SAVINGS AND RETIREMENT PLANNING

Savings represents an individual’s unspent earnings. Saving is the portion of income not spent on
current expenditures. In other words, it is the money set aside for future use and not spent immediately.

Savings are kept in the form of cash or cash equivalents (e.g. as bank deposits), which are exposed to
no risk of loss but also come with correspondingly minimal returns. Savings can be grown
through investing, which requires that the money be put at risk, however.

Different saving products:

Term deposits:

Term Deposits, popularly known as Fixed Deposit, is an investment instrument in which a lump-sum
sum amount is deposited at an agreed rate of interest for a fixed period of time, ranging from 1 month
to 5 years. Term Deposits can be availed at financial institutions like Banks, Non-Banking Financial
Companies (NBFC), credit unions, post offices and building societies.

Characteristics of Term Deposits

Term Deposits have unique monetary features that have made them popular among the investment
circles. The essential characteristics of term deposits are:

 Fixed rate of interest: The rate of interest for term deposits are fixed and are not subject
to fluctuations in the market.

 Safety of investment: Since interest rates of the term deposit are not affected by the
changes in the economy, it is one of the safest investment options available.

 Preset investment period: The investor has the freedom to choose the tenor of the
investment based on the plans offered by the financial institution. Normally the interest
rate offered by the institution will be higher for a longer tenor. But it is advisable to
compare the interest to tenor ratios before making the investment.
  Interest Payment: The investor has the option to choose to receive the interest income
either on maturity or periodically – monthly, quarterly or yearly.

 Wealth Generation: The stable interest received on the investment ensures that the
investors’ wealth grows even during difficult times in the market.

 Rollover: An investor who does not require their money on the maturity of the term
deposit has an option to roll over the deposit for a fresh term. ‘Rollover’ refers to the
reinvesting of maturity proceeds in a new term deposit and adding on to the interest. So,
an investor doesn’t have to utilize their money as soon as the term deposit matures.

 Penalty on premature withdrawal: Since term deposits come with a fixed tenor, it is
considered ‘locked-in’. If the investor opts to withdraw from the deposit before the lock-
in period ends they are liable to pay a penalty to the financial institution along with
lowered interest income.

 Loan against deposit: If in a contingent situation the investor needs financial liquidity,
they can avail a loan of up to 60-75% of the deposit amount.

 Taxation on interest: Under the Income Tax Act, the interest earned on the deposit is
taxable income and can be subject to a Tax Deducted at the Source (TDS).

 Low investment limit: The lower limit of investment varies as per the financial
institution, but the lower limit is generally Rs 1000. Although, there is no upper limit on
how much can be invested in term deposits.

 Insurance on deposit: Under the RBI regulations, any deposit in a certified bank is
eligible for an insurance cover of up to Rs 1 lakh under the Deposit Insurance and Credit
Guarantee Corporation (DICGC).

Types of term deposits:

 Cumulative and Non-Cumulative deposits: Cumulative term deposit is an option

provided for investors who don’t need regular monetary income from the deposit. Hence,
the interest earned is reinvested into the deposit and paid out as a lump sum at the end of
the tenor. A non-cumulative term deposit is for investors who are looking for a regular
 interest payout. With a non-cumulative term deposit, the interest will be credited in the
investor’s account at regular intervals – monthly, quarterly or yearly.

 Sweep-in facility term deposit: Sweep-in is a feature that financial institutions provide
where the individual can set an upper limit on their savings account. Any amount higher
than that limit will be converted into a term deposit. If the savings account faces deficit
then the funds will be withdrawn from the term deposit with a loss of interest only on the
funds swept in. Sweep-in term deposits usually provide a higher interest rate.

 Short-term and Long-term deposits: These term deposits have been classified based on
the holding period of the investment. A short term deposit has a lock-in period ranging
from 1 to 12 months. Long term deposits have a lock-in period ranging from 1 to 10
years. These deposits provide a higher interest rate than the short term deposits.

 Senior Citizen term deposits: An individual over the age of 60 years is considered a
senior citizen. Most banks or financial institutions provide a higher interest rate on term
deposits for senior citizens. Senior citizens are also eligible for tax-saving term deposits
at some banks.

 Special deposit schemes for children: There are a few special deposits scheme aimed
the welfare of children. ‘Sukanya Samriddhi Account’ launched by the government aims
at improving the financial stability of girl children above the age of 10 years. Different
banks have different schemes focussed on the financial welfare of children

 Post Office Time Deposit: Post offices also provide certain financial services. One such
service is the Post Office Term Deposit. It can either be opened as an individual or joint
account. One can transfer their post office term deposit accounts from one post office to
another or own multiple accounts in the same post office. The minimum limit for the
deposit is Rs.200 and the current interest rate is 7.9% for 5 years. Any deposit for a tenor
longer than 5 years is eligible for the tax benefits prescribed under Section 80C of the
Income Tax Act, 1961.

 Tax-saver term deposits: Tax-saver deposits are eligible for a tax deduction of up to Rs
1.5 lakh under Section 80C of the Income Tax Act. These tax saver term deposits have a
 lock-in period of 5 years and any income above Rs 40,000 is taxable. The usual interest
rates range between 5.5%-7.75%.

NBFC

NBFC fixed deposits, also called corporate FDs or company deposits, are investment avenues offered
by financial companies. In other words, if a bank does not offer an FD scheme, it is offered by a
company and called a corporate FD.

Features of NBFC fixed deposit schemes

 Companies offer these deposit schemes to raise funds for their operation.

 The tenure of the scheme usually ranges between 12 months and 60 months.

 You can earn high interest rates by investing in corporate FD schemes.

 You can opt for either the cumulative FD or non-cumulative FD. Under the cumulative
deposit scheme, the interest earned on your investment is reinvested back into the deposit
account. You get the invested amount and the interest earned in one lump sum on the
scheme’s maturity.

However, under the non-cumulative fixed deposit scheme, the interest that you earn on your deposit is
paid back to you. You can choose to receive this interest income monthly, quarterly, half-yearly, or
annually. On maturity, the amount that you deposited and the last instalment of the interest income is
paid.

So, while the cumulative deposit scheme creates a lump sum corpus, the non-cumulative deposit
scheme gives you regular interest incomes and offers liquidity.

Benefits of fixed deposit in NBFC

NBFC deposit schemes have a lot of benefits to offer investors. These fixed deposit benefits include
the following -

 The most prominent benefit of fixed deposits in NBFC is the attractive interest
rates. Interest rates of fixed deposits in NBFCs offer the best returns on your
investments.
  NBFCs offer flexible tenure options to choose from. You can, thus, plan for both your
short-term and long-term financial needs by investing in corporate FDs.

 Investing in the deposit scheme is quite easy and convenient. You can invest online
within minutes. Moreover, the documentation process is simple, allowing you to open a
deposit account with a limited number of documents.

 According to your investment strategy, you can choose from cumulative and non-
cumulative deposit schemes and either create a corpus for your financial goals, or choose
to receive regular incomes.

 Deposits rated FAAA and MAAA also keep your money secure while offering attractive
returns.

 Senior citizens can enjoy additional interest rates on their investments.

Post office saving schemes:

The Post Office Saving Schemes include several reliable products and offer risk-free returns on
investment. Around 1.54 lakh post offices spread all over the country operate these schemes.

 Post Office Savings Account:

 The minimum deposit to open a post office savings account is Rs 500.
 An interest rate of 4% p.a. is applicable on the deposits in the post office account.
 The domestic customer can open the account in single or joint ownership.
 Individuals can avail up to Rs 10,000 deduction from the total income under Section
80TTA of the Income Tax Act.
 5- years post office recurring deposit Account:
 The tenure of this RD account is fixed for five years.
 You can agree to a fixed monthly deposit payment starting from Rs 100 and earn interest
at 5.8% p.a.
 The interest is compounded quarterly.
 You can get a loan of up to 50% against the deposit available in the account after
completing 12 installments without defaulting.
 Post office term deposit:
 There are four possible tenures for post office time deposit accounts you can choose
from, i.e. 1 year, 2 years, 3 years, and 5 years.
 The minimum deposit allowed in this account is Rs 1,000.The interest is calculated
quarterly but is payable on an annual basis. For a tenure of up to 3 years, the rate is 5.5%
p.a., and for a 5-year term, the rate is 6.7% p.a.
 The investment in the account with five year maturity will qualify for Section 80C
deduction.
 The Post Office TD account can also be pledged as a security to scheduled or cooperative
banks.
 Deposits cannot be withdrawn before the expiry of six months from the date of deposit.

 Post Office Monthly Income Scheme Account (MIS)

 You can deposit a sum of Rs 1,000 up to Rs 4.5 lakh in a single account and up to Rs 9
lakh in a joint account.

 You can earn an interest rate of 6.6% p.a. through this account and get a monthly fixed
income from the scheme.

 You cannot prematurely close the account before completing one year. Premature closure
beyond one year can attract penalties..

 The interest income in post office TD/RD is received at the end of the term but interest
from post office MIS is received monthly during the tenure of scheme.

 Senior Citizen Savings Scheme (SCSS)

 This is a government-backed retirement scheme that allows you to make a lump sum

deposit, i.e., one instalment.

 The deposit can range from Rs 1,000 up to Rs 15 lakh.

 The account can be opened individually or jointly with spouse only.

 The scheme offers an interest rate of 7.4% p.a. The interest is payable quarterly.
  Individuals above the age of 60 are eligible to open this account.

 Retired civilian employees aged between 55 years and 60 years and retired defence

employees aged between 50 years and 60 years can also open the account subject to
investing the retirement benefits within one month from the date of receipt of the
benefits.

 The investment under this scheme qualifies for deduction under Section 80C of the

Income Tax Act.

 15-Year Public Provident Fund Account (PPF)

 Many salaried individuals prefer PPF as an investment and retirement tool as the scheme

offers income tax deductions up to Rs 1.5 lakh per financial year under Section 80C.

 The minimum deposit required to open the account is Rs 500, and the upper limit is Rs

1.5 lakh.

 The account tenure is 15 years from the date of opening the account. You only have to

pay Rs 500 per financial year to keep the account active.

 The scheme offers an interest rate of 7.1% p.a. compounded annually. Also, the interest

earned on this account is tax-free.

 The amount invested in PPF can be claimed as deduction under Section 80C of the

Income Tax Act.

 The investor can extend the account for further five years block

National Savings Certificates (NSC)

 NSC comes with a tenure of five years, where you need to make a minimum deposit of

Rs 1,000.

 There is no maximum deposit defined for this account.

 The interest rate of 6.8% p.a. is compounded annually and paid out only at maturity.

 An individual can open any number of accounts under the scheme.

  The certificate can be pledged or transferred as security to the housing finance company,

banks, government companies, and others.

 The amount deposited in this account qualifies for Section 80C deduction.

 NSC can be pledged as a security with scheduled or co-operative banks.

 Currently National Savings Certificate (VIIIth Issue) is accessible.

Recurring deposits:

A Recurring Deposit (RD) account is an investment tool that allows investors to make regular monthly
investments and save money over a specified period. Investors can choose the tenure of the deposit and
the monthly payment amount based on their convenience. RD schemes are generally more flexible
than fixed deposit schemes and are typically preferred by those who want to start an account to save
money and build a rainy-day fund.

Features of Recurring deposit:

 Recurring Deposit schemes aim to inculcate a regular habit of saving among the public.

 Minimum amount that can be deposited varies from bank to bank. It can be an amount as
small as Rs.10.

 The minimum period of deposit starts at six months and the maximum period of deposit
is ten years.

 The rate of interest is equal to that offered for a Fixed Deposit and is hence higher than
any other Savings scheme.

 Premature and mid-term withdrawals are not allowed by certain banks and NBFCs after
charging a penalty while some don’t allow premature or mid-term withdrawal.

 RD offers the additional benefit of taking loan against the deposit, i.e., by using the
deposit as collateral. About 80 to 90% of the deposit value can be given as loan to the
account holder. It varies lender to lender.
  The Recurring Deposit can be funded periodically through Standing Instructions which
the instructions are given by the customer to the bank to credit the Recurring Deposit
account every month from his/her Savings or Current account.

Types of recurring deposits:

 Regular RD Accounts:

A regular RD account is meant for Indian residents aged 18 years or above. The account allows
the account holders to deposit a fixed sum in the account once every month over a pre-specified
period to earn a fixed interest on the deposit amount. A compound or straightforward interest
method will be used for interest calculation based on the account’s tenure.

 RD Accounts for Minors:

Such accounts will be opened in the name of individuals below the age of 18; however, this is
possible only in their parents or guardians’ supervision. Like the regular RD accounts, a fixed
monthly installment and tenure will be set at the time of opening the account. The returns may be
similar or a little higher as compared to the regular RD accounts.

 RD Accounts for Senior Citizens:

Banks provide dedicated RD accounts for senior citizens, i.e. aged above 60 years. Sometimes,
senior citizens get an additional interest on RD as compared to the regular customers. The
interest gets compounded every quarter.

 NRE/NRO RD Accounts:

Non-Resident Indians (NRIs) can open Non-Resident External (NRE) and Non-Resident
Ordinary (NRO) RD accounts. NRIs can earn a good interest and make savings every month
through such accounts on income earned outside and inside India.
CHIT FUNDS:

A chit fund is both a savings and credit product. It bears a pre-determined value and is of a fixed
duration, mostly two to three years. Each scheme admits a specific number of members whose
monthly contributions adds up to the total value of the chit fund at the end of the term.
 Particulars Recurring Deposit Chit Fund
Purpose Only investment Serves as investment and loan
Type of Investment Safe Risky

Type of returns Fixed returns Returns depend on bidding,

lotteries and
distributable surplus

Guarantee Guaranteed profit Profit or loss

Interest rate Higher rate of interest Relatively lower rate of

interest

Fees No processing charges 5% of the chit fund must be

Government regulation
Taxable income
Governed by terms and
conditions of the bank
No TDS, but the interest
earned is taxable
paid as commission fees to the
organizer every month
Governed by The Chit Funds
Act 1982
Generally non-taxable but
must be declared.

Benefits:
 Hindsight benefit with the 2-in-1 advantage. Start as savings and convert into a borrowing
instrument, if and when required.

 Subscriber has the freedom to use the funds as per will.

 Rate of borrowing interest is Low. Since the chit funds work under the principle of mutuality, you
borrow from your future savings
  Rate of return on savings is high. Risk free when compared to any other financial intermediary.
 Tax-free. Dividend earned in the normal course is exempt From Tax.

Working of chit funds:

 A joins a chit fund worth Rs 60,000, at a monthly subscription fee of Rs 1,000, for 60
months. The scheme will have 60 participants contributing to the ‘pot’.

 At the end of the month comes the auction. Any group member can bid for the pot (worth
Rs 60,000 now).

 A member can bid for the pot at par, minus the 5-7% foreman’s commission. The person
bidding with the ‘deepest cut’ (or discount) gets the pot. But at no point can the bid drop
below 40% of the value of the pot.

Assume member A bids at Rs 1,000 discount while B and C stake claim at Rs 800 and Rs
600 respectively.

Being the bidder with ‘deepest cut’, A wins the pot. The foreman pays A Rs 59,000, after
deducting Rs 1,000 (the discount) from the pot value. The Rs 1,000, deducted from A’s
payout, is divided among other members of the group.

A has to continue paying his subscription fee of Rs 1,000 for the remaining months.

By calling money early, and at Rs 1,000 discount, a benefits from timely receipt of funds.

A will also get dividends if other members bid at heavier discounts for the pot in
subsequent months.

Members who do not borrow from the ‘pot’ benefit from dividend accruals; they may
earn 7-10% on their investments.

Mutual funds:

A mutual fund is a professionally-managed investment scheme, usually run by an asset management

company that brings together a group of people and invests their money in stocks, bonds and other
securities.

Mutual funds are operated by professional money managers, who allocate the fund's assets and attempt
to produce capital gains or income for the fund's investors. A mutual fund's portfolio is structured and
maintained to match the investment objectives stated in its prospectus.
A systematic Investment Plan, commonly referred to as an SIP, allows you to invest a small sum
regularly in your preferred mutual fund scheme. By activating an SIP, a fixed amount is deducted from
your bank account every month, which gets invested in the mutual fund of your choice.

Unlike a lump sum investment, you spread your investment over time with an SIP. Therefore, you
don’t need to have a large amount of money to get started with your mutual fund investment through
SIPs. By investing via an SIP, you are forced to set aside a sum at regular intervals, which help you
instill a sense of financial discipline in the long run.

Working of SIP:

Every time you invest in a mutual fund scheme through an SIP, you purchase a certain number of fund
units corresponding to the amount you invested. You don’t need to time the markets when investing
through an SIP as you benefit from both bullish and bearish market trends.

When the markets are down, you purchase more fund units while you purchase fewer units when the
markets are surging. Since NAV of all mutual funds are updated on a daily basis, the cost of purchase
may vary from one SIP installment to another. Over time, the cost of purchase averages out and turns
out to be on the lower side. This is known as rupee cost averaging. This benefit is not available when
you invest a lump sum.

Rupee cost averaging helps us to minimize this guessing game. In the rupee cost averaging
approach, you invest a fixed amount of money at regular intervals irrespective of whether the markets
are going high or low.
ELSS: (Equity linked saving scheme)

The ELSS Funds or Equity Linked Saving Schemes make it possible for people to save huge money on
their tax payments while incurring profit through equities at the same time. There are takers for ELSS
Funds by people of every age group and in every profession.

ELSS is the tax savings option available to the investors under the mutual funds category. These funds
are equity oriented schemes that provide the benefit of tax deduction to the investors under Section
80C of the Income Tax Act, 1961. The maximum deduction available under this category is Rs 1,
50,000 for every financial year. These funds come with a minimum lock-in period of 3 years.
Equity Linked Savings Scheme or ELSS is fast emerging as a popular investment to save tax. It helps
you get the twin benefits of wealth creation and tax saving in one investment. Investors prefer ELSS as
it is one of the few options under Section 80C, which invests in equity instruments.

ELSS invests at least 80% of total assets in equity and equity-related investments which can offer
inflation-beating returns over time. ELSS has a tax advantage that helps you save tax and build wealth
over time. ELSS has a tax advantage that helps you save tax and build wealth over time.

ELSS is more liquid than other tax-saving investments under Section 80C as it has the shortest lock-in
period of three years.

Experts believe that equity investments will out beat most fixed-income investments over three to five
years with stock markets at current levels. Moreover, it is tax-efficient compared to many fixed-
income investments except those qualifying for the EEE tax regime. Investing in ELSS through the
SIP minimizes the impact of market volatility as you avoid timing the stock market.

Investors, who stay with equity investments, including ELSS for the long term, benefit from the power
of compounding. As equity investors earn a return on the principal amount and the returns made over
time, they reach financial goals faster. You must invest in ELSS as early as possible and stay invested
for the long term to build wealth while gaining from tax savings.

Equity investments are volatile over the short run but generate wealth over time. Experts recommend
that you stay invested in ELSS for five or more years to maximize your returns.

You must pick an appropriate ELSS based on your risk tolerance as these schemes invest in mid-cap
and small-cap stocks. It would help if you chose an ELSS with a lower expense ratio than peers to
increase overall returns over time.

PPF (Public provident fund):

The Public Provident Fund (PPF) is a savings-cum-tax-saving instrument in India, introduced by the
National Savings Institute of the Ministry of Finance in 1968. The main objective of the scheme is to
mobilize small savings by offering an investment with reasonable returns combined with income tax
benefits. The scheme is fully guaranteed by the Central Government.
Importance:

 PPF account is one of the best investment options for individuals who have a low-risk
appetite.

 PPF is a government-backed scheme, and the investment is also not market-linked. Due
to this, it offers guaranteed returns to protect the investment needs of many people.

 As the returns from PPF accounts are fixed, they are used as a diversification tool for the
investor’s portfolio. Additionally, they also offer tax-saving benefits.

Various tax benefits of Public provident fund:

Exempt-exempt-exempt tax status

The Public Provident Fund (PPF) gets triple exemption when it comes to income tax, not many
investments have this benefit. You get tax exemption at the time of investment, accrual and
withdrawal. It offers up to Rs 1.5 lakh deduction on investment made in each financial year under
section 80C of the Income-tax Act, 1961. The interest earned each year is also tax-exempt. Finally, the
accumulated corpus that you withdraw upon maturity is also exempt from tax, thus making it tax-free
income.

A very high interest earner in the fixed income category

Although the Employees’ Provident Fund (EPF) currently offers the highest interest rate, PPF interest
rate doesn't fall too far behind. EPF is offering 8.5% as of now. However, only salaried individuals can
avail of this investment option. PPF, on the other hand, is a product in which even self-employed
people can invest. The current interest rate on PPF is 7.1%, which is higher than that offered on other
small savings schemes like the National Savings Certificate, Post Office 5-year Time Deposit and
more.

Suitable in a low interest rate regime

Floating rate is among the many reasons why PPF scores over products like the 5-year tax-saving bank
FD. Unlike fixed deposits, where the interest rate is fixed for the entire investment period, the interest
rate of PPF is floating which can change every quarter. Once the overall interest rate in the economy
starts increasing, the interest rate on PPF will also rise in tandem and your investment will start
fetching higher returns.

Tax haven for the risk-averse

For a conservative investor looking to lower tax outgo along with assured returns and safety of
investment, then PPF is one of the best options. At present, almost all banks are offering interest rates
on their 5-year tax saving FDs that are lower than that offered by PPF. Although small savings
schemes such as the Sukanya Samriddhi Yojana (SSY) and Senior Citizen Savings Scheme (SCSS)
offer higher interest rates, these have designated purposes due to which only a select set of investors
can invest in them.

Enjoys the benefit of compounding

If you have enough time before you reach your goals or are young, the power of compounding can
work wonders for your investment. A PPF account matures in 15 years. After maturity, you can either
withdraw the entire balance and close the account or extend it for five years with or without making
further contributions. Even this extension in blocks of five years can be carried out indefinitely.

Even aggressive investors can leverage it

Investor with high risk appetites can also keep a part of their investments in debt products to diversify
their investment portfolios. If the investment is for a long-term goal, then PPF is a great option because
it gives the desired stability and optimum returns in the debt portion of the portfolio. It can thus help
cushion adverse impact of the equity portion in the long term.

A must for HNIs

For most taxpayers in the highest income tax bracket, section 80C benefit may not be relevant because
they have other avenues to utilise such as EPF, children’s education fee, home loan principal, term
insurance premium etc. However, the tax exempted nature of returns makes PPF a very attractive
choice, especially when income is subjected to tax at the rate of 30% or more. With PFF, one can build
an entirely tax-free corpus.
Features:

 Tenure: The minimum tenure for a PPF account is 15 years. However, the investor has an
option to extend the duration by a block of 5 years.
 Eligibility: Indian Citizens can open a PPF account. However, Non-Resident Indians (NRIs)
and Hindu Undivided Families (HUFs) cannot open a PPF account.
 Number of Accounts: Each individual can have only one PPF account. However, they can open
another account on behalf of a minor.
 Minimum and maximum investment amount: A PPF account can be opened with INR 100.
Also, in a year, the minimum investment amount is INR 500.
 Deposit frequency: The deposit frequency has to be either once a year or in a maximum of 12
installments in a year. It is mandatory to make at least one deposit into the PPF account for 15
years to keep the account active.
 Mode of deposit: Deposits into PPF Scheme can be made through online, demand draft, cheque
or cash.
 Risk: The Government of India backs the Public Provident Fund PPF. Therefore, it is one of
the safest investment options available to individuals. PPF offers guaranteed and risk-free
returns.
 Nomination: The investor has an option to nominate a nominee for their account. They can do
it either at the time of opening the PPF account or subsequently.
 Loan: Investors can avail a loan against their PPF account. However, they can avail the loan
between the third and the fifth year. The loan amount cannot exceed 25% of the investments
made at the end of the second financial year.

National pension Scheme:

The National Pension System (NPS) is an Indian federal government-sponsored pension cum
investment scheme aimed at protecting the citizens of India as they reach their old age.

It is a pure retirement pension plan, in which you can get a stable income with tax benefits after your
retirement, and with a little optional risk one can increase the returns to a great extent.
The NPS is a low-cost pension product, which is professionally managed by pension funds regulated
by the central government’s Pension Fund Regulatory and Development Authority of India.

Features and Benefits of NPS

Some of the features and benefits of investing in NPS are:

 Simple application process: The application process is very simple. All you have to do
is open an account following which you will get a Permanent Retirement Account
Number (PRAN) which they you can use for viewing your account and making
contributions.

 Attractive Interest Rates: The interest rate ranges between 8% to 12% p.a. and can
yield better returns than PPF and other small savings schemes.

 Tax Benefits: You can get tax benefits of up to Rs.2 lakh and more on your investment.
However, Tier II accounts are exempted from any tax benefit.

 Transparent: You will know in which kind of funds your money is being invested in
and the return you will gain.

 Portable in nature: Your PRAN is a unique number and hence it will not change even if
you resign from your current job and get a new one or if you are transferred to another
place.

 Completely safe to invest in NPS: It is completely safe to invest in NPS as all the
contributions and investments are monitored by Pension Fund Regulatory and
Development Authority (PFRDA).

 Dual benefit of compounding effect and low cost: As you invest in NPS, you
accumulate wealth until your retirement. Not only that, charges for maintaining your
account is also very low.

There are two types of NPS accounts - Tier I and Tier II. While NPS Tier I is well-suited for retirement
planning, Tier II NPS accounts act as a voluntary savings account.
NPS Tier1:

NPS Tier 1 account is the most basic form of NPS account, and it comes in different forms namely,

 NPS Government
 NPS Central Government
 NPS Corporate
 NPS All Citizens.

NPS Tier 1 account has a Permanent Retirement Account Number (PRAN). And the tenure of this
account is until the investor reaches the age of 60. Hence the investment has a lock in period until
retirement. The investor can choose to extend the investment until the age of 70. Upon maturity, the
investor can withdraw 60% of the investment amount in a lump sum. This is entirely tax-free. The rest
40% has to be used to purchase an annuity. The income from an annuity is taxable in the year of
receipt as per the individual’s income tax slab rate.

During the tenure of the investment, the investor has to make regular contributions every year. The
minimum investment to be made to keep the account active is INR 500. The investor also can partially
withdraw the investment or opt for a premature exit as per the applicable rules.

NPS tier 2:

The NPS Tier II is a voluntary account that can be opened only if you have a Tier I account. When
opening an NPS Tier II account, you are required to make a minimum contribution of Rs 1,000.
However, there is no mandatory annual contribution requirement in a Tier II NPS account, unlike a
Tier I account where a subscriber must contribute a minimum of Rs 1,000 each year.

Interest Rate on NPS

Unlike other government-backed schemes such as Public Provident Fund (PPF), the returns on NPS
are not fixed. The returns on NPS varies as the individuals will have to choose their preferred fund
house. Therefore, the returns vary across the fund houses. There are eight fund houses that the
investors can choose from and they are: SBI Pension Fund, UTI Retirement Solutions Pension Fund,
DSP Blackrock Pension Fund, ICICI Prudential Pension Fund, Reliance Capital Pension Fund, LIC
Pension Fund, HDFC Pension Management Company, and Kotak Mahindra Pension Fund. If the
applicant does not choose the fund house, then the SBI Pension Fund will be chosen as default.
NPS Rate of interest for NPS Tier1:

Pension Fund Managers 1-year Returns (%) 3-year Returns (%) 5-year Returns (%)

HDFC Pension Fund 9.56% 14.72% 11.90%

Reliance Pension Fund 9.15% 12.05% 10.32%

Kotak Mahindra PF 9.28% 13.00% 11.12%

ICICI Pension Fund 9.30% 13.11% 11.12%

UTI Retirement Solutions 8.77% 13.50% 11.85%

Aditya Birla Pension Fund 7.12% NA NA

LIC Pension Fund 8.13% 11.86% 10.22%

SBI Pension Fund 9.73% 13.49% 11.38%

NPS Rate of interest for NPS Tier 2:

Pension Fund Managers 1-year Returns (%) 3-year Returns (%) 5-year Returns (%)

HDFC Pension Fund 9.47% 14.87% 11.50%

UTI Retirement Solutions 9.39% 13.66% 11.96%

ICICI Pension Fund 9.32% 13.16% 11.14%

LIC Pension Fund 8.51% 11.74% 8.97%

Reliance Pension Fund 8.94% 12.08% 10.32%

Kotak Mahindra PF 9.54% 13.03% 11.12%

SBI Pension Fund 9.71% 13.50% 11.39%

Aditya Birla Pension Fund 6.61% NA NA

Nominal interest rates:

The nominal interest rate refers to the rate of interest before adjusting for inflation. It also refers to the
rate specified in the loan contract without adjusting for compounding. The nominal interest rate is in
contrast to the real interest rate regarding the inflation adjustment and effective interest rate regarding
the compounding adjustment.

Nominal interest rates can be impacted by different factors, including the demand and supply of
money, the action of the federal government, the monetary policy of the central bank, and many others.

Central banks implement the short-term nominal interest rate as a tool of monetary policy. During an
economic recession, the nominal rate is lowered to stimulate economic activities. During inflationary
periods, the nominal rate is raised.

Real interest rates:

A real interest rate is an interest rate that has been adjusted to remove the effects of inflation. Once
adjusted, it reflects the real cost of funds to a borrower and the real yield to a lender or to an investor.

It can easily be calculated by subtracting the actual or expected inflation rate from the rate of interest
quoted for any saving or investment, also known as the nominal interest rate.

Real Interest Rate = Nominal Interest Rate – Actual or Anticipated Rate of Inflation

REAL INTEREST RATES NOMINAL INTEREST RATES

Meaning

The real rates are accustomed to considering the The nominal interest rate is the least difficult
monetary waves or the financial ripples brought about rate that doesn’t take into consideration
by economic inflation. economic inflation.

Also Known as

The real interest rate is additionally called an actual The other name for the nominal interest rate is
interest rate. the coupon rate.
 Formula

Real Rate = Nominal Rate – Inflation Nominal Rate = Real Rate + Inflation

Economic Inflation

The rate of real interest is fixed in view of levels of The nominal interest rate is fixed without the
economic inflation. impact of economic inflation.

Stability

Adaptability and flexibility are the components of the Strength and stability are the elements of the
real interest rate. nominal interest rate.

Adjustment

The real interest rate can be a negative measure The nominal interest rate can never be a
assuming that specific circumstances prevail. negative measure.

Amount

Typically, the interest is low in the real interest rate. Generally, the interest is high in nominal
interest rate.

Cummulative Returns:

The word cumulative means accumulation. Similarly cumulative fixed deposit means a fixed deposit
where interest is accumulated or collected till the end of the maturity period.

The interest earned in one year or in one cycle is reinvested or added to the previous principal, thus
increasing the principal amount. This, in turn, pumps up the interest. Here the power of compounding
is put to best use. Once your FD matures, you receive the maturity amount which is a total of your
initial deposit amount plus accumulated interest.
 Periodic returns:

Where interest accrued is paid regularly to the depositor. The interest-paying interval can vary from
monthly to quarterly and seldom, to semi-annually.

This type of FD offers a regular payout to investors since the interest is not withheld by the bank. It
offers lesser interest as compared to cumulative FD because the power of compounding is not properly
realized.

Cumulative periodic

Definition Interest is accumulated through the Interest is not accumulated

entire FD tenure
Interest Payout Paid on maturity Paid on a monthly, quarterly, half-
yearly, or yearly basis
Income Flow No income during the FD tenure Regular income flow throughout the
tenure
Reinvestment Yes No
Depositor earns interest on interest Since the interest in paid out, there
This leads to higher interest than is no reinvestment option here
periodic returns Total interest is slightly lesser than
the cumulative option
Suitable for Salaried people or those with stable Retirees, housewives, and
profits freelancers

Fixed vs floating rate:(floating rate is also known as flexible rate)

There are various types of exchange rates that are prevalent in the market, but the most commonly
used exchange rate systems are fixed exchange rate and flexible exchange rate systems.

Fixed exchange rate system is referred to as the exchange system where the exchange rate is fixed by
the government or any monetary authority. It is not determined by the market forces.

Flexible exchange rate system is the exchange system where the exchange rate is dependent upon the
supply and demand of money in the market.

In a flexible exchange rate system, the value of the currency is allowed to fluctuate freely as per the
changes in the demand and supply of the foreign exchange.
 Fixed Rate Flexible Exchange Rate

Definition

Fixed rate is the system where the government Flexible exchange rate is the system which is
decides the exchange rate dependent on the demand and supply of the
currency in the market

Deciding authority

Fixed rate is determined by the central Flexible rate is determined by demand and
government supply forces

Impact on Currency

Currency is devalued and if any changes take Currency appreciates and depreciates in a
place in the currency, it is revalued. flexible exchange rate

Involvement of Government Bank

Government bank determines the rate of No such involvement of government bank

exchange

Need for maintaining foreign reserve

Foreign reserves need to be maintained No need for maintaining foreign reserve

Impact on BOP (Balance of Payment)

Can cause deficit in BOP that cannot be Deficit or surplus in BOP is automatically
adjusted corrected

Risk-Return trade off:

Risk-Return Tradeoff is the relationship between the risk of investing in a financial market
instrument and expecting the potential return from the same. It is said that level of return to be
earned from an investment should increase as the level of risk goes up. Conversely, this means
that investors will be less likely to pay a high price for investments that have a low risk level,
such as high-grade corporate or government bonds.

Different investors will have different tolerances for the level of risk they are willing to accept,
so that some will readily invest in low-return investments because there individual risk tolerance
 level. Others have a higher risk tolerance and so will buy riskier investments in pursuit of a
higher return, despite the risk of losing their investments. Some investors develop a portfolio of
low-risk, low-return investments and higher-risk, higher-return investments in hopes of
achieving a more balanced risk-return trade-off.

Low risk or low returns:

At this point the graph indicates the low risk financial instruments such as government bonds, due to
its non speculative nature of bond, they have low returns compare to the corporate bonds. Therefore
returns on the government bond are considered to be risk free rate.

High risk or high potential returns:

As we move along the upward sloping line in the graph, the risk rises, and so does the potential return.
As the investors is parting with their money for riskier assets in return for better returns than risk-free
security. This is the reason why the bonds issued by governments and corporations for the same
duration has different yields as corporate bonds. There is also a default risk priced into them, which is
not the case with federal bonds.

The greater the risk, the greater the expected return. Financial decisions of a firm are guided by
the risk-return trade off. The relationship between risk and return is expressed as
 Return= Risk free rate + Risk premium

Standard Deviation

The standard deviation can help investors quantify how risky an investment is and determine their
minimum required return on the investment.

It is one of the simplest measurements of risk, which measures the deviance of returns from its mean
over a given period of time. Risk can be considered to be the appetite for taking losses. A higher
standard deviation indicates increased risk in an investment which signals that there are higher chances
of losing one’s capital in the investment.

 Ri – the return observed in one period (one observation in the data set)

 Ravg – the arithmetic mean of the returns observed

 n – the number of observations in the dataset

Retirement planning:

Retirement planning means preparing for a steady stream of money after retirement. It entails setting
aside funds and investing specifically with that goal in mind. Your retirement strategy will depend on
your final goal, income, and your age.
Financial responsibilities:

Personal Financial Responsibility addresses the identification and management of personal financial
resources to meet the financial needs and wants of individuals and families, considering a broad range
of economic, social, cultural, technological, environmental, and maintenance factors. This course helps
students build skills in financial responsibility and decision making; analyze personal standards, needs,
wants, and goals; identify sources of income, saving and investing; understand banking, budgeting,
recordkeeping and managing risk, insurance and credit card debt.

Importance of financial responsibility:

 Time Frame: When you are starting out in life, it’s a good idea to understand how money
works. The earlier you start to save, the more compound interest works in your favor. You earn
interest on top of interest.
 Effects: Make sure you pay yourself first out of every paycheck. Strive to save 10 percent of
your savings. If this amount is too difficult, start at a lower percent and work your way up.
 Benefits: Many people have a substantial amount of credit card debt. Credit cards should be
used for convenience and emergency purposes only. If you can pay off the balance when you
receive your statement, you can keep from accumulating debt and paying finance charges.
 Planning: Talk with a financial planner or adviser and try to find ways to make your money
grow and work for you. There are a number of avenues for investing you can explore.
 Prevention/Solution: Avoid the spur-of-the-moment expensive purchases, especially if you
think it may be difficult for you to make monthly payments. Understand the distinction
between needs and wants or necessities and luxuries.
 Warning: When you don’t exercise financial responsibility, some of the difficulties you could
encounter in life are bankruptcy, consumer credit counseling, collection agencies, collection
accounts, eviction, legal action, judgments and foreclosure. Some people need to work well
beyond their retirement years because of no financial discipline.

Basics of financial responsibilities:

 1. Plan Ahead: Circumstances change as you go through different stages of life. Your
financial needs as a student living at university are completely different than a parent of
two! But while you’re in one stage, it doesn’t hurt to keep looking forward! There’s a
reason they say “when you fail to plan, you plan to fail”. If you’re not planning ahead
financially, it’s harder to succeed.
2. Ask Questions: Nobody expects you to have financial responsibility mastered, no
matter what age you are! It’s something people have to constantly learn, so make sure
to ask questions about it. How much of your paycheck should you save? What type of
account should emergency savings go into? How much should you put into an RESP for
your kids? These are all important questions to ask about finances – and the more you
ask, the more you’ll know.
3. Make a Budget: Being financially responsible doesn’t mean no eating out, trips, or big
purchases, it just means properly saving for these things so you can enjoy them –
without a maxed out credit card!

Creating a budget will help you feel more in control of your finances while saving for those fun
purchases. If you’re not sure where to start, here are some simple steps to create your own
budget

 Figure out your net income: How much are you bringing in each month? That’s
where you’ll start your budget. Make sure you account for taxes or other
deductions so your budget isn’t made guessing too high a number.
 Track what you spend: Give yourself a month to track where you’re spending
money normally. This will help you gauge what you have to include in your
budget
 Set some financial goals: Set some for the short-term and long-term – having
achievable short-term goals is key to sticking to your budget. Those small wins –
like putting aside enough for a weekend getaway – make it easier to stick to your
budget for those longer term ones
 Plan out your budget: Now you know what you spend, where, and what you want
to save for! It’s time to start building out your actual budget. Put numbers to each
budget line you have (like rent, utilities, fun money, groceries, or anything
specific to you) and deduct them from your net income. You’ll also want to add
 deposits to savings or emergency funds to this. Your goal is to balance your
budget and spending by the end of each month!
4. And Know How to Stick to a Budget: A budget is only as good as your ability to stick
to it. When you know how to stick to a budget, you’ll have way more success. But
creating your budget is arguably the easier part of things. Your budget is
your plan. Sticking to it is really taking action towards more financial responsibility.
But this can be hard, especially if you have spending habits you’re used to that you need
to break. Here are some tips on how to stick to a budget:

 Remember your budget isn’t set in stone: If after a month you realize your budget
really isn’t working, revisit it!

 Set small rewards – within your price range, of course: Stick to your budget for a
week? Treat yourself to something fun (within your fun budget!). Or put aside a certain
amount of money each week to put towards something you don’t need but definitely
want. Everything is more fun when it’s incentivized!

 Talk to your friends about it: It’s easy to get caught up in spending, especially on
activities with friends. Be honest with your friends about your budget so you can all do
activities within your budget. Nobody feels left out and you don’t feel pressured to spend
more!

5. Be Smart with Credit Card Use: Credit card use is a double edged sword. When used
responsibly, they can be a wonderful financial tool. If used recklessly, credit card debt
can be crippling. But for most, credit cards are the norm, so it’s important to be
intentional about how you use them.
 Use your credit card for needs, not for wants:
 Get a rewards card:

 Pay off your balance

 Stay under 30% of your limit

BUCKET LIST:

The retirement bucket strategy is an investment approach that segregates your sources of income into
three buckets. Each of these buckets has a defined purpose based on the when the money is for:
immediate (short-term), intermediate and long-term.

The Immediate Bucket

Cash and other liquid investments are in the immediate, or short-term, bucket. These investments
include short-duration CDs, T-bills, high-yield savings accounts and other similar assets. You’ll fill this
bucket with investments that are liquid, meaning they’re easily converted into cash. While earning
interest on this money is appealing, the main focus is on reducing risk and ensuring that the money is
there whenever you need it.

The Intermediate Bucket

This middle bucket covers expenses from 3Y to 10Y of retirement. Money in the intermediate bucket
money should continue to grow to keep pace with inflation. However, you’ll want to avoid investing in
high-risk assets.

Common intermediate investments include longer-maturity bonds and CDs, preferred stocks,
convertible bonds, growth and income funds, utility stocks, REITs and more. Working with a financial
professional can help you determine the investments that will meet your investing goals.

The Long-Term Bucket

Long-term investments are historical stock market returns. These assets grow your nest egg more than
inflation, while also allowing you to refill your immediate and intermediate buckets. Long-term bucket
investments are invested in riskier assets that may be volatile in the short-term, but have growth
potential over 10 years or more.

With the retirement bucket strategy, your long-term bucket should have a diversified portfolio of
stocks and related assets. It should be allocated across domestic and international investments ranging
from small-cap to large-cap stocks.
A list of things that one has not done before but wants to do before dying is called bucket list. It could
be beneficial to plan for your retirement by creating a bucket list. For those who aren’t in the know,
a bucket list is a list of things you want to accomplish.

Importance of bucket list:

It's important to have a bucket list because this is a list of life goals you would like to accomplish.
Through the months, years, or your entire life it gives you something to look forward to working on, or
a place to turn when you're feeling like you need direction. When you get to cross something off of
your bucket list because you've completed it, you'll get a great sense of accomplishment along with a
collection of memories to go along with that task.

A bucket list helps you focus on the things you'd like to do; those things that give you a jolt of
excitement and push you to dig deep and go further. This can be true of smaller tasks related to your
hobby or lifestyle, or bigger tasks like planning a trip, visiting a new place, or completing a life goal.
The bucket list is also important because it gives you a target to reach for when things get a little tricky
or overwhelming. It can be difficult to plan an international vacation or any pilgrimage, but knowing
that you'll get to see the sights you've been dreaming of, enjoy the food and culture of another place,
and that you'll have these memories for life, can help push you to sort out the problems, issues, or
obstacles that are in your way.

Goals can motivate us to accomplish things both great and small. However, these goals need to be
coupled with practical plans for achieving them. A bucket list can also be considered as an attempt to
make one's life meaningful and fulfilled.
 BASIS FOR WILL TRUST
COMPARISON

Meaning A will contain a declaration of A trust is a legal arrangement, in

the testator, regarding the which the trust or authorizes a trustee
management and distribution of to manage the transferred asset for the
his personal estate. sake of beneficiary.

Document Will Trust deed

Covers All the assets of testator's estate. Specific asset, as stated in the deed.

Effective On the demise of the testator. On the transfer of asset to the trustee.

Probate The will goes through probate. The trust does not go through probate.

Revocation Anytime before the death of the Depends on the type of trust.
testator.

Publicized Yes, on the death of the owner. No, it is kept private.

Health care:

Health care can be one of the biggest expenses a person faces in retirement. Your overall
retirement budget depends on two things: How much money will be coming in each month and the
total cost of your expenses.

Only 51% of adults age 60 and over believe that their retirement savings are on track.

On average, those 65 and older spend $4,185 per month. 4 However, in 2021 Social Security only pays
a maximum monthly benefit of $3,148 for those who retire at full retirement age; the maximum benefit
increases to $3,345 in 2022.

It is important to recognize that Social Security is only meant to supplement retirement savings:
The Social Security Administration (SSA) reports that Social Security replaces an average of 40% of
pre-retirement income.

The point remains, though, you're probably going to have to look beyond Social Security and into
other sources to cover medical expenses. How much retirement income to budget for health care
depends largely on your age and overall health. “The healthier we are going into retirement typically
means that less money will be allocated toward health care expenses

Reverse Mortgage:

A reverse mortgage loan, like a traditional mortgage, allows homeowners to borrow money using their
home as security for the loan. Also like a traditional mortgage, when you take out a reverse mortgage
loan, the title to your home remains in your name. However, unlike a traditional mortgage, with a
reverse mortgage loan, borrowers don’t make monthly mortgage payments. The loan is repaid when
the borrower no longer lives in the home. Interest and fees are added to the loan balance each month
and the balance grows. With a reverse mortgage loan, homeowners are required to pay property taxes
and homeowners insurance, use the property as their principal residence, and keep their house in good
condition.

With a reverse mortgage loan, the amount the homeowner owes to the lender goes up–not down–over
time. This is because interest and fees are added to the loan balance each month. As your loan balance
increases, your home equity decreases.

A reverse mortgage loan is not free money. It is a loan where borrowed money + interest + fees each
month = rising loan balance. The homeowners or their heirs will eventually have to pay back the loan,
usually by selling the home.

Types of reverse mortgage:

1. Proprietary reverse mortgage loans

2. Single purpose reverse mortgage loan
3. Insured by the federal housing administration

1. Proprietary reverse mortgage loan:

These are not insured with federal housing administration. It is typically designed for the borrowers
with high home values. Rather than being backed by the federal government, proprietary reverse
mortgages are backed by private lenders.
 Because proprietary reverse mortgages are not federally insured, they do not have up-front or
monthly mortgage insurance premiums (MIPs). This means that you can probably borrow more.
Whether this makes it better than an HECM depends on the lender’s interest rate and how much
they’re willing to advance based on the home’s value to compensate for the lack of mortgage
insurance.

2. Single purpose reverse mortgage:

Single-purpose reverse mortgages are the least expensive reverse mortgages, since their proceeds
can only be used for a single, agreed upon use. They are sometimes offered by state or local
government agencies or nonprofit organizations.
This kind of loan is the least common among the three types and isn’t available in every state. It
works a little differently from home equity loans, which can be used for any purpose. Single-
purpose reverse mortgage lenders restrict how the proceeds can be used. As the name implies,
homeowners can only use them for a single, lender-approved item, such as necessary repairs to the
home or property taxes.

3. Federal housing insured (or) home equity conversion mortgage:

Home Equity Conversion Mortgages (HECMs) are the most common reverse home loans.
These federally insured loans allow borrowers who meet age and home-equity requirements to
pull money out of their residences – the higher the property value, the larger the payment can
be. Unlike a conventional 15-or-30-year mortgage, there are generally no income requirements
for qualifying for a HECM. Money derived from a HECM can be used for any purpose.
Benefits:

Power of attorney:

Power of Attorney, or POA, is a legal document giving an attorney-in-charge or legal agent the
authority to act on behalf of the principal. The attorney in charge possesses broad or limited authority
to act on behalf of the principal. The agent can make decisions regarding medical care, financial
matters, or property on behalf of the principal.

A power of attorney comes into play in the event that the principal is incapacitated by an illness or
disability. The agent may also act on behalf of the principal in case the person is not readily available
to sign off on financial or legal transactions.

The power of attorney lapses when the creator dies, revokes it, or when it is invalidated by a court of
law. A POA also ends when the creator divorces a spouse charged with a power of attorney or when an
agent is not able to continue carrying out outlined duties.

Types:

1. General Power: A general power of attorney allows the agent to act on behalf of the principal in
any matters, as allowed by state laws. The agent under such an agreement may be authorized to
handle bank accounts, sign checks, sell property, manage assets, and file taxes for the principal.
2. Limited Powers: A limited power of attorney gives the agent the power to act on behalf of the
principal in specific matters or events. It might explicitly state that the agent is only allowed to
manage the principal's retirement accounts. A limited power of attorney may be in effect for a
specific period.

3. Durable Power of Attorney: The durable type of power of attorney is only effective during the
period a person wished to get someone else act on his or her behalf. A non-durable POA will end
the moment it is revoked or when the expiration date specified arrives.

4. Medical or Healthcare Power of Attorney: If the principal becomes very ill, he or she reserves the
right to decide the quality of care preferred. Medical or health care POA authorizes the agent to
make decisions on behalf of the principal in case of a life-threatening illness. Most health POAs
fall under the durable kind because they take into consideration the fact that the principal may be
too sick to make their own decisions.

Property management:

Property management is the supervision of residential, commercial, and industrial properties, including
apartments, detached houses, condominium units, and shopping centers. It typically involves
administering property owned by another party or entity. On behalf of the lender, the property
manager works to protect the integrity of the property while producing revenue.

The number of responsibilities a property manager has is entirely dependent upon what's stipulated in
the contract between them and the landlord. Whereas some landlords may only want a property
manager to collect rent, others may want a property manager to handle all aspects concerning their
property. Here is a list of various property management responsibilities:
1. Understanding landlord-tenant laws and regulations
2. Handling maintenance requests and repairs
3. Marketing properties
4. Managing tenants
5. Managing rent
6. Supervising other employees
7. Managing the budget
8. Handling taxes
Owners pay property managers a fee or a percentage of the rent generated by a property while it is
under their management. Landlords hire property management firms for a variety of reasons. Some
may have multiple rental properties in their portfolios and lack the time or expertise to maintain the
properties and deal with individual tenants. Some owners only have an interest in owning rental
properties and earning profits from them. When this is the case, they hire professional property
managers.
Property management licensing requirements vary by state. Most states require property management
companies to be licensed by the local real estate board, so property owners need to make sure that the
firms they hire are properly licensed.

Gift:
A gift is property, money, or assets that one person gives to another while receiving nothing or less
than fair market value (FMV) in return. Under certain circumstances, the Internal Revenue Service
(IRS ) collects a tax on gifts. Transfers of money or property that are given freely or exchanged for less
than market value may be subject to the gift tax if the donor has exceeded the annual or lifetime gift
exemption.
A gift differs from other types of financial vehicles, such as investments and loans, because a gift, in
the strict technical definition, does not involve any expectation or obligation of repayment or a profit in
return. A gift in its purest sense is given as a philanthropic gesture or an act of generosity. A gift can
also be given to a charitable organization so the donor can benefit from tax deductions.

If you receive a gift, you generally aren't required to report it as income. The gift-giver is responsible
for paying any tax and filing a gift tax return. Gifts of any amount to
 Spouses
 Political organizations
 Payments of tuition
 Medical expenses on behalf of others, are generally not taxable as gifts.

Giving an individual a gift beyond the gift tax limit in a single year means you have to fill out a gift tax
form when filing your returns, but it doesn't mean you have to pay taxes—unless you've exceeded the
lifetime limit.