B.Com.(Hons.)/B.Com.(Prog.

) Semester-III/V

Skill Enhancement Course (SEC)

Personal Finance and Planning / Personal Finance
Study Material - 1 : Unit (I-III)

SCHOOL OF OPEN LEARNING

UNIVERSITY OF DELHI

Department of Commerce
Editor : K.B. Gupta
 Undergraduate

CONTENT
UNIT –I
INTRODUCTION TO FINANCIAL PLANNING
LESSON – 1 Introduction to Financial Planning & Time Value of Money
LESSON – 2 Introduction to Saving
LESSON – 3 Introduction to digital payment gateways and online frauds

UNIT: Ⅱ
INVESTMENT PLANNING
LESSON – 1 Investment – An Overview
LESSON – 2 Security Analysis
LESSON – 3 Portfolio Analysis
LESSON – 4 Real Estate, Financial Derivative and Commodity Market In India
And Mutual Fund Including Sip
UNIT –III
PERSONAL TAX PLANNING
LESSON – 1 Tax Structure for Personal Taxation
LESSON – 2 Total Income and Residential Status [Section 5 to 9 ]
LESSON – 3 Steps in Personal Tax Planning
LESSON – 4 Exemption for Individuals
Exemptions
LESSON – 5 Deduction Available to Individual
Deductions

Editor : Written by:

K.B.Gupta Dr. Sonia Kangra

SCHOOL OF OPEN LEARNING

University of Delhi
5, Cavalry Lane, Delhi-110007
 UNIT -1
LESSON -1

INTRODUCTION TO FINANCIAL PLANNING AND TIME VALUE OF MONEY

Objective : After studying this lesson you will be able to
 Concept of finance and personal financial planning.
 Need for financial planning
 Different type of loan available in market
 Time value of money
Finance: concept

 Finance is a broad term that describes activities associated with banking, leverage or
debt, credit, capital markets, money, and investments. Basically, finance represents
money management and the process of acquiring needed funds. Finance also
encompasses theoversight, creation, and study of money, banking, credit, investments,
assets, and liabilities that make up financial systems.
 The finance field includes three main subcategories: personal finance, corporate
finance, and public (government) finance.
 In our chapter we would deal with personal finance.

Different definition of finance

Finance is "study how scarce resources are allocated over time (Bodie and
Merton)".

The term finance refers to "all activities related to obtaining money and effective
use (O. Ferrel C. and Geoffrey Hirt )"

Guthumann and Dougall give their definition as following, “The activity concerned
with planning, developing, managing, administering and increasing of the capital
used for business purposes is known as finance”.

In the words of Wheeler, “The overall assessment, acquisition, and conversation of

capital funds to accomplish important objectives of a business enterprise including
the financial requirement is called business finance”

Financial planning

Financial Planning provides you with a blueprint which helps you realize all your
dreams in life in a very systematic and planned manner without causing you any
sleepless nights.Remember, financial planning is a process, not a product.

It gives you the confidence that you know you are on the right track and in safe hands
and that you will have the money when you need it - when you want to buy a house or
a car or when you want to get your daughter married or send her off for education. Or
when you retire.Financial Planning combines the elements of risk management,

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 investment planning, tax planning and retirement planning to comprehensively plan
for your future needs.
Definition of financial planning
Need for financial planning.
 Need for personal financial planning to look at your complete financial situation,
including your assets, liabilities, cash flows, financial goals, risk appetite, life
situation, family background, etc.
 To plan systematically for your financial goals and objectives, including life
insurance, health insurance, retirement, child planning – education & marriage, house
purchase, estate planning, investment planning, etc.
 To make your financial life better and secured for yourself and your family and
ensuring that all financial goals are achieved.
 To better understand and learn about your financial situation and understand the
reasoning and logic behind all recommendations made. Also, to better understand the
different asset classes and financial products and their suitability to you.
 To regularly review the progress of financial plans and/or to revise the financial plans
to accommodate any major change in personal life or financial situation.
Who is a financial planner?
A financial planner is a qualified investment professional who helps individuals and
corporations meet their long-term financial objectives. Financial planners do their work by
consulting with clients to analyse their goals, risk tolerance, and life or corporate stages, then
identify a suitable class of investments for them. From there they may set up a program to
help the client meet those goals by distributing their available savings into a diversified
collection of investments designed to grow or provide income, as desired.
Financial planners may also specialize in tax planning, asset allocation, risk management, and
retirement and/or estate planning.
Incentives for financial planner
Following type of financial planners:
Fee based financial planner:the one who charge fee for formulation of financial plan and do
not get commission from institution.
Commission based financial planner: who act as mutual fund adviser or insurance adviser
and are compensated by institution under which they place client ‘s fund
Combination of both: theone who charge fee and also get commission from the institution
under which they place client fund.
Financial goals /personal finance
Financial planning involves analysing the current financial position of individuals to
formulate strategies for future needs within financial constraints. Personal finance is
specific to every individual's situation and activity; therefore, financial strategies
depend largely on the person's earnings, living requirements, goals, and desires.

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 Individuals must save for retirement, for example, which requires saving or investing
enough money during their working lives to fund their long-term plans. This type of
financial management decision falls under personal finance.
Personal finance includes the purchasing of financial products such as credit
cards, insurance, mortgages, and various types of investments. Banking is also
considered a component of personal finance since individuals use checking and
savings accounts, and online or mobile payment services such as PayPal.
The Personal Financial Planning Process Identifies Financial Goals and Objectives
and Creates A Plan for Achieving Them
Personal financial planning provides you with a long-term strategy for your financial
future, taking into consideration every aspect of your financial situation and how each
affects your ability to achieve your goals and objectives. For example
 Buying a family health cover
 Managing debt
 Planning for retirement
 Investing to save taxes in efficient manner
 Creating wealth for future generation
 saving to buy your favourite vehicle
 Saving for purchasing dream home
 Investing for higher education of children, marriage and other purpose
Financial planning process
There are steps involved in financial planning process:
1. Establishing good relationship with client:The financial planner should have
good communication skills and also interpersonal skills so that client can easily
share his / her financial information. as this is the basis upon which the further
financial plan formation depends. Moreover, high ethical standards should be
maintained as per financial planning board of India (FPBI)
2. Clarify your present situation by collecting the facts.
You will want to assess all relevant personal and financial data such as lists of
assets and liabilities, tax returns, record of securities transactions, insurance
policies, wills, trusts, pension plans, etc.
Financial goal can be categorised into: -
 Short term
 Medium term
 Long term
Each goal has priorities attach to it and each goal need to be converted into
money terms for example I wish to save 10,00,000 for my higher
education. Goals need to be realistic. Another important aspect of financial
planning process is risk tolerance level of client this depends upon the
income level, time horizon.
Two type of data can be gathered from client
 Qualitative data
 Quantitative data

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 Quantitative data include factual information of client like assets and
liabilities, any investment, expenses, income source, retirement
requirement if any, current needs.
Qualitative information isnon-factual information which are important
towards formulation of financial planning plan like
 Risk tolerance
 Personal strength and weaknesses
 Wealth accumulation perspective
 Taxation
 Concern for passing of wealth for future generation
3. Decide where you want to be, financially. This will require you to identify
both personal and financial goals and objectives for you and your family. These
may include family financial planning issues like providing for your children’s
college educations, supporting aging parents, or relieving immediate financial
pressures that would help maintain your current lifestyle and provide for
retirement. These considerations are as important as what is in your bank
account in determining your best strategy.
4. Identify financial problems that create barriers to you. Problem areas can
include too little or too much insurance, a big tax burden, inadequate cash flow,
or current investments that are losing the battle with inflation. These possible
problem areas must be identified before solutions can be found.
5. Provide a written financial plan and also a alternative plan: The length of
the financial plan document will vary with the complexity of your individual
situation. It should always be structured to meet your needs and objectives for
example if client is young and earning reasonably good then it is advisable to
invest more in equity and less in debt as he has long time horizon with good risk
tolerance.
And if the client is retired person then it is advisable to invest more in debt and income
producing investments as he requires regular income to meet his expenses.
Investor can be divided into following category depending upon the risk appetite:
 Risk averse
 Moderates
 Aggressive
Risk averse risk-averse describes the investor who chooses the preservation of capital over
the potential for a higher-than-average return.Generally, the return on a low-risk investment
will match, or slightly exceed, the level of inflation over time.
Moderate investor are generally described as “middle of the road” risk-takers. The goal is to
balance out opportunities and risks, and the approach is sometimes described as a balanced
approach. Typically use a mixture of stocks and bonds. They might be roughly 50/50 or
60/40. That is: 60% of their assets might be in stocks (large companies, small companies,
overseas stocks, etc) while 40% of assets are in bonds (including government and agency
bonds, corporate bonds, high-yield bonds, foreign issues, etc).
Aggressive investor An aggressive investor investment s typically invest in portfolio that
attempts to maximize returns by taking a relatively higher degree of risk. They are the one
who can take higher risk for higher return. Strategies for achieving higher than average

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returns typically emphasize capital appreciation as a primary investment objective, rather
than income or safety of principal. Such a strategy would therefore have an asset allocation
with a substantial weighting in stocks and possibly little or no allocation to bonds or
cash.Aggressive investment strategies are typically thought to be suitable for young adults
with smaller portfolio sizes.
6. Implement agreed-upon recommendations from your plan. A financial plan is only
helpful if the recommendations are put into action. However, the decision to implement,
modify, or reject the recommendations presented in your plan remains your sole
responsibility.
7. Periodically review and revise your plan. A financial plan can be no better than the data
upon which it is based. Periodic reviews and revisions of the plan are essential to account for
changes in personal and economic changes in life.
Financial planning strategy
A good financial planner should express verbally and in written form the detail financial plan
to the client so that he/she is aware how that person will achieve his/her financial plan. some
of the points of strategy are as follows: -
Risk management: this involves minimizing the risk involve finances like health insurance,
life cover, investment cover, income protection in order to provide income security to oneself
and family.
Health insurance is a medical coverage that helps you meet your medical expenses by
offering financial assistance. Due to the high cost of hospitalization expenses, it is important
to have a health insurance plan in place. Moreover, there should be insurance of major asset
which protects your asset against any sudden and accidental damage, ifrequired the company
will pay the repair cost if unrepairable then replace your asset.
Proper asset allocation:this involves investment in proper asset in order to achieve financial
goals like debt, equity, mutual fund, bond, commercial paper. thumb rule for this is
investment in debt should be equal to one’s age and remaining amount should be in equity.
For example, a 30yr person should invest 30%in debt and the remaining 70% in equity.it also
dependent upon the risk appetite and income level of client. Adequate amount of money
should be kept as liquid asset like cash to meet unexpected expenses.
Tax consideration:assessing proper tax planning so as to reduce tax burden effectively. It
will help in accumulation of wealth. Following taxes should be considered: -
 Wealth tax
 Entertainment tax
 Property tax
 Income tax
 Gift tax
 Corporate tax
 Security transaction tax
Debt which attracts more tax should be reduced. All details of financial plan should be made
clear to the client.

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Estate planning:Estate planning is the preparation of tasks that serve to manage an
individual's asset base in the event of their incapacitation or death. The planning includes the
bequest of assets to heirs and the settlement of estate taxes. Most estate plans are set up with
the help of an attorney experienced in estate law.
Assets that could make up an individual’s estate include houses, cars, stocks, artwork, life
insurance, pensions, and debt. Individuals have various reasons for planning an estate, such
as preserving family wealth, providing for a surviving spouse and children, funding children's
or grandchildren’s education, or leaving their legacy behind to a charitable cause.
The most basic step in estate planning involves writing a will. Other major estate planning
tasks include the following:
 Limiting estate taxes by setting up trust accounts in the names of beneficiaries
 Establishing a guardian for living dependents.
 Establishing annual gifting to qualified charitable and non-profit organizations to
reduce the taxable estate
 Setting up a durable power of attorney (POA) to direct other assets and investments

Time value of money

The time value of money (TVM) is the concept that money you have now is worth more than
the identical sum in the future due to its potential earning capacity. This core principle of
finance holds that provided money can earn interest, any amount of money is worth more the
sooner it is received.
Time value of money in personal finance.
Here the person wants to receive money today then in near future. now the question arises
why? this is simply because the person is aware about the time value of money.
If the person having money today in hand then he can earn interest by investing that money,
this is referred to as earning capacity of money.
Say, if you invest a Rs. 100 today – the returns will be more compared to the same
investment made 2 months from now. Moreover, there is always a risk that the borrower
might delay even more or not pay at all in the future.
Example: if a friend of yours offer you to lend 20,000 today and 20,500 after 2 years and you
have option to choose the one. then clearly the second option i.e 20,500 may or may not
fructified and with first option you would have money today and you could invest and earn
return interest their upon.
Present value and future value
Present value is the current value of future payments in lump sum or several part payments
discounted at certain interest rate.
Present value formula =FV/(1+r)n
where: fv = future value
r = rate of return, n = number of periods.
Future Value is the sum of money that any saving scheme with a compounded interest will
build to by a pre-decided future date. It applies to both lumpsum as well as recurring
investments like SIP.

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Calculating future investment for one-time investment.
The formula for calculating future value where investment earning simple
interest:FV=I×(1+(R×T))
where:
I=Investment amount
R=Interest rate
T=Number of years
Where investment earning compound interest:FV=I×(1+RT)
where:
I=Investment amount
R=Interest rate
T=Number of years
Questions based on future value
Q.1 You are scheduled to receive Rs. 14000 in two years. When you receive it, you will
invest it for six more years at 8 percent per year. How much will you have in eight years?
Ans.: FV=I×(1+RT)
14000×(1+8%)6 =22,216.240
Q.1You invest Rs. 10,000. During the first year the investment earned 20% for the year.
During the second year, you earned only 4% for that year. How much is your original
deposit worth at the end of the two years?
Ans: for 1styr : 10000(1+20%)1=12000
For 2nd yr:12000(1+4%)1=12800
Worth at the end of 2 yr =4643.28
Calculating effective annual interest rate
The effective annual interest rate is the real return on a savings account or any interest-paying
investment when the effects of compounding over time are taken into account. It also reveals
the real percentage rate owed in interest on a loan, a credit card, or any other debt.
Effective Annual Interest Rate=(1+i/n)n-1where:
i=Nominal interest rate
n=Number of periods
For example, consider these two offers: Investment A pays 10% interest, compounded
monthly. Investment B pays 10.1% compounded semi-annually. Which is the better offer?
In both cases, the advertised interest rate is the nominal interest rate. The effective annual
interest rate is calculated by adjusting the nominal interest rate for the number of
compounding periods the financial product will experience in a period of time. In this case,
that period is one year. The formula and calculations are as follows:

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  Effective annual interest rate = (1 + (nominal rate / number of compounding
periods)) ^ (number of compounding periods) - 1
 For investment A, this would be: 10.47% = (1 + (10% / 12)) ^ 12 - 1
 And for investment B, it would be: 10.36% = (1 + (10.1% / 2)) ^ 2 - 1
Investment B has a higher stated nominal interest rate, but the effective annual interest rate is
lower than the effective rate for investment A. This is because Investment B compounds
fewer times over the course of the year.
Q.1MR.RAM borrowed 10,00,000from a bank on a one year 16% term loan, with interest
compounded quarterly. Determine effective annual interest rate on loan?
Ans. effective interest rate= (1+0.16/4)4-1=1.1699or 16.99%
Present value of one-time investment
The formula to calculate present value when future value is given
PV=FV/(1+R)n
Q1. what amount would be invested now to become 90,000 in 4yrs when rate of return is
7%per annum and compounding is done once a year?
Ans. PV=FV/(1+R)n
= 90,000/ (1+7%)4
=68649.8855
Q.2 Determine the present value of perpetuity of Rs 1,20,000per year (starting from
beginning) for infinite period at an effective rate of interest of 12% per annum?
Ans. PV of perpetuity would be =1,20,000/0.12=10,00,000
Personal finance / loans
Personal finance is a term that covers managing your money as well as saving and investing.
It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning,
and tax and estate planning. The term often refers to the entire industry that provides financial
services to individuals and households and advises them about financial and investment
opportunities. A person explores various personal finance option to achieve his or her
financial objective.
The strategy involved in personal finance are as follows:
a. Formulation of budget: here you have to decide how much you have to spend
and how much to save for future. Generally, there is 50/30/20 budgeting
method, this means 50% you can spend for your daily and
householdneeds/30% you can spend for shopping /20% goes towards future
saving to be used during any emergency.
b. Create an emergency fund: it is important to pay your unforeseeable expenses
yourself first, so it is important to create emergency fund.
c. Limit your debt: it is advice able to limit your debt and try it never goes out of
hand. Going for debt to build an asset is good option.

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 d. Use your credit card wisely: sometime credit cards are major debt traps. But
one should have a credit card as it helps us to build our credit rating and also
check our expenditure.
e. One should also monitor credit score: monitoring our credit score help us to
build good credit history which help us to get our thing finance. Credit scores
are calculated between 300 and 850. Here's one rough way to look at it:
720 = good credit
650 = average credit
600 or less = poor credit
One should always pay our bills on time.
f. Plan your retirement: Setting aside money now for your retirement not only
allows it to grow over the long term, but it can also reduce your current
income taxes if funds are placed in a tax-advantaged plan fund like an
individual retirement account (IRA).
Personal loan
In order to finance personal needs person took various loans like home loan, educational loan
and car loan etc.
Now have a look at each of these loans in detail.
Home loan: it refers to sum of money borrowed from a financial institution like banks. it
involves flexible or fixed interest and payment terms. property is mortgaged till the payment
of loan. The bank or financial institution will hold the title or deed of the property till the loan
is paid. Interest on home loan can be fixed or floating or partly fixed or partly floating. There
is tax benefit available on home loan under section 80EE of income tax act.
Educational loan: cost of financing education is increasing rapidly. In order to finance
education people, take educational loan like loan to do MBA from a reputed institution.
Educational loan cover accommodation charges, fee and other miscellaneous charges. It can
be taken for a full-time, part-time or vocational course and graduation or post-graduation in
the fields of engineering, management, medical, hotel management, architecture etc. To apply
for the loan, one must be an Indian citizen, having secured an admission into a
college/university recognised by a competent authority in India orabroad. The applicant must
have completed his higher secondary level schooling. As per the Reserve Bank of India (RBI)
guidelines, there are no restrictions on the upper age limit, but some banks may have it.
Car loan: To finance the car you may require to buy you need to take car loan to cover the
cost. It is secured against the vehicle / car you purchase and serve as collateral; in case of any
default the banking institution will take the possession of your vehicle. The lender retains the
ownership of vehicle till the finale payment is made. Usually, a lower interest rate prevails
for car loan.

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 LESSON-2
INTRODUCTION TO SAVING
Objective
 Concept of saving.
 Benefits of saving.
 Management of saving and financial discipline.
Mode of saving or different saving scheme
Saving
Savings is the money a person has left over when they subtract their consumer spending from
their disposable income over a given time period. Savings can be used to increase income
through investing.
The extent to which individuals save is affected by their preferences for future over
present consumption, their expectations of future income, and to some extent by the rate of
interest. There are two ways for an individual to measure his saving for a given accounting
period. One is to estimate his income and subtract his current expenditures, the difference
being his saving. The alternative is to examine his balance sheet (his property and his debts)
at the beginning and end of the period and measure the increase in net worth, which reflects
his saving.
Total national saving is measured as the excess of national income over consumption and
taxes and is the same as national investment, or the excess of net national product over the
parts of the product made up of consumption goods and services and items bought by
government expenditures. Thus, in national income accounts, saving is always equal to
investment. An alternative measure of saving is the estimated change in total net worth over a
period of time.
For example: Saving is the amount left after a person met his /her expenditure for example if
you have 10, 000 after incurring an expenditure of 8,000 you are left with 2,000. This 2,000
will be termed as yours saving.
Benefit of saving:
1. It acts as a Safety net
2. Less Stress
3. Enables you to Travel
4. Financially Independent
5. No worry from Unexpected Expenses
6. Comfortable Retirement
SAFETY NET
It helps you to meet the unexpected expenses like car repair, expensive medical bills, or a
sudden job loss. If you were to lose your job, you'd be thankful you socked away a good
amount of money into your emergency fund to tide you over until you found a new job. There
by acting as safety net. Saving should ideally be equivalent to three to six months of
expenses.

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LESS STRESS
Saving helps to get rid of your tensions like will I be able to pay my educational expenses on
time, or will I be able to meet my medical expenses? stop worrying as now you have good
amount of saving to meet your obligation, thereby saving reduces your stress level.
ENABLE YOU TO TRAVEL
Your savings account isn't only for things you need—it can be for things you want, too.
Saving up for a big purchase beforehand means you won't pay extra in finance costs such
as interest and fees, you can also use that money to plan your desired vacation like visit to
Paris, France -the city of lights, machupicchu, Peru, the Grand Canyon etc.
FINANCIALLY INDEPENDENT
Freedom gave us the ability to pursue our dreams, so it is equally important to create such
independence in our finances too, this is accomplished by saving and investing. As all of us
have desire to have material possession like house, car white goods and spend lifestyle like
watches jewellery and clothes .so it is important to save and invest in return that are higher
than rate of inflation.
We should understand the difference between nominal and real returns. When you invest in a
6 percent fixed deposit, the return that you get is "nominal". If inflation is 4 percent, the
"real" return is just 2 percent. And, in higher tax brackets, even this 2 percent may go away in
taxes.
Therefore, not taking risks at all may be alright to protect your savings but it may not allow
your savings to grow after adjusting for inflation and taxes.
To achieve financial independence, it is therefore paramount that you invest in high yielding
assets. But, with small sums of money at our disposal, the only viable option is to invest in
equity markets through institutional vehicles like mutual funds.Creating financial
independence requires a lot of discipline.
As a thumb rule, one should save at least 25 to 30 percent of one’s monthly earnings. Also,
the younger you are, the higher percentage should be allocated towards equity investments.
COMFORTABLE RETIREMENT
Retirement is an important reality for everyone.When planning for retirement, it’s always
better to start as early as possible for best compounding returns and not to rely heavily on one
source of savings. Because there are always emergencies in old-age. So, having a sufficient
corpus to deal with all these is crucial. You can opt for unit linked insurance plan (ULIPs),
ULIP are designed in a way that offers you both protection and investment benefit, till the
age of 99 to 100 years. These are the plans which not only take care of providing your
beneficiaries with death benefit but also take cares of your living needs,during your
retirement. You have the flexibility to enter into Whole Life ULIPs at any age between 18
and 100 years and can exit at any age. You can also choose till what age you want to save
money, or accumulate money. This could be till your retirement.
Management of spending
Management of spending can easily be achieved by following the financial planning
strategies. This involves following steps: -
1. Devising a budget.

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 2. Cutting down of unnecessary expenditure.
3. Retirement planning
4. Track your spending.
5. Find ways to save.
6. Make plan to pay off your debt.
7. Pay your bills timely.
DEVISING A BUDGET
Budgeting and saving money don't come naturally to many people for obvious reasons.
Spending money on nonessentials is so easy, even if you're committed to a well-laid spending
plan.Budget, which can help you reorganize your finances, prioritize spending, and manage
debt, thus allowing you to make progress toward your long-term financial goals. making a
budget involve the following:
 List all your income after taxes—for example, employee and freelance income,
investment income, and interest earned on any savings accounts. Then list all
expenses—for example, rent or mortgage payments, credit card payments,
instalment loan payments, grocery receipts, and utility bills.
 Subtract the expense from the income to get a general picture of your financial
health. If your income total is larger than your expense total—congratulations—you
just found more money for saving, investing, and paying down your debt. But If
your expense total is larger than your income total, all is not lost, but you'll have to
make some choices about where you spend some of your money going forward if
you want to balance your budget. fu.
 Reduce your expenditure by categorising them into fixed expenses, discretionary
expenses and variable expenses. Fixed expenses are those which have has to be
incurred like rent, medical expenses, you can do nothing with it , it remain constant .
the variable expenses can be controlled to an extent by bringing behavioural
changes like turning of light can reduce electricity bills. discretionary expenses can
effectively be controlled and generate opportunity for saving.
 Adopt a 50-20-30 approach where 50% of your after-tax income on housing, food,
and other necessities
20% on paying down debt or increasing savings
30% on whatever you want—discretionary spending.
 Put your budget to work, means you must strictly follow the budget prepared by you
in order to achieve financial goal.
CUTTING DOWN UNNECESSARY EXPENSES
Start by cutting spending on items you don't need. For example, do you need a $5 coffee
every morning? Could you make do with a smaller, older car? Instead of an expensive
vacation, would you be willing to try a stay-at-home vacation (staycation)?
These types of choices are very personal, so there's no right or wrong answer. But laying
them out on the table can at least help you understand your priorities and some of the options
you may not have realized you had for saving money.

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RETIREMENT PLANNING
Saving for retirement always sounds like a good idea in theory, but it isn’t always easy in
practice. It involves following steps:
 Start saving early,Sign up for your retirement plan as soon as you’re able to. The
sooner you start taking advantage of this benefit, the more you’ll start to save. For
example, if you save at 25 v/s you save at 35, the earlier you start, your savings will
be benefited of the power of compounding.
 Find right retirement investment option which will be in tandem with your monthly
income. Some of the options in India are;
 Invest in real estate:One of the best ways to create a guaranteed income
stream is to own property and lease the property to earn a rental yield. In case
of multiple assets, the rental income is higher. In fact, many seniors lease out
their residences and move into a senior care community. Since rents increase
every year, this form of income also helps stay ahead of inflation. So, it is
prudent to invest in property when we are younger and create a steady and
guaranteed income stream. In addition, we can also sell the real estate asset
and create an addition corpus for investment.
 Reverse mortgage:Another way of creating an income stream from property
is to opt for reverse mortgage. Reverse mortgage is not very popular in India.
However, it is a good solution for creating an income stream.
 Senior citizen saving scheme:This investment scheme offers a guaranteed
return of 7.7% per annum, offers a monthly fixed income, keeps the initial
capital intact and yields better results than other debt instruments. The scheme
also provides for a recurring deposit into which the income can be parked.
This accelerates savings. The maturity period is 5 years. There is no TDS for
this scheme but the interest earned is taxable. The scheme does not qualify for
tax benefits under section 80C of the Income Tax Act.
 Mutual fund:It is also prudent to invest in mutual funds. These investments
have higher liquidity and allow the investor to earn a steady income. They
carry lesser risks than investing in the primary market and yet offer good
returns on investment.
 Pension fund:In addition, seniors should invest in pension funds and saving
schemes. Though these investment options are low risk and help them
preserve their capital, they also offer much lower returns.
 Know your retirement goal:Your expenses during retirement might not be the
same as they are when you’re working. But that doesn’t mean you won’t have any
expenses. You’ll probably need somewhere between 70% to 90% of your current
income to cover yourself in retirement.
It’s a good idea to plan now for what you need later. If you’d like to maintain your
current living standards, try to make sure you’re contributing enough to cover those
costs later in life. If you think you won’t have as many expenses in retirement,
you’ll still need to save, but you can adjust your goals accordingly.
 Tax efficacy:Once you reach retirement age and begin taking distributions, taxes
become a big problem. Most of your retirement accounts are taxed as ordinary

13
 income tax. That means you could pay as much as 37% in taxes on any money you
take from your traditional 401(k) or IRA. That's why it's important to consider a
Roth IRA or a Roth 401(k), as both allow you to pay taxes upfront rather than upon
withdrawal. If you believe you will make more money later in life, it may make
sense to do a Roth conversion. An accountant or financial planner can help you
work through such tax considerations.
 Insurance:A key component of retirement planning is protecting your assets. Age
comes with increased medical expenses, and you will have to navigate the often-
complicated Medicare system. Many people feel that standard Medicare
doesn't provide adequate coverage, so they look to a Medicare Advantage
or Medigap policy to supplement it. There's also life insurance and long-term-care
insurance to consider.
Financial discipline : financial discipline involves control of money, inculcating the habit of
saving and avoiding excessive expenditure. One should consider following steps to harness
financial discipline in order to achieve our financial goal.
 Prepare a monthly spending budget and stick to it.
 Invest with a goal. Goals give direction and help you in selecting right product.
 Avoid loans for your desires. Better do a financial planning check before going in
for a big purchase.
 Invest monthly to become regularise in your savings and this will also help you
maintain consistency.
 Motivate yourself by visualising the goals and the end result for which you are
working for.
Mode of saving or different saving scheme
Savings Schemes are investment options for Indian citizens launched by the government as
well as other public sector financial institutions. These saving schemes were introduced as
an incentive to cultivate healthy saving and investing habits in India. This is also a way to
increase the inflow of money into the Indian economy. In earlier times Indians used to
keep their money with themselves and this caused poor circulation as well as stagnation of
wealth. By means of saving schemes, which are backed by the government, Indian citizens
can allow their wealth to appreciate at higher interest rates and reap benefits such as tax
exemption that certain savings schemes offer.Savings schemes cater to a wide
demographic and encourage individuals to invest for various milestones of life such as
retirement, children’s higher education, their marriage etc. They are ideal for long term
wealth creation as they come with a certain lock-in period and offer good returns. Since
they are not impacted by market volatility, they are safer investment options, ideal for the
conservative investor. Furthermore, the interest rates on various saving schemes are
revised on a quarterly or half yearly basis, keeping up with the rising costs of living and
inflation.
Different saving schemes are depicted in the flow chart given below

14
 tax saving fixed deposit

unit linked insurance plan

sukanya samriddhi yojana

national pension scheme

pradhan mantri vaya vandana yojana

senior citizen saving scheme

Tax saving fixed deposit

Tax-saving
saving FD allows you to make an investment to save tax under section 80C of the
Income Tax Act. The minimum
nimum tenure for a term deposit under Tax Saving Scheme is 5
years. You can get a tax exemption of a maximum of Rs.1.5 lakh.
Key features of tax saving fixed deposit
 Tenure: 5 years to 10 years
 Interest rates available: 5.30% p.a. to 6.00% p.a. for the general
eral public
 Deposit range: Rs.100 to Rs.1.50 lakh p.a.

Key benefits of tax saver fixed deposit

 Tax exemptions as listed out in Section 80C of the Income Tax (IT) Act, 1961.
 Premature withdrawal is allowed after completing 55-year lock-in
in period.
 Most banks offer 0.50% hike in interest rates to senior citizens.
 Most Tax Saving FD schemes come with an option of joint account.
 In case of a joint account, only the primary accountholder is eligible for tax benefits.
Unit linked insurance plan
ULIP is an insurancece product that combines insurance and investment benefits in a single
plan. ULIP, or Unit Linked Insurance Plan, offers life cover which is a major benefit over the
traditional wealth creation tools. It not only helps your money grow but also protects you your
loved ones’ future from life's unexpected turns.
turns.A
A ULIP is both an insurance policy and an
investment. The policy specifies a death benefit - the amount the nominee will be paid if the
policyholder passes away during the term of the ULIP. In addition, if the policy holder
survives the term of the ULIP, he/she can also get the maturity value of the ULIP. This will
be the amount generated by the ULIP investments in equity and/or debt. The policyholder is
typically allowed to choose ULIP funds and asset class
classes
es to generate these returns. This is the
investment component of a ULIP.

15
Note that even if the value of the ULIP investments falls below the sum assured specified in
the ULIP, the policy holder’s nominee(s) will be paid the death benefit specified.
Benefit of ULIP
 Regular Savings:
ULIPs inculcate the habit of regular and disciplined savings, which is the key to
successful long-term financial planning. With regular premium payments, you can
enjoy the benefits of wealth creation for your loved ones.
 Protection:
ULIPs provide the protective benefit of a Life Cover, which keeps your family secure
in your absence. ULIPs provide the protective benefit of a Life Cover, which keeps
your family secure in your absence.
 Flexibility of Investment:
You will have flexibility and control of your money through the following ways:
1. Fund Switch – An option to move your money between equity, balanced and
debt funds
2. Premium Redirection – An option to invest your future premium in a different
fund of your choice
3. Partial Withdrawal## – An option that allows you to withdraw a part of your
money.
4. Top-up – An option to invest additional money to your existing savings
 Tax Benefits~:
Investment in ULIPs is eligible for deduction from taxable income under Section
80C of the Income Tax Act, 1961 up to ₹ 1.5 lakh per annum. The maturity proceeds
of the ULIP are also exempt from tax under Section 10(10D) of the Income Tax Act
subject to conditions specified therein. If the ULIP investor dies during the term of the
ULIP he/she will be entitled to the death benefit specified in the ULIP policy and the
amount received on death is exempt from tax u/s 10(10D) of The Income Tax Act
1961. Switching between ULIP funds also does not attract any tax
Sukanya samriddhi yojana
The Sukanya Samriddhi Account is designed to provide a bright future for your girl
child. It offers a high interest rate of 7.6% and tax benefits under 80c.
Interest earned is free from income tax under section 10 of income tax act.
 Features of scheme
 Attractive interest rate of 7.6%, that is fully exempt from tax under section 80C.
 Minimum Rs. 1,000 can be invested in one financial year
 Maximum investment of Rs. 1,50,000 can be made in one financial year
 If the minimum amount of Rs 1000/- is not deposited in any financial year, a
penalty of Rs 50/- will be charged

16
  Deposits in an account can be made till completion of 14 years, from the date of
opening of the account
 The account shall mature on completion of 21 years from the date of opening of
the account, provided that where the marriage of the account holder takes place
before completion of such period of 21 years, the operation of the account shall not
be permitted beyond the date of her marriage.
National pension scheme
National Pension Scheme (NPS) India is a voluntary and long-term investment plan for
retirement under the purview of the Pension Fund Regulatory and Development Authority
(PFRDA) and Central Government.
The National Pension Scheme is a social security initiative by the Central Government. This
pension programme is open to employees from the public, private and even the unorganised
sectors except those from the armed forces.
The scheme encourages people to invest in a pension account at regular intervals during the
course of their employment. After retirement, the subscribers can take out a certain
percentage of the corpus. As an NPS account holder, you will receive the remaining amount
as a monthly pension post your retirement.
Earlier, the NPS scheme covered only the Central Government employees. Now, however,
the PFRDA has made it open to all Indian citizens on a voluntary basis.
NPS scheme holds immense value for anyone who works in the private sector and requires a
regular pension after retirement. The scheme is portable across jobs and locations, with tax
benefits under Section 80C and Section 80CCD.

Benefits: -
 Return and interest-A portion of the NPS goes to equities (this may not
offer guaranteed returns). However, it offers returns that are much higher
than other traditional tax-saving investments like the PPF.
 Risk assessment -Currently, there is a cap in the range of 75% to 50% on
equity exposure for the National Pension Scheme. For government
employees, this cap is 50%. In the range prescribed, the equity portion will
reduce by 2.5% each year beginning from the year in which the investor
turns 50 years of age.However, for an investor of the age 60 years and
above, the cap is fixed at 50%. This stabilizes the risk-return equation in the
interest of investors, which means the corpus is somewhat safe from the
equity market volatility.
 Tax efficiency –there is deduction up to 1.5 lakh to be claimed by NPS for
your contribution as well as contribution of employee.
80CCD (1) cover self-contribution and maximum deduction that can be
claimed under is 10% of salary and it is 20% of gross income for self-
employed.
You can claim any additional self-contribution up to 50,000 under section
80 CCD (1B) as NPS tax benefit.

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Pradhan Mantri Vaya Vandana Yojana
PMVVY is a retirement and pension scheme that is operated and managed by the Life
Insurance Corporation of India (LIC), the largest life insurance provider in India. Pradhan
Mantri Vaya Vandana Yojana (PMVVY) is retirement cum pension scheme announced by
the Indian Government. The plan is subsidised by the government and was launched in May
2017. The money invested by the purchasers of the scheme is called the purchase price. As
the sovereign guarantees back the scheme, it offers an assured rate of return on investment.
The scheme pays out regular pension and the frequency can be monthly, quarterly, or yearly.
The PMVVY is an excellent alternative to traditional bank deposits.
Benefits of the scheme
 The PMVVY scheme provides subscribers with an assured return at the rate of 8%
to 8.3% for 10 years
 It provides fixed sum regularly.
 Maturity benefit-The entire amount (including the final pension and the purchase
price) would be paid out once the policy term of 10 years is completed
 Loan benefit- Loan of up to 75% of the purchase price can be availed after three
years to cover emergencies
 Surrender benefit -Due to medical emergencies (self and spouse), the subscribers
can withdraw 98% of the purchase price
 Death benefit-If the subscriber passes away within the term of the policy, then the
nominee would be paid out with the purchase price

Senior citizen saving scheme

Scheme is for senior citizen of India. It offers income with highest safety and tax benefit.
Senior citizens resident in India can invest a lump sum in the scheme, individually or jointly,
and get access to regular income along with tax benefits. Senior citizen scheme is
government backed retirement benefit plan.
Benefit of senior citizen scheme
1. SCSS is an Indian government-sponsored investment scheme and hence is considered
safe and most reliable
2. SCSS account includes a simple process and can be opened at any authorized bank or
any post office in India.
3. The account is transferable across India.
4. The scheme offers a high interest rate on the deposit.
5. Get an income tax deduction of up to Rs.1.5 lakh under Section 80C of the Indian Tax
Act, 1961.
6. The 5-year tenure of the account can be extended for another 3 years.

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 LESSON-3
INTRODUCTION TO DIGITAL PAYMENT GATEWAYS AND ONLINE FRAUDS

 Concept of net banking and UPI

 Benefit and disadvantages of net banking
 Roles and responsibility of NPCI, PSP banks and TPAP
 Grievance redressal mechanism for UPI user
 Concept of digital wallets
 Ponzi schemes
 Safeguard and safety measures against Ponzi schemes
 Investor protection measure of SEBI
 Online frauds
 Type of online frauds
 Steps taken by GOI to prevent cyber/online frauds

Introduction
Net banking and UPI.
Net banking: Internet banking, also known as online banking or e-banking or Net Banking is
a facility offered by banks and financial institutions that allow customers to use banking
services over the internet. Customers need not visit their bank’s branch office to avail each
and every small service. The person needs to register themselves with the concerned banks in
order to avail net banking services.
Features of net banking
 Check the account statement online.
 Open a fixed deposit account.
 Pay utility bills such as water bill and electricity bill.
 Make merchant payments.
 Transfer funds.
 Order for a cheque book.
 Buy general insurance.
 Recharge prepaid mobile/DTH.
Advantages of net banking.
 You can avail services round the clock -Most of the services offered are not time-
restricted; you can check your account balance at any time and transfer funds without
having to wait for the bank to open.

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  It is simple and easy to operate-Using the services offered by online banking is
simple and easy. Many find transacting online a lot easier than visiting the branch for
the same. One need not stand in long queues.
 It is convenient and efficient as you can complete transaction within minutes-You
can complete your transactions from wherever you are. Pay utility bills, recurring
deposit account instalments, and others using online banking. You can complete any
transaction in a matter of a few minutes via internet banking. Funds can be transferred
to any account within the country or open a fixed deposit account within no time on
net banking.
 You can keep a track on all your transactions as they all are recorded-When you
make a transaction at the bank branch, you will receive an acknowledgement receipt.
There are possibilities of you losing it. In contrast, all the transactions you perform on
a bank’s internet banking portal will be recorded. You can show this as proof of the
transaction if need be. Details such as the payee’s name, bank account number, the
amount paid, the date and time of payment, and remarks if any will be recorded as
well.
Disadvantages of internet banking
 Require good internet connection-An uninterrupted internet connection is a
foremost requirement to use internet banking services. If you do not have access to
the internet, you cannot make use of any facilities offered online. Similarly, if the
bank servers are down due to any technical issues on their part, you cannot access net
banking services.
 There is concern for security as online transactions are susceptible to hackers-No
matter how much precautions banks take to provide a secure network; online banking
transactions are still susceptible to hackers. Irrespective of the advanced encryption
methods used to keep user data safe, there have been cases where the transaction data
is compromised. This may cause a major threat such as using the data illegally for the
hacker’s benefit.
 Difficulty for beginners-As there are people who are far away from the web of
internet. It is a whole new deal for them to learn how net banking works.Worse still, if
there is nobody who can explain them on how internet banking works and the process
flow of how to go about it. It will be very difficult for inexperienced beginners to
figure it out for themselves.
 Securing password-Every internet banking account requires the password to be
entered in order to access the services. Therefore, the password plays a key role in
maintaining integrity. If the password is revealed to others, they may utilise the
information to devise some fraud. Password is one of the important things as
password theft may occur so one must frequently change our password to avoid any
possible fraud.
UPI: It refers to unified payment interface. It allows smartphone to be used as virtual
debit card. It allows instant money transfer. Real-time bank-to-bank payments can be
made using a mobile number or virtual payment address (UPI ID).
UPI is an initiative taken by the National Payments Corporation of India (NPCI)
together with the Reserve Bank of India and Indian Banks Association (IBA). NPCI is
the firm that handles RuPay payments infrastructure, i.e., similar to Visa and

20
 MasterCard. It allows different banks to interconnect and transfer funds. Immediate
Payments Service (IMPS) is also an initiative of NPCI. UPI is considered as the
advanced version of IMPS.
UPI ID is unique identification of bank account that can be used to send and receive
money. UPI pin is 4digit number that can be chosen by account holder.
HOW UPI WORKS?
UPI uses existing systems, such as Immediate Payment Service (IMPS) and Aadhaar
Enabled Payment System (AEPS), to ensure seamless settlement across accounts. It
facilitates push (pay) and pull (receive) transactions and even works for over-the-
counter or barcode payments, as well as for multiple recurring payments such as
utility bills, school fees, and other subscriptions.
Once a single identifier is established, the system allows mobile payments to be
delivered without the use of credit or debit cards, net banking, or any need to enter
account details. This would not just ensure greater safety of sensitive information, but
connect people who have bank accounts via smartphones to carry out hassle-free
transactions. Overall, UPI implies fewer cash transactions and potentially reduces
the unbanked population.
Services offered by UPI areUsers can access balances and transaction histories along
with sending and receiving money. To send money, users need an account number,
the Indian Financial System Code (or IFSC, which is an alphanumeric code that
facilitates electronic transfers), the mobile number of the recipient, and a virtual ID or
Aadhaar number (which is like a Social Security number).
Benefits of UPIBenefits for banks:
 Single click Two Factor authentication
 Universal Application for transaction
 Leveraging existing infrastructure
 Safer, Secured and Innovative
 Payment basis Single/ Unique Identifier
 Enable seamless merchant transactions
Benefits for end Customers:
 Round the clock availability
 Single Application for accessing different bank accounts
 Use of Virtual ID is more secure, no credential sharing
 Single click authentication
 Raise Complaint from Mobile App directly
Benefits for Merchants:
 Seamless fund collection from customers - single identifiers
 No risk of storing customer’s virtual address like in Cards
 Tap customers not having credit/debit cards

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 Suitable for e-Com & m-Com transaction
 Resolves the COD collection problem
 Single click 2FA facility to the customer - seamless Pull
 In-App Payments (IAP)
UPI transactions are highly secure and are cannot be tempered. It uses a two-factor
authentication method, similar to OTP, for verifying every transaction. There are
many apps coming up every day that supports UPI payments, such as Google Pay,
PhonePe, FreeCharge, Mobikwik, and others. You need to verify your bank account
information to generate UPI ID on the app before you begin transactions.
Roles and responsibilities of NPCI
 NPCI owns and operates the Unified Payments Interface (UPI) platform
 NPCI prescribes rules, regulations, guidelines, and the respective roles,
responsibilities and liabilities of the participants, with respect to UPI. This also
includes transaction processing and settlement, dispute management and clearing cut-
offs for settlement
 NPCI approves the participation of Issuer Banks, PSP Banks, Third Party Application
Providers (TPAP) and Prepaid Payment Instrument issuers (PPIs) in UPI
 NPCI provides a safe, secure and efficient UPI system and network
 NPCI provides online transaction routing, processing and settlement services to
members participating in UPI
 NPCI can, either directly or through a third party, conduct audit on UPI participants
and call for data, information and records, in relation to their participation in UPI
 NPCI provides the banks participating in UPI access to system where they can
download reports, raise chargebacks, update the status of UPI transactions etc.
Roles and responsibility of public sector banks
 PSP Bank is a member of UPI and connects to the UPI platform for availing UPI
payment facility and providing the same to the TPAP which in turn enables the end-
user customers / merchants to make and accept UPI payments
 PSP Bank, either through its own app or TPAP’s app, on-boards and registers the end-
user customers on UPI and links their bank accounts to their respective UPI ID.
 PSP Bank is responsible for authentication of the end-user customer at the time of
registration of such customer, either through its own app or TPAP’s app
 PSP Bank engages and on-boards the TPAPs to make the TPAP’s UPI app available
to the end-user customers
 PSP Bank has to ensure that TPAP and its systems are adequately secure to function
on UPI platform
 PSP Bank is responsible to ensure that UPI app and systems of TPAP are audited to
safeguard security and integrity of the data and information of the end-user customer
including UPI transaction data as well as UPI app security

22
  PSP Bank has to store all the payments data including UPI Transaction Data collected
for the purpose of facilitating UPI transactions, only in India
 PSP Bank is responsible to give all UPI customers an option to choose any bank
account from the list of Banks available on UPI platform for linking with the
customer’s UPI ID.
 PSP Bank is responsible to put in place a grievance redressal mechanism for resolving
complaints and disputes raised by the end-user customer
Roles and responsibility of TPAP (3rd party app)
 TPAP is a service provider and participates in UPI through PSP Bank
 TPAP is responsible to comply with all the requirements prescribed by PSP Bank and
NPCI in relation to TPAP’s participation in UPI
 TPAP is responsible to ensure that its systems are adequately secure to function on the
UPI platform
 TPAP is responsible to comply with all applicable laws, rules, regulations and
guidelines etc. prescribed by any statutory or regulatory authority in relation to UPI
and TPAP’s participation on the UPI platform including all circulars and guidelines
issued by NPCI in this regard
 TPAP has to store all the payments data including UPI Transaction Data collected by
TPAP for the purpose of facilitating UPI transactions, only in India
 TPAP is responsible to facilitate RBI, NPCI and other agencies nominated by RBI/
NPCI, to access the data, information, systems of TPAP related to UPI and carry out
audits of TPAP, as and when required by RBI and NPCI
 TPAP shall facilitate the end-user customer with an option to raise grievance through
the TPAP’s grievance redressal facility made available through TPAP’s UPI app or
website and such other channels as may be deemed appropriate by the TPAP like
email, messaging platform, IVR etc.
Grievance redressal mechanism for UPI users.
 Every end-user customer can raise a complaint with respect to a UPI transaction, on
the PSP app / TPAP app.
 End-user customer can select the relevant UPI transaction and raise a complaint in
relation thereto
 A complaint shall be first raised with the relevant TPAP in respect to all UPI related
grievances / complaints of the end-user customers on-boarded by the PSP Bank
/ TPAP (if the UPI transaction is made through TPAP app). In case the complaint /
grievance remains unresolved, the next level for escalation will be the PSP Bank,
followed by the bank (where the end-user customer maintains its account) and NPCI,
in the same order. After exercising these options, the end-user customer can approach
the Banking Ombudsman and / or the Ombudsman for Digital Complaints, as the case
may be.
 The complaint can be raised for both the types of transactions i.e., fund transfer and
merchant transactions
 The end-user customer shall be kept communicated by the PSP / TPAP by means of
updating the status of such end-user customer’s complaint on the relevant app itself

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Digital wallets
A digital wallet (or e-wallet) is a software-based system that securely stores
users' payment information and passwords for numerous payment methods and websites. By
using a digital wallet, users can complete purchases easily and quickly with near-field
communications technology. They can also create stronger passwords without worrying
about whether they will be able to remember them later.
Digital wallets can be used in conjunction with mobile payment systems, which allow
customers to pay for purchases with their smartphones. A digital wallet can also be used to
store loyalty card information and digital coupons.
E-wallet is a type of electronic card which is used for transactions made online through a
computer or a smartphone. Its utility is same as a credit or debit card. An E-wallet needs to be
linked with the individual’s bank account to make payments. An E-wallet is protected with a
password. With the help of an E-wallet, one can make payments for groceries, online
purchases, and flight tickets, among others. E- wallet has two component software and
information, software component store information related to password, encryption etc
whereas information contain information such as billing address, payment method, mode of
payment etc.some of top digital wallets are Due, ApplePay, Google Wallet, Samsung Pay,
PatPal, Venmo, AliPay, Walmart Pay, Dwolla, Vodafone-M-Pesa,. Recently, Google
combined its two essential payment streams (Android Pay and Google Wallet) into a single
service called Google Pay. Apple on the other hand entered into a strategic partnership with
Goldman Sachs to issue Apple credit cards and expand its ApplePay services.
PONZI SCHEMES
 A Ponzi scheme is a fraudulent investing scam promising high rates of return with
little risk to investors. Companies that engage in a Ponzi scheme focus all of their
energy into attracting new clients to make investments.
 A Ponzi scheme is an investment fraud that pays existing investors with funds
collected from new investors. Ponzi scheme organizers often promise to invest your
money and generate high returns with little or no risk. But in many Ponzi schemes,
the fraudsters do not invest the money. Instead, they use it to pay those who invested
earlier and may keep some for themselves.
 With little or no legitimate earnings, Ponzi schemes require a constant flow of new
money to survive. When it becomes hard to recruit new investors, or when large
numbers of existing investors cash out, these schemes tend to collapse.
 Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with
a postage stamp speculation scheme.
Features of ponzi schemes.
1. A guaranteed promise of high returns with little risk-Every investment carries
some degree of risk, and investments yielding higher returns typically involve more
risk. Be highly suspicious of any “guaranteed” investment opportunity.
2. A consistent flow of returns regardless of market conditions-Investments tend to
go up and down over time. Be sceptical about an investment that regularly generates
positive returns regardless of overall market conditions.

24
 3. Investments that have not been registered with the Securities and Exchange
Commission (SEC)-Ponzi schemes typically involve investments that are not
registered with the SEC or with state regulators. Registration is important because it
provides investors with access to information about the company’s management,
products, services, and finances.
4. Investment strategies that are secret or described as too complex to explain-
Avoid investments if you don’t understand them or can’t get complete information
about them.
5. Clients not allowed to view official paperwork for their investment-Account
statement errors may be a sign that funds are not being invested as promised.
6. Clients facing difficulties removing their money-Be suspicious if you don’t receive
a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to
prevent participants from cashing out by offering even higher returns for staying put.
Security and precaution against ponzi schemes
1. Be cautious: If someone tries to sell you on an investment that has huge and/or
immediate returns for little or no risk, it could well involve some sort of fraud.
2. Be aware: Someone contacting you unexpectedly, perhaps inviting you to an
investment seminar, is often a red flag. Investment scams often target elderly people,
or those close to or in retirement.
3. Check out the seller: verify the professional licence of investment proposal seller
and cautious about any negative information.
4. Verify the investment register: Ponzi schemes are often unregistered at security and
exchange commission of India.
5. Understand the investment: never invest in scheme that you not understand or
having doubt about it. Don't write a check to – or open an account with – anyone who
won’t fully answer your questions.
6. Report any wrong doing: if you come across any fraudulent scheme do report it to
regulatory authority like SEBI i.e., securities and exchange board of India, Investment
regulatory authority of India, reserve bank of India.
Investor protection measures of SEBI
 OFFICE OF INVESTOR ASSISTANCE AND EDUCATION
 INVESTOR EDUCATION AND PROTECTION FUND
OFFCE OF INVESTOR ASSISTANCE AND EDUCATION
SEBI has established the prime mandate to protect the interest of investor. An investor enjoys
investing only if he knows
 How to invest?
 Has full knowledge of investing.
 The market is safe and has no miscreants
 There is arrangement for handling grievance. SEBI’S investor protection has four
strategies

25
 FIRST
 Build capacity of investor through education and awareness so that investor
can make informed choice.
 Investor should get right information.
 Deals with registered intermediaries take necessary precaution and take help in
case of any grievance
 Organising investor awareness and education workshops and also encouraging
market participants to organise similar programme
 Responding to queries of investor through telephone, e-mails, letters and in
person
SECOND
 Adoption of disclosure-based regime. - Under its issuers and
intermediaries disclose relevant information about themselves, the product,
the market and the regulation so that the investor can take informed
decision based on this disclosed information.
THIRD
 Ensure market has systems and practices in place to make transaction safe.
 Sebi has mechanism such as screen-based trading system,
dematerialisation of securities, t+2 rolling settlement, framed various
regulation to regulate intermediaries
FOURTH
 Facilitates grievance redressal. It follows ups with companies and
intermediaries who do not address investor grievances by sending them
reminder and having meeting with them.
 It follows appropriate enforcement action as provided under the law (including
launching of adjudication prosecution proceeding, issuing direction) where
progress to investor redressal is not satisfactory.
Investor education and protection fund
SEBI has established investor education and protection fund in exercise of power conferred
by section 30 of SEBI act 1992. SEBI has made the SEBI (investor education and protection
fund) regulation, 2009 for the regulation of such fund. Important provision of fund are
follows:
Contribution to the fund:
Amount credited to the fund:
 Contribution made by SEBI to the fund
 Grant and donation made by central government, state government or any other
entities approved by SEBI.
 Security deposits, if any held by stock exchange in case of public issue or right issue,
in the event of derecognition of such stock exchange.

26
  Amounts fortified for non- fulfilment of obligation specified in regulation 15B of
SEBI (buy- back of securities) regulation, 1998.
 Interest or other income received out of any investment made from fund Utilisation of
fund
 Educational activities including seminars,training, research and publication aimed at
investor
 Awareness programme including through media- print, electronic aimed at investor
 Aiding investor association recognised by board to undertake legal proceeding in the
interest of investor in securities that are listed or proposed to be listed
 Refund of security deposits which are held by stock exchange and transferred to fund
on derecognition of the stock exchange, in case the companies apply to board and
fulfil the condition for release of deposit.
Online frauds
Fraud that is committed using the internet is “online fraud.” Online fraud can involve
financial fraud and identity theft. Online fraud comes in many forms. It ranges from viruses
that attack computers with the goal of retrieving personal information, to email schemes that
lure victims into wiring money to fraudulent sources, to “phishing” emails that purport to be
from official entities (such as banks or the Internal Revenue Service) that solicit personal
information from victims to be used to commit identity theft, to fraud on online auction sites
(such as Ebay) where perpetrators sell fictional goods.
Type of online frauds
Some of online fraud are explained below: -
Phishing
Phishing attacks attempt to gain sensitive, confidential information such as usernames,
passwords, credit card information, network credentials, and more. By posing as a legitimate
individual or institution via phone or email, cyber attackers use social engineering to
manipulate victims into performing specific actions—like clicking on a malicious link or
attachment—or wilfully divulging confidential information. In addition, some phishing scams
can target organizational data in order to support espionage efforts or state-backed spying on
opposition groups. Because these sites often look “official,” they hope you’ll be tricked into
disclosing valuable information that you normally would not reveal. This often times, results
in identity theft and financial loss.
Spyware and viruses are both malicious programs that are loaded onto your computer without
your knowledge. The purpose of these programs may be to capture or destroy information,
to ruin computer performance or to overload you with advertising. Viruses can spread by
infecting computers and then replicating. Spyware disguises itself as a legitimate application
and embeds itself into your computer where it then monitors your activity and collects
information.
Fraudulent “Pop-up Windows” are a type of online fraud often used to obtain personal
information. They are the windows or ads that appear suddenly over or under the window
you are currently viewing. Fraudulent websites or pop-up windows are used to collect your
personal information. Other terms for the fraudulent process of gathering your personal

27
information include “Phishing or “Spoofing.” Additional links to real websites can be
incorporated into the email to lead you to believe the email is legitimate.
Fraudulent websites, e-mails or pop-up windows will often:
 Ask you for personal information (Account number, Social Security Number, Date of
Birth, etc.).
 Appear to be from a legitimate source (Retail Stores, Banks, Government agencies,
etc.).
 Contain prizes or other types of certificate notices.
 Link to other real or counterfeit websites.
 Contain fraudulent phone numbers.
Pop-up windows are often the result of programs installed on your computer called “adware”
or “spyware.” These programs look in on your Web viewing activity and regularly come
hidden inside many free downloads, such as music-sharing software or screen savers. Many
of these programs enable harmless advertisements, but some contain “Trojan horse”
programs that can record your keystrokes or relay other information to an unauthorized
source.
PROTECTION AGAINST THESE ONLINE FRAUDS
With proper precaution you can protect yourself from these frauds-
1. Know the scam
1. Phishing, Spoofing, Pop-up Fraud – types of online fraud used to obtain personal
information.
2. Trojan Horse – Virus that can record your keystrokes. It can live in an attachment or
be accessed via a link in the email, website or pop-up window.
3. Counterfeit Websites – URLs that forward you to a fraudulent site. To validate a
URL, you can type or cut and paste the URL into a new web browser window and if it
does not take you to a legitimate web site or you get an error message, it was probably
just a cover for a fraudulent web site.
2. Activate a pop-up window blocker.
There are free programs available online that will block pop-up windows. Be sure to
perform an Internet search for “pop-up blocker” or look at the options provided by
major search engines. You will need to confirm that these programs are from
legitimate companies before downloading. Once you have installed a pop-up
blocker, you should determine if it blocks information that you need to view or
access. If this is the case, you should consider turning off the blocker when you are
on Web sites you know use pop-up windows to provide information you need or want
to view.
3. Scan your computer for spyware regularly.
You can eliminate potentially risky pop-up windows by removing any spyware or
adware installed on your computer. Spyware and adware are programs that look in
on your Web viewing activity and potentially relay information to a disreputable
source. Perform an Internet search for “spyware” or “adware” to find free spyware

28
 removal programs. As with a pop-up blocker, you will want to be sure that your
removal program is not blocking, or removing, wanted items, and if it is, consider
turning it off for some websites.
4. Avoid downloading programs from unknown sources.
Downloads may contain hidden programs that can compromise your computer’s
security. Likewise, email attachments from unknown senders may contain harmful
viruses.
5. Keep your computer operating system and Internet browser current.
6. Keep your passwords secret.
Change them regularly, using a mixture of numbers and characters.
Credit card cloning or skimming
Credit card cloning means unauthorised copying of credit cards. It also refers to as skimming
and requires copying information at a credit card terminal using an electronic device or
software, then transferring the information from the stolen card to a new card or to rewrite an
existing card with the information. Unfortunately, cloning and related forms of theft have
become increasingly widespread in recent decades. Thankfully, security improvements such
as the use of personal identification numbers (PINs) and chip cards have helped to protect
against these types of attacks.
Modern chip cards—which have embedded microchips that contain their sensitive
information—are much harder to compromise because the data they contain is encrypted
within the chip itself. This means that even if the thieves successfully access the chip card,
they would not be able to use the information they stole some examples of cloning are
installing hidden scanners onto legitimate card-reading devices such as gas station
pumps, automated teller machines (ATMs), or the point-of-sale (POS) machines common in
most retail stores.
How to spot these crimes?
There are a number of tell-tale signs a machine has been tampered with. Keep an eye out
for:
 A bulky card slots
 A loose or blocked card slot
 A loose or ‘spongey’ pin pad
Protection against these frauds
 Try giving the keypad and card slot a wiggle. If either feels loose then don’t insert
your card at all.
 Second, do your best to cover the keypad when entering your PIN just in case there’s
a camera installed.
 Finally, if the machine swallows your card then call the bank while you’re still in
front of the machine, if you can.

Measure taken by government to tackle online frauds.

29
Central Government has taken steps to spread awareness about cybercrimes, issue of
alerts/advisories, capacity building/training of law enforcement personnel/ prosecutors/
judicial officers, improving cyber forensics facilities etc. to prevent such crimes and to speed
up investigation. The Government has launched the online cybercrime reporting
portal, www.cybercrime.gov.in to enable complainants to report complaints pertaining to
Child Pornography/Child Sexual Abuse Material, rape/gang rape imageries or sexually
explicit content. The Central Government has rolled out a scheme for establishment of Indian
Cyber Crime Coordination Centre (I4C) to handle issues related to cybercrime in the country
in a comprehensive and coordinated manner.
Further steps taken by GOI: -
i. Establishment of National Critical Information Infrastructure Protection Centre
(NCIIPC) for protection of critical information infrastructure in the country.
ii. All organizations providing digital services have been mandated to report cyber
security incidents to CERT-In expeditiously.
iii. Cyber Swachh Kendra (Botnet Cleaning and Malware Analysis Centre) has been
launched for providing detection of malicious programmes and free tools to remove
such programmes.
iv. Issue of alerts and advisories regarding cyber threats and counter-measures by CERT-
In.
v. Issue of guidelines for Chief Information Security Officers (CISOs) regarding their
key roles and responsibilities for securing applications / infrastructure and
compliance.
vi. Provision for audit of the government websites and applications prior to their hosting,
and thereafter at regular intervals.
vii. Empanelment of security auditing organisations to support and audit implementation
of Information Security Best Practices.
viii. Formulation of Crisis Management Plan for countering cyber-attacks and cyber
terrorism.
ix. Conducting cyber security mock drills and exercises regularly to enable assessment of
cyber security posture and preparedness of organizations in Government and critical
sectors.
x. Conducting regular training programmes for network / system administrators and
Chief Information Security Officers (CISOs) of Government and critical sector
organisations regarding securing the IT infrastructure and mitigating cyber-attacks.

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 UNIT: Ⅱ

INVESTMENT PLANNING
LESSON -1
INVESTMENT – AN OVERVIEW

OBJECTIVE

After reading this chapter you will be able to understand

 Concept of Investment
 Difference between Real and Financial Investment
 Features and objective of Investment
 Difference Between Investment and Speculation
 Gambling
 Investment Decision Process
 Difference between Direct and Indirect Investing

Investment is backbone of any economy. Saving of an economy must be channelise into

productive investment to increase income level. The higher investment will positive outcome
like higher gross national income and economic growth. A good business environment is
prerequisite for higher investment and for boasting the morale of investor. The primary
investment is channelise through household saving. These are channelise into more
productive investment to get higher income. An individual can put his money into saving
account or invest into financial market product like equity, debt, mutual fund, or real estate.
Therefore, an individual must be financial literate. This chapter will provide an insight to it.

Investment
An investment is an asset or item acquired with the goal of generating income or
appreciation. Appreciation refers to an increase in the value of an asset over time. When an
individual purchases a good as an investment, the intent is not to consume the good but rather
to use it in the future to create wealth. An investment always concerns the outlay of some
asset today—time, money, or effort—in hopes of a greater payoff in the future than what was
originally put in.

Investment not always guarantee higher return but at time we also incur losses, investment
environment is quite uncertain. We are in fact facing VUCA (votality, uncertainty, complex,
ambiguous) environment in context of investment

For example: in 1986 Microsoft corporation offer its first stock and in 10yr it has grown
5000% on the other hand worlds of wonder also offer stock in same yr. and 10yr later the
company become defunct.

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Financial investment v/s real investment

Financial assets are tangible assets that you can quickly convert into cash. Stocks, bonds,
cash reserves, bank deposits, trade receivables, notes receivable and shares are all common
examples of financial assets. These are tangible or liquid assets that actually represent
claims on the underlying value of the other types of assets such as real estate and
properties. The main characteristic of a financial asset is that it has some type of monetary
value, but that value is not tangible until it’s exchanged for cash. Financial assets also have
classifications such as equities and fixed income securities. Equities are shareholding rights
to a business, and they are issued either as common shares or preferred stock. Unlike
preferred stock, common shares carry voting rights. Fixed income securities are instruments
of borrowing that earn fixed rates of interest over a specified duration. Public institutions
issue some types of fixed income securities, while others are issued by private entities.
Examples include treasury, municipal and corporate bonds. And when you invest in these
assets it is refer to asfinancial investment.

The real assets definition refers to value-generating physical assets that your business owns.
Common examples include land, buildings, inventory, precious metals, commodities, real
estate, land and machinery. These physical assets are important for your business because
they carry some type of intrinsic value. Intrinsic value is defined as the exact value of an
asset as determined by factors such as location, function and acquisition costs. When you
invest in this type of asset it is refer to as real investment

Objective of investment

A person make investment in order to accomplish certain objective. People forego current
consumption in order to avail higher return. ultimate objective of investment is to minimize
risk and maximize return. Nothing can be risk free in this world, risk and return goes hand
in hand, higher the risk higher will be return. Some of the objective that is kept in mind
before making an investment are as follows: -

 Capital appreciation

Capital appreciation is concerned with long-term growth and is most common in

retirement plans where investments work for many years inside a qualified plan, such
as a 401(k) or IRA. However, investing for capital appreciation is not limited to
qualified retirement accounts. This objective involves holding stocks for many years
and letting them grow within your portfolio while reinvesting dividends to purchase
more shares. For example: Let's imagine that you make an initial $1,000 investment
and add $100 monthly for the next 20 years. The total amount contributed during that
period would be $25,000. However, if your investments generate an 8% return
annually, compound interest will place your total savings at $59,575.31.

Investors using the capital appreciation strategy are not concerned with day-to-day
fluctuations. However, they keep a close eye on the fundamentals of the company for
changes that could affect long-term growth. A typical strategy involves regular
purchases.

32
 Current income

The current income involves investing in stocks that pay a consistent and high
dividend, as well as some top-quality real estate investment trusts (REITs) and highly-
rated bonds because these products produce regular current income. People concerned
with current income should consider investing in blue-chip stocks, which are shares in
large, prominent corporations that have shown a long history of growth and consistent
dividend pay outs.

Many people who focus on current income are retired and use the income for living
expenses. In contrast, others take advantage of a lump sum of capital to create an
income stream that never touches the principal, yet provides cash for certain current
needs—such as college tuition.

 Capital preservation

Capital preservation is often associated with retired or nearly retired people who want
to make sure they don't outlive their money. For this investor, safety is critical—even
if it involves giving up return potential for security. The logic for this safety is clear:
A retiree who loses money through unwise investments is unlikely to get a chance to
replace it. Younger investors can have a stock-dominated portfolio because they have
many years to recover from any losses that may occur due to market changes or
economic downturns. This isn't the case for older individuals. Investors who want
capital preservation tend to invest in bank CDs, U.S. Treasury issues, and savings
accounts because they offer modest returns but possess much less risk than stocks.

 Speculation

The speculator is not a true investor, but a trader who enjoys jumping in and out of
stocks for capital gain. Speculators or traders are interested in quick profits and use
advanced trading techniques like shorting stocks, trading on the margin, options, and
other special methods. Speculators have no real attachment to the companies they
trade, and they may not know much about the underlying business except that the
stock is volatile and ripe for a quick profit. Many people try speculating in the stock
market with the misguided goal of getting rich, and the overwhelming majority fail at
doing so. If you want to try your hand, make sure you are using money you can afford
to lose without jeopardizing your livelihood or retirement ambitions. It's easy to get a
false sense of competence after initial success, so thoroughly understand the real
possibilities of losing your investment. However excessive speculation is bad as it
takes away from their true fundamental values. Therefore, SEBI keeps check on
excessive speculation under SEBI act 1992.

33
Speculation vs investment

S.No. Basis of Investment Speculation

difference
1. Time horizon Long, generally exceeding one Short may be as short as
year. intra day
2. Risk Low to moderate Very high

3. Funds Here own funds are used for Speculator also borrow
investment. funds and /or do margin
trading.
4. Return(expected) Low to moderate and consistent Very high and inconsistent

5. Income Dividend, interest etc. Change in price of asset

6. Source of Fundamental factor of the Herd instincts, inside

information company is analysed information

Gambling

Converse to speculation, gambling involves a game of chance. Generally, the odds are
stacked against gamblers. When gambling, the probability of losing an investment is usually
higher than the probability of winning more than the investment. In comparison to
speculation, gambling has a higher risk of losing the investment. For example, a gambler opts
to play a game of American roulette instead of speculating in the stock market. The gambler
only places his bets on single numbers. However, the pay-out is only 35 to 1, while the odds
against him winning are 37 to 1. So, if he bets $2 on a single number, his potential gambling
income is $70 (35*$2) but the odds of him winning is approximately 1/37.

Gambling is taken for someone’s excitement e.g., horse racing, card game lottery etc. here
the winner makes big gain but this cannot be termed as return because that is not consistent or
regular. gambling is zero sum game -someone’s lose is other party’s gain. Therefore,
gambling is uncertain and may involve complete loss of funds.

Investment decision process

The process of investment broadly comprises following steps:

 Setting up investment policy

 Building up of inventory of security
 Performing security analysis
 Constructing portfolios, analysing portfolios and selecting the optimal portfolio
 Portfolio revision
 Portfolio performance evaluation and management.

Setting up investment policy

The investment policy is broadly based on investment goals or objectives, investible funds,
tax status and investment horizon. there can be different investment objective the investment

34
policy based on investment goal and objective of investor like capital appreciation, regular
income, tax benefit etc. the investment policy can be formulated keeping in mind the risk
bearing capacity of investor like investor is risk averse, moderate or risk lover. Every investor
had different risk appetite or risk profile which is essential ingredient in investment policy.
The investment policy is also associated with investment policy or investment horizon.
Investment policy sets the broad framework for investment decision making by an individual
investor.

Building stock of inventory

This involve making list of investing option available to investor like equity, debt, mutual
fund, real estate etc. Then according to investment objective, the investor, find out his
requisite security according to risk bearing appetite and expected return. For example, if
investor’s objective is to receive regular income and prefer low risk, then equity which do not
pay regular dividends may not be included in list of securities where an investor may invest.
Another example, the young person who won't have to depend on his or her investments for
income can afford to take greater risks in the quest for high returns. On the other hand, the
person nearing retirement needs to focus on protecting his or her assets and drawing income
from these assets in a tax-efficient manner.

Performing security analysis

This step involves analysing stock of inventory on the basis of risk and return profile. This is
security analysis. The main idea in security analysis is to estimate the expected return and
risk of individual securities. this may also help investor in detecting undervalued securities
and timing of buy or sell decision

Approaches to security analysis

 Fundamental analysis
 Technical analysis
 Efficient market hypothesis

Fundamental analysis

Fundamental analysis (FA) is a method of measuring a security's intrinsic value by examining

related economic and financial factors. Fundamental analysis study anything that can affect
the security's value, from macroeconomic factors such as the state of the economy and
industry conditions to microeconomic factors like the effectiveness of the company's
management.

The end goal is to arrive at a number that an investor can compare with a security's current
price in order to see whether the security is undervalued or overvalued. Analysts typically
study, in order, the overall state of the economy and then the strength of the specific industry
before concentrating on individual company performance to arrive at a fair market value for
the stock. Fundamental analysis uses public data to evaluate the value of a stock or any other
type of security. For example, an investor can perform fundamental analysis on a bond's
value by looking at economic factors such as interest rates and the overall state of the
economy. Then studying information about the bond issuer, such as potential changes in
its credit rating. For stocks, fundamental analysis uses revenues, earnings, future

35
growth, return on equity, profit margins, and other data to determine a company's underlying
value and potential for future growth. All of this data is available in a company's financial
statements

Technical analysis

Technical analysis is a trading discipline employed to evaluate investments and identify

trading opportunities by analysing statistical trends gathered from trading activity, such as
price movement and volume.

Technical analysis focuses on the study of price and volume. Technical analysis tools are
used to scrutinize the ways supply and demand for a security will affect changes in price,
volume and implied volatility. Technical analysis is often used to generate short-term trading
signals from various charting tools, but can also help improve the evaluation of a security's
strength or weakness relative to the broader market or one of its sectors. This information
helps analysts improve their overall valuation estimate. Technical analysis can be used on any
security with historical trading data. This includes stocks, futures, commodities, fixed-
income, currencies, and other securities. In this tutorial, we’ll usually analyse stocks in our
examples, but keep in mind that these concepts can be applied to any type of security. In fact,
technical analysis is far more prevalent in commodities and forex markets
where traders focus on short-term price movements.

Technical analysis operates from the assumption that past trading activity and price changes
of a security can be valuable indicators of the security's future price movements when paired
with appropriate investing or trading rules.

Efficient market hypothesis

The efficient market hypothesis (EMH), alternatively known as the efficient market theory, is
a hypothesis that states that share prices reflect all information and
consistent alpha generation is impossible. According to the EMH, stocks always trade at their
fair value on exchanges, making it impossible for investors to purchase undervalued stocks or
sell stocks for inflated prices. Therefore, it should be impossible to outperform the overall
market through expert stock selection or market timing, and the only way an investor can
obtain higher returns is by purchasing riskier investments. As per efficient market hypothesis
anytime is a good time to buy or sell as there is no consistent overpricing or under-pricing in
an efficient security market.

Construction of portfolio, portfolio analysis and portfolio selection

A portfolio investment is ownership of a stock, bond, or other financial asset with the
expectation that it will earn a return or grow in value over time, or both. It entails passive or
hands-off ownership of assets as opposed to direct investment, which would involve an active
management role. In today's financial marketplace, a well-maintained portfolio is vital to any
investor's success. As an individual investor, you need to know how to determine an asset
allocation that best conforms to your personal investment goals and risk tolerance. In other
words, your portfolio should meet your future capital requirements and give you peace of
mind while doing so. Investors can construct portfolios aligned to investment strategies by
following a systematic approach.

36
Therefore, after security analysis, the next step is to construct all feasible portfolios or
portfolio opportunity set and selecting optimal portfolio for concerned investor. portfolio
opportunity also termed as investment opportunity set. There may be feasible portfolio by
combining different security in different proportion but all of them may not be efficient.an
efficient portfolio is one which provide maximum return for a given level of risk or which has
minimum risk for given level of return. Such efficient portfolio is large in numbers. Hence to
select the optimum portfolio of investor, one must consider the risk and return preference of
investor

For example, a young person is willing to take risk in order to get maximum return. We may
have optimal portfolio comprising 70% of equity and 30% of bonds. on other hand for retired
old age person the optimal portfolio may be 10% equity and 90% bonds and debenture and
fixed deposit

Portfolio revision

The fifth step in investment decision process is portfolio revision. It consists of repetition of
previous steps in light of changing investment decision environment. Moreover, investment
objective of investor may also change over the time hence it is required to revise the
originally selected portfolio to reflect those changes. Due to changes in prices, theoriginal
portfolio may not remain optimal and hence the investor needs to revise the portfolio.
Changes in prices of securities make some securities attractive, which were not selected
earlier due to higher prices or make some securities which are earlier included in portfolio
unattractive. All this point towards periodic revision of portfolio.

Portfolio performance evaluation and management

The last step in the investment process is to evaluate the performance of the portfolio. It
involves periodically determining the performance of portfolio against the benchmark
portfolio or other similar portfolios or not. portfolio evaluation may be done using absolute
return as well as various adjusted return measures such as sharpe ratio, Treynor’s ratio or
Jensen’s alpha. Sharpe ratio is calculated by dividing excess return (i.e., risk premium) by the
total risk of portfolio. It is measure of excess return over per unit of risk. the higher this ratio
the better is the performance of portfolio.

DIRECT AND INDIRECT INVESTING

Direct investing involves purchase and sale securities by investors themselves. In this case
the investor has entire control over the investment decision that is which security is need to
be purchased or sold as well as when to purchase or sell. The securities may be securities of
capital market (such as equity share, bonds or debentures) or derivative market (such as
treasury bills, certificate of deposits, commercial papers). The investor is required to perform
all task of investment decision making process. Therefore, direct investing involves expertise
and investing skills. Moreover, it is a time-consuming process of investing. In case of direct
investment, the cost of analysis and monitoring is incurred by the investor directly.

Indirect investing involves investing in mutual funds (open ended as well as close ended
funds), exchange -traded funds or collective investment schemes including alternative
investment funds (such as venture capital fund, hedgefunds, REITSs SME fund). In this case,
the investor does not invest directly in various securities. He has no control over the

37
composition of the fund’s investment, investor only controls whether to buy or sell the shares
or units of fund. Therefore, investor only decide in which mutual fund or investment
company to invest in. the finale investment decision is made by the fund or investment
company in case of indirect investing. The investor buys or sell units (shares) of fund,
whichin turn makes investment in securities and build up portfolio as per the investment
objective of fund or scheme. The investor become unit holder in the fund and has ownership
interest in the asset of the fund or investment company and is entitled to interest or dividends
and price appreciation or decline.thus, indirect investing in a mutual fund, ETF or investment
company or even in alternative investment funds, is an alternative route for investor to invest.

It is convenient and ideal form of investing for investor who are not skilled enough or who do
not have time to perform security analysis and portfolio management process, in case of
investment in mutual fund or any other type of investment company, the investment costs are
incurred by fund or company but ultimately these costs are passed on to investor in terms of
management fee or expenses. These expense or fees reduces the value of portfolio or
investment done by fund or company.

Tabular presentation of difference between direct and indirect investing

Direct investing Indirect investing

Meaning
Instruments of investment
Direct investing involves Indirect investing means
purchase or sale of securities investment in mutual funds
by the investors themselves. or other investment
companies rather directly in
securities
Capital market such as Mutual funds -open ended
equity, shares, bonds, and close ended.
debentures etc.
Exchange traded funds
Money market such as
treasury bills, certificates of Collective investment
deposits, commercial paper schemes
etc.
Alternative investment
Derivative market such funds-such as venture
future and option capital funds, hedge funds,
ME funds, real estate
investment trusts (REITS)
etc

Control Investor has entire control Fund or investment

over investment decision company has direct control
i.e., which securities are over the investment decision
need to be purchased or sold i.e., which securities need to
be purchased and sold as
well as when to purchase or
sold
Costs Cost of monitoring and Cost is incurred by fund
analysis is born by investor houses or investment

38
 directly company but they are
ultimately transferred to
investor in the form of
management fee.
Skills and time Direct investing requires Indirect investing does not
investing skills and require investing skills and
expertise. moreover, it is expertise by the individual
time consuming process of investor. the fund or
investing by individual investment company where
investor investor invests is expected
to provide such expertise
and professional fund
management. they have
professional fund managers
Convenience Direct investing may not be Indirect investing is very
convenient to small convenient and preferred
investors who do not posses mode of investment to small
requisite investing skills and investors who do not possess
who do not have much time requisite investing skills and
to perform security analysis do not have much time to
perform security analysis

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 LESSON -2

SECURITY ANALYSIS

OBJECTIVE

After reading this you will be able to understand the following: -

 Understanding the concept of return and risk of security.

 Calculating the return of security and portfolio.
 Comparing the different investment alternative in terms of expected return.
 Differentiate between systematic and unsystematic risk
 Calculate beta of security and significance
 Estimate total risk, systematic risk and unsystematic risk on a security
 Determine the effect of taxes on investment decision.
 Analyse the impact of inflation on investment return

An Investment is an asset or item acquired with the goal of generating income or

appreciation. Appreciation refers to an increase in the value of an asset over time. When an
individual purchases a good as an investment, the intent is not to consume the good but rather
to use it in the future to create wealth. A businessman invests in plant and machinery in
expectation of making profit in future (return). a person puts the money in fixed deposit
account so that he can get higher return in future including interest income in future. An
investor invests in house property expecting that his price will go up in future. at time he can
sell the property and make capital gain. Some people invest in gold and other precious metal
expecting a reward i.e., increase in the price of these metals. Therefore, major motivation
behind investment is reward i.e., return. This return has two component that is capital return
or loss and revenue return(i.e., interest or dividend) which arise due to change in investment.
Some investment has capital gain or loss due to price change as they do not provide any
revenue return to investor. For example, if an investor invests in the shares of company which
does not pay any dividends, then his return will only comprise the second part i.e., change in
price leading to capital gain or loss.

However, there is always a possibility that the actual return may not be same as expected
return. This may be due to number of factors such as pandemic, global slowdown, poor
performance of company. Hence there is always a RISK attach to investment that the actual
return will be different from expected return. Risk is defined as variability in expected
returns. It must be noted that no investment is risk free (except hypothetical risk-free asset).
Return and risk go hand in hand. the higher will be the risk the higher will be the return.
Therefore, every investment requires careful analysis of risk and return.

The two-basic component of investment are risk and return. An investor should make his
investment keeping in mind the risk and return appetite. therefore, one analyses every
security in terms of risk -return. This is known as security analysis. Investor try to reduce its
exposure to risk by picking diverse securities for investment. It is often said that “do not put

40
all your eggs in one basket”. The same is true for investment. A rational investor holds
diverse portfolio. A portfolio is combination of two or more securities.

Return

Return may be defined as income generated by an investment expressed as a percentage of

the cost of investment. Income from investment may be revenue income (like interest and
dividend) and capital income revenue income is generated on regular basis say every year.
The second part capital gain or loss is the difference in end price or selling price and
beginning price or purchase price of investment. It is generated only at the end of investment
period.

Return from a financial asset:

A financial asset which is purchased at purchased priced held for a year, provide some
income at the end of year and sold at selling price will generate the following return

Return = income from asset +(selling price -purchase price)/purchase price Ⅹ 100

Return on equity share

Return on equity share held for one year can be calculated as follows:

Return on equity share=d1+p1-p0/p0

Where d1= dividend receive at the end of one year

p1= price at the end of one year

p0= initial price or price at the beginning of year

return on equity has two component, dividend and capital appreciation/capital gain (arise due
to change in price.

Return on equity= dividend/p0+(p1-p0)/p0

= dividend yield + capital gain yield / loss

Example: Mr. X purchased shares of Voda ltd. At price of 850. He sold the share after
receiving RS50 as dividend at end of year at price 1050. Calculate total return from
investment. how much is dividend yield and how much is capital yield?

Solution. return from share = 50+(1050-850)/850Ⅹ100

=29.4111%

Dividend yield = 50/850= 0.0588

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 Capital yield= (1050-850)/850= 0.235294

Return on equity= dividend yield +capital yield

= 0.0588+0.235294

=0.294111or 29.4111%

Return on bond

Return on bond held for one year can be calculated as follows:

Return on bond =i1+(p1-p0)/p0

Where, i1=interest earned during the year.

p 0= initial price of bond or investment

p1= selling price or bond price at the end of year

Therefore, there are two component of bond return, interest yield and capital
appreciation/capital gain which arise due to change in prices.

Return on bond=int/po+p1-p0/p0

=interest yield + capital gain yield /capital loss

Example: Mr. Y purchased a RS 1000,10% bond maturing after 5 years at a price of

RS.950. He sold the bond after one year at price of RS 975 and also receive interest
income?

Solution. Return from bond =100+(975-950)/950Ⅹ100

=13.16%

Type of return and their calculation

There is various type of return based on the purpose and calculation. These returns explained
below:

Average return

The average return is the simple mathematical average of a series of returns generated over a
period of time. Average return may be used to make expectation about future return on
security. In some of the cases past average return is used as the expected return on that
security.

42
We can calculate average return on the basis of historical returns of a security. This average
return is helpful in comparing investment alternatives and building up expectations about the
return on investment

For calculation of average return, we either use arithmetic mean or geometric mean.

Average return based on arithmetic mean

Mostly average return is calculated using arithmetic mean or simple mean. The average
return is simple average of annual returns earned every year over the holding period or the
assessment period.

Average return =R1+R2+R3………RN/N

Where, R1= return earned in first year

N =number of years for which investment is earned

For example

Year Total return

2008 7.33%
2009 7.5%
2010 7.06%
2011 7.22%
2012 -31.58%
2013 13.88%
2014 41.5%
2015 -6.43%
Average return = 7.33+7.5+7.06+7.22-31.88+41.5-6.43/8

=9.36%

Hence average return on share has been 9.36%

Limitation of average return based on arithmetic mean

Average return based on arithmetic return based on arithmetic mean suffer from following
limitations.

(1) It does not consider the effect of compounding because it is simple

average of number of returns. This make it less useful in investment
analysis because compounding is extremely important in investment
(2) Average return based on arithmetic mean may at times give misleading
return.

43
For example: an investor buys a share of RS.20. At the end of year 1 its price become
becomes RS.25 but holds it. In the end of second year, it again become RS.20. Thus, it gives
25% return in first year and 20% loss in second year. Find out average return using arithmetic
mean.

Solution: average return (based on arithmetic mean) =25%+(-20%)/2

=2.5%

However, the value of share is RS20i.e. equal to purchase price and hence actual investor has
not made any gain over two-year period. It must be noted that if use average return based on
average or arithmetic return in this case, we get incorrect value of return.

Hence it is better to calculate average return based on geometric mean.

B) average return based on geometric mean

Average return calculated using geometric mean considered the effect of compounding.
Average return based on geometric mean is actually average return compounded annually. It
is calculated as follows:

Average return based on geometric mean=[(1+R1) (1+R2) (1+R3) ……. Ⅹ(1+Rn)]1/n-1

Where R1, R2, R3…. are return generated in year 1,2,3…. respectively. n is the total number
of years.

Average return based on geometric mean in generally lower than average return based on
arithmetic because geometric mean considers compounding effect.

If time period is long then the difference between arithmetic mean and geometric mean is
negligible.

Expected return based on probability distribution

The investment environment is quite uncertain, so it is not advisable to use historic data to
make future prediction of return. therefore, may have a number of probable return and assign
probabilities to each expected outcome. Based on this probability distribution, they can
calculate single expected return.

Expected return =∑ 𝑝𝐼𝑟𝐼 ……………………………………….

Where N= total number of outcome of returns

pI =probability in ith return

pI= ith return outcome

for example: if expected return from a share is dependent upon state of economy is given and
also its probability distribution

44
 State of economy Return probability
Good 18% 0.4
Bad -5% 0.3
Normal 15% 0.3

Solution: expected return =18Ⅹ (0.4)-5Ⅹ (0.3) +15Ⅹ (0.3)

=10.2%

Holding period return

Holding period return is return earned during the holding period of investment. Holding
period is also known as investment horizon. If investor holds the investment more than one
year then we calculate its holding period return as the total income plus price change during
the holding period expressed as percentage of purchase price

It is not expressed as a per annum form rather it is the absolute return over a specified holding
period such as 4-year return ,5 year return etc.

⋅ ( )
Holding period return =

Where, T.I = total income received during the holding period

P0 = purchase price

Pn =sale price at the end of holding period

n = number of years for which shares are held.

Question. An investor invests in non- dividend paying share at a cost of RS 100 in beginning
of year 2004. At the end of year 2013 he sells the share for RS 150. Calculated the holding
period return on share?

Solution. Holding period return = Ⅹ100

=50%

It must be noted 50% return is earned over a period of 10years. It is not 50% per annum
rather 50%over 10 years.

45
Limitation of holding period return

 It fails to consider how long it took to earn the return. If time period is greater than 1
year then holding period return over states the true annual return.
 Holding period returns on two investment alternatives cannot be compared if holding
periods of the investment are different.

Absolute return

Absolute return means return calculated without considering the risk on an investment. Hence
absolute return is return generated by an investment without adjusting it for the underlying
risk. Absolute return is often quoted in magazine and newspaper advertisements. Absolute
return is not good measure to compare investment alternative. this is because different
investment had different risk. S and T provide absolute return of 15%and 20% respectively. it
does not mean that share T is better than S as it provides higher absolute return of 20%. It is
might possible that T has a very high risk as compare to S. every investor is risk averse or try
to avoid risk. All investor likes return but disklike risk. Hence while comparing different
investment the investor should considered both risk and return. This can be done by
calculating risk adjusted returns.

Risk – adjusted return

Risk adjusted return is a relative measure of return because it is expressed in terms of per unit
of underlying risk. It is the return adjusted for underlying risk of security. there are variety of
method for calculating risk adjusted returns such as Sharpe’s ratio, Treynor’s ratio etc. the
most important risk adjusted return is calculated as Sharpe ratio also known as return to
volatility ratio. It is expressed in terms of per unit of the underlying standard deviation or
total risk. The higher the Sharpe ratio, the better is the security in terms of risk return
relationship.

Sharpe ratio=average return- risk free return / total risk

Risk

In above section we have calculated return of various type. However, return cannot be
generated without undertaking risk. So now we will discuss the type of risk, concept, source
and calculation of risk associated with financial investment i.e., investment in securities.

Risk is defined in financial terms as the chance that an outcome or investment's actual gains
will differ from an expected outcome or return. Risk includes the possibility of losing some
or all of an original investment. Risk arises because returns are not certain or fixed or cannot
be predicted in advance. Level of risk differ from security to security

Risk and uncertainty are different

Risk and uncertainty are not same. Risk is defined as situation where we can assign some
probabilities to the expected outcome of an event. In case of uncertainty, it is not possible to
predict at all i.e., we cannot assign probabilities to the expected outcomes of an event.
However, in practice, terms risk and uncertainty are often used inter-changeably.

46
All rational investor like return but dislike risk hence all investors are risk averse i.e., they
want higher return for every unit of risk and try to avoid risk. However, there are various
degree of risk aversion. Some investors are most risk averse (i.e., conservative investor) and
others are less risk averse (aggressive investor).

In order to avoid risk, some investors invest in a large number of securities. The basic idea
here is DO NOT PUT ALL EGGS IN ONE BASKET.

Causes and type of risk

Return is affected by host of factor both external and internal to the company which issues
that security. Thus, risk is caused by host of external and internal factors. these are known as
causes of risk

External factor Internal factors

Economic policies Management
Taxation Labour condition
Political condition efficiency
Social and cultural changes governance

External factor influences the return of all securities whereas internal factor influences the
specific security only. It does not influence the return of all the securities.

Risk on securities can be classified into systematic risk and unsystematic risk depending
upon the factors causing it.

Systematic risk

Systematic risk is that part of total risk which is caused by factors beyond the control of a
specific company or individual. Systematic risk is caused by factors such as economic,
political, socio, cultural etc. all the investments or securities are subject to systematic risk and
therefore it is non- diversifiable risk. systematic risk cannot be diversified away by holding a
large number of securities. Systematic risk primarily include-market risk, purchasing power
risk and exchange rate risk.

 Market risk
It is caused due to herd mentality of investor i.e., the tendency of investor to
follow the direction of market. If market prices falling then then even good
performing companies’ shares fall in prices. Thus, decline in share prices due to
market factors is called market risk. Market risk cause almost 2/3 of total
systematic risk. Therefore, sometime systematic risk is also referred to as market
risk. Market price change is the most prominent source of risk in a security.
 Interest rate risk
Interest rate risk arise due to market interest rate. This primarily affect the fixed
income securities because bond price isinversely related to market interest rate. an
increase in market interest rate causes bond prices to fall and vice versa.In fact,
interest rate has two opposite component -price risk and reinvestment risk. both

47
 these risk work in opposite direction. if price is negative (i.e., fall in prices),
reinvestment would be positive (i.e., increase in earning on reinvesting money).
Price risk is the risk associated with the changes in price of security due to change
in interest rate.
For example, a bond issued at par RS 1000 has
5-year maturity and a coupon rate of 10%. now if market interest rate increases to
12%, we will not find any buyer for this bond at RS 1000 because bond will
provide interest income of 10% while market rate is 12%. therefore, this bond will
become attractive only at price lower than RS 1000. the bond price will be:
Bond price = × 1000 = rs.8333.33
Hence an increase in interest rate makes bond price fall and vice versa. This is
price risk component of interest rate risk.
‘reinvestment risk’ is the risk associated with reinvesting interest/dividend income
.it arises when market interest rate falls. In such case, the investor is able to
reinvest his interest /dividend income at lower rate which implies lower future
incomes.
For example, if market interest falls to 8% from 12% then then income generated
from interest income of bond of RS1000@10% will fetch RS 100. And this 100
RS income can be reinvested at 8% market interest rate, hence this will generate
lower income.
It must be noted as market rate falls the bond price rises but reinvestment risk
arises. therefore, price risk and reinvestment risk work in opposite direction.
Interest rate changes is the main source of risk especially in case of fixed income
securities such as bonds and debentures.
 Purchase power risk (inflation risk)
Purchase power risk arise due to inflation. Inflation is persistent and sustained
increase in general price level. Inflation erodes the purchasing power of money
i.e., same money can buy fewer goods and services due to increase in prices
therefore if investor income does not rise during inflation, then investor is getting
lower and lower income in real terms. Fixed income securities are subjected to
purchasing power risk because income from such securities is fixed in nominal
terms.
For example: an investor in a 5year 10% bond at par value of RS 1000. At the end
of year inflation is 5%.
Here interest income in nominal terms = RS 100(10%of 1000)
However real terms = . = 𝑅𝑆. 95.23
It is often said that equity shares are good hedge against inflation and hence
subjected to lower purchasing power risk.
 Exchange rate risk
In globalised world most of economies are exposed to foreign currency. exchange
rate risk is associated with change in foreign currency. The exchange rate risk is
caused by fluctuations in the investor’s local currency compared to the foreign-
investment currency.

For example, if rupee depreciate (say from RS.40per USD to RS.60per USD) then
the value of imported material will increase in terms of rupee even though there is
no change in quantity of imported material. therefore, the company importing this
material will have to spend more rupees to buy dollar for paying for imported
material.

48
Unsystematic risk

Unsystematic risk is risk which is within the control of the company like management, assets,
labour or capital. Therefore, unsystematic risk can be diversified using an efficient portfolio
of securities which are least correlated (preferably not correlated). Hence unsystematic risk is
also called diversifiable risk.

Source of unsystematic risk: -

 Business risk
 Financial risk

Business risk

Business risk is associated with investment decision of company. It arises due to presence of
fixed operating cost in company’s cost structure. Fixed cost is to be paid by the company
irrespective of amount of its revenue. Therefore, in times of declining sales, fixed operating
cost results into losses for the company. business risk is measured by degree of operating
leverage. Degree of operating leverage measures the resultant change in operating income
due to change in its sale revenue.

Degree of operating leverage (DOL) = % change in operating income/ % change in sales

Operating risk arise when DOL> 1. the higher the degree of operating risk the greater will be
business risk

Other source of business risk includes -labour unrest, inefficient management and corporate
governance issues.

Financial risk

Financial risk is associated with financing decision or capital structure of a company. It arises
due to the presence of fixed financial cost or debt capital in company. As result a result a
change in operating profit will have a more than proportionate change in its earning per share
(EPS). the interest cost is must for the company to be paid irrespective of its operating profit.
Financial risk is measured by degree of financial leverage which is the ratio of change in EPS
to change in operating profit of a company.

Degree of financial leverage (DFL) = % change in EPS / % change in operating profit or

EBIT

Financial risk arises when DFL> 1. therefore, companies using excessive debt capital are
subjected to high financial risk

Measurement of risk.

Risk is defined as variability in expected return. Therefore, total risk on security can be
measured by using statistical method of measuring variability or dispersion such as range,
standard deviation or variance

49
Range: range is difference between highest and lowest possible return in case of an
investment. the higher the range the greater will be the dispersion and higher will be risk.
This is not good measure of risk because it does not provide single estimate of risk

Variance or standard deviation

This is most popular and commonly used measure to calculate total risk of security.

We can calculate standard deviation in two case:

1. When only return is given

( )
S.D. =

Where Ri = ith return

n= number of observations

𝑅 =mean return

2. When probability distribution of return is given

S.D. = 𝑝 (𝑅 − 𝑅 )
Or variance = 𝑝 (𝑅 − 𝑅 )

Question: calculate the total risk of security whose past return are given.

Year Ri (%)
1 10
2 12
3 8
4 5
5 10
6 13
7 7
8 5
9 8
10 12

Solution:

Year Ri(%) (𝑅 − 𝑅 )
1 10 1
2 12 9
3 8 1
4 5 16
5 10 1
6 13 16

50
7 7 4
8 5 16
9 8 1
10 12 9

Mean return (𝑅 ) = = 9%

∑( )
S.D.= = = 2.72%

Hence mean return of security is 9% with total risk of 2.72%.

Question: calculate expected return and total risk of security B.

Return (Ri)% probability%

20 0.1

15 0.2

-5 0.2

10 0.3

25 0.2

Solution:

Ri Pi RiPi Pi (𝑅 − 𝑅 )

20 0.1 2 6.4
15 0.2 3 1.8
-5 0.2 -1 57.8
10 0.3 3 1.2
25 0.2 3 33.8

𝛴𝑅𝑖𝑃𝑖 = 12𝛴 Pi (𝑅 − 𝑅 ) =101

𝑅 = 𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑟𝑒𝑡𝑢𝑟𝑛 = 𝛴𝑅𝑖𝑃𝑖 = 12%

Total risk =S.D. = ∑𝑃 (𝑅 − 𝑅 ) = |0| = 10.5%

A security B has average return of 12% and total risk of 10.05%

Coefficient of variation: A relative measure of risk

The major limitation of standard deviation as a measure of total risk is that it is absolute
measure of risk. Therefore, when expected return are same for two investment then their risk

51
can be compared using standard deviation. However, if we want to compare two or more
securities having different average returns, we should not use standard deviation to conclude
about the riskiness of securities. In such case we should use coefficient of variation.
coefficient of variation is relative measure of risk. It can be calculated as given below:

Coefficient = standard deviation / mean return

Question: a person wants to analyse following two securities with respect to risk

Security A B

Expected return (%). 20 30

S.D. of returns (%). 15 18

Solution: in this question although S.D. of returns of security B is higher than that of security
A, it cannot be concluded that security B is more risky. This is because return on security B is
also higher. In this case we should not assess riskiness of security by S.D. which is an
absolute measure of risk. rather we should use coefficient of variation (C.V.) which is a
relative measure of risk

Coefficient of variation = S.D. / MEAN RETURN

Coefficient of variation of security A = 15/20 =0.75

Coefficient of variation of security B = 18/30 = 0.60

Since C.V. of security A is higher, we can say that security A is riskier than security B.

CALCULATION OF SYSTEMATIC RISK

Total risk of security comprises of two components-systematic risk and unsystematic risk.
Systematic risk is caused by factors which are beyond the control of company such as
economic, political or social. it can be captured by sensitivity of security of security’s return
with respect to market return. This sensitivity can be calculated by β (beta) coefficient . β
coefficient is calculated by regressing a security’s return on market return.

R s = α+βRm +e

Where, Rs = return on particular security

Rm = market return

Β = regression coefficient of Rs on Rm

Αlpha(α) = security return independent of market return.

The β can also be calculated as: cov (S, M) / 𝜎𝑚

Where cov (S, M) = Covariance between returns of security S and market return

52
 𝜎𝑚 = 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒 𝑜𝑓 𝑚𝑎𝑟𝑘𝑒𝑡 𝑜𝑟 𝑠𝑖𝑚𝑝𝑙𝑦 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑟𝑖𝑎𝑛𝑐𝑒

The higher the beta (β) the greater is systematic risk

If β =1 then the security is as risky as market portfolio or market index

If β< 1 then the security is less sensitive or risky than market portfolio and hence termed as
defensive stock.

If β > 1 then the security is more sensitive or risky than the market portfolio and hence
termed as aggressive security.

For example, if β = 0.8 then 10% change in market return will result in 8% change in security
return in same direction. On other hand if β = 1.20 then a 10% change in market return will
cause a 12% change in security’s return in the same direction.

The βcan also be negative. if security has negative β it means security’s return are moving in
opposite direction of market return. When market return is decreasing then security is
increasing or vice versa.

Calculation of magnitude of systematic risk

The β is indicator systematic risk of security. it is a number independent of unit of

measurement. hence it does not tell us what is the quantity of systematic risk i.e.,how much
of the total risk is systematic risk?

Systematic risk = βαm

systematic risk is expressed in % term

unsystematic risk

it is that component of risk which is not explained by market. this can be calculated by
subtracting systematic variance from total variance of a security’s return.

Total risk = systematic risk +unsystematic variance

Hence, unsystematic risk = total risk – systematic variance

= 𝜎 −𝛽 𝜎

Question: the total risk on security (expressed in terms of S.D.) is 10% and its beta is 1.2
calculate systematic risk and unsystematic risk of the security if market variance is 36%
squared percentage (i.e., market S.D. is 6%)?

Answer: total variance = 𝜎 = (10)2 = 100 Sq %

Systematic variance = 𝛽 𝜎 = (1.2)2 (36) = 51.84 sq %

53
Systematic risk in terms of S.D. = 7.2%

Unsystematic variance = 100- 51.84

= 48.16 squared

Unsystematic risk in terms of S.D. =6.9%

Expected return (based on capital asset pricing model)

As per CAPM there is positive and linear relationship between expected return and
systematic risk as measured by beta.

E(Ri) = Rf + (E (Rm)- Rf) βi

Where, E(Ri) = expected return on a security i.

Rf = risk free return

E(Rm) = expected market return

βi = beta of security

beta of security measures the sensitivity of security’s return vis-à-vis market return. This can
be calculated by regressing a security’s returns on market returns. (E(Rm)-Rf) is nothing but
market risk premium i.e., risk premium on market portfolio.

(E(Rm)-Rf)βi is the risk premium of the security. Hence risk premium of a security is
calculated by multiplying market risk premium with the beta of that security.

Impact of taxes on investment return

Taxes play an important role in investment decision making. income from investment is
subjected tax. however, rate of tax differs from investment to investment. Some income from
investments is also exempt from tax such as tax-free bonds.

In order to make good investment one need to take into consideration the impact of taxes and
compare the alternative investments benefits either pre-tax or post tax.

Post-tax rate = pre tax rate (1- tax rate)

Taxable equivalent yield: in case of tax-free investment no tax is paid on annual interest
income. here we can calculate taxable equivalent yield to compare it with an investment the
yield of which is taxable. Taxable equivalent yield is the equivalent pre tax yield of a tax-free
investment.

Taxable equivalent yield = tax free rate / (1- tax rate)

If tax free rate is 10% and the investor is in 30% tax bracket,

54
then taxable equivalent yield = 0.10 / (1-0.30) = 0.143 or 14.3 %

Impact of inflation on return from investment

Inflation affects the purchasing power of money therefore it is necessary to take into account
the rate of inflation before making an investment. we can understand the impact of inflation
on investment by calculating the real rate of return rather than nominal rate of return. real rate
of return is rate of return adjusted for inflation i.e., it does not have element of inflation rate.
Nominal rate contains the element of inflation rate.

Real rate = [1 + 𝑛𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑎𝑡𝑒 𝑜𝑓 𝑟𝑒𝑡𝑢𝑟𝑛 1 + 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 ] − 1

Real rate of return = nominal rate of return – inflation rate

If nominal rate of return on investment is 14% and the inflation rate is 4%.

.
then the real rate of return is = .
− 1 = 9.615%

this implies in real terms the investment is only generating 9.615% while we can be
misguided by the nominal rate of return on investment i.e. 14% and hence make our
investment accordingly.

In the time of high rate of inflation, the investment in the economy falls because the investor
will focus on current spending rather than future investment as purchasing power of money
erodes due to high inflation.

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 LESSON – 3

PORTFOLIO ANALYSIS

Objective

 Understanding the portfolio return and its calculation

 Understanding portfolio risk and its calculation
 Construct portfolio for given expected return
 Determining the minimum variance portfolio
 Portfolio construction or selection
 Portfolio theory of harry Markowitz or mean variance optimisation model
 Capital market line
 Capital asset pricing model.

Introduction

An investor does not invest in one security rather he/ she invest in multiple security in order
to meet his investment goals. These investment goal or objective are guiding factor in
decision making. The combination of asset or security in which investor makes an investment
is termed as Portfolio.

Portfolio management process

A portfolio is basically a collection of assets or securities which are so collected together to

reduce the risk. the basic idea behind a portfolio is diversification.

Portfolio management

It is the process of construction, revision and evaluation of a portfolio. The objective of

portfolio is to build a portfolio which give return in accordance with the risk profile of the
investor.

Steps of portfolio management process is explained below:

Step 1: security analysis

An investor can use the multiple security to construct different type of portfolio. These
securities can differ in their risk and return characteristic. There are three approaches to
security analysis –

- Fundamental analysis
- Technical analysis
- Efficient market hypothesis

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In fundamental analysis the value of security will be equal to its intrinsic value. intrinsic
value. Intrinsic value of security is the present value of all future expected cash inflows from
the security. once the intrinsic value is calculated we compare it with actual market price to
find out whether the security is under-priced, overpriced or fairly pricedin the
market.securities which are under-priced in the market are good investment option for
prospective investor. fundamental analysis makes use of EIC (Economy industry and
company analysis) framework to arrive at reasonable estimate of future cash flow from
securities

Technical analysis used past trend in price to predict future price. It assumes that history
repeat itself. Here charts and indicators are used to predict future direction and prices.

Efficient market hypothesis implies that current prices of security fully reflect all the
available information. Security prices change only in case of inflow of new information and
new information is completely random. As per efficient market hypothesis current market
price is the best price to buy or sell the security.

Step 2: portfolio analysis and selection

The next step is to analyse the various securities in terms of risk and return profile of
securities. The larger the number of securities the larger will be the feasibility of infinite
portfolio. Then the investor hasselected an efficient portfolio which provide maximum return
for a given level of risk or which has lowest risk or a given level of return.

Step 3: portfolio selection

Once an investor has identified an efficient portfolio then he / she has to select a portfolio
which suits the risk return appetite of investor. This process is known as portfolio selection.

Step 4: portfolio revision

Due to changing financial environment, portfolio management is continuous process. With

passage of time an efficient portfolio may turn out to be an inefficient portfolio. Hence there
is need to revise the optimum portfolio in light of changing financial environment like capital
market, economic and industry wide factor. The change in investor objective can also
generate the need to revise the optimum portfolio. Therefore, portfolio revision is integral
part of portfolio management.

Step 5: portfolio performance evaluation

Now the step is to evaluate the portfolio as to whether it has performed according to the
expectation of investor. It involves assessing the actual return and risk of portfolio over a
specified time. The method which are used to evaluate the portfolio are – Sharpe ratio,
Treynor’s ratio, Jensen’s alpha, Fama’s decomposition ratio. To evaluate we need to compare
our optimum portfolio with that of some benchmark i.e., market portfolio.

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Portfolio analysis – Markowitz model

Modern portfolio theory (MPT) is a theory on how risk-averse investors can construct
portfolios to maximize expected return based on a given level of market risk. Harry
Markowitz pioneered this theory in his paper "Portfolio Selection,”. This theory focuses on
both portfolio analysis and portfolio selection.

Portfolio Return

Portfolio return is weighted average returns of the individual return on asset or securities
comprising that portfolio. The weights are the proportion of total funds invested in a
particular asset or security.

For example:

Market condition probability Security A (%) Security B (%)

GOOD 0.3 22 6
NEUTRAL 0.5 14 10
BAD 0.2 7 11

Expected return on security A =(0.3Ⅹ22) +(0.5Ⅹ14) +(0.2Ⅹ7) = 15%

Expected return on security B = (0.3Ⅹ6) + (0.5Ⅹ10) + (0.2 Ⅹ11) = 9%

Now the investor wants to invest 50% in security A and 50% in security B. now we have to
compute expected return on portfolio. Expected return on portfolio is weighted average of
returns of the individual securities comprising that portfolio.

E(Rp) = ∑ 𝑤𝑖 Ⅹ 𝐸(𝑅𝑖)

Where, E(Rp) = portfolio return.

Wi = proportion of total fund invested in a particular asset or security i

Ri = expected return on security i.

N = number of asset or securities in the portfolio

So, expected return on portfolio = weight Ⅹ expected return on security A + weight Ⅹ

expected return on security B.

= 0.5 Ⅹ15 + 0.5Ⅹ9

= 12%

Portfolio risk

Portfolio risk is combined risk of securities comprising that portfolio. Risk of individual
security is measured by variance or standard deviation. But we simply can’t combine that
variance together because in portfolio securities also have co-variance i.e., inter-active risk. A

58
covariance between two securities captures the tendency of them moving together. Hence
portfolio risk is based on both variance and covariance between securities.

Portfolio risk considers the standard deviation together with co-variance of returns on these
assets or securities

Portfolio risk in two security case

𝜎𝑝 = 𝑤 𝜎 + 𝑤 𝜎 + 2𝑤 𝑤 𝑐𝑜𝑣 12

Where, w1= proportion of total funds invested in security 1

W2 = proportion of total funds invested in security 2

𝜎1 = standard deviation of return of security 1

𝜎2 = standard deviation of return of security 2

Cov12= co-variance between security 1 and 2

Covariance is equal to the product of coefficient of correlation and standard deviation of

security 2.

Cov12= p12𝜎1𝜎2

As we increase the number of securities the covariance also increases as if we have 5

securities then we have 10 covariance. Therefore, main limitation of Markowitz model is that
it requires substantial amount of input data so as to calculate portfolio return and risk.

Covariance is expressed in specified unit of measurement and hence an absolute

measurement. Hence, we move towards a relative measure i.e., Coefficient of correlation.
And coefficient of correlation is independent of the unit of measurement. It measures the
degree of linear relationship between two variables. Its value ranges from +1 and -1.

Calculation of correlation coefficient

𝒄𝒐𝒗 𝑨𝑩
Pab = 𝝈𝑨 𝝈𝑩

Constructing a portfolio for a given expected return:

Question:construct a portfolio, using securities A and B, for an investor who wants expected
return of 13%. Expected return from security A is 15% and expected return from security B is
9% . calculate this portfolio’s return as well.

Solution:we require 13% expected return from portfolio

Let’s assume weight of security A is w1 and then the weight of security B i.e., w2will be (1-
w1)

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Hence 13=(15Ⅹw1) +(9Ⅹ(1-w1)

w1=0.67, hence w2 = 1-0.67 = 0.33

thus, the portfolio providing a return of 13% would be the one which invests 67% of funds in
security A and 33% in security B.

portfolio risk of such portfolio will be calculated as below:

𝜎 = (0.672 Ⅹ 5.3 2) +(0.33 2Ⅹ 2 2) + 2 0.67 0.33 (-0.94) 5.3 2 =8.63

Hence 𝜎𝑝 = 2.94 %

Minimum variance portfolio

It means construction of such type of portfolio which has minimum risk or variance.
minimum variance portfolio is also the optimum portfolio for an investor who want to
minimize exposure to risk.

We can estimate the weight of two securities in minimum variance portfolio using the
following formula. It can be calculated as:

W min A =

Question:Construct a minimum variance portfolio of securities A and B from the following

information. Calculate this portfolio’s return as well as risk.

Security A B
Expected return 15 9
S.D of returns 5.3 2

Covariance between the return of A and B = -10

Solution: The weight of security A in minimum variance portfolio is calculated as:

( )( ) ( )
Wmin A = . ( )
= = 0.27

Wmin b = 1- 0.27 = 0.73

Hence minimum variance portfolio is one which has 27 % of security A and 73% of security
B.

Portfolio risk 𝜎 = (0.272 Ⅹ 5.32)+ (0.732Ⅹ 22) + 2 Ⅹ0.27Ⅹ 0.73Ⅹ( - 10)

𝜎 = 0.50 %

This minimum variance portfolio risk will have the following portfolio return:

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E (R p) = (15 Ⅹ 0.27) + (9 Ⅹ 0.73) = 10.62 %

Portfolio selection

Now the step is to select an optimum portfolio. The main guiding principle for selecting an
optimum portfolio is that it should be a portfolio which provide maximum return for a given
level of risk or which has minimum risk for a given level of return.

The portfolio selection has been dealt in detail by harry Markowitz in his portfolio theory,
which was extended by Sharpe in capital market theory. Hence for selecting an optimum
portfolio we have two theories which are: -

 Portfolio theory
 Capital market theory

Portfolio theory of harry Markowitz (1992) or mean variance optimization model

The portfolio theory is popularly known as Markowitz model which provide logical and
analytical tool for selection of optimum portfolio. This model is based on expected return
i.e.(mean) and risk (variance) and it is also termed as mean variance optimisation model.

Assumption of portfolio theory

 Investor are risk averse.

 Portfolio can be analysed in terms of their risk and return. portfolio return is weighted
average of return on individual securities. Portfolio risk is calculated using variance
and covariance.
 Selecting of optimum portfolio is based only on return and risk.
 Investor are rational, they attempt to have maximum return for a given risk and
minimum risk for a given return
 Investor have different risk return preference i.e.; their indifference curves are
different.

Steps of portfolio selection in portfolio theory/ Markowitz model

Step 1. Setting the portfolio opportunity set or investment opportunity set.

Portfolio opportunity set shows the risk and return of all possible portfolio which can be
made from set of available securities. In case of N number of securities, we can have infinite
number of possible portfolios in which investor can invest. The graphical presentation of
these portfolio is termed as portfolio or investment opportunity set. The opportunity set
comprises of infinite number of feasible portfolios which can be constructed using available
securities.

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Portfolio opportunity set in case of N securities

Step 2. Defining the efficient set of portfolios i.e., the efficient frontier

Now we need to identify the efficient frontier out of all feasible portfolio. All feasible
portfolios are not efficient. An efficient portfolio is one which has maximum return for given
level of risk or which has minimum risk for a given level of return. An investor is rational
they prefer more return to less risk. If investor choose a portfolio which has same level of
return, then he will choose the one with less risk. Here we apply the rule of dominance. As
per rule of dominance the portfolio having highest return dominates all other portfolio having
same return. Further a portfolio having lowest risk dominates all other portfolio having same
return.

The above graph depicts the efficient portfolio and not efficient portfolio as the efficient
portfolio gives the higher return of 12% for a given level of risk of 20% on the other hand the
not efficient portfolio given 4% return at a level of approximately 20% risk.

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Step 3: constructing indifference curves of theinvestor

The investor will now choose from the optimum portfolio from the efficient portfolio. As we
all know that investor is risk averse and some are less risk averse. The more risk averse
investor should select an optimum portfolio in the lower region of efficient frontier, while
less risk averse investor should select a portfolio in upper region of efficient frontier. But
efficient frontier cannot help an investor to select the optimum portfolio. The basic criterion
for selection of optimum portfolio is that satisfaction / utility of investor is maximised. For
this we construct indifference curve for investor. An indifference curve shows all the
combination of risk and return which provide the investor same utility. Since all investor are
risk averse that is why the indifference curve is upward slopping. The less risk averse will
have rather flatter indifference curves while more risk averse investor will have steeper
indifference curves. But indifference curve of investor cannot intersect. They will be parallel.

Indifference curve of risk averse investor.

We construct three indifference curves for investor i.e. C3,C2,C1.The C3 will provide higher
utility than C 1 .hence portfolio S5 will provide higher utility than other portfolio. We did not
choose S6 as it will also provide higher return but with higher risk as well.

Step 4: selecting the optimal portfolio

The selection of optimum portfolio or best portfolio must meet the following two conditions

 The portfolio is efficient that is it lie on efficient frontier

 The utility of investor is maximised i.e., it should lie on the highest possible
indifference

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Optimum portfolio

It should be noted that optimum portfolio is at point R where their higher indifference curve
meets the efficient frontier. No portfolio is better than portfolio R. according to Markowitz
model the optimum portfolio is the point of tangency between efficient frontier and highest
possible indifference curve. This is also referred as point of equilibrium.

A more risk averse investor will have steeper indifference curves and hence his optimal will
be at lower region of efficient frontier. A less risk averse investor will have more flat
indifference curves and hence his optimum portfolio will lie on the upper region of efficient
frontier

Limitation of Markowitz model

 Markowitz model is quite demanding in terms of data requirements. In order to

analyse N securities, we need (3n + N2)/2 data inputs. It becomes cumbersome and
complex to handle such large data set. For example, in order to analyse 100 securities,
we need 100 returns, 100 variances and 4950 co variances i.e., a total of 5150 data
inputs. This is substantial.
 As per Markowitz model there are as many optimal portfolios as there are number of
investors. However, this limitation is removed when we introduced a risk-free asset in
the capital market.

Capital market theory

Capital market theory extend the Markowitz model to a situation where risk free asset is
introduced in capital market. The problem of optimum portfolio can be resolved when a risk-
free asset is introduced in the market which will allow the investor to lend or borrow at risk
free rate. This theory assume that all investor is rational.

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Assumption of capital market theory

 Investor make decision solely on the basis of risk and return assessment. this means
that expected return and variance are the only factor considered in investment
decisions.
 There is no restriction on short selling
 There are many investors and buy or sell transaction of any investor will not affect the
price of the securities.
 There are no transaction cost or taxes
 There is risk free asset beside risky assets. Hence investor can borrow or lend any
amount at the same risk-free rate.
 Investors have identical or homogeneous expectation about expected returns, variance
of expected returns and covariances of all pairs of securities. This assumption is
important so as to have a unique efficient frontier. If the expectation of investor
differs in terms of returns, variances and covariance then there would be a number of
efficient frontiers which would further complicate the problem

Introduction of risk-free asset in capital market

In portfolio theory efficient frontier is a concave curve but when risk free asset is
introduced in capital market then the efficient frontier become straight line which
originate from risk free return on Y axis and is tangent to original efficient frontier at pint
M. This line is called RfMD. This new efficient frontier which is a straight line is called
capital market line (CML).

Thus, capital market line is the line which starts from Rf and is tangent to the efficient
frontier at point M. The capital market line shows linear relationship between risk and
return. Every point on CML shows an efficient portfolio. The interception of CML is Rf
i.e., risk free rate which shows that if there is no risk, the return earned must be equal to
Rf.

The slope of CML = [(E(Rm)-Rf)] /𝜎

The capital market line:

E(Rp)=Rf + [(E (Rm)- Rf)] /𝜎 . 𝜎𝑝

Where: E(Rp) = expected return of portfolio

Rf = risk free rate of interest

E(Rm) = expected return on market portfolio

𝜎 = standard deviation (total risk) of market portfolio

𝜎𝑝= standard deviation (totalrisk) of the portfolio

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 Features of capital market line

 CML shows linear and positive relationship between expected return and risk of a
portfolio.
 It originates from Rf i.e., risk free rate. hence the interception of CML is Rf.
 The slope of CML is reward to variability ratio i.e.[(E(Rm)-Rf)]/𝜎
 CML is tangent to original efficient frontier at point M, i.e., the market portfolio
or the optimal portfolio of risky assets
 Only efficient portfolio consisting of risk-free asset and portfolio M lie on CML
 CML is upward sloping because price of risk must be positive since investor are
risk averse.

Capital market line

Question: the details of three portfolios are provided to an investor:

Portfolio Expected return Total risk (S.D)

P 15% 3%
Q 19% 6%
R 20% 10%

It further given that the risk-free rate of interest is 4% and expected market return is
12%. risk (S.D) of the market portfolio is 5%. Find out whether these portfolios are
efficient or not.

Solution:we know that portfolio is efficient if it lies on capital market line. Hence, we need
to calculate expected return of these portfolio as per CML. The given expected returns are
based on the probability distribution of returns or some other analysis.

If expected return as per CML = given expected return then the portfolio lies on CML and
hence is efficient. otherwise, the portfolio is inefficient.

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Expected return as per CML is calculated using following equation.

E(Rp)=Rf + [(E (Rm)- Rf)] /𝜎 . 𝜎𝑝

Portfolio Expected Expected return as Efficient or not

return(given) per CML
P 7% 4+(12-4)3/5=8.8% NOT EFFICIENT
Q 19% 4+(12-4)6/5 = NOT EFFICIENT
13.6%
R 20% 4+(12-4)10/5=20% EFFICIENT

The above table depicts that only R portfolio is efficient portfolio because in case of other
portfolios the expected return as per CML does not match with the given returns.

Capital asset pricing model (CAPM)

Capital asset pricing model is extension of capital market theory. CAPM is developed by
Sharpe (1964), Lintner (1965) and Mossin (1966). CAPM is used to find out whether a
security is earning more or less than expected return. From investment point of view investor
should select securities which provide higher return than the one expected by CAPM

Before going a head with explanation of CAPM we will see the type of risk

There are two type of risk systematic risk and unsystematic risk

Systematic risk or non-diversifiable risk: this type of risk is caused by factors which are
beyond the control of specific company. These factors affect all the companies and cause
variability in return. Systematic risk cannot be reduced by holding an efficiently diversified
portfolio. It is indicated by beta coefficient (β). β captures the security return with respect to
market return.

Unsystematic risk or diversifiable risk: this type of risk is caused by the factors which are
within the control of company such as management, operational efficiency, labour condition,
financial leverage. it is called diversifiable because in an efficiently diversified portfolio
unsystematic risk can be completely eliminated.

Unsystematic risk reduces to zero in an efficiently diversified portfolio and hence the only
relevant risk in such a portfolio is systematic risk. Therefore, as per capital market theory the
only relevant risk which is priced in capital market is systematic risk not the total risk.

β: an indicator of systematic risk

Measures the sensitivity of a security’s returns with respect to market return. The more
sensitive a security’s returns are to market return, the higher will be the value of β.

 If security has β<1 then it is less responsive to market returns.

 If β>1 then security is more responsive to change in market return.
 A risk-free asset is not responsive to change in market in market returns and hence
the β of risk-free asset is always zero.

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  Β of market portfolio is always 1. This is because here we are relating market
portfolio with it self and hence it must be 1.

Beta (β)= cov (S, M)/𝝈𝟐𝑴

Where cov (S, M) = Covariance between return of security S and market return

We know cov(s,m)= 𝝈𝒔 × 𝝈𝒎 Ⅹ𝒄𝒐𝒆𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒕 𝒐𝒇 𝒄𝒐𝒓𝒓𝒆𝒍𝒂𝒕𝒊𝒐𝒏 (𝒔, 𝒎)/𝝈𝑴𝟐

Question: following information is available in respect of security G and the market

portfolio M.

Probabilities Security G Market portfolio M

0.3 10 12
0.4 12 15
0.3 14 18

Find out beta of security G.

Solution:

Pi G m PiG PiM Pi (G- Pi (M- Pi (G-

exp G)2 exp M)2 exp G)
(M-exp
M)
0.3 10 12 3 3.6 1.2 2.7 1.8
0.4 12 15 4.8 6 0 0 0
0.3 14 18 4.2 5.4 1.2 2.7 1.8
𝜮 = 𝟏𝟐 𝜮 = 𝟏𝟓 𝜮 = 𝟐. 𝟒 𝜮 = 𝟓. 𝟒 𝜮 = 𝟑. 𝟔

Mean return of G = 12%, Mean market return = 15%

Variance of G = 2.4sq%, variance of M = 5.4sq %, covariance = 3.6sq %

Beta (β) = cov/ market variance = 3.6/5.4= 0.67

Hence beta of security G is 0.67

Capital asset pricing model

Capital asset pricing model used to predict expected return on security or portfolio. Capital
asset pricing model shows that there is a positive and linear relationship between expected
return and systematic risk(β). securities differ in terms of their sensitivity to market
portfolios. Some securities are less sensitive while other are more sensitive. Hence beta of
different securities and portfolios are also different.

Assumption of CAPM

 All investors are risk averse.

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  Investor make decision solely on the basis of risk and return assessments.
 Securities are indefinitely divisible. one can buy or sell securities even in
fractions
 There is no restriction on short selling
 There are infinite investor and buy or sell transaction of any investor will not
affect the prices of securities. There is perfect competition in capital market.
 There is no transaction costs or taxes
 All the investor holds efficiently diversified portfolio having no systematic
risk.

CAPM

E(Ri) = Rf + [ (E(RM) – Rf] βi

Where E(Ri) = expected rate of return from a security or asset

Rf = risk free rate of return

E(RM)= Expected return on market portfolio

Βi = beta coefficient or beta factor of security I

As per CAPM

Expected return = risk free rate + market risk premium Ⅹ systematic risk

Expected return = risk free rate + risk premium

The market portfolio is the efficiently diversified portfolio which contain all the securities
available in the market. market risk premium is the excess of expected return on market over
risk free return

The expected return from security depends upon the following three factors

 Risk free rate of return = this pure time value of money. This is the compensation an
investor must get for time without assumption of risk
 Market risk premium or the market price for risk = this is the reward an investor must
get for bearing one unit of market risk or systematic risk.
 The amount of systematic risk indicated by β: this is the relative amount of systematic
risk in security. The higher the systematic risk the higher will be the expected return.

For example, Rf =5%,E (Rm) = 11 % and β of security T is 1.5 calculate expected return?

E(Ri) = Rf + [ (E(Rm) – Rf] βi

= 0.05 + (0.11-0.05) (1.5)

= 0.14 or 14%

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Whether a security is efficiently or fairly priced in the market?

If actual return is equal to return as per CAPM Then the security is efficiently priced in
market

If actual return is less then return as per CAPM then the security is over- priced in the market
as expected return based on CAPM is higher

If actual return is more then return as per CAPM Then the security is under priced in market
as its expected return based on CAPM is lower while it is providing a higher actual return.

Security market line (SML)

Graphical presentation of capital asset pricing model is called security market line. Security
market line shows linear relationship between expected return and β factor. It has interception
as Rf i.e., it originates from risk free rate. It must be noted that when β is zero then the return
an investor get is equal to risk free return.

SML and pricing of securities:

 Securities lies on SML are efficiently priced in market. For such securities the actual
return (based on probability distribution) is equal to expected return based on CAPM.
 If security lies below SML then the security is inefficiently priced (overpriced) in the
market. Such a security provides actual return which is lower than expected return
based on CAPM. Investor should not invest in such securities.
 If security lies above SML then also it is inefficiently priced, but it is under-priced in
the market. such security provides an actual return which is higher than expected
return based on CAPM.

Position and slope of SML:

 Security market line is upward sloping line

 The position of SML depends upon Rf i.e., risk free rate and slope of SML depends
upon market risk premium.
 If there is higher Rf then SML will be higher and this SML will be parallel to existing
SML with lower Rf and there will be no change in slope
 Difference in slope due to risk premium. the higher the risk premium the higher will
be the slope of SML and steeper will be the SML.

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SECURITY MARKET LINE

Question: following information about two securities P and Q.

Security P Q
Actual return % 12 16
Β 0.7 1.3

Risk free rate is 5% and expected return on market portfolio is 15%. Do you think that
securities A and B are efficiently priced in the market? do they lie on SML?

Solution: here we need to calculate expected return as per CAPM

E(Ri)= Rf + [ (E (RM) – Rf] βi

Expected return from P = 5 + (15-5) (0.7) = 12 %

Expected return from Q = 5 +(15-5) (1.3) = 18%

Since security P has same actual return and return as per CAPM. security P is efficiently
priced and it will lie on SML.

The actual return from security Q is less than as per CAPM i.e., 18%. Hence security Q is
inefficiently priced. It lies below SML. It is overpriced in the market.

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 LESSON – 4

REAL ESTATE, FINANCIAL DERIVATIVE AND COMMODITY

MARKET IN INDIA
AND
MUTUAL FUND INCLUDING SIP

OBJECTIVE

After reading this you will be able to understand: -

 The real estate market in India.

 The introduction to financial derivative
 Classification of financial derivatives.
 Participants in derivative market.
 Comparison between forwards and futures
 Pricing of future contract
 Option contracts
 Comparison between futures and option
 Commodity market in India.
 Mutual funds.
 Mutual fund schemes
 Latest development regarding mutual fund.

Introduction

A prospective investor has various option to invest in like real estates, mutual fund, derivative
depending upon the risk appetite of investor and also upon his/or her investment goal. So we
will explore these option in detail in this lesson.

Real estate.

Real estate is the land along with any permanent improvements attached to the land, whether
natural or man-made—including water, trees, minerals, buildings, homes, fences, and
bridges. Real estate is a form of real property. It differs from personal property, which are
things not permanently attached to the land, such as vehicles, boats, jewellery, furniture, and
farm equipment.

Difference between land, real estate and real property

 Land:refers to the earth's surface down to the centre of the earth and upward to the
airspace above, including the trees, minerals, and water.
 Real estate: is the land, plus any permanent man-made additions, such as houses and
other buildings.
 Real property: one of the two main classifications of property—is the interests,
benefits and rights inherent in the ownership of real estate.

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Physical characteristic of real estate

 Immobility. While some parts of land are removable and the topography can be
altered, the geographic location of any parcel of land can never be changed.
 Indestructibility. Land is durable and indestructible (permanent).
 Uniqueness. No two parcels of land can be exactly the same. Even though they may
share similarities, every parcel differs geographically.

Economic characteristic of real estate

 Scarcity: While land isn't considered rare, the total supply is fixed.
 Improvements: Any additions or changes to the land or a building that affects
the property's value is called an improvement. Improvements of a private
nature (such as homes and fences) are referred to as improvements on the land.
Improvements of a public nature (e.g., sidewalks and sewer systems) are
called improvements to the land.
 Permanence of investment: Once land is improved, the total capital and
labour used to build the improvement represent a sizable fixed investment.
Even though a building can be razed, improvements like drainage, electricity,
water, and sewer systems tend to be permanent because they can't be removed
(or replaced) economically.
 Location or area preference. Location refers to people's choices and tastes
regarding a given area, based on factors like convenience, reputation, and
history. Location is one of the most important economic characteristics of land
(thus the saying, "location, location, location!").

Type of real estates

 Residential real estate: Any property used for residential purposes. Examples
include single-family homes, condos, cooperatives, duplexes, townhouses, and
multifamily residences with fewer than five individual units.
 Commercial real estate: Any property used exclusively for business purposes, such
as apartment complexes, gas stations, grocery stores, hospitals, hotels, offices, parking
facilities, restaurants, shopping centres, stores, and theatres.
 Industrial real estate: Any property used for manufacturing, production, distribution,
storage, and research and development. Examples include factories, power plants, and
warehouses.
 Land: Includes undeveloped property, vacant land, and agricultural land (farms,
orchards, ranches, and timberland).
 Special purpose: Property used by the public, such as cemeteries, government
buildings, libraries, parks, places of worship, and schools.

Important points to be considered while investing in real estate in India.

 Check for Real Estate Regulatory Authority (RERA) registration of the housing
project. These are comparatively cheaper housing opportunities. Verify the RERA
number and approvals online or through municipal authorities. However, before
zeroing down compare monthly maintenance charges, amenities like security, social
clubs), electricity supply, water charges, etc. You should also compare the market
prices of other ready-to-move-in or under-construction projects, along with the brand

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 value of the developer is also important for future valuation as well as the
infrastructure of the building. Know that poor construction could cost you extra in the
future.
 Before you start looking out, establish a budget. Experts say, keep it within your loan
re-payment capacity so that you do not hamper your essential needs. Brokers usually
persuade new investors to spend more and speculate higher returns, however, keep it
within your limits.
 Have a long-term perspective, while choosing a location. For instance, if your
investment is in a residential space, proximity to amenities like bus stops, malls,
hospital, schools, should be looked at, as that will either benefit your family or
increase your prospects of rental income. However, if you are investing in commercial
spaces, proximity to airports, ports, warehouses, etc. will be beneficial. Experts
suggest the location of a property is vital for the re-sale value that the investor will
receive in the future.
 Before you invest in real estate, be clear about what you want to do with the property
– earn rental income, own use, or investment re-sale value. Having these points clear
will help you judge a property better. Depending on your purposes, you need to
calculate return on investment over the short or long-term.
 For first-time home buyers, there are attractive housing loan incentives offered by the
government. House owners get interest rate benefits under the PM Awas Yojana.
Additionally, there are tax benefits on home loan interest rate under Section 24 and on
principal payment under Section 80C along with payments towards registration and
stamp duty.
 Again, compare interest rates and home loan features before deciding on the lender.
The PMAY benefits are offered across all major banks. Enquire about the transfer of
loan options, as you could transfer your loan if you get a cheaper interest rate at
another bank in the future.

Financial derivative

Derivative are financial instrument whose value depend upon or derived from some
underlying asset. The underlying asset can be real asset such as commodities, gold etc or
financial asset such as index, interest rate etc. A derivative does not have its own physical
existence. It emerges out of contract between buyer and seller of derivative instrument. Its
value depends upon the value of underlying asset. Hence return from derivative instrument
depends upon the return from underlying assets. Now a days we find derivative based on
other derivatives. The derivative itself is merely a contract between two parties.

Securities contracts (Regulation) Act ,1956 defines derivative as under:

Derivative includes-

a. A security derived from a debt instrument, share, loan, whether secured or

unsecured, risk instrument or contract for differences or any other form of
security
b. A contract which derives its value from the prices or index of prices, of
underlying securities

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Classification of derivative

Derivative can be classified into broader category based upon underlying asset, nature of
derivative contract or the trading of derivative contract.

 Commodity derivative or financial derivative: derivative can be classified into

financial derivative or commodity derivative based upon the underlying asset. In case
of commodity derivative, the underlying asset is physical or real asset such as wheat,
rice, jute, pulses, or even metal such as gold, silver, copper, etc.
In case of financial derivative, the underlying asset is financial asset such as equity
share, bonds, debenture, stock index etc. The financial derivative is more popular
around the world. The commodity derivative is traded on multi commodity exchange
(MCX) and the national commodities and derivatives exchange (NCDEX) In India.
Financial derivatives are traded on BSE, NSE, United stock exchange (USE) and
MCX-SX in India.
 Elementary derivatives and complex derivatives: elementary derivative are those
derivatives which are simple and easily understandable. Such derivative are futures
and options. Complex derivative has complex provisions and features which make
them difficult to understand by investor. Complex derivatives include exotic options,
synthetic futures and options.
 Exchange traded derivatives and over the counter (OTC)derivative: derivative
may be traded on exchange or they may be privately traded over the counter (OTC).
exchange traded derivative are standardised derivative product traded as per rules and
regulations of exchanges of the exchange. For example, stock index future, stock index
options and stock futures. OTC derivative are private bilateral contracts between two
parties and are non-standardised. these derivatives are specific to the needs of parties
involves. For example, forward contracts in foreign exchange market are OTC
derivatives.

Participants (or trader) in derivatives market

There are many parties in derivative market and make it liquid and smooth market.
Derivative were initially developed to provide hedging against price risk. There are three
kind of traders in derivative market are- hedgers, speculators and arbitrageurs.

Hedgers: investors having long position in market are exposed to price risk i.e., the risk
that asset prices will go down. On the other hand, the investor having short position in
asset are exposed to price risk i.e., the price of asset may go up.hence, they want to hedge
their position against price risk. Hedger use financial derivatives to reduce or eliminate the
risk associated with price of an asset. In hedging risk is actually transferred from hedger to
the speculator. Options are widely used by hedgers to reduce their risk exposure.

Speculators: speculator use derivative to get extra leverage and earn quick gain on the
basis of future movements in price of asset. They can increase both the potential gain or
potential losses by usage of derivatives in a speculative venture. Futures are widely used
by speculator. If a speculator expects that stock price will go up, he buys futures and vice
versa.

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Arbitrageurs: arbitrageurs are those who take advantage of any discrepancy in pricing
and exploit it to bring equilibrium. They take advantage of price discrepancy in two
markets.

Type of financial derivative

Financial derivatives are those whose underlying asset is the financial asset or instrument
such as index, stock, bonds, currency etc. financial derivative are generally classified as
forward, futures, options and swaps.

Forwards

A forward contract is a private bilateral agreement between two parties to buy and sell a
specified asset at a specified price on specified future date.

For example, Mr. X grows 6000kg of wheat. he can sell this wheat at any price in future
but he has a option of getting the price fixed now by selling a forward contract that
obligate him to sell 6000kg of wheat to Ashirwaad Atta after harvest for a fixed or
specified price.

By locking price now, he can eliminate the risk of falling price in near future. but if the
prices rise in near future then he stands at loss. Here Mr. X played safe and secure himself
against the falling prices.

Features of Forward contract

 Customised – each contract is customised designed and parties may agree upon
the contract size, expiration date, the asset type, quality etc.
 Underlying asset – underlying asset can be a stock, bond, commodity, foreign
currency, interest rate or any combination thereof.
 Symmetrical rights and obligation – both the parties to a forward contract have
equal rights and obligations. The buyer is obliged to buy and seller is obliged to
sell at maturity. They can also enforce each other to perform the contract.
 Non regulated market – forward contract is usually made by private and large
non – regulated consisting of banks, government, corporations and investment
banks. It is not regulated by exchange.
 Counter party risk or default risk – this is risk of non- performance of
obligation by either party as regard to payment (buyer) or delivery (seller). Being
a private contract, there are chance of default or counter party risk.
 Held till maturity – the contract is generally held till maturity. A forward contract
cannot be squared up at the wish of one party. It can be cancelled only with the
consent of one party.
 Liquidity- liquidation is low as contracts are customised catering to needs of
parties involved. They are not traded on exchange
 Settlement of contract – settlement of derivative can be in two ways- through
delivery or through cash settlement. Most of forward contract are settled through
delivery.

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Futures

A future is a redefined or modified forward contract. A futures contract is a contract to buy or

sell a specified asset (physical or financial asset) at a specified price at a specified date. It is
traded on an exchange and it is a standardised contract

Features of future contract

 Standardised contract – terms and condition of future contract are standardised. they
are specified by exchange where they are traded.
 Exchange based trading – trading takes place on formal exchange which provides a
place to engage in these transactions and sets a mechanism for parties to trade in these
contracts.
 No default risk- the clearing house protects the parties from default by requiring the
parties to deposit margin and settle gain or loss (mark to market their positions) on
daily basis.
 Liquidity – future contracts are highly liquid contracts as they are continuously
traded on exchange. Any party can square off position any time.
 Before maturity settlement possible – an investor can offset his future position by
engaging in an opposite transaction before the stipulated maturity of contract.
 Margin requirement – all the future contract have margin requirements. Margin
money is required to be deposited with exchange by both the buyer as well as seller at
the time of entering into contract. There are two type of margins – initial margin and
maintenance margin. The margin account is settled on daily basis i.e., mark to market
settlement. If margin amount falls below maintenance margin, then the variable call is
made to replenish the margin amount to the level of initial margin.
 Settlement mechanism – settlement of derivative contract can be in two ways –
through delivery or cashsettlement.

Future contract terminology

 Spot price- the price at which underlying asset are traded in the spot market.
 Future price – the price which is agreed upon at the time of future contract for
delivery at specified date.
 Contract cycle – it is the period over which the contract trades on the exchange.
 Expiry date – it is the last date on which the finale settlement takes place. Last
Thursday of every month is expiry date for futures contracts if that day is holiday,
then then previous working day.
 Contract size or lot size – the quantity of asset that has to be delivered under one
contract.
 Price steps- the minimum difference between two price quotes.
 Price band – the minimum and maximum price change allowed in a day is termed
as price bands. It is generally +- 10%. There are no day minimum / maximum price
range applicable for CNX nifty futures contracts.

Comparison between forwards and futures

Basis forwards futures

Standardisation of Forward contracts are Future contracts are
contract private agreements between exchange traded and

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Trading and regulation
Counter party default risk
Liquidity
Price discovery
Settlement
Hedging / speculation
margin requirement
Example
two parties and are non- standardised contracts are
standardised set in advance.
Forwards are not traded on Futures are traded on stock
stock exchange. They are exchange and are regulated
not regulated.
There is always a possibility Clearing houses guarantee
that party may default. the transaction, thus
minimising the default risk
Liquidity is low, as contracts Liquidity is high as contracts
are tailor – made contracts are standardised exchange-
catering to the needs of traded contracts.
parties involved. Further,
they are not easily accessible
to other market participants
Price discovery is not Price discovery is efficient
efficient as market are as market are centralised
scattered
Settlement of the forward Futures contracts are marked
contract occurs at the end of – to market on daily basis
the contract i.e., settlement which means that they are
date only settled day by day until the
end of the contract.
Forward contracts are Futures are popular among
popular among hedgers speculators
There is no requirement for Both the buyer and seller
depositing margin money by have to deposit margin
either party money with the exchange
Foreign currency market in commodities futures, index
India. futures and individual stock
futures in India

Pricing of futures contract/ forward contract

Pricing of future contract means determination of the specified price at which contract will be
executed. The theoretical or fair price of futures contract can be determined through cost of
carry model. The actual price of a futures contract is however determined through the forces
of demand and supply in futures market.

Cost of carrying model.

The value of future contract will be equal to the current value of the underlying shares or
index plus an amount referred to as the cost of carry. The cost of carry reflects the cost of
holding the underlying asset or shares over the life of the future contract reduced by the
amount the shareholder would receive in dividends or incomes on those assets or shares
during that time.

Based upon the payment and non- payment of dividend, the following situation may arise:

Situation Applicable pricing model

When the underlying asset provides no F=Sert

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income (or dividend)
When the underlying asset provides known F=(S-I)ert
income (or dividend)
When the underlying asset provides known F= Se(r-q)t
income yield (or dividend yield)

Where,

F= future price

S= Spot price of the underlying asset

e = 2.71828 (base of natural logarithm)

r = continuously compounding rate of interest p.a.

t = time duration of futures in years

I = present value of income or dividend at r

q = income yield or dividend yield

investment decision: if the fair or theoretical price of futures contract is higher than its actual
market price then a prospective investor should buy it. In such a case the future contract is
under- priced. On the other hand, if fair or theoretical price of a futures contract is lower than
its actual market price then a prospective investor should not buy it. In such case the future
contract is overpriced.

If fair or theoretical price of future contract is equal to its actual market price then the
contract is efficiently and correctly priced in the market.

Question: consider a stock futures contract on a non – dividend paying share which is
currently trading at Rs. 70 in the spot market. The futures contract matures in 3 months and
the continuously compounded risk-free rate is 8% per annum. Calculate the price of one stock
futures contract having a lot size of 100. (e 0.02 = 1.0202).

Solution: F= Sert = 70 e (0.08) 3/12 = 70 e 0.02 = Rs. 71.41

Lot size = 100, hence the price of one futures contract = 100 Ⅹ 71.41 = RS.7141.

Options

An option is a contract which gives the buyer (holder) a right (but not obligation) to buy or
sell a specified asset at specified price (exercise price) on or before a specified future date.
An option is a contract sold by one party (option writer) to another party (option holder). The
holder of option can exercise the option at a specified price or may allow it to lapse.

This specified price is also known as strike price or exercise. The option contract give right to
buyer. The seller has obligation but no right. If the option holder exercises the option, then
the writer or seller is obliged to perform. When option holder has right to sell, then option

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writer has obligation to buy. The option buyer has a privilege position. Since the buyer has
right but no obligation, he has to pay some price, known as option premium to seller or writer
of option. No right comes free of cost.

Comparison between futures and options

Basis Futures Options

Right
Obligation
Premium payment
Margin requirement
Profit and loss potential
Realisation of profit/ losses
Both the parties have right Only the buyer (or holder)
to ask for performance of of the options has a right to
the contract buy or sell. Seller do not
have any right
Both parties are obliged to Only the seller is obliged to
perform the contract perform the contract
No premium is paid by The buyer pays the options
either party premium to seller.
Both parties have to deposit Only the option writer has to
some initial margin as per deposit initial margin with
the requirement the exchanges as only seller
is exposed to price risk. No
margin is to be deposited by
the option holder, as he has
right but no obligation.
The gain to buyer is loss to The option holder’s loss is
the seller and the loss to the limited (to the extend of
buyer is gain to the seller. premium paid), but has
There is unlimited gain and potential for upside profits.
loss possibility for both the The seller’s gain is limited
parties. to the amount of options
premium but he is expose to
all the downside risk.
Profit loss are ‘marked to The gain of option can be
market’ daily, meaning the realised in following ways:
change in the value of the
position is attributed to the 1.Exercising the option at
accounts of the parties at the expiry.
end of every trading day-but
a future holder can realise 2.going to market and taking
profits/ losses by going to the opposite position
the market and taking the
opposite position. 3.waiting until expiry and
collecting the difference
between asset price and the
strike price.

Type of option

A. Call option – an option contract that gives its holder the ‘right to buy’ a specified
asset at a specified price on or before a specified future date, is termed as call option.

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 The seller has obligation to sell. A call option is bought when buyer a rise in
underlying asset ‘s price. In such as the holder of the call option can buy the stock or
asset at the exercise price which is lower than the market price.
For example: assume current market price of SBI share is 120. Mr A expect that the
price of share will go up, hence he buys a call option for SBI share at a price of 125.
The expiry date is 2 months. and after two month the market price of SBI share is
more then 125, say 130, then Mr A will exercise option at price of 125 and make a
gain of RS 5.
B. Put option – a put option provides a right to sell. An option contract that gives its
holder the ‘right to sell’ a specified asset at a specified price on or before a specified
future date, is termed as put option. The seller has the obligation to buy. A put option
is bought when the buyer of the put option fears a decline in underlying asset’s price.
A put option is exercised when the stockprice is lower than the exercise price.
For example: let us assume current SBI shares is Rs.120. Mr. A assume that current
price of SBI shares is Rs.119. Mr a expect that price of SBI share will go down, hence
he buys a put option on SBI at exercise price of rs 120. The expiration date is after 1
month. Further assume that option can be exercised only on the expiry date and note
before that. Now on expiration date the market price of SBI is less than 120 say 117
then Mr A will exercise option.

Style of option

a. European option – a European style option can only be exercise on expiration date
only.
b. American option – an American option can be exercised at any time before
expiration or on the expiration date.

Mutual funds

Mutual fund is financial intermediary that collects funds from individual investor and invest
those funds in wide range of assets or securities. The individual investor has claim to the
portfolio established by the mutual fund in the proportion of the amount invested, thereby
becoming a part owner of assets of mutual funds. The fund employs professional experts and
investment consultants who invest money so collected in different stocks, bonds or other
securities so as to meet the objective of fund. The mutual fund manager charges fees from
unit holder for administering the fund and manging the portfolio of investment. In India the
mutual fund is required to get registered with securities and exchange board of India (SEBI).

Establishment of mutual funds in India

SEBI (MUTUAL FUND) Regulation,1996 defines mutual fund as under:

Mutual fund means fund established in the form of trust to raise monies through the sale of
units to the public or section of the public under one or more securities including money
market instruments or real estate assets. Thus, mutual fund is established in the form of trust
and this trust has following major constituents:

 Sponsor: it means any person who, acting alone or in combination with another
body corporate, establishes a mutual fund. sponsor is similar to promoter of a
company.

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  Board of trustees: the board of trustees of the mutual fund hold its property for
the benefit of unit holders. The board is vested with general power of
superintendence and direction over asset management company. They are required
to monitor the performance of mutual fund and ensure SEBI regulation by them.
SEBI regulations require that at least two thirds of trustee company must be
independent i.e., that is they should not be associated with sponsor.
 Asset management company (AMC): AMC is a company established under
company’s act,2013 and it is required approval of SEBI to be asset management
company of mutual fund. SEBI require that 50% of the directors of AMC must be
independent
 Custodian: custodian is required to be registered with SEBI. custodian is
appointed to keep custody of the securities or gold and gold related instrument or
other related instrument of mutual fund and provide such other custodial services
as may be authorised by the board of trustees.

Advantages of investing in mutual fund

 Professional management: the service of highly experienced and skilled

professionals is backed up by a dedicated investment research team which first
analyses the performance and prospects of companies and then invest accordingly.
 Diversification: mutual fund invests in vide range of companies of different
industries and sectors. Thus, investor enjoy the benefit of diversification with less
money and less risk. however, it must be noted that sectoral funds such as IT funds,
pharma funds etc. may not provide the benefit of diversification as all the stock in the
portfolio of sectoral schemes belong to a particular sector.
 Convenient administration:it reduces the amount of paper work.it help investor to
avoid many problem-like bad deliveries, delayed payment and unnecessary follow up
with brokers and companies.
 Return potential: mutual fund may provide higher returns in medium to long term
ass they invest in wide range of securities which is not possible to attain by small
investor.
 Low costs: mutual fund is less expensive way of investing in comparison with direct
investing. indirect investing via mutual funds offers the scale in brokerage, custodial
and other fees. All these benefits translate into low cost for investor.
 Liquidity: in open ended schemes, investor can get the money back instantly at the
prevailing NAV. Also, in close – ended schemes, investors can sell their unit on stock
exchange at the prevailing market price.
 Transparency: investor regularly get information about the value of their investment.

Limitation of investing in mutual fund

 No direct choice of securities: mutual fund represents indirect mode of investment;

hence investor do not have a say in securities selection. they cannot select a security
in which they wish to invest.
 Relying on mutual fund manager’s performance: investor has to rely on fund
manger for receiving any earning made by the fund. further, if manger’s pay is linked
with the fund’s performance, then in the zest of earning more, he may go for short
term goals ignoring the long term. There is always a possibility that mutual fund
deviate from its investment objective and serve the interest of its management.

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 High management fee and other expenses: all mutual fund does not run efficiently.
Mutual funds at times charge management fee so as to pay high compensation to the
fund manager.
 Lock in period: many mutual funds scheme especially tax saving scheme have strict
lock in period. The mutual fund units cannot be redeemed during lock in period.
Hence during lock in period, the units of mutual funds become illiquid.

Mutual fund schemes

• open ended
• close ended
structure • interval scheme

• income schemes
• growth schemes
investment • balanced schemes
objective • money market schemes

• tax saving schemes

• sector schemes
others • index schemes

 Open ended mutual fund: it allows entry and exit of investor at any point of time.
The capital of fund is unlimited and there is no fixed maturity date. An investor can
buy or sell unit at any time
time.
 Close ended mutual fund: it has fixed maturity period and the investor can only
invest
nvest only during the initial launch period known as the IPO period. The investor can
make an exit from scheme by selling his units in the secondary market or at the end of
maturity period or during repurchase period.
 Interval funds: these are hybrid fund and combine the features of open ended and
close ended schemes. These schemes are open for purchase and redemption during
pre-specified
specified intervals (monthly, quarterly, annually etc at NAV related prices.
 Load funds: load in context of mutual fund means charge or fee. A load fund charges
a percentage of NAV as entry or exit fee. The charge ranges from 4%to 8% of the
amount invested or it could be a flat fee. For example, if you invest 1000 intoa 5%
load fund, the actualal investment would be 950 as rs 50 will be charge going to the
company.
 No load fund: under this category there is no charge for entry or exit.

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 Domestic fund: there fund is open for investment in the company where the mutual
fund is registered. Most of the mutual fund in India are domestic funds.
 Off-shore mutual fund:these are open for subscription by foreign investors only.
These fund channelise foreign investment in mutual fund in a country, at present
number of off shore fund launched by mutual funds in India. For example-ICICI
prudential US blue chip equity fund
 Growth fund: scheme which offer capital appreciation and dividend opportunity to
the investor. The major investment in such fund is in equity. The main idea behind
such fund is to provide capital gain rather than regular income.
 Income fund:these funds promise a regular income to its investors. Majority of funds
are channelised towards fixed income securities such as debentures, government
securities and other debt instruments. This is relatively low risk-low return investment
avenue. This scheme is ideal for investor seeking capital stability and regular income
 Balanced fund: the combination of growth fund and balanced fund. A balance fund
invests about 50:50 in equity shares and bonds. They invest in shares for growth and
invest in bonds for regular income. These are ideal for investors who are looking for a
regular income source and moderate growth over a period of time.
 Gilt funds:those funds which invest exclusively in government securities;therefore,
these funds provide low return at a very low risk. They are preferred by risk averse
and conservative investors who wish to invest in the shadow of secure government
bonds. Almost every mutual fund operating in India has launched a gilt fund. SBI
magnum gilt is a gilt fund operating in India.
 Money market funds: these funds provide easy liquidity and moderate income. these
schemes invest in short-term debt i.e., money market instrument and seek to provide
reasonable returns for the investors. Investment in money market instrument such as
treasury bills, certificate of deposit, commercial paper and inter- bank money.
 Tax saving schemes [ or equity linked savings scheme (ELSS)]:these schemes
offer tax benefits to its investors under specific provision (section 80c) of income tax
act 1969. this helps the investor in reducing tax liability. these also invest in equities,
thus offer long term growth opportunities. However, these schemes have3-year lock
in period.
 Index schemes – index funds or index schemes attempt to replicate the performance
of benchmark market index such as BSE SENSEX OR NSE NIFTY. The collected
funds are allocated on the basis of proportionate weight of different securities as
stated on the benchmark index and earn the same return as earned by market.
 Sectoral funds: these funds invest exclusively in the stock of companies belonging to
a specific set of companies or sector. The idea is to reap the benefit of the sector or
industry cycle. If industries are going through good times these schemes offer good
returns to the investors.
 Ethical fund: ethical fund make investment on the basis of certain ethics or values
especially shariah value. These funds used a screening criterion to decide about a
company or stock which are suitable for investment. There are two ethical funds
operating in India. They are TATA ETHICAL FUND TAURAS ETHICAL FUND.
The investment in this fund is based on fundamental of shariah or shariat, which are
guided by Islamic investment philosophy which invest in companies based on certain
screening norms.

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LATEST DEVELOPMENTS REGARDING MUTUAL FUNDS

 Exchange traded fund: ETFs are baskets of securities that are traded on a stock
exchange like individual stock. They track an index and money is invested in
securities of index in same proportion, thus has similarity with index mutual
fund.however, unlike the mutual fund’s ETFs can be bought and sold throughout the
trading day like any stock. These funds charge lower expense then an index mutual
fund but investor has to pay the brokerage to buy and sell ETF units. The first ETF in
India “Nifty BeEs (nifty benchmark exchange traded scheme)” based on S&P CNX
Nifty was launched in January 2002 by benchmark mutual fund

Advantages of ETFs

ETFs provide exposure to an index or a basket of securities that trade on exchange like single
stock. Following are the advantages of ETFs.

 While redemption of index fund take place at a fixed NAV price (usually end of
day), ETFs offer the convenience of intra-day purchase and sale on the exchange,
to take advantage of prevailing price, which is close to actual NAV of the scheme
at any point in time.
 They are low-cost investment options than traditional funds.
 Since an ETF is listed on an exchange, costs of distribution is lower and the reach
is wider
 ETFs protect long -term investors from inflows and outflows of short -term
investor. This is because the fund does not incur extra cost for buying /selling the
index shares due to frequent subscription and redemption.

Funds of funds

A fund of funds scheme means scheme which invests in other mutual fund schemes. In other
words, a scheme where the subscription proceeds are invested in other mutual funds, instead
of investing in equity or debt instruments. Since these funds invest in other mutual funds,
they offer and achieve greater diversification than traditional mutual funds. Expense and fee
for such fund is higher as they need to pay to underlying fund.

Systematic investment plan

A systematic investment plan or SIP is a smart mode for investing money in mutual funds.
SIP allows an investor to invest a certain pre-determined amount at a regular interval
(weekly, monthly, quarterly, etc). A SIP is planned approach towards investment and helps
to inculcate the habit of saving and build wealth for future. SIPs are ideal for retail investor
who do not have the resources to pursue active investments.

Following are the benefits of SIP.

 Rupee-cost averaging – an investor invests a fixed amount irrespective of NAV. so

he gets fewer units when NAV is higher and more units when NAV is lower. This
smooth out the market ups and downs thereby reducing the risk of investment when
markets are volatile. Thus, SIP allows its investors to achieve.

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  Power of compounding – Albert Einstein once said “compound interest is the eighth
wonder of the world. He who understand it, earns it… he who doesn’t ... pays it “. the
sooner you start investing, the more time your money has to grow”.
 Disciplined saving – when investment is made through SIP, investor commits to
himself to save regularly. This leads to discipline in saving and investment.
 Flexibility- while it is preferred to invest in SIP for a long term, there is no
compulsion. Investor can discontinue the plan at any time. Moreover, one can also
increase/ decrease the investment amount.
 Long – term gains- due to rupee- cost averaging and the power of compounding SIPs
have the potential to deliver attractive return over long investment horizon.
 Convenience- SIP is a hassle – free mode of investment .one can issue a standing
instruction to his bank to facilitate auto debits from bank account.

Systematic withdrawal plans

Systematic withdrawal plan or SWP Permit the investor to make an investment at one go
and systematically withdraw at periodic interval, at the same time permitting the balance
amount to remain invested. withdrawal can be done either on monthly basis or on a
quarterly basis, based on need and investment goal of investor. SWP includes convenient
pay out options and has several tax advantages. Under SWP, neither tax is deducted nor is
dividend distribution tax applicable. Moreover, there is no entry or exit loads in SWP

Commodity market in India

A commodity market is a place for investors to trade in commodities like precious metals,
crude oil, natural gas, energy, and spices, among others. Currently, the Forward Markets
Commission allows futures trading in India for around 120 commodities. Trading in
commodities is great for investors seeking to diversify their portfolio, as these
investments often help with inflation.

India has 22 commodity exchanges that have been set up under the Forward Markets
Commission. The following commodity exchanges are popular choices for trading in
India-

1. Multi Commodity Exchange of India (MCX)

2. Indian Commodity Exchange (ICEX)
3. National Multi Commodity Exchange of India (NMCE)
4. National Commodity and Derivative Exchange (NCDEX)

Commodity future contracts

The ‘commodity futures contract’ is the assurance that a trader will buy or sell a certain
amount of their commodity at a pre decided rate at a certain time. When a trader purchases a
futures contract, they are not required to pay the whole price of the commodity. Instead, they
can pay a margin of the cost which is a predetermined percentage of the original market
price. Lower margins mean one can buy a futures contract for a large amount of a precious
metal like gold by spending only a fraction of the original cost.

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How commodity market works

Suppose you bought a gold futures contract on MCX at Rs. 72,000 for every 100 gm. Gold’s
margin is 3.5% on MCX. So, you will be paying Rs. 2,520 for your gold. Suppose that the
following day, the cost of gold increases to Rs. 73,000 per 100 gm. Rs 1,000 will be credited
to the bank account you have linked to the commodity market. Assume that the day-after, it
drops to Rs. 72,500. Accordingly, Rs. 500 will be debited from your bank account.

Type of trading strategies in commodity market.

There are two type of trading strategies in commodity market in India.

 Speculator and hedger

Speculator-These dealers constantly examine the costs of commodities in addition to

forecasting the expected price changes. For instance, if a speculator predicts that the price of
gold was to increase, they purchase the commodity futures contract. If the cost of gold
subsequently grows, the trader will then sell the contract for a higher price than they bought.

If the speculator anticipates that the rate of gold will decrease, they sell their futures contract.
Once the prices lower, speculators buy the contract again for a lower price than what they
sold it for. This is how speculators make profits in both cases of market change.

Hedgers - Those who produce or manufacture commodities typically ‘hedge their risk’ by
trading in a commodity futures market. For instance, if the prices of wheat fall during the
harvest period, the farmer will face a loss. The farmer can hedge this risk by entering
a futures contract. In this case, when the price of his produce falls in his local market, the
farmer can offset this loss by making profits through the futures market.

The opposite situation is when the cost of wheat increases during the harvest period. At this
time, the farmer would encounter losses in the futures market. However, these losses can be
compensated for by selling his produce for a higher cost in his local market.

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 UNIT-3
PERSONAL TAX PLANNING
LESSON -1
TAX STRUCTURE FOR PERSONAL TAXATION
Objective: after studying this you will be able to learn
฀ Concept of personal taxation.
฀ Bases of taxation
฀ Definition of person according to income tax
฀ Assessment year and previous year
฀ Cases where assessment year and previous year are same
฀ Rate of income tax for assessment year 2021-2022
฀ Surcharge, marginal relief and education cess.
฀ Tax rebate u/s 87A
฀ Important points related to tax rebate u/s 87A
฀ Investment or payment on which a person can get tax benefit
฀ Maximum amount which is not chargeable to tax.
฀ Permanent account number[section 1369A(1) ]
฀ Power delegated to central government to notify class or classes of persons for
whom it will be obligatory to apply for PAN [section 139(1A)]
฀ Transactions where quoting PAN is mandatory
฀ PAN -Aadhaar interchangeable for income tax purposes.
฀ Penalty for not complying with the provision relating to PAN or Aadhaar.
BASES OF TAXATION
Every person whose total income of the previous year exceeds the maximum amount
which is not chargeable to income tax, he is assessed and chargeable to income -tax in the
assessment year at the rate or rate prescribed by finance act or income tax act for relevant
assessment year . Taxation of individuals in India is primarily based on their residential
status in the relevant tax year. The residential status of individuals is determined
independently for each tax year and is ascertained on the basis of their physical presence
in India during the relevant tax year and past years.
Ways of leving tax in India
฀ Income earned by every person is chargeable to income- tax provided it exceeds the
maximum amount which is not chargeable to tax i.e it exceeds maximum exemption
limit .
฀ It is charged on the total income of the previous year but it is taxable in the
following assessment year at the rate which is applicable in that assessment year.

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฀ Income tax is charged at two rates i.e normal rate and special rate. Normal rate can
be in the form of slab rate or flat rate fixed by finance act but special rates are given
in income tax act.
฀ Tax is calculated on the basis of income ascertained in accordance with the
provision of act.
฀ Total income is calculated on the basis of residential status in India.
฀ Although the income of the previous year is chargeable to tax in the assessment
year, the assessee has to pay income tax in the same previous year in which income
is earned. It is paid in the form of advance tax and deduction of tax at source (TDS).
such tax paid in the previous year ( also known as prepaid taxes) shall be deducted
from in the assessment year.
Important concepts
Person [section 2(31)]

Individual- An individual means a natural person i.e human being ( male , female, minor
child. However the income of minors is included in the income of parents. Sometimes a
minor is himself liable to pay tax on income earned by him . Since a minor is not
competent to contract, his income is taxed through his legal guardian.
A Hindu undivided family- has not been defined under the tax laws. However as per
Hindu law, it means a family which consists of all persons lineally descended from
common ancestors, their wives and daughters .
Firm- a firm which is defined in Indian partnership act ,1932 and shall include a limited
liability partnership as defined in limited liability partnership act 2008.
Association of person- the income tax act does not define association of person (AOP).
Its meaning can be derived in ordinary form. Association of person means two or more
people who join for a common purpose to earn an income. It need not be on the basis of
contract, therefore if two or more persons join hands to carry on a business but do not
constitute a partnership , their grouping may be termed as association of person.
Any association can’t be termed as association of person, it must be association for
income producing activity.

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Body of individual (BOI)- means conglomeration of individuals who carry on some
activity with an objective of earning income. It consists only of individuals . Companies
and firms are not part of the body of individual.
If tax is being paid by BOI/AOP, then the individual need not to pay tax.
A local authority - it means
1. Panchayat
2. Municipality
3. Municipal committee and district board legally entitled to or entrusted by the
government with the control or management of municipal or local funds
4. Cantonment board
Artificial juridical persons -
They are entities which are not natural persons but are separate entities in the eyes of law.
Though they may not be sued directly in a court of law, they can be sued through the
person managing them .
God , idols and deities are artificial persons. Though they may not be sued directly they
can be legally sued through priests or managing committees of place of worship etc. They
are people and their income like offering and donation are taxable . However, under
income tax act , they have been provided exemption from payment of tax under separate
provision act, if certain conditions mentioned therein are satisfied.
Similarly all other artificial persons with a juristic personality, will fall under this
category, if they do not fall within any of preceding categories of persons e.g. University
of Delhi is an artificial person as it does not fall in any of six categories mentioned above.
Question 1 : determine the status of following:
1. Banaras Hindu university
2. Snapdeal
3. Carat lane
4. A and b are legal heirs of c, c died in2018 and a and b carry on business without
entering into partnership.
5. Sri ram enterprises , a firm consisting of four partners A,B,C,D
6. A joint family consisting of P, Mrs. P and their son S.
7. Municipal corporation of UP.
Ans. 1.artficial judicial person
2. A company
3. A company
4. A body of individual
5. A firm

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 6. A hindu undivided family
7. A local authority
Assessment year {section 2(9)}
Assessment year means the period of 12 months commencing on the first day of April
every year. It is , therefore, the period from 1st of April to 31st march for example the
assessment year 2020-2021 will commence on 1.4.2020 and end on 31.3.2021.
The tax is levied in each assessment year with respect to or on the total income earned by
assessee in the previous year.
What is the difference between assessment year and financial year?
From an income tax perspective, FY is the year in which you earn an income. AY is the
year following the financial year in which you have to evaluate the previous year’s
income and pay taxes on it.
For instance, if your financial year is from 1 April 2020 to 31 March 2021, then it is
known as FY 2020-21. The assessment year for the money earned during this period
would begin after the financial year ends – that is from 1 April 2021 to 31 March 2022.
Hence, the assessment year would be AY 2022-22.
Previous year {section 3}
According to Section 3 previous year means the financial year immediately preceding the
assessment year. Financial year starts on 1st April and ends on 31st March.
Important points
● Income Tax is payable on income earned during the previous year and it is assessed
in the immediately succeeding financial year which is called an assessment year.
Therefore the income on during the previous year 1.4.2019 to 31.3.2020 will be
assessed or charge to take in the assessment year 2020 -2021
● All the accessories are required to follow a uniform previous year that is the
financial year 1st April to 31st March as their previous year. previous year for
income tax purpose will be financial year which ends on 31st March although the
assessee can close his books of account on any of the Other date example and
assessee name maintain books of accounts on calendar year basis but his previous
year for the income tax purpose will be financial year not there calendar year
● Financial year is both previous year as well as assessment year it is the previous
year for the income earned during that financial year and assessment year for the
income earned during the preceding previous year example financial year
2019-2020 is the previous year for the income earned during the financial year
2019-2020 and assessment year for the income earned during previous year
2018-2019.
● First previous year for business / profession newly set-up during the financial
year or for a new source of income
❖ A business or profession newly set up or

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 ❖ A new source of income comes into existence during the financial year.
The period beginning from the commencing of such business or from a new source came
into existence, and ending on the last day of that financial year i.e 31st of march shall be
the first previous year for that business or source of income.
For example , if a new business is set up on 22.9.2018 then the first previous year for
that business will be starting from 22.9.2018 to 31.3.2019.therefore the previous year for
newly set up business or a new source of income will either 12 months or less then 12
months or less than 12months.
Illustration 1 ascertain the previous year in the following cases. Having assessment
year 2020-2021.
1. Dr . Gupta was appointed assistant professor of Daulat Ram College for the first
time on 1.9.2019.
2. Dinesh started a cloth business on 27.2.2019
3. Mr. ram purchased a house on 5.7.2018
4. A received a remuneration of 50,000 on 10.3.2019
Solution : 1. 1.9.2019 to 31.3.2020
2. 27.2.2019 to 31.3.2020
3. 5.7.2018 to 31.3.2019
4. 10.3.2019 to 31.3.2020
Cases where income of the previous year is assessed in the same year or where the
previous year or the assessment year are the same.
As a normal rule income during any previous year is assessed or charged to take in the
immediately succeeding assessment year however in the following circumstance the
income is taxed in the same year in which it is earned. Therefore the assessment year and
the previous year in these exceptional circumstances will be the same. These exceptions
have been provided to safeguard the collection of taxes so that the assessee who may not
be traceable later on are not allowed to escape the payment of taxes. These exceptions are
as follows:
1. Shipping business of non resident[ section 172 ] : non-resident who is carrying on
shipping business and on income from carrying passenger livestock goods from a
port in India, Will be charged Income Tax before the ship is allowed to leave the
Indian port. Therefore, before the ship leaves the Indian port, the master of the ship
is under an obligation to furnish a return of full amount earned on account of fare
and freight including the amount paid or payable ll by way of handling charges or
any other amount of similar nature and pay the tax accordingly. In this case 7.5% of
the amount of freight /fare/ charges etc. Shall be Deemed to be income of such
assessee on which income tax will be charged. Therefore in this case the tax is
chargeable on the income in the same in which it is earned .

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2. Assessment of person leaving India[ section 174 ]: When it appears to the
assessing officer that an individual may leave India during the current assessment
year or shortly after its expiry and such individual has no present intention of
returning to India the total income of such individual from the expiry of previous
year for that assessment year that is from 1st April of the assessment year up to the
probable date of his departure from India shall be chargeable to tax in the same
assessment year.
For example Mr S wishes to migrate to US permanently and plans to leave India on 15
11/2018 he submitted his return assessment for the year 2018 19 on 31st 7 2018 the
assessment of which is still pending.
In this case the assessing officer will make to assessments
A. Regular assessment for previous year 2017-18 at the rate applicable for assessment
year 2018-19
B. assessment of income of period 1.4. 2018 to 15.11.2018(Either actual or estimated
basis) and that it should be levied on such income in the assessment year 2018-19
itself but at the rate of advance tax for financial year 2018-19 assessment year
2019-20 given in the part third of first schedule of Finance act 2018.
3. Assessment of association of persons or body of individuals for Artificial
judicial person form for a particular event or purpose[ section 174A ]: Where it
appears to assessing officer that an association of person or a body of individuals or
an artificial judicial person formed or established or incorporated for a particular
event or purpose is likely to be dissolved in their assessment year in which such
Association of persons or body of individuals or artificial judicial person was
formed or established or incorporated or immediately after such assessment year the
total income of such person or body or judicial person for the period from the
expiry of previous year for the that assessment year up to its dissolution shall be
chargeable to tax in that assessment year example if association of person is formed
in the previous year 2018-19 is going to be dissolved in16.6.2019 shall be charged
to Income tax in the assessment year 2019-20 itself although it assessment year
should have been 2020-21.
4. Assessment of persons likely to transfer property to avoid tax[section175]: if it
appears to assessing officer during any current assessment year that any person is
likely to charge, sell ,transfer, dispose off or otherwise part with any of his asset
with the view to avoiding any payment of his tax liability then the total income of
such person for the period from the expiry of the previous year for that assessment
year[ that is from 1st April of that assessment year] till the date when the assessing
officer commence proceedings, shall be chargeable to tax in the same assessment
year. However, in this case also the rate of tax applicable shall be given in the part
Ⅲ of schedule 1 which is applicable for advanced tax also.
5. Discontinued business[ section 176]: where any business or profession is
discontinued in any assessment year the income of the period from the expiry of
previous year for that assessment year up to the date of such discontinuance may, at

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 the discretion of the assessing officer be charged to tax in that assessment year. for
example if a business is discontinued on 16.7.2018 Then the income for the period
1.4.2018 to 16.7.2018 May be assessed in assessment year 2018-19 itself .The tax
will be charged at the rates in Force for advanced tax payable During financial year
2018-19 that is rate given in part Ⅲ of schedule 1
Any person discounting any business or profession shall give to assessing officer notice
of such discontinuance within 15 days thereof
Rate of income tax for assessment year 2021-2022
Individuals and HUFs can opt for the Existing Tax Regime or the New Tax Regime with
lower rate of taxation (u/s 115 BAC of the Income Tax Act)
The taxpayer opting for concessional rates in the New Tax Regime will not be allowed
certain Exemptions and Deductions (like 80C, 80D,80TTB, HRA) available in the
Existing Tax Regime.
฀ For individual less than 60years

Age Existing tax New tax regime u/s

group regime 115 BAC

<60 INCOME TAX INCOME TAX INCOME TAX SLAB INCOME TAX
SLAB RATE RATE

Upto 2,50,000 nil Upto 2,50,000 nil

2,51,000-5,00,000 5% above 2,51,000-5,00,000 5% above

2,50,000 2,50,000

₹ 5,00,001 - ₹ ₹ 12,500 + 20% ₹ 5,00,001 - ₹ 7,50,000 ₹ 12,500 + 10%

10,00,000 above ₹ 5,00,000 above ₹ 5,00,000

Above ₹ 10,00,000 ₹ 1,12,500 + 30% ₹ 7,50,001 - ₹ ₹ 37,500 + 15%

above ₹ 10,00,000 10,00,000 above ₹ 7,50,000

₹ 10,00,001 - ₹ ₹ 75,000 + 20%

12,50,000 above ₹ 10,00,000

₹ 12,50,001 - ₹ ₹ 1,25,000 + 25%

15,00,000 above ₹ 12,50,000

Above ₹ 15,00,000 ₹ 1,87,500 + 30%

above ₹ 15,00,000

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฀ For Individual (resident or non-resident), 60 years or more but less than 80 years of
age anytime during the previous year:

Age group Existing Tax New Tax Regime

Regime u/s 115 BAC

60+ Income Tax Slab Income Tax Rate Income Tax Slab Income Tax Rate

Up to ₹ 3,00,000 Nil Up to ₹ 2,50,000 Nil

₹ 3,00,001 - ₹ 5% above ₹ ₹ 2,50,001 - ₹ 5% above ₹

5,00,000 3,00,000 5,00,000 2,50,000

₹ 5,00,001 - ₹ ₹ 10,000 + 20% ₹ 5,00,001 - ₹ ₹ 12,500 + 10%

10,00,000 above ₹ 5,00,000 7,50,000 above ₹ 5,00,000

Above ₹ ₹ 1,10,000 + 30% ₹ 7,50,001 - ₹ ₹ 37,500 + 15%

10,00,000 above ₹ 10,00,000 above ₹ 7,50,000
10,00,000

₹ 10,00,001 - ₹ ₹ 75,000 + 20%

12,50,000 above ₹
10,00,000

₹ 12,50,001 - ₹ ₹ 1,25,000 +
15,00,000 25% above ₹
12,50,000

Above ₹ ₹ 1,87,500 +
15,00,000 30% above ₹
15,00,000

For Individual (resident or non-resident) 80 years of age or more anytime during the
previous year

Age group Existing Tax New Tax

Regime Regime u/s 115
BAC

Income Tax Income Tax Income Tax Income Tax

Slab Rate Slab Rate

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 Up to ₹ Nil Up to ₹ Nil
5,00,000 2,50,000

₹ 5,00,001 - ₹ 20% above ₹ ₹ 2,50,001 - ₹ 5% above ₹

10,00,000 5,00,000 5,00,000 2,50,000

Above ₹ ₹ 1,00,000 + ₹ 5,00,001 - ₹ ₹ 12,500 + 10%

10,00,000 30% above ₹ 7,50,000 above ₹
10,00,000 5,00,000

₹ 7,50,001 - ₹ ₹ 37,500 + 15%

10,00,000 above ₹
7,50,000

₹ 10,00,001 - ₹ ₹ 75,000 + 20%

12,50,000 above ₹
10,00,000

₹ 12,50,001 - ₹ ₹ 1,25,000 +
15,00,000 25% above ₹
12,50,000

Above ₹ ₹ 1,87,500 +
15,00,000 30% above ₹
15,00,000

Important point
❖ The rates of Surcharge and Health & Education cess are same under both the tax
regimes
❖ Rebate u/s 87-A Resident Individual whose Total Income is not more than ₹
5,00,000 is also eligible for a Rebate of up to 100% of income tax or ₹ 12,500,
whichever is less. This Rebate is available in both tax regimes
Surcharge, marginal relief and health and education cess
What is the surcharge?
Surcharge is an additional charge levied for persons earning Income above the specified
limits, it is charged on the amount of income tax calculated as per applicable rates
10% - Taxable Income above ₹ 50 lakh – up to ₹ 1 crore
15% - Taxable Income above ₹ 1 crore - up to ₹ 2 crore
25% - Taxable Income above ₹ 2 crore - up to ₹ 5 crore
37% - Taxable Income above ₹ 5 crore

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Maximum rate of Surcharge on Income by way of Dividend or Income under the
provisions of Sections 111A, 112A and 115AD is 15%
What is marginal relief ?
Marginal relief is a Relief from Surcharge, provided in cases where the Surcharge payable
exceeds the additional income that makes the person liable for Surcharge. The amount
payable as Surcharge shall not exceed the amount of income earned exceeding ₹ 50 lakh,
₹ 1 crore, ₹ 2 crore or ₹ 5 crore respectively
What is health cess and education cess?
Health & Education cess @ 4% shall also be paid on the amount of income tax plus
Surcharge (if any)
Tax Rebate u/s section 87A
A rebate under section 87A is one of the income tax provisions that help taxpayers reduce
their income tax liability. You can claim an income tax rebate under section 87A if your
total income does not exceed Rs 5 lakh in a financial year. Your income tax liability
becomes nil after claiming the rebate under section 87A.

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STEPS TO CLAIM TAX REBATE U/S 87A
❖ Calculate your gross total income for the financial year
❖ Reduce your tax deductions for tax savings, investments etc.
❖ Arrive at your total income after reducing the tax deductions.
❖ File an income tax return declaring your gross income and tax deductions.
❖ Claim a tax rebate under section 87A if your total income does not exceed Rs 5
lakh.
❖ The maximum rebate under section 87A for the AY 2020-21 is Rs 12,500.
IMPORTANT POINT RELATED TO TAX REBATE U/S 87A
❖ The rebate can be applied to the total tax before adding the health and education
cess of 4%
❖ Only resident individuals are eligible to avail rebate under this section.
❖ Senior citizens above 60 years and below 80 years of age can avail rebate under
section 87A
❖ Super senior citizens above 80 years of age are not eligible to claim rebate under
section 87A
❖ The amount of rebate will be lower of limit specified under section 87A or total
income tax payable (before cess)
INVESTMENT/ PAYMENT ON WHICH A PERSON CAN GET TAX BENEFIT
Section 24(b) – Deduction from Income from House Property on interest paid on housing
loan & housing improvement loan. In case of self- occupied property, the upper limit for
deduction of interest paid on housing loan is ₹ 2 lakh. However, this deduction is not
available for people opting for the New Tax Regime.
Interest on loan u/s 24(b) allowable is tabulated below

Nature of When loan was Purpose of loan Allowable

Property taken (Maximum limit)

self occupied On or after Construction or ₹ 2,00,000

1/04/1999 purchase of house
property

On or after For Repairs of ₹ 30,000

1/04/1999 house property

Before 1/04/1999 Construction or ₹ 30,000

purchase of house
property

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 Before 1/04/1999 For Repairs of ₹ 30,000
house property

Let Out Any time Construction or Actual value

purchase of house without any limit
property

MAXIMUM AMOUNT WHICH IS NOT CHARGEABLE TO INCOME- TAX

In case of certain assessee , there is no income tax on income earned during the previous
year upto a certain limit . The limit for assessment year 2021-2022 for different assessee
is as under:
1. a) in case of every individual (male or female), being Rs 5,00,000
resident in India, who is of the age 80 years or more at
any time during the previous year
b) in case of individual (male or female ) being resident in Rs 3,00,000
India who is of age 60 years and above but less than 80
years at any time during the previous year.
c) any other individual i.e resident in India who is less Rs 2,50,000
than 60 years of age or an individual who is non-
resident irrespective of whether his age is less than or
more than 60years .
d) an individual, irrespective of any age , who has opted Rs 2,50,000
to be taxed section 115 BAC
2. a) hindu undivided family Rs 2,50,000
b) hindu undivided family who has opted to be taxed Rs 2,50,000
under section 115BAC
3. AOP/ BOI other than co-operative society (where no Rs 2,50,000
member
has income exceeding maximum exemption limit)
4. artificial judicial person Rs 2,50,000
5. firm, company , local authority and co-operative society NIL

PERMANENT ACCOUNT NUMBER [SECTION 139A AND RULE 114]

Who has to apply for a PAN ? [section 139A(1)]
(1) Every person,—
(i) If his total income or the total income of any other person in respect of which
he is assessable under this Act during any previous year exceeded the
maximum amount which is not chargeable to income-tax; or

99
 (ii) Carrying on any business or profession whose total sales, turnover or gross
receipts are or is likely to exceed five lakh rupees in any previous year; or
(iii) Who is required to furnish a return of income under sub-section (4A) of
section 139; or
(iv) Being an employer, who is required to furnish a return of fringe benefits under
section 115WD,
(2) The Central Government may, by notification in the Official Gazette, specify, any
class or classes of persons by whom tax is payable under this Act or any tax or duty
is payable under any other law for the time being in force including importers and
exporters whether any tax is payable by them or not and such persons shall, within
such time as mentioned in that notification, apply to the Assessing Officer for the
allotment of a permanent account number.
(3) PAN may be allotted by the AO [section 139A(2) ] : The Assessing Officer, having
regard to the nature of the transactions as may be prescribed, may also allot a
permanent account number, to any other person (whether any tax is payable by him
or not), in the manner and in accordance with the procedure as may be prescribed.
(4) Person other than falling under section 139A(1) or (2) may apply for PAN [section
139A (3) ] : any person , not falling under section 139A (1) or section A (2) above,
may apply to the assessing officer for the allotment of a permanent account number
to such person forthwith.
Power delegated to the central government to notify class or classes of persons for
whom it will be obligatory to apply for permanent account number (PAN) [section
139A(1A)]:with a view to progressively making PAN a common business identification
number for other departments such as the central board of excise and customs and
director general of foreign trade, the act has delegated the power to central government to
notify class or classes of persons for whom it will be obligatory to apply PAN , provided
tax is payable by them under the income-tax act or any tax or duty is payable by them
under any other law in force including importer and exporter whether any tax is payable
by them or not.
The central government by notification notifies the following persons who shall apply to
the assessing officer for allotment of permanent account number:-
1. Exporter and importer defined under customs Act 1962, who are required to obtain
an importer-exporter code under foreign trade (development and regulation ) Act,
1992.
2. Assesses defined in central excise rule ,1944(it is now merged under GST law).
3. Person who issues invoice of cenvat i.e traders etc requiring registration under
central excise rule ,1944.(it is now merged under GST law).
4. Persons who are assessees under service tax. ( it is now merged under GST law).
Transaction where quoting of PAN is mandatory.

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Following are the transactions in which quoting of PAN is mandatory by every person
except the
Central Government, the State Governments and the Consular Offices:
1) Sale or purchase of a motor vehicle or vehicle other than two wheeled vehicles.
2) Opening an account [other than a time-deposit referred at point No. 12 and a Basic
Savings Bank Deposit Account] with a banking company or a co-operative bank
3) Making an application for the issue of a credit or debit card.
4) Opening of a demat account with a depository, participant, custodian of securities or
any other person with SEBI
5) Payment in cash of an amount exceeding Rs. 50,000 to a hotel or restaurant against
bill at any one time.
6) Payment in cash of an amount exceeding Rs. 50,000 in connection with travel to
any foreign country or payment for purchase of any foreign currency at any one
time.
7) Payment of an amount exceeding Rs. 50,000 to a Mutual Fund for purchase of its
units
8) Payment of an amount exceeding Rs. 50,000 to a company or an institution for
acquiring debentures or bonds issued by it.
9) Payment of an amount exceeding Rs. 50,000 to the Reserve Bank of India for
acquiring bonds issued by it.
10) Deposits of cash exceeding Rs. 50,000 during any one day with a banking company
or a cooperative bank.
10A) Deposits of cash aggregating to more than Rs. 2,50,000 during the period of 09th
November 2016 to 30th December 2016 with a banking company, cooperative bank
or post office.
11) Payment in cash for an amount exceeding Rs. 50,000 during any one day for
purchase of bank drafts or pay orders or banker's cheques from a banking company
or a co-operative bank.
12) A time deposit of amount exceeding Rs. 50,000 or aggregating to more than Rs. 5
lakh during a financial year with -
(i) a banking company or a co-operative bank
(ii) a Post Office;
(iii) a Nidhi referred to in section 406 of the Companies Act, 2013 or
(iv) a non-banking financial company
13) Payment in cash or by way of a bank draft or pay order or banker's cheque of an
amount aggregating to more than Rs. 50,000 in a financial year for one or more
pre-paid payment instruments, as defined in the policy guidelines for issuance and
operation of pre-paid payment instruments issued by Reserve Bank of India under

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 section 18 of the Payment and Settlement Systems Act, 2007 to a banking company
or a co-operative bank or to any other company or institution
14) Payment of an amount aggregating to more than Rs. 50,000 in a financial year as
life insurance premium to an insurer
15) A contract for sale or purchase of securities (other than shares) for amount
exceeding Rs. 1 lakh per transaction
16) Sale or purchase, by any person, of shares of a company not listed in a recognised
stock exchange for an amount exceeding Rs. 1 lakh per transaction.
17) Sale or purchase of any immovable property for an amount exceeding Rs. 10 lakh or
valued by stamp valuation authority referred to in section 50C of the Act at an
amount exceeding ten lakh rupees.
18) Sale or purchase of goods or services of any nature other than those specified above
for an amount exceeding Rs. 2 lakh per transaction.
NOTE:
1) Minor person can quote PAN of his father or mother or guardian provided he does
not have any income chargeable to income-tax.
2) Any person, who does not have PAN and enters into any of above transaction, can
make a declaration in Form No.60.
3) Quoting of PAN is not required by a non-resident in a transaction referred at point
No. 3 or 5 or 6 or 9 or 11 or 13 or 18.
4) Any person who has an account (other than a time deposit referred to at point no. 12
and a Basic Saving Bank Deposit Account) maintained with a banking company or
a co-operative bank. He will be required to furnish his PAN or Form No.60 on or
before 30-06-2017 if he has not quoted his PAN or furnished Form No. 60 at the
time of opening of such account or subsequently.
PAN and Aadhaar interchangeable for income-tax purpose
Section 139A of the Income-tax Act, 1961, prescribes various conditions under which an
an assessee is required to obtain a PAN. He needs to mention his PAN in all
communications with the Income-tax Dept. and while entering into specified financial
transactions.
However, there can be situations where a person entering into high-value transactions,
such as purchase of foreign currency or huge withdrawal from the banks, does not
possess a PAN. Thus,
The Finance (No. 2) Act, 2019, has provided for interchangeability of PAN with Aadhar.
It has been provided that every person who is required to furnish or intimate or quote his
PAN under the Income-tax Act, and who,-
a) has not been allotted a PAN but possesses the Aadhaar number, may furnish or
intimate or quote his Aadhaar in lieu of PAN. Further, Income-tax department shall
allot PAN to such person in a prescribed manner.

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b) has been allotted a PAN, and who has linked his Aadhaar number with PAN as per
section 139AA, may furnish his Aadhaar number in lieu of a PAN for all the
transactions where quoting of PAN is mandatory as per Income-tax Act.
Penalty for not complying with provision relating to PAN or aadhar
Section 272B provides for penalty in case of default in complying with the provisions
relating to PAN, i.e., failure to obtain, quote, or authenticate PAN. The amount of penalty
shall be Rs. 10000 for each default.
As the Finance (No. 2) Act, 2019 as provided for interchangeability of Aadhaar with
PAN, Consequential amendments have been made in the penal provisions of Section
272B so as to levy a penalty of Rs. 10,000 for each default in the following cases:
a) If assessee fails to quote or intimate his PAN or Aadhaar or quotes or intimates
invalid PAN or Aadhaar.
b) If assessee fails to quote or authenticate his PAN or Aadhaar in specified
transactions.
c) If receiver (i.e., banks, financial institution, etc.) of documents in respect of
specified transactions fails to ensure that the PAN or Aadhaar are duly quoted and
authenticated

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 LESSON -2
TOTAL INCOME AND RESIDENTIAL STATUS [SECTION 5 TO 9 ]
Objective
After reading this lesson you will be able to learn
฀ Scope of total income/ incidence of tax[section 5]
฀ Residential status of an assessee
฀ Rules of determining residential status of assessee
฀ Resident of India
฀ Resident and ordinary resident of India
฀ Resident but not ordinary resident in India
SCOPE OF TOTAL INCOME / INCIDENCE OF TAX [SECTION 5]
Total income of an assessee cannot be computed unless we know his residential status in
India during the previous year, according to residential status, the assessee can either be :
I. Resident in India or
II. Non-resident in India.
However, individuals and HUF cannot be simply called resident in India. if an individual
is resident in India He will be either:
I. Resident and ordinarily resident in India, or
II. resident but not ordinary resident in India
Only category of person shall there be resident in India or non resident in India. There is
no father classification into ordinary resident or not ordinary resident in their case.
Residential status of an assessee
The following basic rule must be kept in mind while determining the residential status:
● Residential status is determined for each category of persons separately, for
example there is a separate set of rules for determining the residential status of an
individual and separate rules for companies etc.
● Residential status as always determinant for the previous year because we have to
determine the total income of the previous year only
● The residential status of a person is to be determined for every previous year
because it may change from year to year. For example A, who is a resident of India
in the previous year 2019-2020, May become a non resident in the previous year
2020-2020.
● If a person is resident in India in a previous year relevant to an assessment year in
respect of any source of income, he shall be Deemed to be Resident in India in the
previous year relevant to assessment year in respect of each of his other source of
income.

104
● A person may be resident of more than one country for any previous year. If Y Is a
resident in India for the previous year 2018 -2019,It does not mean that he cannot
be resident of any other country for that previous year.
● Citizenship of a country and residential status of that country are separate concepts.
a person may be an Indian national/ citizen, but may not be resident in India. On the
other hand, a person may be foreign national / Citizen, but may be resident in India.
● It is the duty of the assessee to place all material facts before the assessing officer
to enable him to determine his correct residential status.
Rules for determining residential status in India [section 6(1)]
An individual can either be:
I. Resident in India, or
II. Non resident in India
An individual cannot simply be called a resident India, if he is a resident in India we
have to for the determine whether he is
I. Resident and ordinary resident in India or
II. Resident but not ordinary resident in India.

When an individual is said to be resident in India?

An individual will be treated as a Resident in India in any previous year if he / she
satisfies any of the following conditions:
1. If he / she is in India for a period of 182 days, or more during the previous year or
2. If he / she is in India for a period of 60 days or more during the previous year and
365 days or more during 4 years immediately preceding the previous year.

105
The Finance Act, 2020, w.e.f. Assessment Year 2021-22 has amended the above
exception to provide that the period of 60 days as mentioned in (2) above shall be
substituted with 120 days, if an Indian citizen or a person of Indian origin whose Total
Income, other than Income from Foreign Sources, exceeds ₹ 15 lakh during the previous
year.
The Finance Act, 2020 has also introduced new Section 6(1A) which is applicable from
Assessment Year 2021-22. It provides that an Indian citizen earning Total Income in
excess of ₹ 15 lakh (other than income from foreign sources) shall be deemed to be
Resident in India if he / she is not liable to pay tax in any country.
Meaning of foreign sources [explanation ]
For the purpose of section 6, the expression ‘ income from foreign sources’ means
income which accrues or arises outside India (except income derived from a business
controlled in or profession set up in India ) and which is not deemed to accrue or arise in
India.
EXCEPTION/ CONCESSIONS
● Increase in individual who is citizen of India and who leaves India in any previous
year for the purpose of employment outside India, the condition number 2
mentioned above shall not be applicable for the relevant previous year in which he
leaves India .In other words For that particular previous year in which he leaves
India for the purpose of employment outside India he shall be called resident only
when he satisfy the condition NO.1 mentioned above.
Similarly in case of an individual who is a citizen of India and who leaves India in
any previous year as a member of crew of Indian ship the condition NO.2 shall not
be applicable
● In case of an individual who is a citizen of India or is a person of Indian Origin,
being outside India comes on a visit to India in any previous year, the condition NO.
2 Mentioned above in his case also shall not be applicable. In other words, he shall
not be resident in India unless his stay in India is at least 182 days during the
relevant previous year in which he visits India.
NOTE
● A person is said to be of Indian Origin if he or either his parents or any of his
grandparents was born in undivided India that is before India was partitioned.
● In case of an individual being a citizen of India a member of crew of a foreign
bound ship leaving India, the period or periods of stay in India shall in respect of
such voyage be determined in the manner and subject to such conditions as may be
prescribed
● Relevant previous year mains previous year for which there is tension status is
being determined

106
● In computing the period of stay in India it is not necessary that the state should be a
continuous period; what is to be seen is the total number of days stay in India during
the relevant previous year.
● It is also not necessary that the state should be only at one place, for example he
may stay at Bombay for 90 days and then go out of India and on return in the same
previous year he may stay at Delhi for 128 days during the same previous year.
● In computing the period of 182 days, the day the individual enters India and the day
leaves India should both be treated as stay in India.
● Place and purpose of stay in India is immaterial presence in territorial water of India
would also be regarded as presence in India.
meaning of employment: the term employment is not defined in the income -tax Act.
A man may employ himself so as to earn profits in many ways. Thus he can set up an
independent practice abroad or a businessman can shift his business activities to a foreign
country .A person merely undertook tours abroad in connection with his employment in
India would not be eligible for the relaxation .
Citizen of India shall be deemed to be resident in India in certain cases [ section 6
(1A)] w.e.f. A.Y. 2021-2022
An individual shall be deemed to be resident in India in the previous year if he satisfies
the following conditions:
1. He is a citizen of India.
2. He has total income , other than the income from foreign sources, exceeding Rs
15,00,000 during the previous year.
3. he is not liable to tax in any other country or territory by reason of his domicile or
residence or any other criteria of similar nature
It is hereby declared that the above section 6(1A) shall not apply in case of an individual
who is said to be resident in India in the previous year under section 6(1).
In other words ,where an individual , is a citizen of India, having total income ,other than
the income from foreign sources, exceeding Rs 15,00,000 during the previous year and he
is not liable to pay tax in a foreign country due to his -
1. domicile
2. residence, or
3. criteria of similar nature
condition of section 6 (1) shall not be applicable and he shall be deemed to be resident in
India in all cases i.e although he does not stay in India for even one day.
Further as per section 6(6) citizens of India who are deemed to be resident in India under
section 6(1A) shall be treated as not ordinarily resident in India.
Meaning of term ‘liable to tax’ [section 2(29A) ]

107
‘liable to tax’ in relation to a person and with reference to a country, means that there is
an income -tax liability on such a person under the law of that country for the time being
in force and shall include a person who has subsequently been exempted from such
liability under the law of that country.
Thus if an individual is liable to tax under the law of a foreign country , section 6(1A)
relating to deemed to be resident in India shall not be applicable. On the other hand , if he
is not liable to tax in a foreign country, section 6(1A) related to deemed to be resident in
India shall become applicable provided the conditions mentioned in section 6(1A) are
satisfied. However, in this case , he shall be not ordinarily resident in India as per section
6(6).
When an individual is said to be a resident and ordinary resident in India?
If a person satisfy both the condition then he is said to be resident and ordinary resident in
India
A. He has been resident in India for at least 2 out of 10 previous year immediately
preceding the relevant previous year
This means that he must have satisfied any one of the above conditions, with exception/
concession (given above) for being a resident for at least 2 out of 10 previous years
immediately preceding the relevant previous year.
And
B. He has been in India for 730 days or more During the seven previous years
immediately preceding the relevant previous year.
CONDITIONS TO BE SATISFIED FOR BEING RESIDENT BUT NOT
ORDINARILY RESIDENT IN INDIA
1. He has been a non-resident in India in 9 out of 10 previous years immediately
preceding the relevant previous year or he has been in India for a period of 729days
or less in 7 previous years immediately preceding the relevant previous year, or
2. He is citizen of India, or a person of Indian origin ,having total income, other than
the income from foreign sources, exceeding Rs 15 lakhs during the previous year,
who has been in India for a period or periods amounting in all to 120 days or more
but less than 182 days, or
3. He is a citizen of India who is deemed to be resident in India under section 6 (1A).
When an individual is said to be a resident but not an ordinary resident in India?
[section 6(6)(a)]
An individual who is resident in India is said to be’ not ordinarily resident in India’ if it
does not satisfy any or both of the conditions of resident and ordinary resident in India.
When an individual is said to be non-resident in India? [section 2(30)]
An individual is said to be non-resident if he is not a resident in India; that is none of the
conditions with exception /concession of resident in India .
The condition of for determining the residential status may be summarised as under:

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(A)Condition for determining whether an individual is resident or not

1 2 3 4

For an Indian citizen For an Indian for individual not For an Indian citizen
who leaves in India citizen or a person covered under or a person of Indian
during the relevant of Indian Origin column 1 , 2 and 4 Origin who is
previous year for the who is outside outside India, comes
purpose of India, comes to to visit India during
employment or as a visit India during the relevant
member of the crew the relevant previous year and
of an Indian ship. previous year and his total income
his total income from foreign sources
from foreign exceeds Rs 15 lakhs.
sources does not
exceed Rs 15
lakhs.

a. Must be in a. must be in a. Must be in Must be in

India for at least 182 India for at least India for at least 182 India for at
days during the 182 days during days during the least 182
relevant previous year the relevant relevant previous days during
previous year year the relevant
OR previous
year

Condition b. in condition b. in b. Must be in Must be in

column 3 is not column 3 is not India for at least 60 India for 120 days
applicable for that applicable for that days during the or more and less
previous year previous year relevant previous than 182 days
year and 365 days during the relevant
during the 4 previous year and
previous year 365 days during 4
immediately previous years
preceding the immediately
relevant previous preceding the
year relevant previous
year.

If the condition if the condition If none of the above if the condition

mentioned above is mentioned above 2 conditions is mentioned above is

109
not satisfied he will is not satisfied he satisfied he will be not satisfied then an
not be resident in will not be non- resident in individual is said to
India president in India India. be non- resident

(B) Condition to be satisfied for being an ordinary resident in India

Should be resident in India for at least 2 out of 10 previous year preceding the relevant
previous year

AND

Should be in India for at least 730 days during the seven years preceding the relevant
previous year

If any or both of the above conditions are not satisfied he shall be not an ordinary
resident in India.
Question : Mr. be a citizen of Russia has been staying in India since 1991 leaves India on
16.7.2018 On a visit to Russia and returned on4.1.2019. determine his residential status
for previous year 2018-2019
Solution: What needs to be examined if he Satisfies first condition that is stay in India for
at least 182 days. History in India during the previous year first four 2018 to 31st 3 2019
is shown in the table

April 2018 30 days October 2018 -

May 2018 31 days November 2018 -

June 2018 30 days December 2018 -

July 2018 16 days January 2019 28 days

August 2018 - February 2019 28days

September 2018 - March 2019 31 days

Total stay in India during the previous year was 194 days. As he is in India for more than
in 182 days during the relevant previous year he satisfies the first condition and is
therefore a resident.
In this case we need not to examine the second condition as the first condition is already
satisfied
Time and hour of leaving and arrival in India is relevant. However in this case it is not
given here the number of hours are otherwise not important as he was in India for more
than 182 days. It would have been important if it was a marginal case of 182 days.

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Now we find out if he is ordinarily resident or not
a. Examine first condition( Resident for at least two out of 10 previous year prior to
relevant previous year)
10 previous year prior to the relevant previous year at 2008 - 2009 to 2017 - 2018
During these years he has always been in India. He, therefore, Satisfies the first
condition for being a resident (182 Days stay in India during the relevant previous
year
b. Now examine the second condition (730 days stay in India during 7 previous year
prior to the relevant previous year)
7 years prior to the previous year means the period 1.4.2011 to 31.3.2018. During
this period he should be in India for at least 730 days. As he has been in India
during the entire period this condition is also satisfied.
As both the conditions have been satisfied he is resident and ordinarily resident in
India.
Scope of total income according to residential status is as under:
❖ In the case of resident in India (Resident and ordinary resident in case of
individual) [section 5(1)]
The following incomes from whatever source derived from part of total income in case of
resident in India/ ordinary resident in India.
I. Any income which is received or is deemed to be received in India in the relevant
previous year by or on behalf of such person
II. any income which accrues or arises or is Deemed to be accrue or arise in India
during the relevant previous year
III. any income which accrues or arises outside India during the relevant previous year
❖ In case of resident but not ordinary resident in India( in case of individuals and
HUF ) [section 5(1) and its proviso]
The following income from whatever source derived from part of total income in the case
of resident but not ordinary resident in India.
I. Any income which is received or is deemed to be received in India in the relevant
previous year by or on behalf of such person.
II. any income which is a cruise or a rice or is Deemed to be accrue or arise to him
during the relevant previous year
III. Any income which accrues or arises in to him outside India during the relevant
previous year if it is derived from a business controlled in or a profession set up in
India.
❖ In case of non resident [section 5(2 )]
The following income from whatever source derived form part of total income in case of
non resident in India:

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I. Any income which is received or is deemed to be received in India during the
relevant previous year by or on behalf of such person.
II. Any income which accrues or arises or is Deemed to accrue or arise to him in India
during the relevant previous year.
Does it may be noted that the income described in Ⅰ. And 11.in all three cases above are
to be included in the total income of all three categories of assessees in the same manner.
The income described in 111. That is income which accrue or arise outside India is:
1) Not includible in the total income of all in case the assessee is non- resident in
India.
2) Includible in the total income in case of resident but not ordinary resident in India
only when it is derived from a business controlled in or profession setup in India.
Therefore the incidence of tax is likely to be more in case of an assessee who is resident
and ordinarily resident in India, A little less in case of resident but not ordinary resident
in India and the least in case of non- resident in India if the assessee has various income
both inside and outside India.
Important note
● Global income is taxable in case of resident in India but where an assessee has paid
tax in the foreign country on the income which accrues and arises outside India he
shall get a relief of tax paid by him in the foreign country while computing his tax
payment on such income in India. This is known as double taxation relief.
● The income which has in any preceding year being included in the total income of a
person on accrual basis shall not again be included on its receipt by him in India
during the previous year.
● Any income is to be included in the total income only if it is taxable as per the
provision of Income Tax Act and shall be computed as per the provision of the Act.
Exempt income shall not form the part of total income.
● Receipt of income: For the purpose of taxation what is relevant is the first receipt. if
an amount is received outside India and then subsequently remitted to India it shall
be a receipt outside India and many because it has been limited to India would not
make it an income received in India for example, a non-resident received rental
income equivalent to ₹150000 in UAE. But then remit it to India .This income
would not be taxable in his hands because it is neither earned in India nor received
in India.
● Income in cash or kind: income is taxable whether it is received in cash or in kind.
when income is received in kind its value would be determined as per the provision
of the Income Tax Act for the purpose of inclusion in the taxable income.
● income should pertain to the previous year. The Income to be taxed in a particular
assessment year is the income which is earned or which arises during the relevant
previous year. therefore if an income which is earned during any earlier year but
which could not be text in India due to any reason may be because of the fact that
the assessee was non resident in that year, will not become taxable merely because

112
 it has been remitted to India during the previous year .For example if x earned an
Income of 200000 during the previous year 2017-2018 Outside India and keep It
outside India during that year but remitted this amount during the previous year
2018-2019, It shall not be taxed as income of previous year 2018-2019.

Income received or Deemed to be received in India [section 7]

1. Received in India : any income which is received in India, during the previous
year by any assessee, is liable to tax in India, irrespective of residential status of
assessee and place of accrual of such income.
● Receipt means first receipt: the receipt of income refers to the first occasion when
the recipient gets the money under his own control. Once an amount is received as
income, Any remittance or transmission of the amount to another place does not
result in receipt within the meaning of this clause at the other place.
The principle of importance, firstly, in determining the year of receipt, and
secondly, for ascertaining the incidence of taxation where it depends upon the
receipt of income. For instance Incase of non-resident, their foreign income is not
assessable, unless it is actually received in India. In their case, unless at the time the
money is received in India it is received as income from an outside source such
receive will not be an income receipt. If a resident had already received money
outside India ( in an earlier year or during the previous year) as income or exempt
income and he was transferring the fund into India in the accounting year, Sach
monies will not count as income in the eyes of law.
2. Income Deemed to be received in India [section 7] : The following income shall be
deemed to be received in India in the previous year even in the absence of actual
receipt:
● Contribution made by employer to the recognised provident fund in excess of 12%
of salary of the employee
● Interest credited to RPF of employee which is in excess of 9.5 % per annum
● Transfer balance from and recognise fun to recognised provident fund .
● The contribution made by the central government or any other employer in the
previous year to the account of an employee under and notified the contributory
pension scheme referred to in the section 80ccd.
Income which accrues or arise in India or deemed to accrue or arise in India
[section 9 ]
1. Accrue or arise in India: Accrue means to arise or spring as a natural growth or
result. To come by way of increase. Arising means coming into existence or notice
or presenting itself . Accrue means growth or accumulation with are tangible
shaped so as to be receivable; ln Secondary sense the two words together mean ‘ To
become a President and enforceable right’ and ‘ to become a present right of
demand’

113
Frequently, in the context of accrual or the word order is used. The two different
concepts. A person said to have earned his income in the sense that he has contributed to
its production by rendering services or otherwise and their parenthood of the income can
be traced to him. but in order that the income may be said to have accrued to him, an
additional element is necessary that he must have created a debt in his favour.
2. Income which are Deemed to accrue or arise in India [section 9 ] : The following in
commercial be Deemed to accrue or arise in India:
● Income from a business connection in India: any income which arises, Directly or
indirectly from any activity or a business connection in India is deemed to be earned
in India.
Business connections may be in several forms, for example a branch office in India or an
agent or an organisation of a non-resident in India. formation of a subsidiary company in
India to carry on business of non -resident Parent company would be a business
connection in India. Any profit of non -resident which can be reasonably attributed to
such part of operation carried out in India through business connection in India are
Deemed to be earned in India.
● Income from any property, asset or source of income situated in India: Any income
which arises from any property movable or immovable tangible or intangible which
is situated in India is Deemed to accrue or arise in India.
For example: Miss S. who lives in London has a house property situated in India which
has been given by her on rent. Rent derived by S shall be taxable in India whether such
rent is received by her in India or outside India as house property is situated in India.
● Income from transfer of any Capital Asset situated in India : Where the Capital
Asset is situated in India, regardless of the residential status of the transferor or the
transferee, Capital gain, arising on its transfer, would be deemed to be income
accruing or arising in India and hence would be taxable.
● Any income which falls under the head ‘salaries’ if it is earned in India: Any
income table for services rendered in India shall be regarded as income earned in
India though it may be paid in India or outside.
● Salary payable by government to Indian citizen/ National for services rendered
outside India: The following condition have to be satisfied before such income is
treated as Deemed to accrue or arise in India:
● Income should be chargeable under the head salaries
● The payer should be the Government of India.
● The recipient should be an Indian citizen- whether resident or non resident
● The service should be rendered outside India while salary of Indian citizen in the
above case shall be Deemed to accrue or arise in India but all allowances for two
sides paid outside India by government of India to above Indian citizen for their
rendering services outside India are exempt under section 10(7)
● Interest payable by:

114
 ❖ Government or
❖ A person who is resident in India, except where interest is payable in respect
of money borrowed used for the purpose of business or profession carried on
outside India or
❖ A person who is non-resident in India provided interest is payable in respect
of money borrowed and used for a business or profession carried on in India,
shell bi income which is deemed to accrue or arise in India in the hands of the
recipient.
● Royalty payable by:
❖ Government or
❖ a person who is resident in India except where it is payable in respect of any
right/ information/ property used for the purpose of a business or profession
carried outside India or earning any income from any source or outside India,
❖ A person who is non-resident provided royalty is payable in respect of any
right/ information/ property used for the purpose of business or profession
carried on in India or earning any income from any source in India, shall be
income which is deemed to accrue or arise in India in the hands of the
recipient.
● Fee for Technical Services payable by:
❖ Government or
❖ a person who is president in India, except where services are utilised for a
business or profession carried on outside India earning any income from any
source outside India or
❖ a person who is non-resident provided fee is payableIn respect of service for a
business or profession carried on in India for earning any income from any
source in India,
Shall be income which is Deemed to accrue or arise in India in the hands of the recipient.
Question : H Limited, A Israeli company, which is non resident in India on the following
income by the way of fee for Technical Services. advice about the taxability of such
income in the hands of H Limited ,in India.

SOURCE TAXABILITY

1. The Government of India paid rupees taxable

2000000 under an agreement to be
used for the project in India.

2. S Limited, an Indian company paid taxable

rupees 30 lakh for the know-how to be

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 SOURCE TAXABILITY

used in India.

3. Y Limited, an Indian company paid 40 Not- taxable

lacs to know- how acquired in
Germany to be used in China.

4. Get limited, on -non resident company taxable

paid 24 lakh for acquiring know-how
to be used in India for carrying on
certain manufacturing business.

The provision regarding incidence of tax above may be summarised in the following
table:

Whether
Particulars of income taxable

Resident and Not- Non-

ordinary ordinary resident
resident resident

1. Income received or Deemed to be yes yes yes

received in India whether earned in
India or elsewhere

2. Income which accrues or arises or is yes yes yes

deemed to accrue or arise in India
during the previous year whether
received in India or elsewhere.

3. Income which accrues or arises yes yes no

outside India and received outside
India from a business controlled from
India

4. Income which accrues for arises yes No No

outside India and received outside
India in the previous year from any
other source

5. Income which accrues or arises No No No

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 outside India and received outside
India during the preceding the
previous year and remitted to India
during the previous year

Highlights of provision of incidence of tax

A. Any income which is either received in India or Deemed to be received in India is
taxable in India is respective of the residential status.
B. Any income which is either earned in India or is Deemed to be earned in India is
taxable in India at respective of residential status.
C. For residents in India all the global income weather earned/ received is taxable in
India.
D. For non- resident, income is taxable only if it is either on in India or it is received
in India.
E. For not ordinary resident income earned and received outside India will be taxable
only when it is from a business or a profession controlled or set up in India.
Illustration 2.14: The following the particulars of income R for the previous year
2020-2021:

S.No particulars amount

1. rent from a property in Delhi received in the 80,000

USA.

2. Income from business in USA controlled from 1,20,000

delhi

3. income from business in bangalore controlled 1,80,000

from USA

4. rent from a property in the USA received there 60,000

but subsequently remitted to India.

5. Interest from deposits with indian company 20,000

received in USA

6. Profit for the year 2019-2020 of a business in 75,000

USA remitted to India during the previous year
2020-2021 (not taxed earlier)

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7. gifts received from his parents(i.e relative) 45,000

Compute his income for the assessment year 2021-2022 if he is:

1. Resident and ordinarily resident in India,
2. Not ordinarily resident in India.
3. Non - resident in India.

118
Solution

particulars resident and not ordinarily non-resident

ordinarily resident
resident

1. Income earned
/deemed to
accrue/arise in India

rent from a property in 80,000 80,000 80,000

delhi.

income from business 1,80,000 1,80,000 1,80,000

in bangalore

interest from Indian 20,000 20,000 20,000

company

2. Income earned and

received outside

income , from a
business controlled
from india

income from business 1,20,000 1,20,000 _

in USA

3. income earned and

received outside
India other than 2.

rent from property 60,000 _ _

inUSA

4,60,000 4,00,000 2,80,000

Note:
1. Profits of 2019-2020 are not income of the previous year 2020-2021 and hence
cannot be included in the income for assessment year 2021-2022.
2. gifts received are capital receipts and are not regarded as Income.

119
Illustration : W earns the following income during the financial year 2020-2021:

Particulars Rs

1. Interest from an Indian company received in 1,20,000

London.

2. Pension from former employer in India received in 1,80,000

USA

3. Profits earned from business in Italy which is 2,00,000

controlled in India, half of the profit being
received in India.

4. Income from agriculture in Bhutan and remitted to 1,25,000

India.

5. Income from property in England received there 4,00,000

6. Past foreign income brought to India 10,000

7. Gifts of money received by W ,outside India on 1,20,000

5.8.2020 from Y, a resident in India

Compute his income for the assessment year 2021-2022 if W is :

1. Resident and ordinarily resident in India.
2. Non- resident in India.
Solution

S.No Particulars Resident and non- resident

ordinarily resident

1. Income deemed to accrue /arise

in India

Interest from Indian company 1,20,000 1,20,000

Pension from employer in India. 1,80,000 1,80,000

gifts of money exceeding Rs 1,20,000 1,20,000

50,000 received by W outside
India on 5.8.2020

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2. Income received in India

50% of profits of business in Italy 1,00,000 1,00,000

3. Income earned and received

outside India,from a business
controlled from India.

50% of profit of business in Italy 1,00,000 _

4. Income earned and received

outside India other than 3.

Income from Agriculture in 1,25,000 _

bhutan

Income from property in England 4,00,000 _

11,45,000 5,20,000

Past foreign income is not to be included because it is not the previous year 2020-2021.
Illustration : during the financial year 2020-2021 Anil kumar had the following income:

S.No Particular Rs

1. Salary income received in india for service 3,90,000

rendered in england.

2. Income from profession in India but received in 3,60,000

hong kong

3. Property income in saudi arabia (out of which 5,00,000

2,40,000 was remitted to India)

4. Profit earned from business in bangalore 1,50,000

5. Agriculture income in Uganda 1,60,000

6. Profit from business carried on at myanmar but 2,20,000

controlled from India
Compute the income of Anil kumar for the assessment year 2021-2022 if he is
1. resident and ordinary resident .
2. not -ordinary resident.

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3. non- resident in india.
Solution computation of taxable income of Anil kumar for the assessment year
2021-2022

S.No. Particulars R&OR NOR NR

1. Income received in
India wherever it
accrues

Salary received in India 3,90,000 3,90,000 3,90,000

for service rendered in
England

2. Income accrued
inIndia wherever
received

(i) Profit earned from 1,50,000 1,50,000 1,50,000

business in bangalore

(ii) Income from 3,60,000 3,60,000 3,60,000

profession in India but
received in hong kong

3. Income accrued and

received outside India

(i) Property income in 5,00,000

Saudi Arabia

(ii) Agriculture income 1,60,000

in Uganda

(iii) Profits of a 2,20,000

business carried on in
myanmar but controlled
from India

Total income 17,80,000 11,20,000 9,00,000

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 LESSON -3
STEPS IN PERSONAL TAX PLANNING
Objective : After reading this chapter you will be able to understand :
฀ Introduction
฀ Method used to minimise tax liability
฀ Tax evasion
฀ Tax avoidance
฀ Tax planning
฀ Distinction between tax planning and tax avoidance and tax evasion
฀ Objective of tax planning
฀ Type of tax planning
฀ Factor on the basis of which tax planning is done
฀ basic techniques to tax planning
● Tax avoidance
● Tax deferral
● Conversion of income
฀ Smart investing
฀ Things you can learn from filing your income tax return
Introduction
Human beings by nature always want good for themselves and want to enjoy the fruit of
their labour only by themselves. De did not want to share with anybody particularly those
with whom they have no relationship. The person will not part away from his hard earned
money even if it is sanctioned by the law.
But it is the duty of an individual to save legally from payment of taxes so that an
individual can save for him and his dependent to be a good and honorable citizen .On the
other hand the practical concept of taxation law is to realise the revenue by way of text to
the maximum. Therefore the perception of taxpayers and tax collectors are different. The
taxpayer puts every effort to maximize revenue and reduce the incidence of tax. On the
other hand the tax collector tries to maximize revenue within the framework of law. It is
here that tax planning has assumed importance in the complexities of taxation law.
Thus, the primary objective of tax planning is to save the hard labour of the taxpayer
in enjoying the fruits of his income and wealth to the maximum possible extent.
❖ Methods commonly used by taxpayer to minimise tax liability
Tax payers try to minimize tax liability. To achieve this goal the following three methods
are commonly used by him.
● tax evasion
● tax avoidance

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● tax planning
Tax evasion
Unscrupulous citizens evade their tax liability by dishonest means. for example:
● Concealment of income
● Inflation of expense to suppress income
● Falsification of accounts
● Conscious violation of rules
These devices are unethical and have to be condemned. The court also does not
favour such unethical means. Evasion once proved not only to attract heavy penalties but
also lead to prosecution. Such an evader of tax is not a good citizen and tax evasion as a
means\ to reduce tax liability cannot be advocated by anyone.
case study on tax evasion in Indian context.
Tax avoidance
Tax avoidance is minimising the incidence of tax by adjusting the affairs in such a
manner that although it is within the four corners of taxation law, the advantages are
taken by finding out the loopholes in the law. The shortest definition of tax avoidance is
that is the art of dodging tax without breaking the law.
In the case of tax avoidance, the taxpayer apparently circumvents the law without giving
rise to criminal offence, by the use of a scheme, arrangement or devise, often of complex
nature but where the main purpose is to defer, reduce or avoid the tax payment under the
law.
In the words of justice chinnappa Reddy of Supreme Court in McDonald and Company
Limited versus CTO(1985) , The Evil consequences of tax avoidance are manifold and
may be summarised as under:
● Substantial loss of much-needed public revenue, particularly in a welfare state like
ours
● Serious disturbance caused to the economy of the country by piling up mountains of
Black Money directly causing inflation.
● A large hidden loss to the community by some of the best brains in the country
being involved in the perpetual war waged between tax avoider and his expert team
of advisor lawyers and accountant on one side and the tax officer and his perhaps
not so skillful advisor on the other side.
● Sense of injustice and inequality which takes avoidance arouses in the breasts of
those who are unwilling or unable to profit from it.
● Ethics (or lack of it )of transferring the burden of tax liability to the shoulder of the
guide less, good citizens from those of artful dodgers.
As to the Ethics of taxation, the learned judge observed :We now live in a welfare state
whose financial needs, if backed by the law, have to be respected and met. we must

124
recognise that there is behind taxation law as much moral sanction as behind any other
welfare legislation and it is a pretence to say that avoidance of taxation is not an ethical
and that it stands on the no less model plane then honest payment of taxation
Tax planning
Tax planning is the arrangement of financial activities in such a way that maximum tax
benefits are enjoyed by making use of all beneficial provisions in the tax laws. This is
permitted and not frowned upon.
Tax planning is permissible even after McDonald's case: there might be a difference of
opinion in various quarters in respect of tax avoidance as these days judges have started
thinking in the interest of the state with a firm determination to leave the age-old accepted
thinking of 1936 and to look into the future.
But planning is still not touched by the judgement and in the words of Ranganath Mishra,
judge of Supreme Court in McDonald's case itself it is permissible provided it is within
the framework of law. He observed:
Tax planning may be legitimate provided it is within the framework of law. Colourable
device cannot be part of tax planning and it is wrong to encourage or entertain the belief
that it is only able to avoid the payment of tax by resorting to dubious methods. It is the
obligation of every citizen to pay taxes honestly without resorting to illegal means.
Cases which have diluted the impact of McDonald's decision
● Banyan and Berry v CIT (1996)
The learnt judge observed that in Mcdowell and Company Limited case the court
nowhere said that every action or inaction on the part of taxpayer which result in
reduction of tax liability to which he may be subject to it in future, is to be viewed with
suspicion and be treated as a device for avoidance of tax irrespective of the legitimacy or
genuineness of the act. The Principle Enunciated in the above case is has not affected the
freedom of citizen to act in a manner according to his requirement, his wishes in the
manner of doing any trade , activity or planning his affairs with circumspection, within
the framework of law, unless the same falls in the category of colorable device.
Distinction between tax planning, tax avoidance and tax evasion:
Tax planning, tax avoidance and tax evasion are the three different approaches to the
same objective that is to reduce tax liability. However they have different characteristics.
Tax planning is perfectly legal as the objective of tax reduction is achieved by making use
of beneficial provisions in the tax laws. On the other hand, text avoidance is also legal
though technically satisfying the requirement of law. Tax evasion is a method of evading
tax liability by dishonest means like separation, conscious violation of rules, inflation of
expenses etc.
Tax planning implies compliance with the taxing provision In such a manner that the full
advantage is taken of all exemptions, deductions, concessions, rebates and reliefs
permissible under the act so that the incidence of tax is least. Tax planning therefore,
cannot be equated to tax evasion or tax avoidance. Tax planning may be equated as
intelligent application of expert knowledge of planning corporate affairs with a view to

125
securing consciously provided tax benefits on the basis of national priorities in keeping
with the interest of the state and the public.
The cases covered under ‘Tax avoidance’ are those where the taxpayer has apparently
circumvented the law without giving rise to a critical offence by the use of a scheme,
arrangement or device often of complex nature whose sole purpose is to defer, reduce or
completely avoid the tax payable under the law. In other words tax avoidance is a method
of reducing incidence of tax by taking advantage of certain loopholes in the tax laws.
Tax evasion is a dubious way of attempting to solve tax problems by suppression of
income, violation of rules, inflation of expenses etc. Tax evasion, therefore, cannot be
considered tax planning because it amounts to breaking of law whereas tax planning is
devised within the legal Framework by availing of what the legislature intended.
Thus, any legitimate step taken by an assessee towards maximising tax benefit keeping
in view the intention of the law will not only help him but the society also. All those who
do the tax planning could help themselves in efficient and economic conduct of their
business affairs without getting entangled in the controversy of tax avoidance or evasion.
The distinction between tax avoidance and tax evasion has been spelt out in hela holding
pvt. Ltd. v CIT (2013),Here Court observed
● The distinction between tax evasion and tax avoidance is still prevalent.
● Generally speaking as a result of such things as illegality, suppression,
misrepresentation and fraud.
● Take avoidance is a result of action taken by assessees, none of which is illegal or
Forbidden by the law in itself and no combination of which is similarly Forbidden
or prohibited.
● The permissibility of tax Avoidance, will fall to be decided, when and only when,
on the basis of facts and transactions truly disclosed by assessee. A point of law
arises, whether on certain reasonable construction of one part of taxing statute, as
applied to assessee case, tax which would otherwise be payable by assessee
becomes not payable in the case in hand.
● When the court is faced with the task of construction in above Manner ,The court is
not bound to make the construction in favour of assessee on proof by the assessee,
That it has entered into no Illegality no prohibited transaction.
● The court would have to assess, in the facts and circumstance of each case, upon
general principles of conscience and justice, whether the arrangement of affairs by
the assessee, so as to cause the reduction of tax incidence,can fairly be permitted to
the assessee, as a genuine means of tax reduction, employed by it in a commercial
fair sense, or whether allowing the assessee to earn the reduction, in the facts and
circumstance of particular case, as oppose to the public policy of not encouraging
citizens to engage themselves in dealings and transactions designed primarily for
the purpose of non - payment of tax only.

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Difference between tax planning and tax evasion

Tax planning Tax evasion

1. Tax planning is an act within Tax evasion is an attempt to avoid tax by

permissible range of the act misrepresentation of facts and
conducted to achieve social and falsification of accounts.
economic benefits

2. Tax planning is a legal right which Tax evasion is a legal offence which
enables the taxpayer to achieve may lead to penalty and prosecution.
social and economic objectives.

3. Tax planning accelerates Tax evasion retards the development of

development of the economy of a the economy of a country by generating
country by generating funds for black money which works as a parallel
investment in desired sectors. economy.

4. Tax planning promotes Tax evasion encourages bribery and

professionalism and strengthens the weakens the economic and political
economic and political situation of situation of the country.
the country.

Difference between tax avoidance and tax evasion.

Tax avoidance Tax evasion

1. Tax avoidance means planning for Tax evasion means avoiding tax liability
legal requirements but it defeats the illegally.
basic intention of the legislature.

2. Tax avoidance takes into account Tax evasion involves use of unfair
various lacunas of law. means.

3. Tax avoidance is lawful but involves Tax evasion is unlawful

the element of mala fide intention

4. Tax avoidance is planning before the Tax evasion involves avoidance of

actual liability for tax comes into payment of tax after the liability of tax
existence has arisen.

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Tax management
Tax management refers to the compliance with the statutory provision of law. While tax
planning is optional , tax management is mandatory. It includes maintenance of accounts ,
filing of return, payment of taxes, deduction of tax at source, timely payment of advance
tax, etc. Poor tax management may lead to leavy of interest, penalty, prosecution etc. In
some cases it may lead to heavy financial loss if proper compliance is not made eg. If a
loss return is not filed in time it will result in a financial loss because such loss will not be
allowed to be carried forward.

Tax planning Tax management

1. Tax planning a wider term and include Tax management is narrower term and is
tax management the first step towards tax planning.

2. Tax planning emphasises on Tax management emphasis on compliance

minimisation of tax burden. of legal formalities for minimisation of tax.

3. Every person may not require tax Tax management is essential for every
planning. person

4. Tax planning helps in decision making Tax management helps in complying with
the conditions for effective decision
making.

5. Tax planning helps to claim various Tax management helps in complying the
benefits of tax conditions for claiming tax benefits

6. Tax planning involves comparison of Tax management involves maintenance of

various alternatives before selecting accounts in prescribed form , filing of
the best one . return , payment of tax, etc.

7. Tax planning looks at future benefits Tax management relates to the past,
present and future.

Objectives of tax planning

● Reduction of tax liability
● Minimisation of litigation
● Productive investment
● Healthy growth of economy
● Economic stability
Reduction of tax liability : One of the supreme objectives of tax planning is the
reduction of tax liability of the taxpayer and the resultant saving of the earning for a

128
better enjoyment of the fruits of the hard labour. By proper tax planning, a taxpayer can
oblige the administrators of the taxation laws to keep their hands off from his earnings.
Minimisation of litigation : Where a proper tax planning is resorted to by the taxpayer in
conformity with the provision of the taxation laws, the chances of unscrupulous litigation
are certainly to be minimised and the tax- payer may be saved from hardships and
inconvenience caused by unnecessary litigations which more often not even knock the
doors of supreme judiciary.
Productive investment: The planning is a measure of awareness of the tax-payer to the
intricacies of the taxation laws and it is the economic consciousness of the income -earner
to find out ways and means of productive investment of the earnings which would go a
long way to minimise his tax burden . The taxation laws offer large avenues for the
productive investment of the earnings granting absolute or substantial relief from
taxation. A taxpayer has to be constantly aware of such legal avenues that are designed to
open the floodgates of his well- being , prosperity and happiness. When earnings are
invested in avenues recognised by law, they are not only relieved of the burden of
taxation but they are also converted as means of further earning.
Healthy growth of economy : The saving is the only basement upon which the economic
structure of human life is founded. A saving by legally sanctioned devices is a prime
factor for the healthy growth of the economy of a nation and its people. An income saved
and accumulated in violation of law scours on the nation. Generation of black money
darkens the horizons of the national economy and leads the nation to economic
destruction . In the suffocating atmosphere of black money, a nation sinks with its people.
But tax planning is the generator of a superbly white economy where the nation awakens
in the atmosphere of peace and prosperity .
Economic stability : Under tax planning , taxes are paid without any headache either to
the taxpayer or to the tax collector. Avenues of productive investment are largely availed
of by the taxpayers. Productive investment increases the economic prosperity of a nation.
The planning thereby creates economic stability of the nation and its people by even
distribution of economic resources.
Types of tax planning
Tax planning can be broadly classified into two heads:
1. Short- term tax planning
2. Long- term tax planning
Short term planning is normally for a period upto a year and it is done from year to year
to achieve some particular objective. On the other hand, long term planning will be for a
longer period and it may not pay off immediately.
Factors on the basis of which tax planning is done.
It is essential that the areas of planning be identified so that one does not realise too late
that one has missed the opportunity for tax- cost reduction.
Following factors are helpful for effective tax planning

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● Residential status and citizenship of assessee
● Heads of income/ assets to be included in computing Net wealth
● Latest legal position
● Form v/s substance
Residential status: as we know that non- resident in India is not liable to pay income tax
on incomes which accrue or arise and also received outside India, whereas resident in
India is liable to pay income tax on such income. Therefore, every assessee Would like to
be non- resident in India, if he has income which accrues or arises outside India.
If an individual is non-resident in India, he should be careful about the facts given
below:-
1. If an individual is a citizen of India in any previous year, he should not stay in India
for more than 181 days in that previous year. Where he wishes to stay in India for
more than 181 days at a stretch, he should plan his stay in such a manner that his
stay in one previous year does not exceed 181 days.
For example he can stay from 2nd October of previous year to 28 September of the
next previous year aggregating to 362 days at a stretch, still he will be called
non-resident in India as the period of stay in each year will not exceed 181days.
The above holds good in case of a person of Indian origin .
Note: one should be careful regarding leap years as the number of days for the
month of February in that case shall be 29 instead of 28.
2. The citizen of India who wishes to leave India in any previous year for employment
abroad, should leave India by 28th September so that his stay in India does not
exceed 181days and he may be called non-resident in India for that previous year.
3. A citizen of India , who does not leave India for employment abroad should leave
India by 29th may of the previous year if he had been in India for 365days or more
in the 4 preceding years.
4. Foreign national can stay in India for 181 days in the previous year and he will still
be non- resident in India provided his stay in India during the 4 preceding previous
years immediately preceding the relevant previous year does not exceed 364 days. If
it exceeds 364 days , then in such a case , he can not stay in India for more than 59
days in that previous year. However , he can stay at a stretch of 59+59 days if this
falls in two previous years. Thus such a person comes to India in the first week of
February and stays upto may 29th of the next year.
If an individual can not become non- resident in India , he can still escape the liability of
tax on all foreign income which accrue or arise and received outside India except if such
income accrue or arise from a business or profession set up or controlled from India
provided he is not an ordinary resident in India.
The HUF will be non- resident in India only when entire control and management of its
affairs is situated outside India. If it is not possible, HUF can claim the status of not

130
ordinarily resident in India provided the karta of HUF satisfies both or any of the two
conditions.
A non-resident in India can bring his income to India , which accrued or arose to him
outside India in any previous year, after the previous year of accrual because in that case
it will not be treated as received in India. It will be called as remitted to India.
The same holds good in case of not ordinarily resident in India provided such income is
not from the business or profession which is set up or controlled from India.
Heads of income : before the tax planner goes in for his task , he has to have a full
picture of the source of income of the taxpayer and the member of his family. Though the
total income includes all income from whatever source derived , the scope of tax-
planning is not similar in respect of all sources of income. The assessee can avail the
benefits of exemption and deductions under each head of income. Further , he can avail
the benefit of rebate and relief under the act. A consolidated tax planning may be
attempted only after the tax- planning in respect of the different heads of income and a
failure to do so may jeopardise the tax planning and may not achieve the desired result. It
is possible to exploit a property by letting it out as an investment, use it in its own
business for an office or a factory or lease it along with other equipment. All these
alternatives will involve assessment of income under different heads as property, business
or other sources.
Under business and other sources, one get depreciation, while income from property gets
a adhoc statutory deduction of 30% from its annual value a depreciable Assets on sale
involves short term capital gain liable to be taxed at normal rate, while in case of property
is held as investment, the same could involve long term capital gain taxable at
concessional rate after indexation of the cost. It may however, be noted that heads of
income are not decided with reference to assessee books or his method of bookkeeping
but with reference to statutory provision.
Similarly, the tax- planner should know which assets are liable to wealth tax and what are
the exemptions allowable in such assets to avail the maximum benefit and reduce the
wealth tax liability.
Latest legal position: It is the foremost duty of tax- planner to keep himself fully
conversant with the latest position of the taxation law along with the allied laws and also
the judicial pronouncement in respect thereof. For this purpose he must have thorough
and up-to-date understanding of annual finance Acts, taxation law amendments,
amendment if any of other allied laws the latest judicial pronouncement of High Court
and Supreme Court, various circulars of Central Board of Direct taxes which seeks to
clarify the legal position so far as the revenue is concerned. A successful tax- planner can
be exempted only if the tax- planner knowledge of legal principles is up to date.
Form vs substance: will have to thoroughly understand the true nature of any transaction
which relates to income- plus or minus. In this connection, he will have to bear in mind
the following principles enunciated by the courts on the question as whether form or
substance of transaction should prevail in income tax- matters:

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● Form of transaction: when a transaction is arranged in one form known to law, it
will attract the tax liability while, if it is entered into another form which is equally lawful
,it may not. I'm considering, therefore, whether a transaction attracts tax or not, the form
of transaction put through by the taxpayer is to be considered and not the substance
thereof. but this rule applies only to genuine transactions. where statutorily the parties
have to reduce a certain transaction into writing, it is not open to any courts or any other
authority to permit oral evidence to be abducted by the parties or to entitle them to go
behind the statement made in the document.[motor and general stores(p) ltd. v CIT
(1967)66 ITR 701(AP)]. A citizen cannot be taxed merely with a view to swelling the
revenue, ignoring the legal position regarding the substance of the transaction. it is not
open to the income tax authorities to deduce the nature of documents from the purported
intention by going behind the document or to consider the substance of matter or to
accept in part and reject it in part or to rewrite the document mainly to suit the purpose of
the revenue [CIT V MOTORS & GENERAL STORES (p) Ltd. (1967) 66 ITR 692 (SC)]
● Genuineness of transaction: In deciding whether the transaction is genuine or
culturable one because in such a situation, It is not the question of form and
substance but of appearance and truth it will be open to authorities to pierce the
corporate veil and look, behind the legal facade, at the reality of the transaction. The
taxing authorities are entitled and indeed bound to determine the true legal relation
resulting from a transaction. If the parties have chosen to conceal by a device legal
relation, it is open to the taxing authority to unravel the device and determine the
substance of the transaction. The true legal relation arising from a transaction alone
determines the taxability of receipt arising from the transaction. [CIT V B.M
kharwar (1969)72ITR 603 (SC)]
● Expenditure : In the case of an expenditure, the mere fact that the payment is made
under an agreement does not preclude the department from enquiring the actual
nature of the payment. [swadeshi cotton mills Co.ltd v CIT (1967)63 ITR 57 (SC)].
In order to determine whether a particular item of expenditure is of revenue or
capital nature, the substance and not merely the form should be looked into.[ Assam
bengal cement Co. ltd v CIT (1955).
Basics of tax planning technique
Tax avoidance
The term tax avoidance when narrowly used then it means that the higher tax bracketed
person gives his property to lower tax- bracketed person in order to avoid tax in that
bracket. the lower tax bracketed person pays less income tax on that property. when the
term is used broadly then the high bracketed person does not pay income tax on his
property income.
The most common example of tax avoidance is full use of deductions to which you are
entitled under the tax-laws. A third example of tax avoidance is to qualify for income tax
credit provided under the law. A tax credit is dollar to dollar reduction against the income
tax liability of a person and it is not affected by the tax- payer’s marginal income tax
rate. For example if you have calculated Rs 10,000 as your income tax liability and you

132
qualify for income tax- credit of Rs 1,000 then you owe only Rs 9,000 as tax liability to
the government.
In practical effect, tax credit is worth more to lower tax bracketed people(22%and below)
and deduction is worth more to higher tax bracketed people( 24 % and above).
There are generally two types of tax credit , one is refundable and the other is
non-refundable. Under refundable tax credit the money is paid to you even though you
don’t have any tax -liability. whereas non- refundable tax-credit is the one which at best
reduces your tax liability to zero. One should always maximize the refundable credit
which you can earn. Unfortunately , however, most of the credit are non- non-refundable.
Some examples of non-refundable or partially refundable tax credit are as follows:
● The child and dependent care tax credit.
● The child tax credit ( partially refundable )
● The adoption credit.
● The credit for elderly and disabled
● Certain higher education expense credit such as lifetime learning credit.
As a general strategy of avoiding paying tax, you should accelerate deduction and tax
credit into the current year and postpone income to next year . Salaried employees find it
difficult to postpone income as they have no control over it. However self -employed
have much more latitude with respect to this tax planning technique.
Tax deferral
The second technique of tax planning is tax deferral. under it one contributes to a
retirement plan at work or personal saving retirement plan such as traditional IRA or Roth
IRA .One can also defer the payment of tax while contributing to 401(k) or 403(b) plans
and deferring the tax payment on any income generated from these contributions.
Because 410(k) and 403(b) are tax deferred retirement plans under the law , you must pay
tax on earnings beginning in the year after you reach the age of 70 and 6 months. In the
meantime you enjoy the benefit of tax-free compounding of money.
Now let us look after the practical application of this tax deferral technique: suppose you
have an option to have either $1000 today or after 10 years. What will be your answer?
The answer will be of course today as with this $ 1000 today as you can invest this
amount and earn interest income. Now suppose you invest this$ 1000 in a treasury bill
that provides an interest rate of 5% annually. At the end of 10 years you will have
$1628.89.Alternatively if you take $ 1000 after 10 year then the present value of this
$1000 will be $ 613.91.
Now look at this example in another way. Think of this 5% return as income tax
percentage. If you have income tax liability of dollar 1000 this year And somehow you
can therefore this liability for 10 years Then the present value of this liability will be
dollar 613.91 it (saving of more than dollar 386).And using the principle of time value of
money the longer you postpone the liability, Lower the present value and higher will be
the savings.

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There are also tax Deferral techniques used in financial products. If you purchased a tax
deferral fixed or variable annuity products, the taxes on your earning from after tax
contribution to that product are deferred (in some cases upto the age of 100 years). You
can also purchase a tax -deferred annuity with a lump sum distribution that you make
from your employer's retirement plan( such as 401(k)). However these contributions are
made with before tax money (you never paid taxes on it) distributions must be made in
the year you reach the age of 70 and 6 months if you ebay to avoid paying hefty taxes on
them.
Another product that provides for tax deferral is cash value life insurance policy. If you
do not access the cash then surrender the amount under this policy during your lifetime,
the death proceeds from this policy to your named beneficiary are completely income tax-
free.

Conversion of income
Every item of income is generally classified as either ordinary income( such as salary and
wages) or capital gains (generally income derived from sale or disposition of financial
products such as stock or business property). Different tax rates are applied to these
different types of income .For example ordinary income is taxed at a minimum rate of
37% whereas long term capital gain is taxed at minimum 20%. This rate differential calls
for a prudent tax- planning strategy that converts as much as ordinary income into capital
gain income. It also throws light on the importance of saving and investing as much as
possible, because appreciation on investment assets is taxable at the rate no higher than
20%.
Assuming that you have earned $1000 in salary and are currently (in the year 2018) in the
maximum ordinary income- tax bracket of 37%. Your after tax income will be $630. If
you take this same $1000 and invest it in ABC stock which you later sell at $2000 at least
1 year after you bought it , your after tax disposable dollars are now $800($1000-$200).
Note that you incur only a 20% capital gain tax. If you were in the 12% or lower ordinary
income -tax bracket, you would not pay any capital gains tax on this sale.
Since 2003, you can take advantage of capital gain income- tax rates on most investment
income (dividends) generated from stocks or stock mutual funds. However, keep in mind
that dividends payable from indirect real-estate investments, such as real estate
investment trust (REIT) ,do not qualify for this same advantage ( although beginning in
2018 there is some reduction in tax rate reduction on REIT ‘s dividends).
Tax -smart investing
Which type of account - tax deferred or taxable one sould park the given investing
product.
● Tax- deferred accounts such as retirement products, are those where the taxpayer
grows their asset without having to pay taxes on it. So ideally one should park our
tax inefficient investment here.

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● One type of financial investment you should not position in a tax deferred account
is municipal bonds or municipal bond funds. Interest from municipal bond is tax
exempt , so if you are positioning it in tax deferred account then you are converting
it tax free status to taxable status after it is withdraw from retirement plan.It is
important to note that the tax exempt yield of municipal bond as compared to
taxable corporate bond is so advantageous that it make economic sense to modify
this strategy. however you are generally better off refraining from positioning
municipal bonds or municipal bond funds in a tax deferred account as income
tax-strategy.
What you can learn from your income tax return
● What is your filing status?
If you are married and living together throughout the year you should file your
return jointly with your spouse, because generally you will be taxed more
favourably. Alternatively if you are a single parent with dependent children or a
child, you should investigate filing your return by using advantageous head of
household status.
● Should you itemize or take advantage of standard deduction ?
Given the standard deduction under 2017 TCJA is double for single or married
filing return jointly, So it is likely that many fewer individuals will opt for
itemization . however if you have a sizable portion of Mortgage property E and
make huge annual charitable contributions then it may be advantageous for you to
itemize deductions.
● Should your investment interest be taxable or tax- exempt ?
The higher your marginal tax rate then you should invest in tax-exempt investment
such as Municipal Bond or Municipal Bond fund.
● Do you have any Self employment income ?
If you do then you are entitled for a number of business deductions that otherwise
You would not be able to claim.
● Do you have any capital loss( loss from sale of any property Or investment)?
As a text wrapping technique you should recognise capital loss in the year you
incurred capital gains. Those losses can be offset against capital gain.
● Do you have additional income tax credit this year?
All allowable tax credits have certain conditions Or limitations. however if you
qualify for tax credit then it will offer you a dollar for Dollar deduction.
● Do you pay taxes or receive a tax refund ?
Goal of many taxpayers is to receive as much tax refund as possible while filling
their return, but think about it, if you receive a refund, you have just given the
federal government a tax free loan for the entire previous tax year. Alternatively you
do not want to withhold so little tax that penalty imposed on it for the previous year.
Your goal should be a small tax payment with the filing of an individual income tax
return.

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 LESSON-4
EXEMPTION FOR INDIVIDUALS
Objective
After reading this chapter you will be able to learn
● Income which does not form the part of total income/ exempted income.
➢ Agriculture income [section 10(1)]
➢ sum received by member from HUF [section 10(2)]
➢ share of profit of partner from a firm [section 10(2A)]
➢ Interest on non- resident (external) account [section 10(4)]
➢ Travel concession or assistance received by an individual from his employer
[section 10(5)]
➢ remuneration to person who not citizen of India [section 10(6)]
➢ Allowances or prerequisites outside India [section 10(7)]
➢ Death-cum retirement gratuity received by an employee [section 10(10)]
➢ payment in commutation of pension received by the employees [section
10(10A)]
➢ leave encashment [section 10(10AA) ]
➢ compensation on retrenchment [section 10(10B)]
➢ payment under Bhopal gas leak Disaster (processing of claims ) Act ,1985
[section 10(10BB)]
➢ exemption for compensation received or receivable on account of any
disaster [section 10(10BC)]
➢ Amount received on voluntary retirement [section 10(10C)]
➢ Tax on non- monetary perquisites paid by employer [section 10(10CC)]
➢ Amount received under a life insurance policy [section 10(10D)]
➢ Provident fund [section 10(11)]
➢ Interest and withdrawals from sukanya samriddhi Account [section 10(11A)]
➢ payment from recognised provident fund [section 10(12)]
➢ amount payable at the time of closure or opting out of national pension
scheme to be exempt to the extent 60% of the total amount payable[section
10(12A)]
➢ tax-exemption to partial withdrawal from national pension system [section
10(12B)]
➢ any payment from approved superannuation fund [section 10(13)]

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➢ house rent allowance [section 10(13A)]
➢ notified special allowance [section 10(14)]
➢ interest, premium or bonus on specified investment [section 10(15)]
➢ scholarship granted to meet the cost of education [section 10(16)]
➢ daily allowance and constituency allowance etc received by MPs and MLAs
[section 10(17)]
➢ Award or reward [section 10(17A)]
➢ pension received by certain awardees/ any member of their family [section
10(18)]
➢ exemption of family pension received by the family members of armed
forces (including paramilitary forces ) personnel killed in action in certain
circumstance [section 10(19)]
➢ Income of local authority [section 10(20)]
➢ income of an approved local authority [section 10 (20)]
➢ income of an approved research association [section 10(21)]
➢ income of news agency [section 10(22B)]
➢ Any income (other than income chargeable under the head "Income from
house property" or any income received for rendering any specific services or
income by way of interest or dividends derived from its investments) of an
association or institution[ section10( 23A)]
➢ Any income of an institution constituted as a public charitable trust for the
development of khadi or village industries or both, and not for purposes of
profit [section 10(23B)]
➢ Income of certain funds of national importance [section 10(23C)]
➢ Income of notified mutual funds [section 10(23D)]
➢ Interest on securities which are held by, or are the property of, any provident
fund to which the Provident Funds Act, 1925 [ section 10(25)]
➢ Income of a member of schedule tribe residing in certain specified areas [
section 10(26)]
➢ Income of an individual being a sikkimese [section 10(26AAA) ]
➢ Any income of a corporation established by a Central, State or Provincial Act
or of any other body, institution or association has been established or formed
for promoting the interests of the members of the Scheduled Castes or the
Scheduled Tribes or backward classes or of any two or all of them.[ section
10(26B)]
➢ In the case of an assessee who carries on the business of growing and
manufacturing tea in India [section 10(30)]

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 ➢ Income of minor child clubbed in hands of parent[ section 10(32)]
➢ Income arising on account to a shareholder on account of buy back of shares
[section 10(34A)
➢ Exemption of capital gain on compensation received on compulsory
acquisition of agricultural land situated within specified urban limits [ section
10(37) ]
➢ Exemption of amount received by an individual as loan under reverse
mortgage scheme [ section 10(43) ]
➢ Exemption in respect of income chargeable to equalization levy [section
10(50) ]
All receipts which give rise to income are taxable under income tax act unless it is
specifically provided that it does not form the part of total income. Such income which do
not form part of total income they also be called income exempted from tax. Section 10 to
Section 13 a certain incomes are either totally exempt from tax or exempt upto certain
amount. Therefore, these income, to the extent these are exempted, are not included in
the total income of an assessee for computation of his total income.
There are many incomes which are exempt as per section 10. some of the important
incomes which are exempt from Tax under section 10 are discussed below:
Agriculture Income[ section 10(1)]
Agriculture Income is exempt provided it falls within the definition of Agricultural
income given under section 2(1A) .Agriculture Income, though exempt. Is to be
aggregated in case of certain assesses for the purpose of determining the rate of tax on
non agricultural income.
meaning of agriculture income
Section 10(1) simply states that any agricultural income earned by the person is exempted
from income tax. Now, in order to understand the full coverage of exemption provided to
agricultural income under section 10(1) of the Income Tax Act, it is important to under
the definition / coverage of the term ‘Agricultural Income’.
Section 2(1A) of the Income Tax Act defines the term ‘Agricultural Income’. As per the
definition, the agricultural income means as under –
1. The revenue earned in the form of rent or lease generated from the land if –
a. The land is situated in India; and
b. The land is used for agricultural purposes.
2. The income derived from the land by agriculture operations (such operations
include both basic and subsequent operations).
3. The income derived from the processing of the agricultural produce so as to render
it fit for the market or sale of the agricultural produce.

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4. The income derived from any building owned and occupied in and around the
agricultural land.
condition to be satisfied to be called agriculture income
It is mandatory to satisfy the following conditions in order to qualify as ‘Agricultural
Income’ –

Conditions No. 1 –The land is either measured to land revenue in India or the land is
subject to a local rate measured and collected by the Government Officers.
If the above condition is not satisfied, the land should not be situated at any of the below
locations –
Where the population is more than INR 10,000 – The land should not be situated within
the jurisdiction of the local municipality or cantonment board.
The land should not be situated within the following –

Aerial distance from the local limits of Corresponding population

any municipality or cantonment board.

Not more than 2 KMS More than 10,000 but not exceeding
1,00,000

Not more than 6 KMS More than 1,00,000 but not exceeding
10,00,000

Not more than 8 KMS More than 10,00,000

Condition No. 2 –
The building must be in or on the immediate area of the land. The said building must
have been used either as a dwelling house or as a storehouse or as an out building, in
connection with the land.
Note regarding agriculture income
1. The income derived from transferring agricultural land doesn’t qualify as
agricultural income.
2. The income derived from seedlings or saplings (grown in a nursery) is deemed to be
an agricultural income.
Sum received by a member from HUF [ section 10(2)]
Any sum received by an individual as a member of Hindu undivided family, shall be
exempt in the hands of the member.
Share of profit of a partner from a firm [section 10(2A]
In case of a person being a partner of a firm( which includes limited liability partnerships)
his share in the total income of the form shall be exempted from tax.

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Interest on non resident( external) account[ section 10(4)]
In case of individual assessee any income by way of interest on money standing to his
credit in non resident( external) account in any bank in India shall also be exempted if
certain conditions are satisfied
Travel concession for assistance received by individual from his employer[ section
10(5)]
Leave travel Allowance refers to an amount received by an employee from his employer
for leave proceeding to any place in India either on leave, after retirement of service or
termination from his Service. The Benefit is Available to individuals Residents as well as
non- residents in respect of leave concession for himself / herself or family. Family
Includes Spouse children of individual parents and brothers and Sisters dependent upon
him/her.
Condition for the purpose of section 10(5)
(1) The amount exempted under clause (5) of section 10 in respect of the value of travel
concession or assistance received by or due to the individual from his employer or
former employer for himself and his family, in connection with his proceeding,—
(a) On leave to any place in India;
(b) To any place in India after retirement from service or after the termination of
his service, shall be the amount actually incurred on the performance of such
travel subject to the following conditions, namely :—
(i) Where the journey is performed on or after the 1st day of October, 1997, by air, an
amount not exceeding the air economy fare of the national carrier by the shortest
route to the place of destination;
(ii) Where places of origin of journey and destination are connected by rail and the
journey is performed on or after the 1st day of October, 1997, by any mode of
transport other than by air, an amount not exceeding the air-conditioned first class
rail fare by the shortest route to the place of destination; and
(iii) Where the places of origin of journey and destination or part thereof are not
connected by rail and the journey is performed on or after the 1st day of October,
1997, between such places, the amount eligible for exemption shall be :—
(A) Where a recognised public transport system exists, an amount not exceeding
the 1st class or deluxe class fare, as the case may be, on such transport by the
shortest route to the place of destination; and
(B) Where no recognised public transport system exists, an amount equivalent to
the air-conditioned first class rail fare, for the distance of the journey by the
shortest route, as if the journey had been performed by rail.]
For the assessment year beginning on the 1st day of April, 2021, where the individual
referred to in sub-rule (1) avails any cash allowance from his employer in lieu of any
travel concession or assistance, the amount exempted under the second proviso to clause
(5) of section 10 shall be the amount, not exceeding thirty-six thousand rupees per person,
for the individual and the member of his family, or one-third of the specified expenditure,
whichever is less, subject to fulfilment of the following conditions, namely:-
(i) The individual has exercised an option to avail exemption under the second proviso
of clause (5) of section 10, in lieu of the exemption under clause (5) of section 10 in

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 respect of one unutilised journey during the block of four calendar years
commencing from the calendar year 2018;
(ii) The payment in respect of the specified expenditure is made by the individual or
any member of his family to a registered person during the specified period;
(iii) The payment in respect of the specified expenditure is made by an account payee
cheque drawn on a bank or account payee bank draft, or use of electronic clearing
system through a bank account or through such other electronic mode as prescribed
under rule 6ABBA; and
(iv) The individual obtains a tax invoice in respect of specified expenditure from the
registered person referred in clause (ii).
Explanation 1- For the purpose of this sub-rule,-
(i) "Tax invoice" means an invoice issued by the registered person under section 31 of
the Central Goods and Services Tax Act, 2017 (No. 12 of 2017);
(ii) "Registered person" shall have the meaning assigned to it in clause (94) of section
2 of the Central Goods and Services Tax Act, 2017 (No. 12 of 2017);
(iii) "Specified expenditure" means expenditure incurred by an individual or a member
of his family during specified period on goods or services, which are liable to tax at
an aggregate rate of twelve per cent. or above under various Goods and Services
Tax (GST) laws and goods are purchased or services procured from GST registered
vendors or service providers;
(iv) "Specified period" means the period commencing from the 12th day of October,
2020 and ending on the 31st day of March, 2021.
Explanation 2 For the removal of doubt, it is hereby clarified that if the amount received
by or due to an individual, as per the terms of his employment, from his employer in
relation to himself and member of his family, in connection with the specified
expenditure is in excess of the thirty six thousand rupees per person, for the individual
and the member of his family, the exemption under this sub-rule would be restricted to
thirty-six thousand rupees per person, for the individual and the member of his family, or
one-third of the specified expenditure, whichever is less.
Remuneration to persons who are not citizen of India[ section 10(6)]
In case of an individual who is not citizen of India, the following income shall be
exempt:
● Remuneration received by diplomat,
● Remuneration received by a foreign national as employee of foreign Enterprise
● Non resident employed on a foreign ship
● Remuneration of employees of foreign governments during his training in India.
Allowances for perquisites outside India[Section 10(7)]

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Any allowances or perquisites paid or allowed, as such outside India by the government
to a citizen of India for rendering service outside India exempt.
Death cum retirement gratuity received by an employee [section 10(10)]
Gratuity is a benefit given by the employer to employees. A recently approved
amendment by the Centre has increased the maximum limit of gratuity. Now it is tax
exempt up to Rs 20 lakh from the previous ceiling of Rs 10 lakh, which comes under
Section 10(10) of the Income Tax Act.
Payment in commutation of pension received by employees[ section 10(10A)]
As per section 10(10A), any commuted pension, i.e., accumulated pension in lieu of
monthly pension received by a Government employee is fully exempt from tax.
Exemption is available only in respect of commuted pension and not in respect of
un-commuted, i.e., monthly pension.
In case commuted pension received by other employees
Case 1 In case of employee receive any gratuity
The commuted value of 1/3rd of the pension which the employee is normally entitled to
receive.
Case 2 In case the employee does not receive any gratuity.
The commuted value of 1/2 of the pension which the employee is normally entitled to
receive.
Leave encashment [section 10(10AA)]
Employees are entitled to various types of leave while they are in service. the leaves may
be either availed by them or in case they are not availed of the idle apps or these are
allowed to be encashed every year or these are accumulated and after retirement or death
example an employee is entitled to 60 days leave in a year but he availed only 20 leaves
during the year. Depending upon the rules of the company. He may be entitled to get
leave of 40 days encashed, but in most cases the employee is entitled to accumulate his
unavailed leaves and encashment of such accumulated leave is done only at the time of
his retirement/ resignation or death. the is as under:
Encashment of leave during tenure of service: leave encashment to an employee while he
continues to be in service with the same employer is fully taxable. In this case however
the assessee can claim relief under section 89.
Encashment of accumulated leave at the time of retirement :For the purpose of exemption
of accumulated leave encashment, employee are divided into two category:
1. Government employees [which means Central and State Government employees
only]: encashment of accumulated leave at the time of retirement whether on
superannuation or otherwise received by government employee, is fully exempt
from tax. leave encashment is exempt nothing is to be included in gross salary
2. Other employees: leave encashment of accumulated leaves at the time of retirement
whether on superannuation or otherwise is received by other employee( including

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 employees local authority and public sector undertaking) is exempt to the extent of
maximum of the following four amount:
A. Leave encashment actually received
B. 10 month’s average salary {10 month preceding the retirement}
C. Cash equivalent of unavailed leave calculated on the basis of maximum 30 days
leave for every year of actual service rendered to the employee from those from
whose service he has retired . The cash equivalent is to be calculated on the basis of
the average salary.
D. Amount specified by the government i.e. 3,00,000.
Compensation on retrenchment[ section 10(10B) ]
Any compensation received by workmen at the time of his retirement, under the
industrial dispute act 1947 or under
A. Any other act or rules or any other order or notification issued thereunder or
B. Any other standing order. Or
C. Any award, contract of service or otherwise, shall be exempted to the extent of
minimum of the following limits:
A. Actual amount received
B. 15 days average pay for every completed year of service or part thereof in excess of
six months
C. Amount specified by Central Government that is 500000
Compensation received in excess of the aforesaid limit is taxable and would, therefore,
form part of gross salary. However the assessee shall be eligible for relief under section
89.
Payment under Bhopal gas leak disaster( processing of claims) act 1985 [ section
10(10BB)]
Any payment made under the above act or any scheme made thereunder, shall be exempt
in the hands of the recipient.
Exemption for compensation received or receivable on account of any disaster[
section 10(10 and BC) ]
Any amount received or Al receivable from central government or a State government or
a local authority by An individual by way of compensation on account of any disaster
shall be exempt.
Amount received on voluntary retirement[ section 10 (10C ) ]
The compensation received or receivable by the employee of the specified employee on
voluntary retirement, under the golden handshake scheme, is exempt under section
10(10C) To the extent of actual amount of compensation received or 500000 ,Whichever
is less.

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note:-
1. The exemption is available to an employee only once and if it has been a while for
an assessment year it shall not be allowed to him for any other assessment year
2. The assessee Shall not be eligible for relief under section 89 in case he has claimed
exemption under section 10( 10C). On the other hand, if he claims relief under
section 89, he cannot claim Exemption under section 10( 10 C).

Tax on non- monetary perquisites paid by employer [section 10(10CC)]

The Income Tax paid by the employer himself on non-monetary perquisites provided to
the employee exempt in the hands of the employee.
Amount received under Life Insurance policy[ section 10(10D) ]
Amount received under Life Insurance policy, including the sum allocated by the way of
Bonus on such policy, is wholly exempt from tax. however the following sum received
are not exempt under this section
1. Any sum received from a Policy under section 80DD(3) or section 80 DDA(3) or
2. Any sum received under keyman insurance policy
3. Any sum received, under an insurance policy issued on or after1.4.2003 but on or
before 31.3.2012 in respect of which the premium payable for any of the years
during the term of the policy exceeds 20% of the actual capital sum assured.
However ,such sum received on death of a person shall be exempt or
4. Any sum received under an insurance policy issued on or after 1.4.2012 in respect
of which premium payable for any of the years during the terms of the policy
exceeds 10% of the actual capital sum assured or
5. Any sum received under insurance policy issued on or after 1.4.2013 for insurance
on the life of any person , who is
A. A person with disability or a person with severe disability as referred in section
80U,or
B. Suffering from disease or ailment as specified in rules made under section 80DDB
In respect of which premium payable for any of the years during the terms of policy
exceeds 15% of the actual capital sum assured
6. Any sum received under any unit linked insurance policy/policies, issued on or after
the 1.2.2012, if the amount of premium or aggregate premium payable for any of
the previous year during the terms of such policy / policies exceeds 2,50,000.
However this does not apply to any sum received on the death of a person .
Notes:- keyman insurance policy means a life insurance policy taken by a person on the
life of another person who is or was the employee of the first mentioned person or is or
was connected in any manner whatsoever with the business of the first mentioned and

144
includes such policy which has been assigned to a person ,at any time during the term of
the policy, with or without any consideration .
Provident fund[section 10 (11) ]
Any payment from a provident fund to which provident fund act, 1925 applies or from a
public provident fund set up by the central government shall be exempt.
Interest or withdrawal from sukanya samriddhi account [section 10(11A) ]
Any payment from an account opened in accordance with the sukanya samriddhi account
rules , 2014 made under the government saving bank act,1873 shall not be included in the
total income of the assessee. As a result , the interest accruing on deposits in, and
withdrawals from any account under the scheme would be exempt
Payment from recognised provident fund [section 10 (12)]
The accumulated balance due and becoming payable to an employee participating in a
recognised provident fund , to the extent provided in rule 8 of part A of the fourth
schedule of income -tax act, 1961, shall be exempt .
Amount payable at the time of closure or opting out of the national pension scheme
to be exempt to the extent of 60% of the total amount payable [section 10(12A)]
Any payment from national pension system trust to an assessee on account of closure or
his opting out of the pension scheme referred to in section 80CCD , to the extent it does
not exceed 60% (upto 40% A.Y 2019-2020) of the total amount payable to him at the
time of closure or his opting out of the scheme , shall be exempt from tax.
However , the whole amount received by the nominee , on the death of the assessee shall
be exempt from tax.
Tax -exemption to partial withdrawal from national pension system by an employee
[section 10(12B)]
Any payment from the national pension system trust to an employee under the pension
scheme referred to in section 80CCD, on partial withdrawal to the extent it does not
exceed 25% of the amount of the contribution made by him shall be exempt from tax.
Any payment from an approved superannuation fund [ section 10(13)]
Any payment from approved superannuation fund shall be exempted provided it is made :
1. On death of a beneficiary or
2. To any employee in lie of or commutation of an annuity on his retirement at or
after a specified age or on his becoming incapacitated prior to such retirement.
3. By way of refund of contribution to on the death of a beneficiary or
4. By way of refund of contribution to an employee on his leaving the service in
connection with which the fund is established otherwise than by retirement at or
after a specified age or on his becoming incapacitated prior to such retirement, to
the extent to which such payment does not exceed the contribution made prior to the
commencement of this act and any interest thereon.

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5. By way of transfer to the account of an Employee under a pension scheme referred
to in section 80ccd and notified by the central government.
House rent allowance[ section 10 ( 13A)]
The amount which is not to be included in the total income of an assessee in respect of
the special allowance referred to in clause (13A) of section 10 shall be—
(a) The actual amount of such allowance received by the assessee in respect of the
relevant period; or
(b) The amount by which the expenditure actually incurred by the assessee in payment
of rent in respect of residential accommodation occupied by him exceeds one-tenth
of the amount of salary due to the assessee in respect of the relevant period; or
[(c) an amount equal to—
(i) Where such accommodation is situate at Bombay, Calcutta, Delhi or Madras,
one-half of the amount of salary due to the assessee in respect of the relevant
period; and
(ii) Where such accommodation is situate at any other place, two-fifth of the amount of
salary due to the assessee in respect of the relevant period,]
Whichever is least.
Notified special allowance [section 10(14)]
(1) For the purposes of sub-clause (i) of clause (14) of section 10, prescribed allowances,
by whatever name called, shall be the following, namely :—
(a) Any allowance granted to meet the cost of travel on tour or on transfer;
(b) Any allowance, whether, granted on tour or for the period of journey in connection
with transfer, to meet the ordinary daily charges incurred by an employee on
account of absence from his normal place of duty;
(c) Any allowance granted to meet the expenditure incurred on con-veyance in
performance of duties of an office or employment of profit :
Provided that free conveyance is not provided by the employer;
(d) Any allowance granted to meet the expenditure incurred on a helper where such
helper is engaged for the performance of the duties of an office or employment of
profit;
(e) Any allowance granted for encouraging the academic, research and training pursuits
in educational and research institutions;
(f) Any allowance granted to meet the expenditure incurred on the purchase or
maintenance of uniform for wear during the performance of the duties of an office
or employment of profit.
Explanation : For the purpose of clause (a), “allowance granted to meet the cost of
travel on transfer” includes any sum paid in connection with transfer, packing and
transportation of personal effects on such transfer.

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2) For the purposes of sub-clause (ii) of clause (14) of section 10, the prescribed
allowances, by whatever name called, and the extent thereof shall be the following,
namely :—
S.No. Name of Allowance
1. Any Special Compensatory a) Manipur 800 per month
Allowance in the nature of Mollan/RH-2365.
[Special Compensatory
(Hilly Areas) Allowance] or (b) Arunachal Pradesh
High Altitude Allowance or (i) Kameng;
Uncongenial Climate (ii) North Eastern Arunachal
Allowance or Snow Bound Pradesh where heights are
Area Allowance or 9,000 ft. and above;
Avalanche Allowance (iii) Areas east or west of
Siang and Subansiri sectors

(c) Sikkim
(i) Area North-NE-East of
line Chhaten LR 0105,
Launchung LR 1902, pt.
4326 LW 1790, pt. 4349 LW
1479, pt. 3601 LW 1471 to
mile 13 LW 1367 to Berluk
LW 2253.
(ii) All other areas at 9,000
ft. and above.

(d) Uttar Pradesh

Areas of Harsil, Mana and
Malari Sub-divisions and
other areas of heights at
9,000 ft. and above.

(e) Himachal Pradesh

(i) All areas at 9,000 ft. and
above ahead of line joining
Puhka-jakunzomla towards
the bower.
(ii) Area ahead of line
joining Karchham and
Shigrila towards the bower.
(iii) All areas in Kalpa,
Spiti, Lahul and Tisa.

(f) Jammu and Kashmir

147
(i) All areas from NR
396950 to NR 350850, NR
370790, NR 311776 North
of Shaikhra Village, North
of Pindi Village to NR
240800.

(ii) Areas of Doda, Sank and

other posts located in areas
at a height of 9,000 ft. and
above.

(iii) North of line Kud-Dudu

and Bastt-garh, Bilwar,
Batote and Patnitop.

(iv) All areas ahead of

Zojila served by Road
Srinagar-Zojila-Leh in Leh
District.

(v) Gulmarg - All areas

forward of line joining
Anita Linyan 3309 -
Kaunrali - 2407.

(vi) Uri South - All areas

forward of Kaunrali - Kandi
1810 Kustam 1505 -
Sebasantra 1006 Changez
0507 - Jak 19904 Keekar
9704 Jamun 9607 Neeta
9508.

(vii) BAAZ Kaiyan Bowl -

All areas forward of Dulurja
9712-BAAZ 0317 -
Shamsher 0416 including
New Shamsher 0615 -
Zorawar 1017 - Malaugan
Base 1027 - Radha 0836 to
Nastachun Pass 9847.

(viii) Tangdhar - All areas

west of Nastachun Pass

148
 Tangdhar Bowl and on
Shamshabari Range and
forward of it.

(ix) Karan and Machhal

sub-sectors - All areas along
the line Pharkiangali 0869
to Z Gali 4376 andforward
of Shamshabari Range.

(x) Panzgam, Trehgam and

Drugmul.

[Rs. 800] per month

II. Siachen area of Jammu
and Kashmir [Rs. 7,000]
per month

III. All places located at a

height of 1,000 metres or
more above the sea level,
other than places specified
at (I) and (II) above.

2. Any Special Compensatory a) Little Andaman, Nicobar RS 1300 per

Allowance in the nature of and Narcondam Islands; month
Border Area Allowance,
Remote Locality Allowance (b) North and Middle
or Difficult Area Allowance Andamans;
or Disturbed Area
Allowance (c) Throughout
Lakshadweep and Minicoy
Islands;
3. [Special Compensatory (a) Madhya Pradesh Rs 200 per month.
(Tribal Areas/Schedule (b) Tamil Nadu
Areas/Agency Areas) (c) Uttar Pradesh
Allowance] (d) Karnataka
(e) Tripura
(f) Assam
(g) West Bengal
(h) Bihar
(i) Orissa
4. Any allowance granted to an Whole of India 70 percent of such
employee working in any allowance up to a
transport system to meet his maximum of [Rs.

149
 personal expenditure during 10,000] per month.
his duty performed in the
course of running of such
transport from one place to
another place, provided that
such employee is not in
receipt of daily allowance
5. Children Education Whole of India [Rs. 100] per
Allowance month per child up
to a maximum of
two children.
6. Any allowance granted to Whole of India [Rs. 300] per
employee to meet hostel month per child up
expenditure of his child to a maximum of
two children.
7. Compensatory Field Area A. Areas in Arunachal [Rs. 2,600] per
Allowance Pradesh areas
B. Throughout Manipur and
Nagaland.
C. Areas in Sikkim
D. Areas in Himachal
Pradesh
E. Areas in Uttar Pradesh
F. Areas in Jammu and
Kashmir
8. Compensatory Modified A.areas in Punjab and [Rs. 1,000] per
Field Area Allowance Rajasthan month
B.area in Haryana
C.areas in Himachal
Pradesh
D.areas in G. areas in Uttar
Pradesh
H. areas in Jammu and
Kashmir Arunachal Pradesh
and Assam
E.Throughout Mizoram and
Tripura.
F. Following areas in
Sikkim and West Bengal
9. Any special allowance in the Whole of India [Rs. 3,900] per
nature of counter-insurgency month.
allowance granted to the
members of armed forces
operating in areas away from
their permanent locations

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Interest , premium or bonus on specified investments [ section 10(15)]
Any income by way of interest , premium on redemption or other payment on such
securities, bonds, annuity certificates, saving certificates, other certificates issued by
central government and deposits as the central government , by notification in the official
gazette, specify in this behalf, subject to such conditions and limits as may be specified in
the said notification.
Interest on individuals in post office savings bank accounts to the extent of Rs 3500 and
Rs 7000 in case of joint account shall be exempt under section 10(15)(i).
(iib) in the case of an individual or a Hindu undivided family, interest on such Capital
Investment Bonds as the Central Government may, by notification in the Official Gazette,
specify in this behalf :
Provided that the Central Government shall not specify, for the purposes of this
sub-clause, such Capital Investment Bonds on or after the 1st day of June, 2002;
(iic) in the case of an individual or a Hindu undivided family, interest on such Relief
Bonds as the Central Government may, by notification in the Official Gazette, specify in
this behalf ;

(iid) interest on such bonds, as the Central Government may, by notification in the
Official Gazette, specify, arising to—
(a) A non-resident Indian, being an individual owning the bonds ; or
(b) Any individual owning the bonds by virtue of being a nominee or survivor of the
non-resident Indian ; or
(c) Any individual to whom the bonds have been gifted by the non-resident Indian :
Provided that the aforesaid bonds are purchased by a non-resident Indian in foreign
exchange and the interest and principal received in respect of such bonds, whether on
their maturity or otherwise, is not allowable to be taken out of India :
Scholarships granted to meet the cost of education [section 10(16)]
Scholarships granted to meet the cost of education are exempt.
Daily and constituency allowance, etc. Received by MPs and ML As [ section 10(17)]
The following income shall be exempt in hands of the persons specified:
I. Daily allowance received by any person by reason of his membership of parliament
or of any state legislature or of any committee thereof ;
II. Any allowance received by any person by reason of his membership of parliament
under the members of parliament (constituency allowance) rules ,1986;
III. Any constituency allowance received by any person by reason of his membership of
any state legislature under any act or rules by that state legislature.

151
Notes; if MP or MLA opts to be taxed under section 115 BAC, the above exemption shall
not be allowed.
Award or reward [section 10(17A)]
Any payment made either in cash or kind , shall be exempt from tax provided it is made :
A. In pursuance of any award instituted in public interest by the central government or
state government or instituted in the public interest by the central government or
any state government or instituted by any other body any approved by central
government in this behalf.
B. As a reward by the central government or any state government for such purposes
as may be approved by the central government on this behalf in the public interest.
Pension received by certain awardees/any member of their family [ section 10(18)]
Any income by way of pension /family pension received by an individual or any member
of his family pension received by an individual or any member of his family shall be
exempted if such individual has been in the service of central / state government and has
been awarded Param Vir Chakra or Mahavir Chakra or such gallantry award as may be
notified.

Exemption of the family pension received by the family members of armed forces
(including para-military forces ) personnel killed in action in certain circumstances [
section 10(19)]
Where the death of a member of the armed forces (including para- military forces) of the
union has occurred in the course of operational duties , in such circumstances and subject
to such condition as may be prescribed ,the family pension received by the widow or
children or nominated heirs, as the case may be , shall be exempt from tax.
Income of a local authority [section 10(20)]
The following income of a local authority shall be exempt:
❖ Income which is chargeable under the head , ‘ income from house property’,
❖ Income from capital gain or
❖ Income from other source or Income from trade and business carried on by it
which
❖ accrues or arises from the supply of :
● Water or electricity within or outside its own jurisdictional area or
● Any other commodity or service within its own jurisdictional area.
In other words , the entire income of a local authority shall be exempt from tax except the
income derived from the supply of commodity or service ( other than water and
electricity) outside its own jurisdictional areas.

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Income of an approved research association [section 10(21)]
Under this clause , income of a research association ,which is approved, is exempt from
tax if certain conditions are satisfied.
Income of specified news agency [section 10(22B)]
Any income of such a news agency , set up in India solely for collection and distribution
of news, as the central government may notify, is totally exempt , in this behalf, is totally
exempt. This exemption is available , provided the news agency applies its income or
accumulates it for application solely for collection and distribution of news and does not
distribute its income in any manner to its members .
Any income (other than income chargeable under the head "Income from house
property" or any income received for rendering any specific services or income by
way of interest or dividends derived from its investments) of an association or
institution[ section10( 23A)]
any income (other than income chargeable under the head "Income from house property"
or any income received for rendering any specific services or income by way of interest
or dividends derived from its investments) of an association or institution established in
India having as its object the control, supervision, regulation or encouragement of the
profession of law, medicine, accountancy, engineering or architecture or such other
profession as the Central Government may specify in this behalf, from time to time, by
notification in the Official Gazette:

Provided that—
(i) The association or institution applies its income, or accumulates it for application,
solely to the objects for which it is established; and
(ii) The association or institution is for the time being approved for the purpose of this
clause by the Central Government by general or special order:
Provided further that where the association or institution has been approved by the
Central Government and subsequently that Government is satisfied that—
(i) Such association or institution has not applied or accumulated its income in
accordance with the provisions contained in the first proviso; or
(ii) The activities of the association or institution are not being carried out in
accordance with all or any of the conditions subject to which such association or
institution was approved,
It may, at any time after giving a reasonable opportunity of showing cause against the
proposed withdrawal to the concerned association or institution, by order, withdraw the
approval and forward a copy of the order withdrawing the approval to such association or
institution and to the Assessing Officer;
Any income of an institution constituted as a public charitable trust for the
development of khadi or village industries or both, and not for purposes of profit
[section 10(23B)]

153
ny income of an institution constituted as a public charitable trust or registered under the
Societies Registration Act, 1860 (21 of 1860), or under any law corresponding to that Act
in force in any part of India, and existing solely for the development of khadi or village
industries or both, and not for purposes of profit, to the extent such income is attributable
to the business of production, sale, or marketing, of khadi or products of village
industries:
Provided that—
(i) The institution applies its income, or accumulates it for application, solely for the
development of khadi or village industries or both; and
(ii) The institution is, for the time being, approved for the purpose of this clause by the
Khadi and Village Industries Commission:
Provided further that the Commission shall not, at any one time, grant such approval for
more than three assessment years beginning with the assessment year next following the
financial year in which it is granted:
Provided also that where the institution has been approved by the Khadi and Village
Industries Commission and subsequently that Commission is satisfied that—
(i) The institution has not applied or accumulated its income in accordance with the
provisions contained in the first proviso; or
(ii) The activities of the institution are not being carried out in accordance with all or
any of the conditions subject to which such institution was approved,

it may, at any time after giving a reasonable opportunity of showing cause against the
proposed withdrawal to the concerned institution, by order, withdraw the approval and
forward a copy of the order withdrawing the approval to such institution and to the
Assessing Officer.
Explanation.—For the purposes of this clause,—
(i) "Khadi and Village Industries Commission" means the Khadi and Village Industries
Commission established under the Khadi and Village Industries Commission Act,
1956 (61 of 1956);
(ii) "khadi" and "village industries" have the meanings respectively assigned to them in
that Act;
Income of certain funds of national importance [section 10(23C)]
Any income received by any person on behalf of the following is exempt from tax:

154
● The prime minister national relief fund or the prime minister citizen assistance and
relief in emergency situations fund (PM CARES fund)or
● The prime minister ‘s fund (promotion of folk art)or
● The prime minister ‘s aid to student fund or
● The national foundation for communal harmony or
● The swachh bharat kosh, set up by the central government or
● The clean ganga fund, set up central government or
● The chief minister relief fund or the lieutenant governor’s relief fund in respect of
any state or union territory or
● Any university or other educational institution existing solely by for educational
purpose and not for purpose of profit or
● Any hospital or other educational institution for the reception and treatment of
persons suffering from illness or mental defectiveness or during convalescence or
requiring medical attention or rehabilitation ,existing solely for philanthropic
purpose and not for purpose of profit.
● The provision also empower the prescribed authority , on an application , to grant
exemption , to grant exemption from income tax by giving approval in respect of :
A. Any other fund or institution established for charitable purposes, having regard to
its objects and importance throughout India or throughout any one or more states
[section 10(23C )]
B. Any trust or institution , which is either wholly for public religious purposes or
wholly for public religious and charitable purpose , and which is administered and
supervised in manner so as to ensure that its purposes.

Income of notified mutual funds [section 10(23D)]

Any income of the following mutual funds shall be exempt from tax:
● A mutual fund registered under the securities and exchange board of India act ,
1992or regulations made thereunder:
● Such other notified mutual funds set up by a public sector bank or other public
sector banks or a public financial institution or authorised by the Reserve bank of
India and subject to such conditions as the central government may, by notification
in official gazette , specify in this behalf .
Explanation.—For the purposes of this clause,—

155
(a) The expression "public sector bank" means the State Bank of India constituted
under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined
in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a
corresponding new Bank constituted under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under section
3 of the Banking Companies (Acquisition and Transfer of Under-takings) Act, 1980
(40 of 1980) and a bank included in the category "other public sector banks" by the
Reserve Bank of India;
(b) The expression "public financial institution" shall have the meaning assigned to it in
section 4A of the Companies Act, 1956 (1 of 1956);
(c) The expression "Securities and Exchange Board of India" shall have the meaning
assigned to it in clause (a) of sub-section (1) of section 2 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992);
Interest on securities which are held by, or are the property of, any provident fund
to which the Provident Funds Act, 1925 [ section 10(25)]
(i) Interest on securities which are held by, or are the property of, any provident fund to
which the Provident Funds Act, 1925 (19 of 1925), applies, and any capital gains of
the fund arising from the sale, exchange or transfer of such securities;
(ii) Any income received by the trustees on behalf of a recognised provident fund;
(iii) Any income received by the trustees on behalf of an approved superannuation fund;
(iv) Any income received by the trustees on behalf of an approved gratuity fund;
(v) Any income received—
(a) by the Board of Trustees constituted under the Coal Mines Provident Funds
and Miscellaneous Provisions Act, 1948 (46 of 1948), on behalf of the
Deposit-linked Insurance Fund established under section 3G of that Act; or
(b) by the Board of Trustees constituted under the Employees' Provident Funds
and Miscellaneous Provisions Act, 1952 (19 of 1952), on behalf of the
Deposit-linked Insurance Fund established under section 6C of that Act;
Income of a member of schedule tribe residing in certain specified areas [ section
10(26)]

Section 10(26) grants exemption to certain income of a member of scheduled tribe

residing in specified areas or the states Arunachal Pradesh, Manipur, Mizoram or in
Ladakh region of state of Jammu & Kashmir if certain conditions are satisfied.
Income of an individual being a Sikkimese [section 10(26AAA) ]
The following income which accrues or arises to a Sikkimese individual , shall be exempt
from income -tax
● Income from any source in the state of Sikkim
● Income by way of dividend or interest on securities.
However this exemption will not be available to a Sikkimese woman who , on or after
1.4.2008 , marries a non - Sikkimese individual.

156
Any income of a corporation established by a Central, State or Provincial Act or of
any other body, institution or association has been established or formed for
promoting the interests of the members of the Scheduled Castes or the Scheduled
Tribes or backward classes or of any two or all of them.[ section 10(26B)]
any income of a corporation established by a Central, State or Provincial Act or of any
other body, institution or association (being a body, institution or association wholly
financed by Government) where such corporation or other body or institution or
association has been established or formed for promoting the interests of the members of
the Scheduled Castes or the Scheduled Tribes or backward classes or of any two or all of
them.
Explanation.—For the purposes of this clause,—
(a) "Scheduled Castes" and "Scheduled Tribes" shall have the meanings respectively
assigned to them in clauses (24) and (25) of article 366 of the Constitution;
(b) "backward classes" means such classes of citizens, other than the Scheduled Castes
and the Scheduled Tribes, as may be notified—
(i) by the Central Government; or
(ii) by any State Government, as the case may be, from time to time;
In the case of an assessee who carries on the business of growing and manufacturing
tea in India [section 10(30)]
In the case of an assessee who carries on the business of growing and manufacturing tea
in India, the amount of any subsidy received from or through the Tea Board under any
such scheme for replantation or replacement of tea bushes or for rejuvenation or
consolidation of areas used for cultivation of tea as the Central Government may, by
notification in the Official Gazette, specify:
Provided that the assessee furnishes to the Assessing Officer, along with his return of
income for the assessment year concerned or within such further time as the Assessing
Officer may allow, a certificate from the Tea Board as to the amount of such subsidy paid
to the assessee during the previous year.

Explanation.—In this clause, "Tea Board" means the Tea Board established under section
4 of the Tea Act, 1953
Income of minor child clubbed in hands of parent[ section 10(32)]
Under section 64(1A) the income of minor child is includible in the total income of the
parent under the circumstance mentioned therein, section 10(32) provides that such parent
in whose income the minor’s income is included shall be entitled to exempt to the extent
such income does not exceed of rs 1500 in respect of each minor child ,whose income is
so includible. In other words , the exemption shall be allowed to the extent of the income
of each minor child included or rs 1500 per child , whichever is less.

157
Income arising on account to a shareholder on account of buy back of shares
[section 10(34A)
Any income arising to an assessee, being a shareholder , on account of buy back of shares
including shares listed on a recognised stock exchange by the company as referred to in
section 115 QA
Exemption of capital gain on compensation received on compulsory acquisition of
agricultural land situated within specified urban limits [ section 10(37) ]
Any capital gain ( whether short -term or long -term ) arising to an individual or a Hindu
undivided family from transfer of agricultural land by way of compulsory acquisition
shall be exempt provided the compensation or the enhanced compensation or
consideration , as the case may be , is received on or after 1.4.2004. The exemption is
available only when such land has been used for agriculture purposes during the previous
two years immediately preceding the date of compulsory acquisition by such individual
or a parent of his or by such Hindu undivided family.
Exemption of amount received by an individual as loan under reverse mortgage
scheme [ section 10(43) ]
Amount received by an individual as a loan , either in lump sum or in installment , in a
transaction of reverse mortgage referred to in section 47(ⅩⅥ) shall be exempt
Exemption in respect of income chargeable to equalization levy [section 10(50) ]
Any income arising from any specified service provided on or after the date on which the
provision of chapter Ⅷ of the finance act, 2016 comes into force i.e 1.6.2016 and
chargeable to equalisation levy under that chapter shall be exempt.

158
 LESSON -5
DEDUCTION AVAILABLE TO INDIVIDUAL
Objective
After reading this chapter you will be able to learn :-
● Introduction to deduction
● Type of deduction
● Basic rule to deduction
● Deduction in respect of certain type of payments
➢ Deduction in respect of life insurance premium ,deferred annuity, contribution
to provident fund, subscription to certain equity shares or debentures,
etc.[section 80C]
➢ Deduction in respect of contribution to certain pension funds [section 80CCC ]
➢ Deduction in respect of contribution to pension scheme of central government
by central government or any other employer [section 80CCD ]
➢ Deduction in respect of medical insurance premia [section 80D]
➢ Deduction in respect of maintenance including medical treatment of a
dependent who is a person with disability [section 80DD] .
➢ Deduction in respect of medical treatment ,etc.[section 80DDB]
➢ Deduction for interest paid on loan taken for pursuing higher education
[section 80E]
➢ Deduction in respect of interest on loan taken for residential house
property[section 80EE]
➢ Deduction in respect of interest on loan taken for certain house property
[section 80EEA]
➢ Deduction in respect of purchase of electric vehicle [section 80EEB]
➢ Deduction in respect of donation to certain funds , charitable institution ,etc
[section 80 G]
➢ Deduction in respect of rent paid [section 80GG]
➢ Deduction in respect of certain donation for scientific research or rural
development [section 80GGA]
➢ Deduction in respect of contribution given by companies to political parties
[section 80GGB]
➢ Deduction in respect of contribution given by any person to political parties [
section 80GC ]
➢ Deduction in respect of royalty income etc, of authors of certain books other
than textbooks [section 80QQB]

159
 ➢ Deduction in respect of royalty on patents [section 80RRB]
➢ Deduction in respect of interest on deposits in savings accounts to the
maximum extent of Rs 10,000 [ section 80TTA ]
➢ Deduction in case of a person with disability [ section 80U ]
● Difference between deduction and exemption
Introduction
In computing the total income of assessee, certain deductions are permissible under
section 80C to 80U from gross total income . These deductions are however not allowed
from the following incomes although these incomes are part of gross total income.
● Long term capital gains
● Short term capital gain on transfer of equity shares and units of equity oriented fund
through a recognised stock exchange i.e short term capital gain covered under
section 111A.
● Winning the lottery , races, etc.
● Incomes referred to under section 115A,115AB,115ACA,115AD and 115D
Type of deduction
Deductions are of two type:-
● Deductions on account of certain payments and investments covered under section
80C to 80GGC
● Deduction on account of certain incomes which are already included under gross
total income covered under sections 80-IA to 80U.
The income arrived at, after claiming the above deductions from gross total income, is
known as total income. It may also be called taxable income. The total income ,thus
calculated should be round off to the nearest ₨ 10.
Note :-These Deductions will not be available to a taxpayer opting for the New Tax
Regime u/s 115 BAC, except for deduction u/s 80CCD (2) which will be applicable for
New Tax Regime as well.
Basic rules of deduction [section 80A/80AB/80AC]
1. Deduction cannot exceed gross total income [section 80A(2)]: The aggregate
amount of deduction under section 80C to 80U shall not in any case exceed the
gross total income (exclusive of long term capital gains, short term capital gain
covered under section 111A,winnings of lotteries ,crossword puzzles, etc and
income referred to in sections 115A to 115AD and 115D of the assessee. Therefore
the total income after deduction will either be positive or nil. It cannot be negative
due to deductions. If the gross total income is negative or nil, no deduction can be
permitted under this chapter.

160
2. Deduction not allowed to members if allowed to AOP/BOI [section 80(3)]:if
deduction is allowed under the above section to the AOP/BOI then the deduction for
same payment / income will not be allowed to the members of AOP/BOI.
3. Deduction allowed only when it is claimed by assessee [section 80 A(5)]:where
the assessee fails to make a claim in his return of income for any deduction under
section 10AA or section 80-IA to 80RRB no deduction shall be allowed to him
thereunder.
4. Assessee duty to place relevant material :if an assessee approached a statutory
approaches a statutory authority for obtaining a concession under the taxing statute,
he should in fairness place all material before the said authority and be also in a
position to satisfy the said authority that he was entitled to obtain the concession.
5. Benefits of certain deduction not to be allowed in cases where return is not filed
within the specified time limit[section 80AC]: where in computing the total
income of an assessee of any previous year relevant to the assessment year
commencing on or after 1.4.2018 any deduction in respect of certain
incomes(sections 80-IA to 80RRB) , then such deduction shall not be allowed to
him unless he furnish a return of his income for such assessment year on or before
the due date specified under section 139(1).
Deduction in respect of certain payment
Deductions on account of certain payments are allowed from sections 80C to 80GGC.
➢ Deduction in respect of life insurance premium ,deferred annuity, contribution
to provident fund, subscription to certain equity shares or debentures,
etc.[section 80C]
● Which assessees allowed deduction u/s 80C: This deduction is allowed only to the
following assessee from their gross total income computed as per provision of the
act:
1. An individual or
2. A Hindu undivided family
● Deduction on account of the following saving cannot exceed Rs 1,50,000:the
assessee shall be entitled to a deduction of whole of the amount paid or deposited in
the previous year, being the aggregate of sum referred to below as does not exceed
RS 1,50,000
1. Any sum paid by an individual to effect or to keep in force an insurance on the life
of :
A. An individual himself
B. His/Her spouse
C. Any children of such individuals.
The children may be married/unmarried, dependent /not dependent on the individual .

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In case of Hindu undivided family the premium should be paid on the life of any member
of the family.
Premium paid on life insurance policy exceeding certain percentage of the capital sum
assured not eligible for deduction [section 80C(3)]

Premium paid on insurance policy other Amount paid eligible for deduction
than contract of deferred annuity

1. For policy issued on or before 20% of the capital sum assured

31.3.2021

2. For policy issued on or after 1.4.2013 15% of the capital sum assured
for the insurance on life of a person,
who is-
● A person with disability or a person
with severe disability as referred to in
section 80U , or
● Suffering from disease or ailment as
specified in the rules made under
section 80DDB

3. For the policy issued on or after 10%of the capital sum assured
1.4.2012

2. Any contribution by the employee towards a statutory provident fund or recognised

provident fund . The deduction in this respect is allowed to an individual only.
3. Any subscription by an individual or HUF to national saving certificates (8th or 9th
issue ) . Any interest accrue on these certificates which is deemed to be reinvested
also qualifies for deduction .
4. Any contribution by an individual or HUF for participation in the unit linked
insurance plan of the unit trust of India or unit linked insurance plan of LIC mutual
fund referred to in section 10(23D).
5. A subscription by an individual or HUF to any notified deposit scheme of :
● A public sector company which is engaged in providing long -term finance for
construction or purchase of houses in India for residential purpose or
● Any authority constituted in India by or under any law enacted either for the
purpose of dealing with and satisfying the need for housing accommodation or for
the purpose of planning , development or improvement of cities, towns and villages
or both ,

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6. Subscription to such bond issued by the national bank of agriculture and rural
development (NABARD) as the central government may, by notification in the
official gazette , specifies in this behalf.
7. Any sum deposited in an account under the senior citizen saving scheme rules,
2004.
8. Any sum deposited as a five years-time deposit in an account under the post office
time deposit rules,1981.
9. Any sum contributed by an employee of the central government , to specified
amount of the pension scheme referred to in section 80CCD
● For fixed period not less than 3 years and
● Which is in accordance with the scheme as may be notified by the central
government in the official gazette for the purpose of this clause Important note
● The deduction is allowed only when the specified amount has been paid during
the previous year.
● Deduction under 80C is not available for long term capital gain and short term
capital gain covered under section 111A
● A person shall be treated as having acquired any shares or debentures on the
date on which his name is entered in relation to those shares and debentures in
the register of members or of debenture holders, as the case may be, of the
public company.
฀ Deduction in respect of contribution to certain pension funds [section 80CCC
]
Condition for claiming deduction under this section
● Deduction is permissible to only individuals under this section .
● It is allowed in respect of any amount paid or deposited in the previous year by such
individual to effect or keep in force a contract for any annuity plan of life insurance
corporation of india or any other insurer for receiving pension from the fund set up
by LIC or any other insurer referred to in section 10(23AAB)
● Amount is payable out of income chargeable to tax.
Quantum of deduction allowed : the whole of amount paid or deposited (excluding
interest or bonus accrued or credited to the assessee’s account if any) or 1,50,000 ,
whichever is less
Note
➔ If deduction is allowed under section 80CCC, deduction u/s 80C will not be
available in respect of the payment made towards the annuity plan.
➔ The deduction is allowed to non- resident individuals also.
฀ Deduction in respect of contribution to pension scheme of central government
by central government or any other employer [section 80CCD ]

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Deduction of an employee’s/assessee’s contribution [section 80CCD(1)] : the
deduction under this section is allowed to -
➔ An assessee who is an individual and in employed by the central government on or
after 1-1-2004 or by any other employer (the date with other employer is not
relevant ) or
➔ Any other assessee being an individual.
● The deduction is allowed on account of-
➔ Any amount not exceeding 10% of salary of the previous year paid or deposited by
the employee in his account under the notified pension scheme,
➔ Any amount contributed by any other assessee being an individual to such pension
scheme not exceeding 20% of his gross total income in the previous year.
● The atal pension yojana(APY) has since been notified for purpose of section
80CCD(1)
● Deduction of 50,000 under section 80CCD (1B): the employee or the individual
referred to in section 80CCD(1),shall be allowed a deduction in computation of his
total income,[whether or not any deduction is allowed under section 80CCD(1) to
the extent of-
➔ The whole amount paid or deposited in the previous year ,or
➔ 50,000
Whichever is less.
However, no deduction under section 80CCD(1B) shall be allowed in respect of the
amount on which a deduction has been claimed and allowed under section 80CCD(1).
● Deduction of employer’s contribution [section 80CCD(2)]: any amount contributed
by the employer (i.e central government or any other employer) to such pension
scheme shall be allowed as deduction for an amount not exceeding 14% of salary in
case of central government employee and 10% of the salary in case of any other
employee in the previous year.
฀ Limit on deductions under section 80C ,80CCCand 80CCD [section 80 CCE]
The aggregate amount of deduction under section 80C,section 80CCC and
80CCD(1)[excluding employer’s contribution to pension scheme or contribution made by
the assessee under section 80CCB(1B)]shall not in any case exceed 1,50,000.
฀ Deduction in respect of medical insurance premia [section 80D]
● Deduction is permitted under this section to individual or HUF
● Deduction is allowed for the following purpose -
➔ In case of an individual: it is allowed for -
❖ The amount paid to effect or to keep in force an insurance on the health of
assessee or his family or his parent or parents ,or

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 ❖ Any contribution made to the central government health scheme or such other
scheme as may be notified by the central government in this behalf
❖ Any payment made on account of preventive health check up of assessee or his
family or check up of the parent of the assessee
Family means spouse and dependent children of the assessee
➔ In case of HUF: it is allowed for the amount paid to effect or to keep in force an
insurance on the health of any member of that hindu undivided family.
➔ In case of senior citizens : deduction on account of medical expenditure incurred
(instead of sum paid to effect any insurance of the health).

Quantum of deduction
1. Where the assessee is an individual : the deduction allowed shall be the aggregate
of the following,namely:-
● A. The whole of the amount paid to effect or to keep in force an
insurance on the health of the assessee or his spouse and dependent
children or
B. Any contribution made to central government health scheme(CGHS)
As does not exceed in aggregate 25000 and
● The whole of the amount paid to effect or to keep in force an insurance on the
health of the parent or parents (whether dependent or not ) of the assessee as
does not exceed Rs. 25,000.
However preventive health checkup assesse, his family or his parent or parents,
the maximum amount allowed shall be limited to Rs 5,000 and this 5,000 shall
be within the ceiling of above 25,000.
Moreover in the case of senior citizens there is an additional deduction of
25,000 . In other words , the deduction shall be 50,000 instead of 25,000.
2. Where assessee is hindu undivided family : the deduction allowed shall be the
whole of the amount paid to effect or to keep in force an insurance on the health of
any member of that hindu undivided family as does not exceed in aggregate Rs
25,000.
Additional deduction of 25,000 in case of senior citizens . In other words, the
deduction shall be 50,000 instead 25,000.
3. Deduction on account of medical expenditure incurred (instead of sum paid to effect
any insurance of the health) to be allowed in case of senior citizens.
The individual may claim the following deduction instead of deduction available
under clause 1. Above:

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➔ The whole of the amount paid as medical expenditure incurred on his health of any
member of his family as does not exceed in the aggregate Rs 50,000
➔ The whole amount paid on account of medical expenditure incurred on the health of
any parent of the assessee does not exceed in the aggregate Rs 50,000.
The above point shall be applicable in case of senior citizens, and no amount shall have
been paid to effect or to keep in force an insurance on the health of such person .
Note :-
● The deduction is allowed when payment is made to GIC (general insurance
corporation of India ) or any other approved insurer. It is popularly known as
mediclaim scheme.
● The deduction is allowed to non-individual also if the above conditions are satisfied.

● Senior citizen means an individual residing in India who is of age 60 years or more
at any time during the relevant previous year. And hence in case of an individual
who is of 60 years or more and is non -resident in India , the deduction will be
limited to 25,000 as he will not be considered to be senior citizen for this purpose
฀ Deduction in respect of maintenance including medical treatment of a
dependent who is a person with disability [section 80DD] .
Condition for claiming deduction under this section
1. Deduction is available to Indian resident ( either individual or HUF)
2. Deduction is available if the assessee has during the previous year.
● Incurred any expenditure for the medical treatment (including nursing ) , training
and rehabilitation of dependent , being a person with disability,or
● Paid or deposited any amount ,under any scheme frame by LIC or any insurer or
UTI and which is approved by the CBDT. The scheme should provide for the
payment of annuity or a lump sum amount for the benefit of dependent being a
person with disability in the event of the death of the individual or the member of
HUF, in whose name subscription to the scheme has been made by the HUF for the
benefit of handicapped member. The assessee must nominate either the dependent
being a person with disability or any other person or a trust to receive the payment
on his behalf for the benefit of the dependent being a person with disability.
3. The assessee , claiming deduction under this section shall provide deduction under
this section ,shall furnish a copy of the certificate issued by the medical authority in
the prescribed form and manner, along with return of income under section 139 in
respect of the assessment year for which deduction is claimed.

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Quantum of deduction
Rs 75,000 from his gross total income ,irrespective of actual expenditure incurred /
amount deposited.
฀ Consequences if the dependent being a person with disability pre
decreases/die before, the individual or the member of the HUF[section 80 DD(3)]
If the dependent being a person with disability predeceases the individual or the member
of the HUF in whose name money has been deposited ,an amount equal to the amount
paid or deposited under the scheme shall be deemed to be the income of the assessee of
the previous year in which such amount is received by assessee and shall accordingly be
chargeable to tax as the income of that previous year.
฀ Deduction in respect of medical treatment ,etc.[section 80DDB]
Condition for claiming deduction under this section :
1. Deduction is available to person who is resident in india (either an individual or
HUF)

2. Deduction is allowed in respect of any expenditure actually incurred for the medical
treatment of the following persons for such disease or ailment as may be specified
in rules made in this behalf by the board
In case of individual - for himself or a dependent

In case of HUF - for any member of the HUF

3. No deduction under this section shall be allowed unless the assessee obtains the
prescription for such treatment from a neurologist ,an oncologist , a hematologist
,an immunologist or such other specialist , as may be prescribed
Quantum of deduction : actual amount paid or Rs 40,000 whichever is less .However in
case of senior citizens the maximum deduction allowed shall be Rs 1,00,000 instead of
Rs40,000. In other words the actual expenditure incurred or Rs 1,00,000 whichever is
less.
Further any amount received under any insurance from the insurer or reimbursed by an
employer for the medical treatment of a person , the amount so received shall be reduced
from the deduction allowable under this section.
฀ Deduction for interest paid on loan taken for pursuing higher education
[section 80E]
Condition for claiming deduction under this section

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1. This deduction is available to individual assessee
2. The individual must have taken loan from :
● Any financial institution ,or
● Any approved charitable institution .
3. The loan must have been taken for pursuing higher education . such education must
be for assessee himself or any of his relative
4. Deduction shall be allowed only in respect of any sum paid by him , in the previous
year by way of interest on such loan.
5. Such an amount should be paid out of his income chargeable to tax.
Quantum of deduction : the amount paid during the previous year towards interest.
Period of deduction : deduction shall be allowed for 8 assessment years starting from the
assessment year in which the assessee start paying the interest on loan , or until the
interest thereon is paid by the assessee in full , whichever is earlier.
Meaning of higher education : higher education means any course of study pursued
after passing the senior secondary examination or its equivalent from any school , board
or university recognised by the central government or state government or local authority
or by any other authorised by the central government or the state government or local
authority to do so.
Meaning of relative: relative in relation to an individual means the spouse,and the
children of the individual or the student for whom the individual is legal guardian .
฀ Deduction in respect of interest on loan taken for residential house
property[section 80EE]
An individual shall be allowed deduction for any loan taken by an individual from any
financial institution for acquisition of residential property subject to the following
condition being satisfied:
● The loan has been sanctioned by the financial institution during the period
beginning on 1/4/2016 and ending on 31/3/2017
● The amount of loan sanctioned for acquisition of the residential house property does
not exceed Rs 35,00,000.
● The value of residential house property does not exceed 50,00,000.
● The assessee does not own any residential house property on the date of sanction of
loan.
● Where deduction under this section is allowed for any interest ,deduction shall not
be allowed for such interest under any provision of this act for the same or any other
sanction of loan.
Quantum of deduction : the deduction under this section shall not exceed 50,000 .
฀ Deduction in respect of interest on loan taken for certain house property
[section 80EEA]
To whom deduction is allowed : the deduction shall be available to an individual who is
not eligible to claim deduction under section 80EE.

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Purpose for which deduction under this section shall be allowed [section 80EEA(1)]:
the deduction shall be allowed on account of interest payable on loan taken by him from
any financial institution for the purpose of acquisition of a residential house property
provided the conditions mentioned in section in section 80EEA(3) are satisfied.
Quantum of deduction [section 80EEA(2)]: the deduction under section 80EEA(1)
shall not exceed Rs 1,50,000 and shall be allowed in computing the total income of
individuals for the assessment year beginning on 1.4.2020 and subsequent assessment
years.
Condition to be satisfied for claiming deduction under section 80EEA(1) [section 80
EEA(3)]
● The loan has been sanctioned by the financial institution during the period
beginning on 1/4/2019 and ending on 31/3/2022.
● The stamp duty value of residential property does not exceed Rs 45,00,000.
● The assessee does not own any residential property on the date of sanction of loan.
฀ Deduction in respect of purchase of electric vehicle [section 80EEB]
To whom the deduction is allowed: to any individual
Purpose for which deduction under this section is allowed [section 80 EEB(1)] : the
deduction shall be allowed on account of interest payable on loan taken by him from any
financial institution for the purpose of purchase of an electric vehicle provided the
conditions mentioned in section 80 EEB(3) are satisfied.

Quantum of deduction [section 80 EEB (2 ) ]: the deduction under section 80 EEB(1)

shall not exceed Rs 1,50,000 and shall be allowed in computing the total income of the
individual for the assessment year beginning on 1.4.2020 and subsequent assessment
years.
Condition to be satisfied for claiming deduction under section 80 EEB (1) [section
80EEB (3)]: the deduction under section 80 EEB (1) shall be subject to the condition that
the loan has been sanctioned by the financial institution during the period beginning on
1.4.2019 and ending on 31.3.2023.
฀ Deduction in respect of donation to certain funds , charitable institution ,etc
[section 80 G]
● Deduction under this section shall be allowed to all assesses, whether company or
non-company, whether having income under the head ‘profit and gains of business
or profession ‘ or not .
● The donation should be a sum of money. Donations in kind do not qualify for
deduction.
● The donation should be made only to specific funds / institutions.
● No deduction shall be allowed under this section in respect of donation of any sum
exceeding Rs 2,000 unless such sum is paid by any mode other than cash.
● For availing deduction under this section it is obligatory on the part of the assessee
to produce proper proof of payment. Where the payment is not proved by
production of proper receipt, etc the deduction under 80G is not available.

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Some deduction is allowed to the extent of 100% of the donation and in some cases it is
allowed to the extent of 50% of donation.
A. Donation made to following are eligible for 100% deduction without any qualifying
limit:

● National defence fund set up by the central government.

● Prime minister’s national relief fund and PM CARES fund,
● University /educational institution of national eminence approved by the prescribed
authority.
● Maharashtra chief minister ‘s earthquake relief fund ,
● National illness assistance fund
● National sports fund set up by the central government.
● National children fund.
● Swacchh Bharat Kosh set up the central government,
● Clean ganga fund set up by the central government ( in this case donation will be
eligible for deduction only when they are made by a resident assessee.
● The national fund for control of drug abuse(inserted by the finance act, 2015 w.e.f
A.Y 2016-2017)
B. Donations made to the following are eligible for 50% deduction without any
qualifying limit:
● Jawaharlal Nehru memorial trust.
● Prime minister’s drought relief programme.
● Indra Gandhi memorial trust.
● Rajiv Gandhi foundation.
C. Donation to following are eligible for 100% deduction subject to qualifying limit:
● Donation to government or any approved local authority, institution or association
to be utilised for promoting family planning
● Any sum paid by the assessee, being a company , in the previous year as donation to
Indian Olympic association or to any other association or institution established in
India and notified by the central government for-
➔ The development of infrastructure for sports and games, or
➔ The sponsorship of sports and games in India.

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D. Donation to the following are eligible for 50% deduction subject to qualifying limit:
● Donation to government or any approved local authority ,institution or association
to be utilised for any charitable purpose other than family planning.
● To any authority constituted in India by or under any law for satisfying the need for
housing accommodation or for the purpose of planning development or
improvement of cities , towns and villages or for both.
● To any corporation established by the central or any state government specified
under section 10(26BB) for promoting interests of the members of minority
communities.
● Any notified temple, mosque, gurdwara, church or other place notified by the
central government to be historic, archaeological or artistic importance, for
renovation or repair of such place

฀ Deduction in respect of rent paid [section 80GG]

Condition for claiming deduction under this section :
● This deduction is allowed to individuals.
● The individual shall pay rent for his residential accommodation , weather furnished
or unfurnished.
● The individual, his or her spouse or minor child or a HUF of which he/ she is a
member, does not own any residential accommodation at the place where such
assessee ordinarily resides or at a place where he works or carries on his business or
profession .

If assessee i.e. the individual owns any residential accommodation at any place , other
than place of residence or the work of the assessee, then such property should not be
assessed in the hands of the individual as self -occupied property.
● The assessee must file a declaration in form No. 10BA alongwith the return of
income to claim deduction under section 80GG .
Quantum of deduction : the deduction shall be the minimum of the following amounts:
1. Excess of rent paid over 10% of ‘adjusted total income ‘
2. 25% of adjusted total income
3. Rs 5,000 per month.
฀ Deduction in respect of certain donation for scientific research or rural
development [section 80GGA]
Deduction in respect of payment made during the previous year to the following
institution
฀ any sum paid by the assessee in the previous year to a scientific research association
which has as its object the undertaking of scientific research or to a University,
college or other institution to be used for scientific research.

171
฀ to an association or institution, which has as its object the undertaking of any
programme of rural development, to be used for carrying out any programme of
rural development approved for the purposes of section 35CCA; or
฀ to an association or institution which has as its object the training of persons for
implementing programmes of rural development.
Amendment to section 80GGA
In section 80GGA of the Income-tax Act, after subsection (2), the following subsection
shall be inserted with effect from the 1st day of April, 2013, namely:—
"(2A) No deduction shall be allowed under this section in respect of any sum exceeding
ten thousand rupees unless such sum is paid by any mode other than cash.".
Quantum of deduction
100% of the sum paid to the above institution.
฀ Deduction in respect of contribution given by companies to political parties
[section 80GGB]
Any sum contributed by an Indian company in the previous year to any political
party or an electoral trust shall be allowed as deduction while computing its total
income.
฀ Deduction in respect of contribution given by any person to political parties [
section 80GC ]
Any amount of contribution made in previous year to a political party or an
electoral trust by an assessee being any person , exempt local authority and every

artificial judicial person wholly or partly funded by the government shall be allowed
as deduction while computing the total income of such person.
Note:- no deduction shall be allowed in this section in respect of any sum contributed by
the way of cash.
฀ Deduction in respect of royalty income etc, of authors of certain books other
than textbooks [section 80QQB]
Condition for claiming deduction under this section
➔ The deduction is available to individuals who is resident in India and is also the
author of the book.
➔ The book should be a work of literary, artistic or scientific nature.
➔ The income must be derived by him in the exercise of his profession
➔ The income must be either :
● On account of any lump sum consideration for the assignment or grant of any of his
interest in the copyright of such book ,or
● Of royalty or copyright fees (whether receivable in lump sum or otherwise)
Quantum of deduction : 100% of such income or 3,00,000 whichever is less.

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฀ Deduction in respect of royalty on patents [section 80RRB]
Essential condition for claiming deduction under this section
● The deduction is available to individual who is resident in India and is a patentee or
co-patentee
● The patent should be registered under the patents act, 1970.
● His gross total income of the previous year includes royalty in respect of such
patents.
Quantum of deduction : 100% of such royalty income or 3,00,000.
However , where a compulsory licence is granted in respect of any patent under the
Patent Act ,1970, the income by way of royalty for the purpose of allowing deduction
under this section shall not exceed the amount of royalty under the terms and conditions
of licence settled by the controller under that act.
฀ Deduction in respect of interest on deposits in savings accounts to the
maximum extent of Rs 10,000 [ section 80TTA ]
Where the gross total income of an assessee, being an individual (other than a senior
citizen ) or a Hindu undivided family, includes any income by way of interest on deposits
( not being time deposits ) in a savings account with-
1. A banking company to which the banking regulation act,1949 applies (including
any bank or banking institution referred to in section 51 of that act)
2. A co-operative society engaged in carrying on the business of banking ( including a
co- operative land mortgage bank or a co-operative land development bank) or

3. A post office as defined in clause(K) of section 2 of the Indian post office act,1898
A deduction of such interest shall be allowed to the extent of Rs10,000 to an assessee
(other than the assessee referred to in section 80 TTB i.e a senior citizen ) being an
individual or HUF.
฀ Deduction in respect of interest on deposits in case of senior citizen [section 80
TTB ]
1. Senior citizen to be allowed a deduction of Rs 50,000 on account of interest on
deposits [section 80TTB(1)]: where the gross total income of an assessee, being a
senior citizen includes any income by way of interest on deposits with-
A. A banking company to which the banking regulation act,1949 applies (including
any bank or banking institution referred to in section 51 of that act)
B. A co-operative society engaged in carrying on the business of banking ( including a
co- operative land mortgage bank or a co-operative land development bank) or
C. A post office as defined in clause(K) of section 2 of the Indian post office act,1898
There shall be , in accordance with and subject to the provisions of this section , be
allowed , in computing the total income of the assessee , a deduction -

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1) In a case where the amount of such income does not exceed in the aggregate Rs
50,000, the whole of such amount , and
2) In other cases Rs 50,000.
2. No deduction shall be allowed if deposit held in the name of partner/ member
by the firm /AOP [section 80 TTB(2) ]
฀ Deduction in case of a person with disability [ section 80U ]
Essential condition for claiming deduction under this section
1. The assessee is an individual being a resident and is a person with disability .
2. He is certified by the medical authority to be a person with disability , at any time
during the previous.
3. He furnishes a certificate issued by the medical authority in the form and manner ,
as may be prescribed along with the return of income under section 139, in respect
of the assessment year for which the deduction is claimed.
Quantum of deduction: Rs 75,000 in case of a person with disability. And Rs 1,25,000 in
case of a person with severe disability.
Individuals and HUFs can opt for the Existing Tax Regime or the New Tax Regime with
lower rate of taxation (u/s 115 BAC of the Income Tax Act)
The taxpayer opting for concessional rates in the New Tax Regime will not be allowed
certain Exemptions and Deductions (like 80C, 80D,80TTB, HRA) .
Difference between deduction and exemption

Income tax exemptions are provided on particular sources of income and not on the total
income. It can also mean that you do not have to pay any tax for income coming from
that source. For example, income from agriculture is exempted under tax. In addition,
long-term capital gains arising from the sale of a property can be reinvested in a real
estate property or specified bonds within a certain time period to get tax exemption.
Salaried individuals get house rent allowance (HRA) as a component of their salary. This
component can be used to claim tax exemption under certain conditions.
In contrast, income tax deductions can be claimed on the gross total income. Certain
specified investments and expenditure are considered to claim deductions. For example,
investment in specified mutual funds, interest repayment of education loan, and premium
payment for medical insurance can be considered for deductions. Also, salaried taxpayers
can claim a standard deduction of Rs.40,000 from the gross salary. This standard
deduction has been enhanced to Rs.50,000. This reduces their total taxable income and, in
turn, reduces the tax payable.

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