas, if shares are held as an investment
then income arising in the nature of dividend shall be taxable under the head of
income from other sources.

TDS on Dividend Income

As per Section 194, TDS shall be applicable to dividends distributed, declared or
paid on or after 01-04-2020, an Indian company shall deduct tax at the rate of 10%
from dividend distributed to the resident shareholders if the aggregate amount of
dividend distributed or paid during the financial year to a shareholder exceeds Rs.
5,000. However, no tax shall be required to be deducted from the dividend paid or
payable to Life Insurance Corporation of India (LIC), General Insurance Corporation
of India (GIC) or any other insurer in respect of any shares owned by it or in which it
has full beneficial interest.

12) NOTE ON TYPES OF TRUST:

Estate planning is a type of agreement where a person decides who will

own and manage their assets once the person is deceased or
incapacitated. Estate planning is important, as it eliminates the burden of
legal heirs having to bear the taxes of transferring the assets had the estate
not been planned. In case the beneficiary is a minor, a guardian is
assigned until the minor becomes 18 years old.

Types of Estate Planning Trusts

Revocable and irrevocable trusts are two of the most common types of
estate planning trusts.

1. Revocable Trust
A revocable trust, as the name suggests, can be adjusted, revised, or
canceled completely. These types of trusts are beneficial to the grantor,
as it avoids any legal battle. However, the creditors of the grantor can
have access to the estate by getting a court order.

2. Irrevocable Trust

An irrevocable trust cannot be adjusted, revised, or canceled once the

grantor transfers the assets to the trust. However, the grantor can take a
second to die/survivorship life insurance, where the beneficiary gets the
payout only when all the insured parties are dead. Also, since the
beneficiary gets the payout only on the death of the insured, it could lead
to criminal offenses like murder.
Apart from revocable and irrevocable trusts, below are other types of
trusts set up in estate planning:

1. Asset Protection Trust

While in a revocable trust, a creditor can get access to the estate by
court order, an asset protection trust protects the grantor from this type
of risk. After transferring the assets to the trust, the grantor or trust
maker doesn’t become the beneficiary.
Hence, the funds are protected from any creditor attacks. Once the trust
is terminated, the assets are given back to the grantor.

2. Charitable Trust
A charitable trust is beneficial to the trust maker, as it reduces or avoids
paying taxes. It also helps when the trust maker owns very high-value
assets. By putting the high-value assets in the charitable trust, they avoid
paying huge taxes and also receive a huge payout, while a portion of it
goes to charity.

13) DONATIONS UNDER 80G

Meaning - Section 80G of the Income Tax Act primarily deals with donations made towards
charity, with an aim to provide tax incentives to individuals indulging in philanthropic
activities. This section offers tax deductions on donations made to certain funds or charities.
An amount donated by an individual to an eligible charity can be claimed as a tax deduction
while filing of an income tax return.

Section 80G Eligibility

All taxpayers (individuals/companies/Hindu Undivided Families) are eligible to make
donations to charity under Section 80G and claim a deduction, subject to limits set
down by the government. NRIs are also entitled to the benefits under Section 80G,
provided their donations are to eligible trusts or institutions.

Deduction under Section 80G

Donations paid towards eligible trusts/charities which qualify for tax deductions are
subject to certain conditions. Donations under Section 80G can be broadly classified
under four categories, as mentioned below.
1. Donations with 100% deduction (Without any qualifying limit): Donations made
under this category enjoy 100% tax deduction and are not subject to any
qualification limit being met. Donations to the National Defense Fund, Prime
Minister’s National Relief Fund, The National Foundation for Communal Harmony,
National/State Blood Transfusion Council, etc. qualify for such deductions.
2. Donations with 50% Deduction (Without any qualifying limit): Donations made
towards trusts like Prime Minister’s Drought Relief Fund, National Children’s Fund,
Indira Gandhi Memorial Fund, etc. qualify for 50% tax deduction on donated
amount.
3. Donations with 100% deduction (Subjected to 10% of adjusted gross total
income): Donations made to local authorities or government to promote family
planning and donations to Indian Olympic Association qualify for deductions under
this category. In such cases, only 10% of the donor’s Adjusted Gross Total Income
is eligible for deductions. Donations which exceed this amount are rounded off to
10%.
4. Donations with 50% deduction (Subjected to 10% of adjusted gross total income):
Donations made to any local authority or the government which would then use it
for any charitable purpose qualify for deductions under this category. In such cases,
only 10% of the donor’s Adjusted Gross Total Income are eligible for deductions.
Donations which exceed this amount are capped at 10%.
 14) SECTION 80C

Section 80C – Deductions on

Investments
Section 80C is one of the most popular and favourite sections amongst the
taxpayers as it allows to reduce taxable income by making tax saving
investments or incurring eligible expenses. It allows a maximum deduction
of Rs 1.5 lakh every year from the taxpayers total income.
The benefit of this deduction can be availed by Individuals and HUFs.
Companies, partnership firms, LLPs cannot avail the benefit of this
deduction.
Section 80C includes subsections , 80CCC, 80CCD (1) , 80CCD (1b) and
80CCD (2).

Section 80CCC – Insurance

Premium /Section 80CCD –
Pension Contribution

Eligible investments for tax deductions

80 C 80C allows deduction for investment made in PPF , EPF, LIC

premium , Equity linked saving scheme, principal amount payment
towards home loan, stamp duty and registration charges for
purchase of property, Sukanya smriddhi yojana (SSY) , National
 saving certificate (NSC) , Senior citizen savings scheme (SCSS),
ULIP, tax saving FD for 5 years, Infrastructure bonds etc

80CCC Deduction 80CCC allows deduction for payment towards annuity pension
for life insurance plans Pension received from the annuity or amount received upon
annuity plan. surrender of the annuity, including interest or bonus accrued on
the annuity, is taxable in the year of receipt.

80CCD (1) Employee’s contribution under section 80CCD (1) Maximum

Deduction for deduction allowed is least of the following
NPS
• 10% of salary (in case taxpayer is employee)

• 20& of gross total income (in case of self employed)

• Rs 1.5 Lakh ( limit allowed u/s 80C)

80CCD (1b) Additional deduction of Rs 50,000 is allowed for amount

Deduction for deposited to NPS account
NPS
Contributions to Atal Pension Yojana is also eligible for
deduction.

80CCD (2) Employers contribution is allowed for deduction upto 10% of

Deduction for basic salary plus dearness allowance under this section. Benefit in
NPS this section is allowed only to salaried individuals and not self
employed.
SECTIONS – IMPORTANT
Section 80CCD
Deduction For - Contributions to National Pension Schemes (NPS)

Deduction Limit - ₹ 50,000

As per the Central Government's notification, tax deductions can be claimed

for contributions to National Pension Schemes under 80CCD.

Contributions made by an employee, employer or voluntary self-contribution

are eligible for deduction. Section 80C allows an overall deduction of
₹1,50,000 lakh plus an additional deduction of ₹50,000 for self-contributions
to NPS or Atal Pension Yojana under Section 80CCD(1b).

Section 80D
Deduction For: Premiums Paid Towards Health Insurance Policies

Health check-up expenses are also eligible for a tax rebate of ₹5,000 under
Section 80D.

The health check-up exemption is inclusive of the ₹25,000 rebate on health

insurance. In other words, people who have claimed ₹5,000 for medical check-
up costs may be eligible for a rebate of ₹20,000 on their premium charges.

Section 80DD
Deduction For - Medical or rehabilitation expenses paid for a handicapped
dependent.

Deduction Limit:

• ₹75,000 for people with 40% to 80% disability

• ₹1,25,000 for people with higher than 80% disability

It is related to the tax deduction available in the following cases:

HUFs and individuals paying for a disabled family member's treatment and
wellbeing are eligible to claim exemptions under Section 80DD on the total
income spent.
The coverage limit is determined by the percentage of disability, with people
with 40-80% disability eligible for a deduction of ₹75,000.

Whereas, families that are caring for an individual with a disability of more
than 80% can receive ₹1.25 lakh for all their related expenses. This benefit is
only available to the dependent individual's family.

Section 80DDB
Deduction For - Medical expenses paid for oneself or dependents in treating a
specific illness or disability

Deduction Limit - ₹40,000 (₹1,00,000 for senior citizens)

When you pay for the treatment of a family member diagnosed with one or
more specific diseases, you may be eligible for a tax waiver.

Individuals under the age of 60 are eligible to receive a maximum of ₹40,000.

Accordingly, such waivers are increased to ₹1 Lakh for senior citizens (60-80
years old) and super seniors (over 80 years old).

A waiver may be given for the treatment of critical illnesses such as malignant
cancers, chronic renal disease, AIDS, haematological ailments, and
neurological diseases (causing 40% or more disability).

Section 80E
Deduction For - Interest Paid Towards Education Loan

Deduction Limit - No Limit

In the financial year, the interest part of the EMI is deducted. There is no
maximum amount that can be deducted.

A bank certificate, however, is required. This certificate should separate the

principal and interest portions of the education loan you paid during the
financial year.

A deduction will be allowed for the total interest paid. No deductions will be
allowed for the principal repayment.

According to the amount of funds required, an education loan can either be

unsecured or secured.
It is important to note, however, that such waivers are limited to the first eight
years of loan repayment. After eight years, interest paid will be taxable.

Section 80EE
Deduction For - Home Loan Interest for First-time Buyers

Deduction Limit - ₹50,000 | plus benefits from Section 24(b)

If the property value is less than ₹45 Lakh, first-time home-buyers can claim
additional interest benefits up to ₹50,000 over Section 24(b) on home loan
EMIs. This effectively allows up to ₹2.5 Lakh to be saved in taxes in addition
to the Section 80C deduction.

For a tax rebate on EMI payments under Section 80EE, an applicant must not
have owned any other property before applying for a home loan.

Section 80G
Deduction For - Donations Made to Charitable Organisations

Deduction Limit - No Limit

Entire contribution to a charitable organisation is exempt from taxes under

Section 80G. If the transfers have been made through banks, there is no limit
to these tax waivers.

Cash donations are exempt from tax calculations for up to ₹2,000 per year.
Such contributions must, however, be made to registered charitable
organisations.

Section 80GG
Deduction For - House Rent Allowance (HRA), if NOT Included in the Salary
Breakdown

Deduction Limit - Specified Conditions

Section 80GG allows you to claim exemptions on your total taxable income if
your company does not include the HRA component in your salary breakdown.
In the case of tax-saving investments other than 80C, tax waivers are granted
to the least of the following:

• Monthly ₹5,000
• The total annual income of 25%
 • 10% of the basic annual income.

Section 80GGA
Deduction For - Donations for Scientific Research and Rural Development

Deduction Limit - No Limit

Tax exemptions can be claimed under Section 80GGA for donations for
scientific research and rural development.

Such deductions can be made on 100% of the income spent, as long as it was
made through a bank account and documented.

Section 80 GGB
Deduction For - Donations Made to Political Parties or an Electoral Trust

Deduction Limit - No Limit

According to Section 80GGB of the Income Tax Act 1961, any Indian company
that contributes any amount to a political party or electoral trust registered in
India can deduct that amount from its income tax liability.

Section 80 GGC
Deduction For - Donations Made to Political Parties or an Electoral Trust

Deduction Limit - subject to donation should not be made in cash or kind

Note: The 80GGC can be claimed by any individual except by local

governments or artificial juridical persons that receive government funding in
whole or in part.

Individuals, Hindu Undivided Families (HUF), firms, AOPs, BOIs, and Artificial
Juridical Persons are eligible for making contributions under Section 80GGC.
However, the government should not fund the Artificial Juridical Persons.

Section 80TTA
Deduction For - Interest Earned on Savings Account Deposits

Deduction Limit - ₹10,000

A maximum of ten thousand rupees can be deducted from the net total
interest earned from the savings accounts with the bank and/or post office.
FDs, RDs, and corporate bonds are not included in interest income.

Multiple savings accounts in different banks are treated as a single account,

so that their cumulative interest is taxed under 'income from other sources'.

For interest income that exceeds ₹10,000 in one year, only the excess amount
over the cap is taxed at rates determined by the aggregate annual income.

Section 80U
Deduction For - Individuals with Disabilities Receive Income Tax Benefits

Deduction Limit:

• ₹75,000 for 40% to 80% disability

• ₹1,25,000 for higher than 80% disability

Section 80U allows disabled individuals to claim tax waivers if they are
certified by a registered medical authority to be 40% disabled.

People with disabilities whose disabilities are between 40% to 80% can claim
₹75,000, while those with disabilities more than 80% can claim ₹1.25 lakhs in
tax benefits.

Section 24(b)
Deduction For- Income from house property

Deduction Limit - ₹2 lakhs

You can earn tax exemptions on your home loan interest payments as well.
Under Section 24(b), interest of up to ₹2 lakhs is tax-free, provided that the
construction is completed within five years of the loan term.

Section 10(13A)
Deduction For - House Rent Allowance Provided Under Salary Break-Up

Deduction Limit - Specified Conditions

Salary-earning employees may be entitled to receive House Rent Allowance as
part of their pay. You can claim a HRA exemption if you are renting a home.
You can claim an exemption up to the lower of the following:

• Amount of HRA actually received

• 50% of your salary if you live in a metro city or 40% if you are in a non-
metro city
• Rent paid – 10% of annual salary

Other Exemptions from Salary Income

In addition to the HRA exemption, you can also take advantage of tax
exemptions on Leave Travel Allowance, meal coupons, conveyance allowance,
medical allowance, etc.

Section 10(10D)
Deduction For - Sum Assured Upon Maturity of Life Insurance Policy

Deduction Limit - Entire sum assured on maturity/ maturity amount

Under Section 10(10D), the entire amount paid by the life insurance company
upon maturity of the life insurance policy either on untimely death of an
insured or end of the policy term can be claimed as a tax rebate.

However, such death benefits are exempt from tax calculations if they are
taken after April 1, 2012, and the total premiums are less than the full sum
assured.

To be eligible for waivers under section 10(10D), the premium expenses

should not exceed 20% of the total sum assured if the policy was taken out
prior to 1st April 2012.

Gifts, Wills, and Taxation

Money received by way of gift is also tax-free. If you receive gifts from your
direct relatives, there is no upper limit on exemption. From non-relatives,
however, gifts up to ₹50,000 are tax-free. If you receive cash gifts on the event
of marriage, they are completely tax-free without any limit and irrespective of
the person giving the gift. Money received through will is also tax-free in your
hands.

Do not depend entirely on Section 80C to reduce your tax liability. Though
Section 80C does offer a major tax-saving deduction, there are other sections
that one can explore. So, use the above-mentioned sections of the Income Tax
Act and save your tax outgo.