CERTIFIED FINANCIAL PLANNER Exam

preparation material

Prepared by : Harminder Garg, CFPCM

IIFC – Indian Institute for Financial Certifications
Chandigarh off : SCF 9, 2nd Floor, Phase 11, Mohali
Delhi off : 17A/32, Karol Bagh, New Delhi
Website : www.iifcedu.in Email Id : info@iifcedu.in

Contact details : 82838 42598, 0172 – 4001566

Version 6 : Aug 2020
 Harminder Garg, CFPCM

Profile

A result-oriented finance professional with proven abilities in financial planning

of clients and training for CFP aspirants. I have worked in corporate sector for 15
years in leading brands like ICICI Securities, HDFC Bank, FPSB India, ICICI Bank in
Mumbai, Delhi & Chandigarh.

I worked with FPSB India (CFP Certification board in India) during 2008-10 in
Knowledge Management dept. I have 7 years rich experience in content writing
& training delivery in ICICI Securities as Zonal Training Manager. I also have Client
relationship management experience as I worked as State Head in ICICI
Securities and Private Banker in HDFC Bank.
I have cleared CFP Certification challenge status exam in “A” Grade in year 2007.
I have done Executive PGDM in finance from IMT Ghaziabad, PG in Financial
Advising from IIBF and NISM Investment Advisor Level 1 (XA), NISM Investment
Advisor Level 2 (XB) & Retirement Advisor module.

I started CFP Challenge status trainings in year 2011 along with my association
in corporate sector. I started IIFC (Indian Institute for Financial Certification) to
provide training for CFP Certification, NISM XA & XB Certification, NISM
Retirement Advisor Certification, IIBF - Advance Wealth Management
Certification.

Email: Info@iifcedu.in www.iifcedu.in Prepared by: Harminder Garg, CFPCM

Till date I have done 18 batches of this workshop and with success strike ratio of 82%, Total
52 candidates cleared CFP Certification exam and achieved Global mark in Financial Planning.

CFP Certification is a mark of excellence granted to individuals who meet the stringent
standards of education, examination, experience and ethics. It is the most prestigious and
internationally accepted Financial Planning qualification with over 1,81,360 CFP Professionals
in 27 territories worldwide. The CFP Certification wins trust and presents opportunities
worldwide.

List of 52 Candidates who Cleared CFP Exam through my workshops

Sr. Name of Candidate Designation Company Name City Name

No.
1 Rishi Jiwan Gupta CEO Wealthways Chandigarh
2 Mukesh Kapri Senior Branch Manager ICICI Securities Delhi
3 Manpreet Singh Brar Relationship Manager SBI Mutual Fund Chandigarh
4 Varun Associate Moody’s Analytics Delhi
5 Dheeraj Ahuja Regional Head ICICI Securities Delhi
6 Ajay Jha Regional Head ICICI Securities Hyderabad
7 Sanjeev Chaudhary VP Yes Bank Delhi
8 Vivek Singh Branch Manager ICICI Securities Noida
9 Ashish Shoundik Sr Cluster Manager ICICI Securities Delhi
10 Rajan Rawat State Head ICICI Securities Delhi
11 Charu Pahuja Director & Business Head Wise Finserv Pvt. Ltd. Noida
12 Ajay Kumar Yadav CEO & CIO Wise Finserv Pvt. Ltd. Noida
13 Mayur Tandon Cluster Collection Manager Fullerton India Credit Delhi
14 Anju Rana IFA Delhi
15 Puneet Khanna Head - Affinity Business Edelweiss General Mumbai
Insurance
16 Paras Chandna Business Analyst CSC Noida
17 Surinder Singh DVP Validus Wealth Delhi
18 Hemant Goyal Chief Manager - Corporate ICICI Bank Gurugram
Finance
19 Shakti Manchanda Founder Parkworth Investment Delhi
Advisor
20 Arun Aggarwal AGM - Corporate Banking ICICI Bank Delhi
21 Shobhit Gupta Branch Manager ICICI Securities Mumbai
22 Ashish Jain Sr Team Leader ICICI Securities Delhi

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Sr. No. Name of Candidate Designation Company Name City Name
23 Charu Malhotra Visiting Faculty Ghaziabad
24 Mamta Kumari IFA & Visiting Faculty Delhi
25 Vivek Bhardwaz GM - Sales Vinsak India Pvt. Ltd. Delhi
26 Bharat Jain Chief Manager -EPC Group ICICI Securities
27 Ajay Anand Zonal Head - Sales Angel Broking Bengaluru
28 Sathish Kumar Investment Consultant DBS Bank Chennai
29 Sagar Gandhi AVP - Research Analyst Future Generali Life Mumbai
Insurance
30 Anindita Sen AVP ICICI Securities Mumbai
31 Kavan Udgiri Regional Head Reliance Securities Hyderabad
32 Piyush Shukla Sr. Manager Chattishgarh rajya gramin Delhi
bank
33 Parul Jaiswal Regional Head - Sales ICOFP Delhi
34 Monica Anand IFA & Visiting Faculty Delhi
35 Iti Tripathi Business Solution NIIT Tecnologies Ltd. Delhi
consultant
36 Rajeev Arora Founder Alpha Creators Ghaziabad
37 Vinay S Chief Manager - Sales ICICI Securities Mumbai
Development
38 Charu Hastir Founder Tikkun Olam FP Services Bengaluru
39 Amit Singhvi Freelance Trainer Udaipur
40 Kishan Vasista Zonal Manager - L&D ICICI Securities Bengaluru
41 Paavan Buch Regional Manager - ICICI Securities Ahmedabad
Financial Planning
42 Yogesh Laad Director - Private Banking HDFC Bank Hyderabad
43 Rajagopal P Director - Products & Visa Mumbai
Innovation
44 Naresh Sabhnani Business Analyst Wipro Jaipur
45 Kamaksha Bhatia Manager - Products HDFC Bank Mumbai
46 Gulzar Maniyar Manager - Financial ICICI Securities Mumbai
Planning
47 Dheer Sheth Equity Advisor ICICI Securities Mumbai
48 Chintan Vora VP 5nance.com Mumbai
49 Charu Kohli Chief Manager - Capability ICICI Bank Mumbai
Enhancement
50 Amitkumar Tulsyan Regional Product Manager ICICI Securities Mumbai
51 Akhil Goel Manager – Equity Advisor ICICI Securities Mumbai
52 Aditya Dhage VP & Sr. Wealth Manager Sanctum WM Mumbai

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In Lockdown period ( Apr-June 2020) 61 candidates registered with us for CFP Certification
training and currently 5 Online Live training batches running on in morning 6.30 am to 8.30
am and evening 7 pm to 9 pm on alternate day basis.

List of 61 Candidates who enrolled with us for coaching of CFP Exam in APR 20 -June 20
Sr.
Name of Candidate Designation Company Name City Name
No.
1 Ashish Arora Founder Wisemate Wealth Panchkula
2 Tejinder Singh Mokha Founder Bachat Guru Chandigarh
3 Vikas Bhattu AVP - Exclusive Banking IndusInd Bank Chandigarh
Finnovative Inv. & IMF
4 Navdeep Jaura Founder Mohali
Pvt.Ltd
Director - Private
5 GAGAN MALIK HDFC Bank Dubai
Banking

6 Shalesh Sharma Cluster Head Nippon India Mutual Fund Delhi

7 Vibho Rai Relationship Manager L & T Mutual Fund Patna

Finbucks Financial
8 Amit Jindal Founder Chandigarh
Services
Channel Head -
9 Ganesh Jha Tata Mutal Fund Delhi
Banking & PCG
10 G B Singh Regional Head SBI Mutual Fund Chandigarh
11 Manpreet Singh Chawla Founder Fair Investments Mohali
DVP - Burgundy
12 Sandeep Kaura Axis Bank Chandigarh
Vertical
Team Head - PWM
13 Rajeev Pamecha ICICI Securities Mumbai
Vertical
14 Akhilesh Tiwari AVP - Wealth Bank of Baroda Vadodra

15 Sudha Ajit Founder Synergy Financial Advisory Mumbai

KGMS Broking & Research

16 Karan Shah Director Ahmedabad
Pvt. Ltd.
17 Vivek kapoor Exclusive RM IndusInd Bank Chandigarh
18 Sahil Jerath AVP Axis Mutual Fund Delhi
Moti Lal Oswal Financial
19 Anuj Kaushik Business Partner Delhi
services
20 Vineet Chaudhary State Head - Punjab ICICI Securities Chandigarh

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List of 61 Candidates who enrolled with us for coaching of CFP Exam in APR 20 -June 20

Sr.
Name of Candidate Designation Company Name City Name
No.
21 Nikit Sharma AVP Validas Wealth Gurugram
22 Hemendra Kumar Singh VP & National Head Bharti Axa Life Insurance Delhi
23 Vinci kaur Branch Manager Bharti Axa Life Insurance Chandigarh
Piramel Capital & Housing
24 Rittesh Rathi Sr Manager Mumbai
Finance
Nidhi Nivesh Financial
25 Naveen Kumar Founder Meerut
Services
Financial Services Provider
26 Manish Kalra Founder Jalandhar
Firm
27 Gurleen kaur Founder & CEO Hareepati Delhi
28 Sachin Sheth VP ICICI Securities Mumbai
29 Jatin Hura Founder Findependence Solutions Ahmedabad
Tiger Wealth
30 Bhavmit Chandoak CEO & MD Chandigarh
management
31 Rohan Celly VP Bank Of America Gurugram
32 Bablu kumar singh Branch Manager Max Life India Insurance Patna
33 Anand Sabharwal CA Chandigarh
Freelancer Corp0rate
34 Pawan Sharma Chandigarh
Trainer
Financial Services Provider
35 Sumit Sharma Founder Jalandhar
Firm
36 Gurpreet Singh Acquisition Head ICICI Prudential MF Chandigarh
Financial Services Provider
37 Rishu Garg Founder Jalandhar
Firm
38 Mohit Dhall Founder Mohit Enterprises Nawanshahar
Blurock Wealth
39 Devender Goswami Founder Ludhiana
Management
Freelancer Corporate
40 Rohan Brijlal Surat
Trainer
Financial Services Provider
41 Swapnil Founder Indore
Firm

Email : Info@iifcedu.in www.iifcedu.in Prepared by: Harminder Garg, CFPCM

List of 61 Candidates who enrolled with us for coaching of CFP Exam in APR 20 -June 20
Sr.
Name of Candidate Designation Company Name City Name
No.
Investgate Financial
42 Vipin Minocha Founder Chandigarh
Services
43 Mandeep Singh Relationship Manager SBI Mutual Fund Rewari
44 Nidhi Parnami Branch Manager Axis Bank Ludhiana
45 Santosh Mishra Yes First RM Yes Bank Delhi
46 Chirag Joshi Branch Manager Sharekhan Nagpur
47 Neha Narula Relationship Manager Kotak MF Delhi
VP - Retail Asset
48 Sandeep Bali Yes Bank Delhi
opreations
Wealth Plus Financial
49 Shailesh mane Founder Mumbai
Services
50 Pardeep Kumar Relationship Manager SBI Mutual Fund Aligarh
51 Tanuj Sehgal Partner Earning Plus Chandigarh
52 Naveen Kumar Manager Rural Bank Hisar
Financial Services Provider
53 Dhananjay dehotra Founder Pune
Firm
BNP Paribas Wealth
54 Sridhar Sattiraju Director Hyderabad
Management
55 Atul kulkarni Manager LIC India Mumbai
Deeplaxmi n
56 Founder Deeplaxmi Investments Nashik
Gangakhedkar
57 Anubhav awasthi State Head Axis Mutual Fund Dehradoon
58 Satya Kumar Relationship Manager ICICI Bank Ltd Rajkot
59 Samir Desai Founder Desai Investments Dahod
Financial Services Provider
60 Hemant Raheja Partner Jalandhar
Firm
61 Vikas Sagar Team Lead Deutsche Bank Bangalore

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 Table of Contents
Serial no. Topics Page No.
Module 1 Introduction to Personal Financial Planning 1 - 25
Question for Practice 1 to 33 26-36

Module 2 Risk Assessment & Insurance Planning 37-55

Question for Practice 1 to 23 56-63

Module 3 Retirement Planning 64-78

Question for Practice 1 to 30 79-88

Module 4 Investment Planning 89-108

Question for Practice 1 to 22 109-114

Module 5 Income Tax Planning 115-149

Question for Practice 1 to 33 150-160

Module 6 Estate Planning 161 - 169

Question for Practice 1 to 13 170-173

Module 7 Financial Planner Code of Ethics & Professional 174-188

responsibility
Question for Practice 1 to 25 188-195

Additional theory questions 196 -206

CFP Syllabus 207-214

FPSB Sample Roger - with 15 Questions 215-220

Case Studies Urvashi - with 15 Questions 221-227

FPSB Sample Mr. Ashwin – with 7 Questions 228-232

Cases with Mr. Gurpreet – with 8 Questions 233-237
Probable Mrs. Sahanubuti – with 9 Questions 238-242
Questions Mr. Mahesh – with 5 Questions 243-247
Mr. Sanjay – with 6 Questions 248- 252
Goal Seek Questions 253-254

Disclaimer : We have taken Case Studies & CFP Syllabus from FPSB India Website &
Incorporated in this study material to facilitate CFP Students.

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 Phone: +91 91 5271 9562

Email: IndiaCFPStudent@fpsbindia.org

Website: india.fpsb.org

Syllabus & Topic List

CFPCM Certification Program

Financial Planning’s Highest Global Standard

CFPCM, CERTIFIED FINANCIAL PLANNERCM and are certification marks owned outside the U.S.
by Financial Planning Standards Board Ltd. (FPSB).

These Pages extracted from FPSB CFP Syllabus

 About Financial Planning Standards Board Ltd. (FPSB Ltd.)

FPSB Ltd. manages, develops and operates certification, education and related
programs for financial planning organizations to benefit the global community by
establishing, upholding and promoting worldwide professional standards in financial
planning. FPSB demonstrates its commitment to excellence with the marks of
professional distinction – CFP, CERTIFIED FINANCIAL PLANNER and CFP Logo Mark –
which it owns outside the United States. The FPSB global network consists of
organizations in the following 27 territories: Australia, Austria, Brazil, Canada, Chinese
Taipei, Colombia, France, Germany, Hong Kong, India, Indonesia, Ireland, Israel,
Japan, Malaysia, the Netherlands, New Zealand, People’s Republic of China, Peru,
Republic of Korea, Singapore, South Africa, Switzerland, Thailand, Turkey, the United
Kingdom and the United States. At the end of 2018, there were 181,360 CFP
professionals worldwide. For more, visit fpsb.org.

Effective 1 April 2019, FPSB Ltd. has taken over administration of India’s CFP
certification program. From that date forward, all matters and inquiries pertaining to
India's CFP certification program should be directed to FPSB Ltd.

Format of CFPCM Examination

Testing Method: The format of CFPCM examination conducted by FPSB Ltd. is objective
Multiple Choice Questions (MCQ) in a Computer-based Testing (CBT). It has the virtues
of online examination in that candidates can self-schedule date and time slot, test
center of their choice as well as the order in which to appear in individual exams. It is
a server based examination generating a unique set of question items in a specified
arrangement and difficulty grade for each candidate in his/her one or more attempts.
The examination takes place in controlled and secured environment of Exam
Administrator at their specified test centers throughout India. The link for test centers
is:

http://nseindia.com/education/content/testing_center.htm

Exam Duration:
Exam 1 – 4: Two (2) hours each for Exam 1, Exam 2, Exam 3 and Exam 4

Exam 5 ( Advanced Financial Planning or Challenge Status Exam) : Four (4) hours

These Pages extracted from FPSB CFP Syllabus

 Structure of CFPCM Examination

Exam 1 – 4 tests the competency of a candidate in individual components of Financial Planning.

They can be attempted in any order by the candidate. Only after a candidate is successful in all
the component exams, Exam 1 – 4, he/she is eligible to take an attempt at the final exam,
Exam 5. The format followed is objective multiple choice questions which are disjointed for
component exams and intricately linked to Case Studies simulating real life financial situation
of a household towards achieving financial goals. The following table explains the testing
guidance and composition of exams:

Module Name Testing Exam No. of Marks

Exam Composition items Categories $

Module I* Introduction to NA NA NA NA
Financial Planning

Module II Risk Analysis & Exam 1 Module I – 20% 77 1,2,3 & 4

Insurance Planning Module II – 80%

Module III Retirement Planning & Exam 2 Module I – 20% 77 1,2,3 & 4
Employee Benefits Module III – 80%
Module IV Exam 3 77 1,2,3 & 4
Investment Planning
Module I
– 20%
Module IV
– 80%

Module V Tax Planning & Estate Exam 4 Module I – 20% 77 1,2,3 & 4
Planning Module V – 80%
2
Module VI Advanced Financial Exam 5 Case Study # 2,3,4 & 5
Case
Planning format
Studies/
30 items

* Module-I consists of generics of Financial Planning, viz. the Process, Practice Standards,
Professional Conduct, Code of Ethics, etc. apart from Financial Mathematics. This module is
embedded in all component exams, Exam 1 – 4 to the extent of 20% and in the Advanced
Financial Planning exam (Exam 5) to the extent of 14%.

# Other component weights in Advanced Financial Planning Exam: Insurance 18%;

Retirement 16%; Investment 32%; Tax & Estate matters 20%.

$ Marks categories in increasing order signify the complexity and difficulty level of each item
and seek to test in that order the extent of information or knowledge, clarity of concepts,
basic skills, analytical skills, and advanced analytical skills requiring strategy evaluation &
synthesis.

These Pages extracted from FPSB CFP Syllabus

 Pattern of Module VI (Exam 5):

The format of Exam 5: Advanced Financial Planning is the Case Study format where a
candidate would be required to solve a set of 30 question items based on any two of a
set of case studies. The probable case studies will be displayed on FPSB Ltd’s website.
Any two of these case studies would appear (in random selection) for every candidate
who logs in to appear in the examination.

Items per Case Study: 15 / Total Marks per Case Study: 50

Total items Exam 5 : 30 / Total Marks Exam 5 : 100

Exam duration: 4 hours – No Negative Marking

Exam 5: Pattern of Questions in each Case Study

Risk Assessment
Financial Planning Retirement Investment Tax Planning &
& Insurance
& Ethics Planning Planning Estate Planning
Planning

No
Items Marks Items Marks Items Marks Items Marks Marks
Items

2 2 4 1 2 0 0 1 2 1 2

Marks 3 1 3 1 3 1 3 0 0 1 3
Category
4 0 0 1 4 0 0 1 4 0 0

5 0 0 0 0 1 5 2 10 1 5
Total 3 7 3 9 2 8 4 16 3 10

These Pages extracted from FPSB CFP Syllabus

 Detailed Testing of Competency over Various Components:

Each case study would be followed by a set of 15 question items spread over 5 distinct
sections (above matrix) covering various financial planning components. The
distribution of these items over the marks-categories of 2, 3, 4 and 5 marks constitutes
the weights of these components in Advanced Financial Planning. These marks
categories are broadly ordained to signify as follows which are their testing criteria.
Also given alongside is these categories’ total weight per case study.

The complexity and difficulty level of question items from 2-mark to 5-mark items
would also involve time consumption individually to justify four-hour duration of Exam
5.
The expected time consumption of on an average 90 seconds each in 2-mark items,
3 minutes each in 3-mark items,
10 minutes each in 4-mark items and
15 minutes each in 5-mark items, which is desired of a candidate possessing enough
knowledge, technical skills and strategic thinking to be on the verge of being a
professional making and executing financial plans, would justify the allotted duration
to complete Exam 5.
Enough time is also provisioned to link the question items to the case study,
understand the subject household’s financial goals, strategies adopted and available
resources to arrive at the most appropriate alternatives.
As can be seen from below and reiterated here is the relatively much higher bias
towards testing analytical aptitude and strategic thinking requiring synthesis of
various goals of a client in a unified financial plan.

Marks Theoretical testing knowledge ‘Grade 1’ Items Mark Weight

s
2-mark 2
1 0
5 %
0

3-mark ‘Grade 2’ 4 12 2
Theoretical testing
4
clarity of concepts
%
or Numerical testing basic skills

4-mark Numerical testing analytical ‘Grade 3’ 2 8 1

skills 6
%

5-mark ‘Grade 4’ 4 20 4
Numerical testing advanced
0
analytical skills,
%
strategy evaluation &
synthesis
T 1 50
o 5 1
t 0
al 0
%

These Pages extracted from FPSB CFP Syllabus

 CFPCM Certification Exam preparation material

Introduction to Personal Financial Planning

Financial planning is the process of developing strategies to assist consumers in managing their financial
affairs to meet life goals. The process of financial planning involves reviewing all relevant aspects of an
individual’s situation across a large breadth of financial planning activities, including inter-relationships
among often conflicting objectives.

The process of financial planning typically involves some or all of the following steps:

1. Establishing and defining the relationship with the client, including an evaluation of the financial
planner’s ability to serve the client;
2. Collecting qualitative and quantitative client information;
3. Analyzing and assessing the client’s information, objectives, needs and priorities;
4. Identifying and evaluating strategies and developing recommendations and presenting them to the
client;
5. Implementing the recommendations, which requires reaching agreement with the client on
responsibilities and having appropriate licenses to deliver financial products and services; and
6. Reviewing the client’s situation on an ongoing basis to ensure the recommendations continue to be
appropriate in changing market environments or client situations.

Step 1: “Letter of Engagement” is a professional requirement under Practice Guidelines of FPSB India. It is
necessary to define the “Scope of Engagement” before beginning work on a client’s Financial Plan. The same
is to mutually define and determine the activities that may be necessary in order to proceed with client
engagement.
The scope and limitation of the services of a CFPCM practitioner need to be disclosed in writing by him/her
in the beginning itself. A CFP practitioner may not be proficient in executing all aspects of Financial Planning,
e.g. a complex succession planning may be outsourced to a lawyer, and an evolved taxation issue may be got
resolved through a tax expert or Chartered Accountant, a large portfolio of assets to be actively managed
may be handed over to a portfolio manager. Such an arrangement should find an explicit mention in the
Financial Plan for the said activity, and should be a part of the scope of engagement. Barring these specific
incidents of other professionals’ facilitation, a CFP professional is trained to provide holistic services across
all domains of personal finance.

A marked difference from other professionals is that CFP practitioners abide by the Financial Planner Code
of Ethics and Professional Responsibility. They pursue continuous professional development to remain
conversant with current trends. Few essential features of the Letter of Engagement, are:

i) Specific services to be included or excluded, such as implementation of the financial plan and its periodic
review.
ii) Your compensation arrangements with respect to the engagement, including fees to be paid by the client.

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 CFPCM Certification Exam preparation material

iii) Existing conflicts of interest, including those involving compensation arrangements with third parties,
and any future conflicts of interest if they occur.

As mentioned in (i) above, the Financial Plan can be holistic that is covering all domains of finance
(investment, financial management, insurance and risk management, retirement, taxation and estate) and
all activities like planning, execution and review. However, the Financial Plan can be limited to few domains
and services also. The disclosure by client about other professional engagements may not be a necessary part
of the engagement letter. The maximum liability of the practitioner against the claims and complaints of the
client is beyond the scope of the letter of engagement.

Step 2: After defining and discussing with the client the basic terms of the Financial Plan construction, the
next logical step is to collect quantitative and qualitative information of the client. The function of collecting
qualitative information lays down the process of determining a client’s attitudes, expectations, financial
experiences and the level of financial sophistication. Some inferential data like the risk appetite of the client
can be drawn from this qualitative information.

• The client data can be obtained in a format, viz. Client Questionnaire. The scope of such Questionnaire or
Data Sheet is to extract such information which may form the basis of any analysis to be carried out for
determining the financial status of the client. Such information may pertain to assessing Client’s

a. Assets & Liabilities

b. Cash Flow (Current Income & Expenditure)
c. Investment profile
d. Insurance adequacy
e. Any Pension and Superannuation entitlements
f. Any Estate Planning undertaken

a) The client data analysis should be aimed at identifying

a. Client’s risk tolerance

b. Suitability of current investments as per the identified risk tolerance
c. Gaps in insurance requirements
d. A general tax efficiency in various financial deals
e. Client’s likely financial goals in the currency of his/her active working life
f. Expected nest egg (retirement corpus), if any, in normal course
g. Client’s likely Estate discharges

Step 3: Assessing a client’s objectives, needs and priorities comes under the following core financial planning
function comes under Analysis. Major activities under this step are to consider potential opportunities and
constraints to develop strategies and to assess information to develop strategies. Evaluation and optimization
of various strategies to choose the most appropriate comes under “Synthesis” within this step. As a part of

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 CFPCM Certification Exam preparation material

this function, the Planner may identify other issues that may potentially impact client’s ability to achieve
financial goals.

The Financial Planner should analyze your information to assess your current situation and determine what
you must do to meet your goals. Depending on what services you may have asked for, this could include
analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies.

Identifying client’s various financial Goals

a. Education / Higher Studies of children
b. Marriage of children
c. Buying house property / additional house
d. Buying a motor vehicle
e. Starting a new venture
f. Target nest egg (retirement kitty)
g. Any other specific goal of client such as charity

Identifying general weaknesses in client’s situation and how they can affect his aspiration goals
a. Inability to accumulate savings because of cash flow problems, i.e. Expenditure > Income
b. Inadequacy of risk coverage: life, assets and income protection
c. Insufficient retirement funds
d. Inefficient tax planning of investment, other cash flows
e. Lack of wills / power of attorney / nominations /continuity in transitions of assets

Step 4: Developing Appropriate Strategies and Presenting the Financial Plan

Client Risk Tolerance

First Step of building a financial plan is the planner has to deal with risk planning.
Planner helps the client to identify risks to which he is exposed to, and accordingly he has to construct a plan
of action to provide adequate insurance against those risks. while taking insurance you should know that
Under-insuring can be Highly damaging whereas Over-insuring can adversely affect the lifestyle of the client
by reducing the available cash flow. The planner also needs to determine which insurance policy will be best
for the client.

Cash Flow Analysis and Modelling

Through cash flow statement planner comes to know of how much potential savings client that is able to
manage from income. Financial Planner Identifies various alternative strategies for achieving the client’s goals
and objectives. During Evaluation of various strategies, planner may discuss with client the Importance,
Priority and Timing of the client’s objectives and needs. This process may result in single, multiple strategies
or no change to client’s current course of action.

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If the planner realizes that all goals and objectives of the client cannot be met then the client needs to reduce
expenses by managing his / her lifestyle or the Client needs to look at increasing his income in order to
increase savings or Some of the Financial goals could be sacrificed based on priority.

Before developing recommendation, a Planner Identifies and evaluates all alternative strategies which can
reasonably address the client’s objectives, needs and priorities. While presenting financial planning strategy
to client, a CFP professional is most likely to explain assumptions/factors critical to the strategy and the
related risks.

 Develop advice, wherever required, to strengthen the client’s position in sync with goals & prepare a
skeleton financial plan
 Address the concerns and queries that the client has raised after considering the skeleton financial
plan. This led a planner to the actual development of financial spreadsheets with detailed analysis
culminating in a written financial plan
 Present a well-documented draft financial plan for the client to review the same
 The client is required to be apprised of relevant regulatory section which discloses, in writing, the
details of all commissions and fees being charged to or paid by the client
 A ‘Statement of Advice’ in writing needs to be furnished to the client and enough time afforded to
the client to properly study the same prior to any transactions being executed
 The reference must be included on the areas where the planner needs to liaise with experts in the
field of insurance, investment, taxation, law, etc. in line with client’s focused objectives thereto

However, the CFP Professional should avoid stating and asserting that the recommendations shall meet or
achieve financial goals.

Elements of Financial Plan: Five major elements that go into building the Financial Plan

1. Investment Planning: The core part of investment planning consists of deciding on an asset allocation
strategy which is in line with the meeting the overall objectives of client. Asset Allocation means
diversifying money among different types of investment categories. Asset Allocation is the primary basis
which decides the rate at which grows in the long run. The various asset classes that an investor can invest
in are:
a) Equity
b) Debt
c) Real Estate
d) Precious Metals: Gold, Silver
e) Commodities
f) Alternative Investments Like Art, Currencies
Asset Allocation Strategy is primarily decided based on:

a) Returns that need to be generated on the investments

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b) Risk profile of the client

c) Time horizon of investing
d) Personal circumstances of the client
Once asset allocation strategy is decided planner needs to evaluate various investments options. Product
selection is done based on evaluation

Retirement Planning

The Retirement planning is to ensure that client has same standard of living after retirement even in the
absence of cash inflows in income form.
For retirement planning planner needs to discuss the following aspects of retirement with client:
The kind of lifestyle client wish to lead after retirement.
a) Helping client in setting realistic retirement goals
b) Determining the total amount of money that a client needs for retirement
c) The planner, as part of a financial plan, needs to create a clear strategy to create sufficient financial
resources to meet the retirement needs of the client.
Income Tax Planning

a) Tax Planning is all about using any allowable strategy to reduce and minimize tax liabilities.
b) Tax Planning is supposed to be used as part of the overall strategy and not independently.
c) The financial planner’s job is to help the client to minimize taxes, not to evade them
Estate Planning:

The financial planner should ensure that the client makes a will and appoints an executor to his estate
during his lifetime. He should also ensure that appropriate nominations for all assets are in place the
financial planner should guide the client in setting up the distribution of his estate in a manner that
minimizes the tax impact on the heirs.

Drafting a Financial Plan

The draft financial Plan would contain details of:

a) A list of all goals of the client
b) Net Worth Statement
c) Cash Flow Statement
d) Risk Planning Sheet
e) Calculations containing details of retirement planning
f) Details related taxation and emergency fund
g) Asset Allocation Strategy
h) Working of Investment Plan
i) Estate Planning
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Step 5: Implementation or execution of the Financial Plan should be well covered at the engagement level
itself. However, few things can well change, e.g. the scope of the engagement, as originally defined; the
conflicts of interest, previously disclosed; the sources of compensation and material relationships, previously
disclosed, etc. However, the responsibility itself of implementing the recommendations cannot change at this
stage. If engaged for only implementing recommendations, a CFP professional is not required to identify
activities for sourcing/coordinating with other professionals.
The Plan execution should be done in consultation and prior approval of the client. Any changes in the existing
strategy must be got approved by the client after discussing all aspects and implication of altering the
strategy.

The Planner gains the client’s agreement on implementation of the recommendations and provides the
required documentation. The planner’s responsibilities may include:

a) Identifying activities necessary for implementation.

b) Determining respective responsibilities of the planner and the client.
c) Referring to and coordinating with other professionals and sharing client information as authorized.
d) Selecting and securing products and/or services for the client.
e) If there are conflicts of interest, sources of compensation or material relationships with other
professionals that have not been previously disclosed, the planner discloses these to the client. The
planner explains the rationale for referrals and the qualifications of referred professionals.
Implementation:

a) There needs to be a plan of action, it should lay out in sequence the tasks, decisions and
assessments to be made along the way to financial success.
b) The plan should be clarified with the client.
c) Implementing the financial plan is the most difficult step in the entire process.  Client has to often
do multiple sacrifices. So, client needs constant motivation and prodding to implement the plan.
d) The planner needs to remember that the client’s financial plan is worthless on paper but potentially
priceless, if implemented in true spirit.
Coordinate as necessary with other Professionals:

a) Coordinate as necessary with other professionals such as accountants, attorneys, real estate agents,
investment advisors, stock brokers and insurance agents.
b) Technical experts know their fields very well and can suggest products tailored to the client’s
objectives, resources and risk profile.
c) The planner needs to review the specialist’s proposal to make sure it fits the client’s needs and
other parts of the financial plan.

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d) The planner should make sure that the specialist’s perspective ---aggressive or conservative----is
compatible with the client.

Step 6: After implementing the financial plan process does not end, it is the continuous process where
regular monitoring and periodic evaluation is necessary to ensure that things are happening as per the plan.

When Monitoring a financial plan, the planner needs to evaluate the following points:

a) When was the plan written?

b) What assumptions were made about the client’s financial condition and personal situation and the
general economy? How have these assumptions changes over time?
c) Are assumptions changed over time?
d) Are assumptions now more or less favorable?
e) Does the planner expect the new assumptions to prevail long enough to make changes to the
financial plan?
Monitor and Evaluate Soundness of Recommendations:

As plan is put into action, the planner should evaluate the sounds of recommendations implemented in
meeting the goals and objectives of the client in case planner feels they are not line then he should
communicate with client and help client to achieve his goals and objectives.

Review the Progress of the plan with client - The review process may also include:

a) Confirming that the financial planning recommendations agreed on by the client and planner have
been implemented
b) Assessing progress towards achievement of the objectives of the financial planning
recommendation
c) Re-evaluating initial assumptions made by the financial planning professional for reasonableness
d) Determining whether any adjustments are required in financial plan due to client’s circumstances
e) Mutually agreeing on any changes that may be required
f) Discuss and Evaluate changes in client’s Personal Circumstances (e.g. Birth/death, Age, Illness,
Divorce, Retirement)
g) In India, tax laws undergo change almost every year. The planner may need to review these changes
and evaluate the impact that these changes have on the recommendations given to the client.
h) Once the changing circumstances are evaluated the planner needs to work with client to modify the
plan accordingly. Planner should schedule periodic review sessions to evaluate the course of
financial plan.

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Time Value of Money

• A sum of money received today is worth more than the same amount of money to be received a few
years down the line. This is because inflation affects the value of money to depreciate with time. Not
just inflation, the opportunity cost of money has a bigger concern here. Opportunity cost is the value
of the next best choice that one gives up when making a decision. The ‘cost of capital’ or the ‘required
rate of return’ are also criteria in order to evaluate future cash flows.

• Let us take here the required rate of return on a capital sum invested as the rate of discounting. If r
represents the rate of discounting over a specified time period, the present value of a sum of money
C to be received n time periods is given by
PV = C / (1+r) ^n

• Thus, the Time Value of Money represents the current worth of a future sum of money (or stream
of cash flows) given a specified rate of return known as the discount rate. The higher the discount
rate, the lower the present value of the future cash flow(s).

• The Present Value of a sum of Rs. 1,000 to be received 1 year from now if the discount rate applied
is 12% is given by

PV = 1,000 / (1.12) = Rs. 892.86

• The PV of the same sum to be received 3 years from now at the same discount rate is PV = 1,000/
(1.12)^3 = Rs. 711.78

Financial Mathematics

The skills in Financial Mathematics help an individual to distinguish and appreciate simple and compound
rates of interest, nominal and effective rates and present value of a series of future payments, discounting
and accumulation of a series of cash flows. These skills come handy in evaluation of a financial product in
relation to the financial goal chosen.

Compound interest: The essential feature of compound interest is that interest itself earns interest. The
compound interest can be worked out using Excel formula. We shall have to use FV (Future Value) formula.
On typing =FV (in a cell of Excel Worksheet, we get the following strip FV (rate, nper, pmt, [PV], [type])

 ‘Rate’ has to be filled in decimals or a number %, e.g. 14% has to be written as either 0.14 or 14%.
The rate is applicable over the time. Rate is always synchronized with compounding factor i.e.14%
p.a. is annual compounding then rate is also annual. However, if compounding is monthly or NPER
(Number of period) factor is monthly then rate must be monthly effective.

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 ‘nper’ is the number of time periods, e.g. 5 in case of 5-year time span, 24 in case of monthly
compounding time period in a 2- year time span, etc.

 ‘Pmt’ is the periodic investment made in each specified time period. In case of Outflow the value
should be ‘negative’ sign. In case of Inflow the value should be in “positive” sign. In case of one-time
Principal investment, it is to be taken as 0.

 ‘Pv’ is the present value of the investment made, i.e. Principal amount of initial/one-time
investment. In case of Outflow the value should be ‘negative’ sign. In case of Inflow the value should
be in “positive” sign.

 ‘Type’ is the ‘begin’ mode or ‘end’ mode, depending on Inflow/Outflow made at the beginning or
end of each of the specified period. For ‘begin’ mode, we have to take 1, and for ‘end’ mode we
have to take 0. The Begin/End mode only matters if there is value in PMT factor & answer will
depend upon begin/End mode.

If payments are made at the beginning of each time period, they are said to be paid in advance or
annuity due. Deposits in savings, rent payments, and insurance premiums are examples of annuities
due. Loan repayments are always at end the end of month is taken in End mode.

Case 1: Mrs. Renu wishes to take a home loan in such a way that she should repay the loan in the next 12
years of her service tenure. She can afford an installment of up to Rs. 8,500 per month. The prevailing rate of
interest of housing loan is 10% p.a. (compounded monthly). What loan amount she can target?

Solution: The Present value of monthly installments of Rs. 8,500 for 12 years at 10% p.a. (compounded
monthly) shall be the amount of loan. Loan amount = 711250

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Case 2: Mr. Prabhat decides to take a car loan of Rs. 8 lakh for 5 years at 12.5% p.a. on reducing monthly
balance of the loan outstanding. Find the Equated Monthly Installment (EMI) to be paid.

Solution: As the installments are being repaid on monthly intervals at the end of month, The PMT is to
be found by using Excel formula = 17998

Case Study 3: The Insurance Company offers you a pension plan in which you will receive Rs. 20000 a year
for first 10 years and Rs. 30000 a year for next 10 years after end of first 10 years. How much would you be
willing to pay for these annuities, if applicable discount rate is 9% and annuities are paid at the end of each
year?

Step 1: PV at 10 year for annuity receivable of Rs.30, 000 in 10th to 20th year

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Step 2: 192529 is PV at 10th year, take this value in FV & Calculate all inflow at current date = 209680

Nominal rate Vs Effective rate

a) The nominal interest rate is the periodic interest rate times the number of periods per year; for example, a
nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month
(compounded).It may be noted that nominal rate of interest should always specify the period of
compounding, or else the information is not complete. .
• Nominal interest rates are usually quoted for contractual rates, i.e. rates known or fixed in advance, e.g.
bank deposit rates where the interest is paid on quarterly basis or loan rates usually mortgages, where the
repayments are by way of monthly installments and interest is charged on reduced balances after every
installment, thus rendering the rate monthly/quarterly compounded.
• Two nominal rates of interest are not comparable unless their compounding periods are the same. This
anomaly is corrected and uniformity or ready comparability restored when we convert nominal rates to
effective rates of interest, usually over a standard period of one year, thereby making a nominal rate of
interest charged as annual effective rate of interest, or interest with annual compounding.

• Thus, a nominal of 12% p.a. compounded monthly will have an equivalent annual effective rate of
interest of i = ((1+(0.12/12))^12) – 1
= ((1.01) ^12) – 1 = 1.126825 - 1 = 0.126825 or 12.68%

• A nominal of 12% p.a. compounded quarterly will have an equivalent annual effective rate of
interest of i = ((1+(0.12/4))^4) – 1
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= ((1.03) ^4) – 1 = 1.125509 – 1 = 0.125509 or 12.55%

• A nominal of 12% p.a. compounded half-yearly will have an equivalent annual effective rate of
interest of i = ((1+(0.12/2))^2) – 1
= ((1.06) ^2) – 1 = 1.1236 – 1 = 0.1236 or 12.36%

# The annual effective rate of interest , say 12% p.a. compounding monthly can be found by the excel
formula FV (rate, nper, pmt, pv, [type])

Here, rate is 1% monthly ,nper is 12, pmt is 0, pv is -100 and type 0. Thus, the following strip gives the
annual effective rate of interest of 12%p.a. compounding monthly . FV(1%,12,0,-100,0) = 112.68 (it means
12.68% annual effective rate of Interest)

Thus, it is seen that higher the period of compounding for a nominal interest, higher the effective rate of
interest over a definite time span.

In our practical day-to-day life, not many interest rates we encounter are contractual. They are rather
indicative over a significantly long period of time. These may be long-term indicative returns on equity
investments, debt/bond investments, etc. or yield of an annuity. But the corpus built over a long period may
not necessarily be by way of annual installments. The installments may be of made quarterly or monthly. Or
the annuity payments may be on monthly intervals.

It is of interest therefore to find the effective rate of interest over a small sub-period, say a month,
corresponding to an indicative rate of interest (also effective) for a longer time span, say a year. This is
necessary if the corpus is accumulated by way of investments made in each sub-period. Thus, in effect we
need to find the effective rate of interest over the sub-period which corresponds to the interest rate over the
longer time span.

Reworking the formula (1 + i) ^ (1/p) - 1

For example, for 12% p.a. compounded rate of interest, we may find effective interest rate over
month, we get (1.12)^(1/12) -1=1.009489 - 1= 0.009489 or 0.95%
We may note that this monthly effective rate of interest is less than 1%.

• Similarly, we can find a quarterly effective rate of interest which corresponds to an annual effective
rate of 12% p.a. We get (1.12)^ (1/4) -1=1.02874 - 1= 0.02874 or 2.87%

a) Again, we can observe that the corresponding nominal rates of interest for monthly compounding,
11.39% p.a. and for quarterly compounding 11.49% p.a. are less than the annual compounded rate
of 12% p.a.

# The monthly effective rate equivalent to an annual effective rate, say 12% can be found by the excel
formula RATE (nper, pmt, pv, [fv], [type], [guess])

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Here, nper is 12, pmt is 0, pv is -100, fv is 112 and type 0. Thus, the following strip gives the monthly
effective rate of interest equivalent to an annual effective rate of interest of 12%. Rate(12,0,-100,112,0) =
0.9489% p.m. Note that it is less than 1% p.m.

Case Study 4: Mr. Hariharan has accumulated nest egg of 50 lakh on his retirement age 60. He invests this
accumulated corpus in a pension plan of life Insurance Company. He requires monthly annuity of Rs. 60, 000
for his family needs from the end of one month of initial deposit. Expected return on investment is 10%. For
how many completed months can he receive this annuity by investing in the said pension plan?

Ans: 137.50 months

Case 5: Mr. Kunal verma desires to target a pension of Rs. 1 lakh per month for 15 years once he retires. If he
invests the corpus collected for his retirement in a 9% yielding annuity, find the corpus to be targeted.
(Assume pension start from beginning of retirement)

Solution: (i) Here, we have to find the PV of a stream of monthly payments of Rs. 1 lakh continuing for 180
months (15 years) if the effective annual rate of return for the investment vehicle chosen is 9%.

(ii) The rate of return in our Excel formula shall be taken on a monthly effective basis because after every
installment of pension withdrawal the force of interest shall work on the outstanding amount of corpus at
that point. We get the required rate by working out (1+0.09) ^ (1/12)-1 = 0.007207

(iii) The PV is given by =PV (rate, nper, pmt, [fv], [type]), that is 1,01,38,168
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Case 6: Mr. Subash has amassed a nest egg of Rs. 74.80 lakh which he utilizes to buy him a monthly pension
for 20 years. He wants to leave Rs. 30 lakhs at the end of the pension period. If he buys the annuity which
yields 10.75%, what amount of level monthly pension he should opt for? (Assume pension start from
beginning of retirement)

Solution: Retirement Corpus 74.8 lakh at retirement age is inflow to buy an annuity plan. PV should be in
negative sign. Legacy planning of Rs. 30 lakhs is outflow & required to put in positive sign in FV.

Case 7: Ms. Jayanti Nair, currently 30, wants to create a corpus of Rs. 2 crores for her retirement at the age
of 55 years. She currently has a balance of Rs. 1.47 lakh in an investment vehicle which in future is expected
to yield 12% p.a. What amount of monthly contribution should Ms. Nair aim to set aside every month with
immediate effect in the same investment vehicle in order to achieve the desired target corpus?
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Solution: Existing investments 147000 at age of 30 is inflow accumulate retirement corpus. PV should be in
negative sign. Corpus required at age 55 is outcome of all investments at amounted Rs. 2 Cr required to put
in positive sign in FV= 10281 monthly.

Inflation adjusted or Real rate of Return

Inflation-adjusted return reveals the return on an investment after removing the effects of inflation.

Example: When retirement corpus is calculated at the retirement age for post-retirement years, at one side
corpus investment give return and on other side inflation increase the required expenses in post-retirement
years, in such scenario real rate of Interest is calculated by formulae

Real rate of return = ((1+ rate of return on Investment)/ (1+Inflation rate)) -1

Example: Aamir invested in a MF which is yielding 12% p.a. What is the real rate of return from the MF, if
the inflation during the same period is 8% p.a.?
Net Present Value

• Determining the appropriate discount rate is the key to properly valuing future cash flows that could
be earnings or obligations.

• The Net Present Value is the sum of present values of all future cash flows taking into account all
present and future outflows also. If C0, C1, C2, ………,Cn represent the cash flows at time periods 0
(present), 1, 2,……..,n, the Net Present Value of NPV is given by the following expression NPV = C0 +
C1 / (1+r) + C2 / (1+r)^2 + ……..+ Cn / (1+r)^n

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• Here, outflows shall take negative sign, e.g. for a one time outflow at the present time (i.e. time 0) ,
the expression will take - C0 while all cash inflows starting from time periods 1,2,……,n will take
positive sign.
• If NPV is positive for a given discount (i.e., a required rate of return) for an investment made at time
0, it is worth making the investment.

Case 8: For an investment of Rs. 10,000 made today, future cash inflows are Rs. 2,000 at the end of 1st year,
Rs. 3,000 at the end of 2nd year, Rs. 4,000 at the end of 3rd year and a final inflow of Rs. 5,000 at the end of
5th year. For a required rate of return of 10% p.a., evaluate the investment.

Solution: NPV = -10,000 + (2000 / 1.10) + (3,000 / 1.10^2) + (4,000 / 1.10^3) + (5,000 / 1.10^5)
= -10,000 + 1,818.18 + 2,479.34 + 3,005.26 + 3,104.61
= 407.39
As the NPV of cash flows from the standpoint of 10% p.a. required return is positive, the investment is
worth making.
Internal rate of return

• If we equate the Net Present Value expression to zero, i.e.

NPV = C0 + C1 / (1+r) + C2 / (1+r)^2 + ……..+ Cn / (1+r)^n = 0

On solving the equation for r, we get the Internal Rate of Return (IRR) or the yield for a given cash flow stream.
Therefore, the IRR for an investment is the discount rate that makes the net present value of the investment's
income stream total to zero.

A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by
alternate investments of equal risk. Thus, the IRR should be compared to any alternate costs of capital
including an appropriate risk premium. In the context of savings and loans the IRR is also called the effective
rate of interest.

Case 9: For an investment of Rs. 10,000 made today, future cash inflows are Rs. 2,000 at the end of 1st year,
Rs. 3,000 at the end of 2nd year, Rs. 4,000 at the end of 3rd year and a final inflow of Rs. 5,000 at the end of
5th year. Calculate internal rate of return from this investment.

Solution: We can make use of Excel formula of IRR for solving the equation for the value of r. On typing
=IRR (in any cell will generate the following strip IRR (values, [guess]). Now we shall have the following
values as annual cash flows, i.e. C0, C1, C2, C3, C4 and C5. Here, C0 is the investment made in the
beginning, is an outflow and shall take negative sign.

-10,000 2,000 3,000 4,000 0 5,000

Taking these values in either successive cells in a column or in a row and enclosing them in a range
in place of values in the above strip, we instantly get the IRR as 11.48%.
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XIRR: This Excel function is used when cash flows are on different dates or the periodicity (interval) in flows
is same. Then CAGR is calculated by using this formula.

Case 10: Vivek wants to invest for the higher education of his two children Abhinav and Chinmay. The cost
currently is Rs. 1,50,000 per year per child and has been increasing at 6% per year. Abhinav and Chinmay are
of age 12 and 8 respectively and will need higher education for four years beginning at age 18. How much
should Vivek save each month, beginning today for the next six years in an investment vehicle yielding post-
tax 9% p.a. to finance education for both the children?

Solution: We shall solve the case in the following steps:

Step 1: We need to find the outlay on education in the years of requirement at the then prevailing prices,
i.e. after accounting for inflation.
Step 2: We need to discount the outlays in individual years to the present-day values at the rate of
investment chosen. The sum of these values is the Present Value of total required outlay on education.
Step 3: This PV along with the monthly effective rate of interest on investment, the total tenure (nper) of
investment in months will be used in finding the monthly investment (pmt) required. The calculations will
be as follows:

Age of Outlay in PV Age of Outlay in PV

Abhinav the year Chinmay the year
12 8
13 9
14 10
15 11
16 12
17 13
18 Abhinav=1.5X(1.06)^6 A/(1.09)^6 14
19 Abhinav=1.5X(1.06)^7 B/(1.09)^7 15
20 Abhinav=1.5X(1.06)^8 C/(1.09)^8 16
21 Abhinav=1.5X(1.06)^9 D/(1.09)^9 17
Chinmay=1.5X(1.06)^10 E/(1.09)^10 18
Chinmay=1.5X(1.06)^11 F/(1.09)^11 19
Chinmay=1.5X(1.06)^12 G/(1.09)^12 20
Chinmay=1.5X(1.06)^13 H/(1.09)^13 21

On taking total of all individual PV amounts, we get the PV of whole payment stream as Rs. 9,22,407.50

Step 3 - We shall calculate the monthly investment required to meet this liability. We shall use the formula
=PMT (rate, nper, pv, [fv], [type]) where as= (1.09)^(1/12)-1 = 0.007207 or 0.7207% effective monthly

nper= 72 months, pv= - 9,22,407.50, [fv]= 0, [type]= 1 We get pmt= Rs. 16,348.73

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Post office saving schemes

A post office offers various types of deposit schemes for those who want to invest their money. These are
also known as small savings schemes. The USP of these schemes is their sovereign guarantee, i.e., it is
backed by the central government. Some of these schemes such as NSC also offer tax-saving benefits under
section 80C of the Income-tax Act.

The interest rate offered on these schemes are reviewed and fixed quarterly by the government.

National Saving Certificates (NSC)

 Minimum investment Rs. 500/- No maximum limit.

 Interest applicable compounded yearly and paid at the end of term along with principal & time
period of scheme is 5 years. In 2011 govt. also introduce NSC of 10-year duration.
 Two adults, Individuals, and minor through guardian can purchase.
 No pre-mature encashment.
 Annual interest earned is deemed to be reinvested and qualifies for tax rebate for first 4 years under
section 80 C of Income Tax Act.
 Maturity proceeds not drawn are eligible to Post Office Savings account interest for a maximum
period of two years.
 Facility of reinvestment on maturity.
 Certificate can be pledged as security against a loan to banks/ Govt. Institutions.
 Certificates are transferable from one person to another person before maturity.
 Tax Saving instrument –Deduction under section 80 C of Income Tax Act.
 Interest income is taxable but no TDS

Post office 5-year Recurring Deposit

 Minimum Investment of Rs. 10 per month and in multiple of Rs. 5 thereafter payable before end of
calendar month.
 Scheme is for 5 year & continuation of scheme for 5 more years with an option of with or without
deposits.
 Interest applicable payable quarterly & Interest is taxable

Post Office Monthly Income Saving Scheme:

 Applicable Interest rate payable monthly.

 Maturity period is 5 years.
 Minimum investment amount is Rs.1500/- or in multiple thereof.
 Maximum amount is Rs. 4.5 lacs in single account and Rs. 9 lacs in a joint account.

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 Account can be opened by an individual, two/three adults jointly and a minor through a guardian. A
minor having attained 10 years of age can open an account in his/her own name directly. Minor has
a separate limit of investment of Rs. 3 lacs and the same is not clubbed with the limit of guardian.

 Facility of automatic credit of monthly interest to saving account if accounts are at the same post
office.
 Facility of premature closure of account after one year.
 Extension of A/c after defined period is not allowed. Maturity proceeds not drawn are eligible to
saving account interest rate for a maximum period of two years.
 Deduction under section 80 C not admissible.
 Most suitable scheme for senior citizens and for those who need regular monthly income.

SUKANYA SAMRIDDHI ACCOUNT

 Objective: To promote the welfare of Girl Child

 Who can open the account: A natural/ legal guardian on behalf of a girl child

 Maximum number of accounts: Up to two girl children or three in case of twin girls as second
birth or the first birth itself results in three girl children

 Minimum and Maximum Amount of Deposit: Min.1000 of initial deposit with multiple of one
hundred rupees thereafter with annual ceiling of Rs.150000 in a financial year

 Tenure of the Deposit: 21 years from the date of opening of the account

 Maximum period up to which deposits can be made: 15 years from the date of opening of A/c.

 Partial withdrawal, maximum up to 50% of balance standing at the end of the preceding
financial year can be taken after Account holder’s attaining age of 18 years.

 Interest on Deposit: As notified by the GOI, compounded annually with option for monthly
interest pay-outs to be calculated on balance in completed thousands.

 Tax Rebate: As applicable under section 80C of the IT Act, 1961. In the latest Finance Bill, the
scheme has been extended Triple exempt benefits i.e. there will be no tax on the amount
invested, amount earned as interest and amount withdrawn.

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Inflation Indexed Bonds

Inflation Indexed Bond (IIB) is a bond issued by the Sovereign, which provides the investor a constant return
irrespective of the level of inflation in the economy. The main objective of Inflation Indexed Bonds is to
provide a hedge and to safeguard the investor against macroeconomic risks in an economy. The coupons are
small 1.4% - 1.5%, but are paid every year on the indexed face value.

For understanding the concept of IIB, it has to be compared with the instrument of fixed deposits with the
bank. While fixed deposit offers a fixed rate of interest for the investment for a given number of years, it
does not protect the investor from the erosion of real value of the deposit due to inflation. IIB on the other
hand, gives a constant minimum real return irrespective of inflation level in the economy. Capital increases
with the inflation, so actual interest is better than originally promised. In case of deflation, interest
payments decrease with the negative inflation. However, capital does not decline below the face value, i.e.
Initial investment, in case of deflation.

Thus, inflation component on principal is not paid with interest but the same is adjusted in the principal. At
the time of redemption, adjusted principal or the face value, whichever is higher, would be paid. If adjusted
principal goes below the face value due to deflation, the face value would be paid at redemption and thus,
capital will get protected. Interest rate will be provided protection against inflation by paying fixed coupon
rate/interest rate on the principal adjusted against inflation.

Kisan Vikas Patra (KVP) :

Kisan Vikas Patra (KVP) is a savings scheme available at India Post Offices in the form of certificates. It is a
fixed rate small savings scheme designed to double your investment after a predetermined period of time
(113 months in the currently available issue). KVP is a fixed return scheme backed by the government that
offers guaranteed returns. Certificates are currently available in denominations of Rs. 1,000, Rs, 5,000, Rs.
10,000, and Rs. 50,000. Eligibility criteria for investing in the KVP scheme:

a) The applicant has to be an adult resident of India.

b) A parent/guardian may invest on behalf of a minor.
c) Hindu Undivided Families (HUFs) and Non-Resident Indian (NRIs) cannot invest in Kisan Vikas Patra.

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Sovereign Gold Bonds

Sovereign Gold Bonds are Government securities denominated in multiples of gram(s) of gold. They are
substitute for investment in physical gold. These Bonds are issued by the Reserve Bank of India on behalf of
the Government of India and are traded on stock exchange.

Eligibility for Investment:

The Bonds under this Scheme may be held by a person resident in India, being an individual, in his capacity
as such individual, or on behalf of minor child, or jointly with any other individual. The bond may also be
held by a Trust, HUFs, Charitable Institution and University. “Person resident in India” is defined under
section 2(v) read with section 2(u) of the Foreign Exchange Management Act, 1999

Form of Security

The Bonds shall be issued in the form of Government of India Stock in accordance with section 3 of the
Government Securities Act, 2006. The investors will be issued a Holding Certificate (Form C). The Bonds
shall be eligible for conversion into de-mat form.

Denomination

The Bonds shall be denominated in units of one gram of gold and multiples thereof. Minimum investment
in the Bonds shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu
Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to
time per fiscal year (April – March), provided that

• in case of joint holding, the above limits shall be applicable to the first applicant only;
• annual ceiling will include bonds subscribed under different tranches during initial issuance by
Government and those purchased from the secondary market; and
• the ceiling on investment will not include the holdings as collateral by banks and other Financial
Institutions.

Issue Price

The nominal value of the Bonds shall be fixed in Indian Rupees fixed on the basis of simple average of
closing price of gold of 999 purity published by the India Bullion and Jewelers Association Limited for the
last 3 working days of the week preceding the subscription period. The issue price of the Gold Bonds will be
₹ 50 per gram less than the nominal value to those investors applying online and the payment against the
application is made through digital mode.

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Interest

The Bonds shall bear interest from the date of issue at the rate of 2.50 percent (fixed rate) per annum on
the nominal value. Interest shall be paid in half-yearly rests and the last interest shall be payable on
maturity along with the principal. Coupon rate could be changed from series to series. In 2019 series
Interest rate was 2.75%. No Tax is deducted at source on these coupon payments.

Payment Options

Payment shall be accepted in Indian Rupees through cash up to a maximum of ₹ 20,000/- or Demand Drafts
or Cheque or Electronic banking. Where payment is made through cheque or demand draft, the same shall
be drawn in favor of receiving office.

Redemption & Tradeable

• The Bonds shall be repayable on the expiration of eight years from the date of issue of the Bonds.
Pre-mature redemption of the Bond is permitted from fifth year of the date of issue on the interest
payment dates.

• The redemption price shall be fixed in Indian Rupees and the redemption price shall be based on
simple average of closing price of gold of 999 purity of the previous 3 working days, published by the
India Bullion and Jewelers Association Limited. Investors will earn returns linked to gold prices
• Tradable on National Stock Exchange of India Limited after Issue date as per date specified by RBI

• Loan can be availed with the pledge of these units.

Tax Treatment

• Interest on the Bonds shall be taxable as per the provisions of the Income-tax Act, 1961. The capital
gains tax arising on redemption of SGB to an individual has been exempted.
• The indexation benefits will be provided to long term capital gains arising to any person
on transfer of bond after 3 years and taxable at the rate of flat 20% with applicable cess.
• Interest received in form of Coupon is taxable at Slab rates.
• Holding period less than 3 years is considered as Short term capital gain and taxable at slab rates

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Gold ETF’s

Gold Exchange Traded Funds (ETFs) are simple investment products that combine the flexibility of stock
investment and the simplicity of gold investments. ETFs trade on the cash market of the National Stock
Exchange, like any other company stock, and can be bought and sold continuously at market prices.

Gold ETFs are passive investment instruments that are based on gold prices and invest in gold bullion.
Because of its direct gold pricing, there is a complete transparency on the holdings of an ETF. Further due to
its unique structure and creation mechanism, the ETFs have much lower expenses as compared to physical
gold investments. At the time of NFO, after subscription of units by Investors, AMC purchase physical Gold &
kept with Custodian.
Gold ETF tax treatment is long term capital gain after 3 years with indexation benefit and short term capital
gain at slab rates. No STT is applicable when you buy – sell these units on Stock exchange.

Gold Monetization Scheme (GMS)

Gold Monetization Scheme was launched by Government of India in 2015, under this scheme one can deposit
their gold in any form in a GMS account to earn interest as the price of the gold metal goes up.

The benefits of gold monetization scheme are:

Mobilize idle gold: The scheme will help in mobilizing gold that has been lying idle in the confined spaces of
households, trusts, and other institutions in India. The movement of gold in the national market will further
benefit the Indian gems and jewelry sector which is a major contributor to India’s exports.

Earn interest: Gold lying in your bank lockers or household does not earn you anything. In fact, when you
store gold in a bank locker, it costs you bank locker charges to keep it safe. The gold monetization scheme
will help you earn interest on your gold deposits, which will add to your savings.

Enjoy tax benefit: The earnings on the gold monetization scheme are exempted from capital gains tax, wealth
tax, and income tax. Even when the value of your gold deposit appreciates, capital gains tax will not be levied
on it or on the interest you earn from it.

Get flexibility on redemption: The gold depositor has the option to take either cash or gold on redemption.
However, the redemption preference has to be mentioned at the time of deposit.

Reduce the government’s reliance on gold imports: The mobilized gold will also supplement the RBI’s
(Reserve Bank of India) gold reserves. It will also help the government in reducing the Government’s cost of
borrowing. In the long run, it is also expected to decreases India’s dependency on gold imports.

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Mortgage

Mortgages are secured loans that are specifically tied to real estate property, such as land or a house. The
property is owned by the borrower in exchange for money that is paid in instalments over time.

Home Equity

Home equity is the market value of a homeowner’s unencumbered interest in their property. A simple
formula for determining home equity is to subtract the amount of the mortgage balance and all liens on the
home from the current fair market value of the home. If the home has been appraised for 3,000,000 and
the outstanding balance on the mortgage is 1,250,000, the equity in the home is 1,750,000. It creates a lien
against the borrower’s house and reduces the actual home equity
Home equity loans are secured loans where the home acts as the collateral. In the event that the borrower
defaults, the creditor can take possession of the asset used as collateral and sells it to satisfy the debt by
regaining the amount originally lent to the borrower.

Types of mortgages

Simple Mortgage: Suppose Mr. X borrows money by doing a simple mortgage of his property. In this case,
Mr. X (Mortgagor) would assign the property to the lender (Mortgagee). Here there is no transfer of
possession of Mr. X’s property to the lender. It is under mutual agreement that in case of non-payment by
Mr. X to the mortgagee within the specified time, the mortgagee can cause the mortgaged property to be
sold in accordance with law and have the sale proceeds adjusted towards the payment of the mortgage
money.
Mortgage by Conditional Sale: Suppose Mr. X borrows money by mortgaging his property under mortgage
by conditional sale, then the possession of the property is transferred to the lender. However, the sale
becomes absolute only in case Mr. X defaults on his mortgage. In case Mr. X repays the mortgage loan, the
sale of the property becomes void and the ownership is transferred back to Mr. X.

Usufructuary Mortgage: In this type of mortgage, by an express or implied term, the mortgagor gives
possession to the lender and gives him rights to accrue the rents or income coming from that property
towards repayment for interest and mortgage money till the time repayment is complete. There is no time
limit for payment of the mortgage money.

Leasing

A lease is a long-term agreement to rent equipment, land, buildings or any other asset. In return for most—
but not all—of the benefits of ownership, the user (lessee) makes periodic payments to the owner of the
asset (lessor). The lease payment covers the original cost of the equipment or the asset and provides the
lessor a profit.

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Financial Lease: Financial leases are most common by far. A financial lease is usually written for a term not
to exceed the economic life of the equipment. A financial lease would usually consist of:
a) Periodic payments need to be made
b) Ownership of the equipment reverts to the lessor at the end of the lease term
c) The lease is non-cancellable and the lessee has a legal obligation to continue payments to the end of
the term
d) The lessee agrees to maintain the equipment
In case of a financial lease, the lessee must record the leased item as an asset on his/her balance sheet and
record the present value of the lease payments as debt. The lessor must record the lease as a sale on
his/her own balance sheet.

Operating Lease: The Operating lease, or “maintenance lease”, can usually be cancelled under conditions
spelled out in the lease agreement. Maintenance of the asset is usually the responsibility of the owner
(lessor). Computer equipment is often leased under this kind of lease.

Sale and Leaseback

The Sale and leaseback is similar to the financial lease. The owner of an asset sells it to another party and
simultaneously leases it back to use it for a specified term. This arrangement lets you free the money tied
up in an asset for use elsewhere. You’ll find that buildings are often leased this way.

Hire purchase

In cases where a buyer cannot afford to pay the asked price for an item or property as a lump sum but can
afford to pay a percentage as a deposit, a hire-purchase con- tract allows the buyer to hire the goods for a
monthly rent. When a sum equal to the original full price plus interest has been paid in equal instalments,
the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum)
or return the goods to the owner. Hire purchase differs from a mortgage and similar forms of lien-secured
credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the
hire-purchase contract.

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Intro to Financial Planning - Questions for Practice

EMI & Interest rate calculation

1. Vikas, aged 45, wants to refinance his existing housing loan of Rs. 4.60 lakh which is on floating rate of
interest 10%p.a.and has outstanding term of 20 years. He wants to repay this outstanding loan by the time
he retires at 60 years of age. He also wants to avoid the uncertainty of floating rate of interest and would like
to convert into fixed rate of interest which is available at 50 basis points more than his current floating rate
of interest for the required term. Prepayment charges for closure of existing loan is 3% and processing fee
for new loan is 1%. What will be his new EMI? (Assume all charges are to be added in new loan amount)

a) 5290
b) 5084
c) 5238
d) 5350

2. Sushil has told you that one of his friends is requesting him for a cash loan of Rs. 50,000 which will be
repaid in ten equated monthly installments of Rs. 5,500 beginning after a month after the date of
disbursement of loan. He wants to know the annualized effective rate of return underlying this transaction.
According to you the same is __________________.

a) 21.25%
b) 23.46%
c) 26.16%
d) 29.53%

3. Vinod wants to go abroad on a family vacation tour. A tour operator is offering him a package in which he has
to pay only Rs. 20,000 which is 10% upfront amount, while the remaining amount is to be repaid in 36 EMIs
of Rs. 7,500 each, first EMI payable after one month. He wants to know the annual effective rate of interest
which he may incur in subscribing to this offer.
a) 24.10% p.a.
b) 27.00% p.a.
c) 32.61% p.a.
d) 28.56% p.a.

4. Today is 31st March 2011; Sushma took personal loan at 17% p.a. rate of interest (reducing monthly
balance basis) for tenure of 39 months. The installments are payable on the 1st of every month.
Principal amount of loan outstanding was Rs. 1.07 Lakh as on 1st March, 2011 pursuant to payment of
installment. Eight installments are yet to be paid. The foreclosure charges are 2% of the amount
outstanding. She receives a good amount of Bonus from her company. She wants to fore-close this loan

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today. She wants to know from you, what is the annual effective return generated by her by fore-closure
of loan today, instead of regular payment of EMI’s on due date.
a) 5.34%
b) 8.13%
c) 10.48%

5. A personal loan of Rs. 3 lakhs is availed on credit card at 14% p.a. interest for tenure of 2 years. The
credit card company charged processing fees of 1% of the loan amount. The interest on monthly reducing
balance basis was charged in the credit card. What is the annual effective cost paid in this transaction?

a. 13.8%
b. 18.7%
c. 16.10%

6. Prabu’s Debt Mutual Fund portfolio has generated returns of 11% per annum. He wants to know the actual
return of his portfolio, after tax and inflation, if his income tax slab is 30% and rate of Inflation is 6% p.a.
(Indicate nearest figure).

a) 1.60% p.a.
b) 1.70% p.a.
c) 4.70% p.a.
d) 3.50% p.a.

7. Mr. A has invested in an instrument for three years. The instrument has produced a return of 11%,15%
and 12% in the three years. You as Mr. A’s advisor have observed that the ruling inflation in these three
years respectively was 4%,7% and 8%. You find the real rate of return which Mr. A has received as ______.

(a) 5.65% p.a. (b) 7.08% p.a. (c) 5.96% p.a. (d) 6.32% p.a.

8. Recently a nationalized bank announced its 600-day Fixed Deposit with Interest compounded quarterly.
Surinder is keen to invest in this FDR. You want to assess the real rate of return in this FDR keeping in
view the prevailing inflationary trend, and advise him to have at least 4% p.a. real rate of return. Keeping
this in view, at what rate of interest this FDR is attractive enough for him to invest? (Rate of inflation is
6%)

a) 9.8 % p.a. to 9.9% p.a.

b) 10.2% p.a. to 10.3% p.a.
c) 10% p.a. to 10.1% p.a.
d) 9. 60% p.a. to 9.70% p.a.

9. Sushant has received offer to invest in New Fund Offers of open-end equity growth schemes ABC and
PQR of two Mutual Funds. The schemes have same investment objectives and other features, except
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in the Fund Management Charges (FMC), which is 2.25% p.a. for ABC and 1.50% p.a. for PQR. Sushant
is not able to appreciate as to what difference this would make in the end analysis. You advise that if
He makes an investment of Rs. 5,000 each per month for twenty years in ABC and PQR, and assuming
that both funds generate same pre-FMC return, say 12%, year after year, and the accumulated
amount in PQR will be ______% higher than that of ABC after twenty years.
a) 10.06
b) 9.14
c) 9.31
d) 10.31

IRR or CAGR Calculation

10.During identification of new business opportunities, one of Surinder’s friends Gaurav has offered him a
business proposal Surinder shall take the franchise of a company which is a reputed brand in the field of
pathology lab. Franchise rights shall be valid for 5 years and the project requires an upfront investment of
Rs. 25 lakhs for required infrastructure. The franchisee agreement has an option that the company can take
over the franchisee after 5 years by charging depreciation @15% p.a. on the straight-line basis. The projected
profits from the business are as follows:

Year 1 3.50 lakh

Year 2 4.74 lakh
Year 3 5.17 lakh
Year 4 6.35 lakh
Year 5 7.10 lakh

Surinder wants to know what IRR he will earn on his investment from this project. (Please ignore taxes and
assuming no additional investment is made during this five-year period)

a) 8.20%
b) 5.17%
c) 7.82%

11. Govind invested Rs. 20 lacs in HDFC Equity Fund (Dividend option) on 1st April 2007, at a price of Rs.
21.129 / unit. The Fund has been a good performer, and declared dividends of

Rs. 3 / unit on 30 Nov, 2007,

Rs. 5 / unit on 17 Mar, 2009 and
Rs. 5 / unit on 7 Mar, 2010
The current price of HDFC Equity Fund (as on 30 Apr, 2010) is Rs. 56.35 / unit.
What has been the annualized return of Govind’s investment so far?

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a) 47.33%
b) 52.81%

12. Vinod was allotted 10,000 units of a Mutual Fund scheme at Rs. 10.00 per unit on 23rd October 2005. He
chose dividend reinvestment option. He received dividends on 24th October 2006 @Rs. 1.65 per unit
(reinvested at NAV of Rs. 10.47), on 8th May 2007 @Rs. 1.80 per unit (reinvested at NAV of Rs. 11.84) and on
23rd December, 2007 @Rs. 2.00 per unit (reinvested at NAV of Rs. 11.28). Vinod redeemed all the units on
23rd March 2009 at Rs. 9.04. He wants to know the annual rate of return he earned on the investment?
(Please ignore charges and Taxes if applicable)

a) 10.79% p.a.
b) 9.52% p.a.
c) 11.18% p.a.

Education & Marriage Goal Planning

13. Vishal, aged 46 years and Aditi, aged 43 years, they have a son Ajay, aged 16 years and a daughter Priti,
aged 12 years. Vishal has been investing Rs. 35,000 in an Equity mutual fund scheme in the beginning of each
year from last 10 years. Each child will spend 3 years at college, starting from their respective age 21 years.
The current cost of higher education in college is Rs. 2.5 Lakh p.a. for each child. Vishal wants to know the
amount he should be investing in the beginning of every month, starting immediately and up to date of the
first withdrawal, to pay for his children’s higher education requirements. (Inflation -6% pa, return on equity
MF scheme – 12% pa)

a) Rs. 7,853
b) Rs. 8,840
c) Rs.6,183
d) Rs. 8,942

14. Vikas has two children Sonu (aged 5 years) and Monu (aged 2 Years). He wants to invest yearly to achieve
his goals for his children's higher education for both children at their age of 21 in lump sum; presently
valued at Rs. 3 Lakh each. For accumulation of fund you recommend Vikas to invest in Debt and Equity in
the ratio 20:80. If Vikas starts investment from today, what approximate amount should he set aside every
year to achieve his said goals? Assume Vikas maintains separate investment accounts for Sonu and Monu
and invests till they turn 21 years of age respectively. (Inflation rate - 4%, rate of return on equity -15% p.a.,
rate of return on debt -9% pa)

a) Rs. 9,000 and Rs. 8,000 respectively

b) Rs. 9600 and Rs. 7,000 respectively
c) Rs. 8,000 and Rs. 7,000 respectively
d) Rs. 10,000 and Rs. 8,000 respectively

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15. Anita wants to invest monthly for her son Rajesh’s (aged 11 years) Higher education when he turns age
of 21. She will make investment of Rs. 2500 p.m. till the age of 15 and thereafter Rs. 4000 pm till he turns age
of 21. Present cost of higher education is Rs. 5 lakh which is expected to escalate at the rate of 12% p.a. You
have advised her to invest monthly in Debt MF and Equity MF in the ratio of 30: 70 till Rajesh turns age of 17.
Thereafter, further investments are made in Debt MF and Equity MF in the ratio of 60: 40. Anita wants to
know, how much additional amount she needs to invest monthly, starting from today, till Rajesh turns
age of 21. (Assume Equity return – 14%, Debt return 9% pa)

a) Rs. 3,650
b) Rs. 3,575
c) Rs. 3,500
d) Rs. 3,425

16. Today’s date is 1st April 2015. Current Age of Ramesh is 4 years. And current age of Govind is 1 year.
Education expenses are required for each child at their respective age of 18 (Rs. 4 lakhs at current cost) and
for four subsequent years (Rs. 3 lakh p.a. at current cost). Expenses escalate at 5.5% p.a. All withdrawals are
made in the beginning of the financial year. This goal is provided for by investing monthly an amount at 11%
p.a. with immediate effect up to one year prior to the initial expenses required for the elder child. Find this
monthly investment.

a) Rs. 14,730
b) Rs. 15,520
c) Rs. 16,600

17. Ravi and Anita want to invest Rs. 20,000 p.m. jointly. Starting from today, Ravi wants to invest this amount
into an investment product, which doubles the investment amount in 8 year 7 months. They want to invest
Rs. 20,000 in this product every month till a month before the first maturity receipt of their investment. The
maturity amount of such investment product shall be reinvested in a balanced Mutual fund scheme
generating 0.75% return per month. Ravi wants to know the accumulated amount of funds at the time of last
maturity receipt of invest product with them to fund her daughter’s marriage. According to you the same is
________________.

a) Rs. 63,14,378
b) Rs. 62,27,373
c) Rs. 61,81,015
d) Rs. 61,41,015

18. Surinder, aged 42 years, has one daughter Divya, aged 5 years. He will need Rs. 15 lakhs in present terms
for the marriage of their daughter Divya, when she turns age of 24.

You suggest him to invest Rs. 1 Lakh every year in NSC’s from today to the date till Divya turns 19 years of
her age. The maturity proceed of each NSC is reinvested in debt mutual fund scheme. He asks you whether,
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with the amount thus accumulated, he would be able to achieve the goal of Divya’s marriage, or there could
be a shortfall in meeting such expenses. (Assume Rate of Inflation 6% p.a., return on debt MF 7.5 %, NSC –
8.4%)

a) Surplus of Rs. 1,98,240

b) Shortfall of Rs. 6,29,160
c) Surplus of Rs3,40,500
d) Shortfall of Rs. 7,48,143

19. Ramakant has invested maximum allowable amount in POMIS on 1st Dec 2011. He intends to invest
interest from this POMIS in Gold ETF which is expected to give an average monthly return of 0.75% p.m. (net
of expense).
Calculate total amount received on POMIS maturity along with Gold ETF value. (Assume Interest rate on PO
MIS is 8.2%)
a) Rs. 6,81,930
b) Rs. 7,35,021
c) Rs. 6,98,372

20. A business man wants to achieve the goal of marriage of his daughter after 10 years. The funds required
would be Rs. 25 lakh at then costs. He wants to invest monthly for the goal. You suggest an asset allocation
strategy where he should invest monthly in equity and debt in ratio 65:35 for 9 years, and shift the entire
accumulated amount in these funds to liquid fund in the last year. If the returns expected from equity, debt
and liquid funds in this period are 12 % p.a., 9 % p.a. and 5 % p.a., respectively, what approximate amount
per month is required to be allocated to equity and debt schemes?

a) Rs. 12,679 & Rs. 8,453

b) Rs. 9,485 & Rs. 6,323
c) Rs. 8,601 & Rs. 4,631
d) Rs. 12,075 & Rs. 8,05

21. Your Client start investing Rs. 12,000 per month a year ago in an asset allocation of 30:70 in equity and
debt to achieve a goal in 6 years from now. You realize that he would be requiring Rs. 15 lakh for the same
goal. You expect equity and debt to give returns of 11.75% p.a. and 8.25% p.a., respectively in the entire
period of investment. You assess changing asset allocation to 65:35 in equity and debt by investing Rs.
2,000 additional per month to see how closer he can reach to his goal. You find that ______.

a) surplus of Rs. 2,13,707

b) shortfall of Rs. 1,68,091
c) surplus of Rs. 6,47,691
d) surplus of Rs. 1,47,691

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22. Your client starts investing immediately for 10 years annually Rs. 60,000 in the ratio of 80:20 in equity
and debt products. You expect return from equity and debt to be 11.75% p.a. and 8.25% p.a. during this
period. To protect the wealth, he rebalances the portfolio in 40:60 ratio of equity and debt after 10 years
and invests in the new ratio annually Rs. 60,000 for the next 5 years. The return expected from equity and
debt in this period subsides to 9% p.a. and 7% p.a., respectively. What rate of return is expected on his total
investments? How would this return fare when seen from average inflation of 6% during the entire period?

(a) 6.96% p.a.; real return of 0.91% p.a.

(b) 7.57% p.a.; real return of 1.48% p.a.
(c) 7.24% p.a.; real return of 1.17% p.a.
(d) 9.52% p.a.; real return of 3.32% p.a.

23. Your client Mr A. has his Rs. 50 lakh portfolio in three asset classes as on 1st April 2009 comprised of
Equity and Debt each in 35 % allocation with the rest of the portfolio invested in Gold ETF. Over the period
up to 1st January 2013, Gold has given a total return of 90 % in the portfolio whereas equity and debt have
total return of 11% and 15%, respectively. You rebalance the portfolio today and change its allocation to
60% in equity with the other two classes equally sharing the balance. What should be the transfer of money
amongst asset classes.

(a) Shift from Equity to Debt Rs. 1,52,962 and shift from Gold ETF to Equity Rs. 6,66,762
(b) Shift from Debt to Equity Rs. 2,10,000 and shift from Debt to Gold ETF Rs. 1,05,000.
(c) Shift from Debt to Equity Rs. 6,51,500 and shift from Gold ETF to Equity Rs. 14,89,000
(d) Shift from Debt to Equity Rs. 9,01,176 and shift from Gold ETF to Equity Rs. 15,69,28

24.

Present Age of Daughter 18

Age when Daughter gets married 25
Provision for Daughter's marriage expenses at current costs 2,000,000
Present age of Son 16
Age when Son gets married 26
Provision for Son's marriage expenses at current costs 1,500,000
Cost of escalation of marriage expenses 7.50%
Existing funds to be utilized 925,000
Aggressive fund return 11%
Risk free return 7%

Goal & Strategy:

You suggest Mr. A to achieve the goal for accumulation of funds for marriage expenses by starting a
systematic regular monthly investment immediately along with the lump sum of existing funds
available in an aggressive fund for 4 years and shift to safe investments 3 years prior to Daughter's
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marriage. What is the approximate monthly investment amount required?

a. 68340
b. 56232
c. 52632

25. In order to meet the goal of higher education of his son after 15 years, a person chooses to invest in two
series of Inflation Indexed Bonds, each having a 10-year maturity period. One series is to be invested
immediately and the other after 5 years. A sum of Rs. 10 lakhs is invested in the first series, while the invested
sum is increased to Rs. 15 lakh in the second series. The real coupon is 1.5% while average inflation over the
entire period is estimated to be 5% p.a. The coupons to be received and the maturity proceeds of individual
bond series are invested in risk free instruments at 6% p.a. till required for higher education. What would be
the extent of accumulation for the higher education goal?

a. 5075987
b. 5347134
c. 5117550

26. ACCUMULATION/SWITCHES-1: The higher education costs per annum are Rs. 3 lakh at present costs.
The costs are escalating @9% per annum. Mr. A estimates for his son that such funds would be required for
5 years after 6 years from now. He starts accumulating funds immediately in a systematic manner every
month in an equity mutual fund scheme. He would switch equivalent funds required for a particular year to
liquid mutual fund scheme one year in advance. The funds would continue to be accumulated for a period
up to the last switch to liquid fund. What should be the SIP amount in the equity growth fund? (Take expected
return from equity growth funds @12% p.a. and from liquid fund @6% p.a.)

a.19850 b. 18764 c. 24950

27.
As a tax efficient strategy to meet entire education expenses, a Debt Fund and an Equity Fund is started today
with initial investment of Rs. 5,00,000 each. Different SIPs are also started immediately, in Debt Fund for
4 years and in Equity Fund for 10 years. ( Current age of child is 3 years)
Debt Fund is used to meet entire Basic Education expenses. The Debt Fund is also used to meet the yearly
expenses of secondary education and higher education from lump sum amounts switched at certain intervals
from the Equity Fund in the following manner: First; at age 8 to meet secondary education expenses from
age 11 to 13; Second, at age 11 to meet the secondary education expenses from age 14 to 16; Third, at age
14 to meet the higher education expenses. The expenses due in a year are withdrawn in the beginning. What
should be the amounts of monthly SIPs in Debt Fund and Equity Fund today?

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Basic Education to start at age 5

Years of Basic Education 6 years

Funds required for Basic Education 250,000 Rs. p.a.

Secondary Education to start at age 11
Years of Secondary Education 6 years

Funds required for Secondary Education 400,000 Rs. p.a.

Higher Education to start at age 17

Lump sum required for Higher Education 3,000,000 Rs.

Cost escalation for all education expenses 8% p.a.
Returns expected from Debt schemes 7% p.a.
Returns expected from Equity schemes 11% p.a.

a) 51709
b) 76,947
c)80,908
d) 67890

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Loan Amortization Schedule

28. Vinod has not taken any loan but has recently invested in an upcoming housing project in Aurangabad
for a flat worth Rs. 44 lakh of which Rs. 4 lakh down payment has already been made. He has to pay 20%
of the remaining amount on 1st October, 2009 and another 20% six months thereafter. The 3rd installment
of 30% shall be due on 1st January, 2011 and the final 30% one year thereafter, pursuant to which the
possession would be obtained.
Vinod has tied up with a bank for housing loan at fixed rate of interest of 12.5% p.a. The Bank would release
loan installments as per the schedule finalized with the Builder. The tenure of loan is 15 years from the date
of disbursement of first installment and EMI/revised EMI would be payable a month after the respective
release of loan installments. The EMI changes at every stage of the release of installments as if the
outstanding loan amount is repayable over the remaining tenure. Vinod wants to know what would be the
EMI payable after the full disbursement of loan amount.
a) Rs. 47,812
b) Rs. 50,818
c) Rs. 52,390
d) Rs. 52,537

29. Anita availed of the housing loan at an interest rate of 9% p.a. (on reducing monthly balance basis) on 1st
December, 2003 for a term of 15 years. The first EMI was paid on 1st January, 2004 and thereafter on 1st of
every month. Anita wants to know by how much the EMI should be increased from 1st November, 2009 if
the entire loan is to be repaid by 1st December, 2012.Principal amount of loan outstanding as on 1st October,
2009 is Rs. 23.47 Lakh. Pursuant to payment of installment, if due
(Assume that the housing loan company agrees to such an arrangement without any penalty or charges)

a. Rs. 39,426
b. Rs. 38,223
c. Rs. 39,802

30. Mr. A had taken a loan of Rs. 40 lakh in 1st July 2010 at a floating rate of interest of 10% p.a. for tenure
of 20 years from a housing finance company. The company sent a notice raising the interest rate to 10.75%
p.a. effective 1st January 2012 thereby increasing EMI. He decides to refinance the loan at 10.25% from a
bank which charges a processing fee of 1% of loan sanctioned. What absolute amount he stands to save in
the remaining tenure if the outstanding loan amount (pursuant to payment of 1st April 2012 installment) is
refinanced so that the new loan terminates as per original tenure?

(a) Rs. 3,60,948

(b) Rs. 1,92,266
(c) Rs. 4,90,240
(d) Rs. 2,39,401
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31. An individual has recently purchased a house worth Rs. 40 lakh for self-occupation by availing housing
loan of Rs. 28 lakh at 9.25% p.a. rate of interest. The tenure of loan is 18 years. He has Rs. 12 lakh financial
assets at present. He is expected to save annually Rs. 2 lakh which he will invest on a quarterly basis
beginning after a quarter from now in an instrument which is expected to provide return of 9% p.a. What
would be his net worth five years from now? The value of the house which is for consumption purposes is
not considered in the net worth so arrived.

(a) Rs. 2.83 lakh

(b) Rs. 18.82 lakh
(c) Rs. 6.68 lakh
(d) Rs. 7.36 lakh

32. Mr. A purchased a flat worth Rs. 50 lakh in 1st January 2007 by availing a housing loan of Rs. 35 lakh for
tenure 15 years at the rate of 9% p.a. The value of his flat as in 1st January 2013 has appreciated to Rs. 90
lakh. What approximate value of home equity can he consider in his flat towards his unencumbered
interest after also setting aside 15% of the appreciation value towards taxes and other costs to be
discharged on selling the unit?

(a) Rs. 49 lakh

(b) Rs. 74.56 lakh
(c) Rs. 57.79 lakh
(d) Rs. 63.79 lakh

33. Mr. A purchased a flat worth Rs. 50 lakhs in 1st January 2007 by availing a housing loan of Rs. 40 lakhs
for tenure 15 years at the rate of 8.25% p.a. The value of his flat as on 2nd-April-2018 has appreciated to Rs.
1.25 crore. What approximate value can be considered by a finance company towards "Loan against
Property" if the norm is to consider 60% of the value of home less any encumbrances?

(a) Rs. 59.748 lakh

(b)Rs. 60.876 lakhs
(c)Rs. 63.598 lakh
(d)Rs. 66.015 lakh

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Risk Assessment & Insurance Planning

Insurance contract

Contract of Insurance being a contract has to satisfy the pre-requisites of the contract under the Indian
Contract Act, 1872. The conditions necessary for a contract as per the act are:

 Consideration: A contract is not valid unless there is consideration given by one party to the other
party. In case of insurance contract, the insured pays premium to the insurer in return for an insurance
cover.

 Common and Free Consent: Both the contracting parties should understand the contract and should
consent to the same contract. Also, the consent such made should be by a free mind without any
influence by any party.

 Competent to contract: The party to the contract should be competent to contract. Minors and
persons of unsound mind are not competent to contract.

 Legal: The objective of the contract must be legal and should not prohibit by any law.

Distinct legal characteristics of an insurance contract

In addition to the basic requirements of the contract, Insurance contracts are subject to certain special
principles

 Utmost good faith

 Insurable Interest

 Indemnity

 Subrogation

Co-insurance & Reinsurance

–Co-insurance refers to the sharing of insurance by two or more insurers in an agreed proportion. This can
be done by the insurer himself. Co-insurance is different from reinsurance the fact that different risks or a
proportion of amount is shared between the insurers to diversify the risk or in case of very high value of
assets a single company cannot afford to insure the risk alone. In case of claims, the losses are shared in the
ratio of liability assumed
Condition of average

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The Financial Planner must help to decide the sum assured. This is because most policies have a “Coinsurance
Clause”, which provides that if the sum insured is less than 85% of the value of the property, then this is case
of under insurance & insured will have to bear a proportion of the loss. For example: If the property value is
10,00,000 and the sum assured is 7,00,000, on a loss of 4,00,000 on the property only,
7,00,000/10,00,000*4,00,000 = 2,80,000 will be borne by the insurance company.

Common types of deductibles

•Deductibles are amounts specified at the time of contracting to be deducted at the time of making the claim.
The common types of deductibles are:

• Excess: Excess is the amount compulsorily deductible from the amount of the claim. This ensures that the
insured is not compensated 100% by the insurer which entails certain amount of risk to be borne by the
insured himself. Excess can also be voluntary to reduce the amount of premium. The main advantages of
Excess are that certain minimum risk shared by the insured to act prudently & to avoid processing of smaller
amounts of claim

•Franchise: In case of an excess if the amount of claim exceeds the excess the amount of excess is deducted
and balance amount is paid. However, in case of franchise, if the claim exceeds the franchise the whole claim
is paid and if the claim is less than franchise then nothing is paid.

Explanation of Difference between Excess and Franchise

Type of Deductible Amount Amount of claim Amount payable

Deductible
Excess 300 500 200
Excess 300 200 0
Franchise 300 500 500
Franchise 300 200 0

Household Insurance:

Householders’ Insurance (HHI) policy is designed to cover various risks and contingencies faced by
householders under a single policy. It provides protection. For property and interests of the insured and his
family members who permanently reside with the insured.

Replacement or Reinstatement value: Reinstatement cost is the cost which would incur on reconstructing
the damaged property. As per standard regulations, reinstatement cost includes value of foundation and it
doesn’t include land cost. This policy entitles the insured person to a property of the same construction as
the property which has been destroyed. But it must ensure that the property has been adequately insured.

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Replacement value is the amount necessary to replace or rebuild your home or repair damages with materials
of similar kind and quality without deducting for depreciation.

Indemnity value: This is the value of the item at the time of the loss. Payment of the indemnity value is
designed to put you in the same financial position you were in immediately before the loss occurred.
If a 4-year-old car is destroyed completely, the insurance company will compensate for what the car was
worth at the time of its loss. If it paid the full value of a new car, this would create a moral hazard by
motivating some drivers to intentionally destroy the car in an attempt to profit from insurance. For the same
reason, the insured cannot collect from multiple insurance policies, even from different companies, for the
same loss. Indemnity value is also referred to as Market Value.

What is the procedure for assessing the value of my home structure and its contents?
The structure of your home is insured as per the re-instatement value and the contents are insured as per
the market value.
The value of your home structure is assessed as per the area of your home multiplied by the rate of
construction per. sq. feet, as on the date of taking the policy. For example, if your home is 1000 sq. feet and
the construction rate per sq. feet is Rs. 800/-, then the sum insured for your home’s building structure is Rs.
8,00,000.

On the other hand, the contents are assessed on the market value of the items. This means that if there
were a loss, the claim would be paid on the value of purchasing a similar new item, less depreciation for the
usage.

Liability Insurance

Liability insurance is a policy that offers protection to businesses and individuals from risk that they may be
held legally or sued for negligence, malpractice or injury. This insurance policy protects the insured from
legal payouts and costs for which the policyholder is deemed to be responsible. There are a number of
liabilities insurance policy available. These include third party liability, public liability, product liability,
employer liability, professional liabilities, industrial risks and so on.

Professional Indemnity Policy:

This policy is meant for professionals to cover liability falling on them as a result of errors and omissions
committed by them whilst rendering professional service. The policy offers a benefit of Retroactive period
on continuous renewal of policy whereby claims reported in subsequent renewal but pertaining to earlier
period after first inception of the policy, also become payable.

Scope: The policy covers all sums which the insured professional becomes legally liable to pay as damages to
third party in respect of any error and/or omission on his/her part committed whilst rendering professional

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service. Legal cost and expenses incurred in defense of the case, with the prior consent of the insurance
company, are also payable, subject to the overall limit of indemnity selected.
Only civil liability claims are covered. Any liability arising out of any criminal act or act committed in violation
of any law or ordinance is not covered. The policy is meant for professionals.

1. Doctors and medical practitioners

2. Engineers, architects and interior decorators.
3. Lawyers, advocates, solicitors and counsels.
4. Chartered accountants, financial accountants, management consultants.

Critical illness insurance

This insurance policy provides cover on the insured suffering from several dreaded diseases. The policyholder
gets the entire sum assured amount and he does not have to submit and proof of the expenditure done or
to be incurred. Also, some policies come with a premium waiver benefit where after diagnosis of critical
illness the future premium payables are waived.

Disability Insurance

It is very common for people to take insurance for their valued assets including cars, homes and health. But
not everyone insures something that is very essential for survival - the ability to earn an income by working.
Apart from normal health insurance policies, a disability insurance plan is a very critical type of insurance
scheme that individuals must consider having. A long - term disability can wreak havoc on your personal
finances and savings if you are not wholly prepared.

Permanent & Total Disablement Insurance

This Insurance policy provides you cover against Permanent Total Disablement (PTD) on account of an
accident. The definition of total disability usually refers to “the inability to perform every and any duty of
own occupation” or “the inability to carry out the substantial and material duties of occupation”.

Some disabilities automatically classify the insured as totally disabled. Such disabilities are also referred
to as presumptive disabilities and include loss of hearing and speech, permanent blindness, total
blindness, loss of two limbs etc.

When the insured becomes disabled, he has to wait for a defined period of time before receiving benefits
from disability insurance policy. This period influences the premium amount for disability insurance, if
you choose a shorter waiting period, the premium might be higher.

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Temporary Disability Insurance Policy

This policy provides for protection against the risk of loss of income earned during the period of disability,
hospitalization or due to inability of attending work due to gradual healing (through rest) after sickness or
injury commonly known as convalescence.
Some personal accident policies provide a limited benefit of protecting the income during the time of start
of disability; approximately equal to 1% of the capital sum insured per week of such disablement till a certain
limit of period generally 2 years.

Health Insurance

Health insurance is a type of insurance where, the insurer pays the medical cost of the insured if the insured
becomes sick due to covered causes, or due to accidents. Due to increasing cost of healthcare and risk of
diseases, accidents and disability Health Insurance are becoming popular. Medical expenses cannot be
estimated and have a tendency for sudden impact on the finances of the Individual.

Portability of Health Insurance

When you change your health insurance policy from one insurance company to another, you don’t have to
lose the benefits you have accumulated.
In the past in health insurance policies, such a move resulted in your losing benefits like the waiting period
for covering "Pre-existing Diseases".
Now IRDA protects you by giving you the right to port your policy to any other insurer of your choice. It has
laid down that your new insurer “shall allow for credit gained by the insured for pre-existing condition(s) in
terms of waiting period”.
This applies not only when you move from one insurer to another but also from one plan to another with
the same insurer.

Rights

 You can port your policy from and to any general insurance company or specialized health insurance
company
 You can port any individual/ family policies
 Your new insurer has to give you the credit relating to waiting period for pre-existing conditions that
you have gained with the old insurer
 Your new insurer has to insure you at least up to the sum insured under the old policy
 The two insurers should complete the porting as per the timelines prescribed in the IRDA
(Protection of Policyholders’ Interests) Regulations and guidelines

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Conditions

• You can port the policy only at the juncture of renewal. That is, the new insurance period will be
with the new insurance company
• Apart from the waiting period credit, all other terms of the new policy including the premium are at
the discretion of the new insurance company
• At least 45 days before your renewal is due you have to
o Write to your old insurance company requesting a shift
o Specify company to which you want to shift the policy
o Renew your policy without a break (there is a 30 day grace period if porting is under process)

IRDA Facilitation

IRDA has created a web-based facility to get and maintain data about all health insurance policies issued by
insurance companies to individuals so that it can be accessed by the new company to which a policyholder
wishes to port his policy. This enables the new insurer to obtain data on history of health insurance of the
policyholder wishing to port his policy.

Guidelines for Portability of Health Insurance Policies as per IRDA Regulations 2016

1. A policyholder desirous of porting his/her policy to another insurance company shall apply to such
insurance company to port the entire policy along with all the members of the family, if any, at least
45 days before, but not earlier than 60 days from the premium renewal date of his/her existing
policy.

2. On receipt of intimation referred under Clause (1) above, the insurance company shall furnish the
applicant, the Portability Form as set out in Annexure-I to these guidelines together with a proposal
form and relevant product literature on various health insurance products which could be offered.

3. The policyholder shall fill in the portability form along with proposal form and submit the same to
the insurance company.

4. On receipt of the Portability Form, the insurance company shall seek the necessary details of
medical history and claim history of the concerned policyholder from the existing insurance
company. This shall be done through the web portal of the IRDAI.

5. The existing insurer, on receiving such a request on portability shall furnish the requisite data for
porting insurance policies in the prescribed format in the web portal of IRDAI within 7 working
days of the receipt of the request.

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6. On receipt of the data from the existing insurance company, the new insurance company may
underwrite the proposal and convey its decision to the policyholder in accordance with the
Regulation 4 (6) of the IRDA (Protection of Policyholders’ interest) Regulations, 2002.

7. If, on receipt of data within the above time frame, the insurance company does not communicate its
decision to the requesting policyholder within 15 days in accordance with its underwriting policy as
filed by the company with the Authority, the insurance company shall not have any right to reject
such proposal and shall accept the proposal.

8. In order to accept a policy which is being ported in, the insurer shall not levy any additional loading
or charges exclusively for the purpose of porting.

9. No commission shall be payable to any intermediary on the acceptance of a ported policy.

10. Portability shall be allowed in the following:

a. All individual health insurance policies issued by General Insurers and Health Insurers including family
floater policies.

b. Individual members, including the family members covered under any group health
insurance policy of a General Insurer or Health Insurer shall have the right to migrate from
such a group policy to an individual health insurance policy or a family floater policy with
the same insurer. Thereafter, he/she shall be accorded the right mentioned in 1 above.

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Bonus applicable in Traditional Life Insurance Policies

In the most common understanding of the word, bonus is a reward or any extra amount that one may receive
over and above the base amount. A similar concept is also applicable to your life insurance policy. In this
context, a bonus is an additional sum which gets accrued to the policy on a yearly basis. This amount is paid
out by the insurance company to the policyholders upon maturity of the plan, or in case of unfortunate death.
What bonus
Premiums paid by policyholders are pooled within the insurance company’s life fund. The company uses
these pooled assets to pay out claims. A large part of the life fund is invested in government-secured debt
instruments, with a small portion invested in equity to achieve a desired return. Based upon the earnings
from the investments made by the company and its claims experience, the company aims to distribute a part
of its surplus to the with-profits policyholders in the form of bonus.
The bonus rate is decided after considering a variety of factors such as the return on the underlying assets,
the level of bonuses declared in previous years and other actuarial assumptions.
Bonus is offered on traditional plans which are built in to the plan structure. To avail of the bonus, it is
important that the type of plan you have purchased is a with-profits one, often known as a participating
policy as well. These types of policies participate in the surplus which gets shared in the form of a bonus to
the policyholders.

Types of bonuses
Simple Reversionary bonus (SRB) This type of bonus is calculated on the sum assured only. This bonus is
declared annually and is accrued to be paid out at the time of a claim or maturity.
Compound Reversionary bonus (CRB) CRB is calculated as a percentage of the sum assured and all previously
accrued bonuses. The bonus of each year is added to the sum assured and the next years bonus is calculated
on the enhanced amount.
Let’s take an example to understand which type of bonus is beneficial for you
Rahul Khanna has two participating policies of Rs 5,00,000 each. Let’s assume that on the first policy he gets
a bonus using the simple revisionary method and on the second policy he gets a bonus using the compound
revisionary method.

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The SRB declared on the policy is Rs 25 per 1,000 of sum assured, while CRB declared is 3 per cent throughout
the policy term. As seen from the table above, the CRB to be accrued at the end of the 10th year is much
higher, as compared to the SRB of the same year.
Terminal Bonus: The terminal bonus, also known as a persistency bonus, is a bonus paid to indicate an overall
performance of a participating policy. The terminal bonus is paid at the time of maturity or death of the life
assured. This form of bonus may be given after staying in the policy for a pre-determined time period and is
offered at the discretion of the insurer.

Interim Bonus: Interim bonus is payable for those policies that mature or result in a death claim in between
two bonus declaration dates. While the policy has already accrued the bonus declared at the end of the last
financial year, there may be a short period in between the bonus declaration date and the maturity/claim
date for which the policy has not received bonus. In such instances, bonus is added on a pro-rata basis using
the interim bonus rates declared by the company. An interim bonus ensures that policyholders who claim
benefits in midst of a year will receive credit for keeping the policy in force for that part of the year.
Cash Bonus The insurance company may decide to give the bonus in cash, i.e. bonus accruing in a year will
be paid to the policyholder at the end of the year. This gives the policyholder an opportunity to receive the
bonus year on year rather than the usual way of accruing till bonus maturity.
Things to consider
Bonus offered While evaluating a traditional policy, it is a good idea to consider beforehand the type of bonus
that your plan offers. This would be mentioned in the brochure of the plan, or you could also check with your
agent/intermediary.
Check bonus rates While choosing your traditional plan, make sure to check the bonus rates offered by them
over the years. These rates are usually published on the insurers website and will give you an idea of the kind
of benefits you stand to gain from the particular policy.

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Paid UP Policy

Paid-up policy falls into the category of traditional insurance plans. . If an individual stop paying the
premiums, but does not withdraw the money from his/her policy, the policy is referred to as paid up. The
sum assured is reduced proportionately, depending on when he/she has stopped paying the premiums. The
concerned policyholder can then receive the amount (Paid up value plus accumulated bonus till paid up date)
at the end of the term. The sum assured is limited to the paid-up value. It is calculated as the ratio of number
of premiums paid to the total number of premiums that were supposed to be paid according to the policy
multiplied by the sum assured at maturity. In case of Paid up, Policyholder will not be entitled for any Terminal
Bonus at the time of maturity of policy.

So, when you make a policy paid-up, it still is in force with a reduced sum assured and does not discontinue.
The reduced sum assured is called the paid-up value of the policy. After date of Paid up no fresh bonus will
accumulate in the policy till maturity.

Here is the formula for Paid-up:

Paid-Up Value = (Number of premiums paid / Total number of premiums payable) * Original sum assured

Surrender of Life Insurance Policy

Life insurance is a long-term financial product. Though you may buy any LIC insurance or investment policy
with a specific purpose to meet a long-term need, your investment perspective can change over the years
of time. Sometimes you may have to exit from your long-term LIC investment for various reasons such as a
change in your requirement, sudden personal economic hardship or the product is a misfit for your current
investment portfolio. Whatever may be the reason, as per IRDA guidelines, Life Insurance companies allows
you to surrender your policy mid-way with certain conditions attached to it in specific to each policy.
What is the surrender value?
Surrendering the LIC policy means terminating the policy before the date of maturity. As the name implies,
surrender value is the amount that is paid by the insurance company on terminating or surrendering the
policy.
‘Surrender value’ exists for only those Life Insurance policies that have savings component attached to it.
For such savings plus insurance plans, the surrender value will be paid on terminating the policy in return of
all the premiums paid by you till the date of surrender. In many cases, depending on the terms and

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conditions of the policy surrender charges will be levied. The final surrender value payable is determined
after deduction of charges if any.
Usually, in most of the traditional investment policies, policy acquires the surrender value after the
payment of premium for at least two to three policy years.
What is guaranteed surrender value?
Guaranteed surrender value is the amount that is guaranteed to be paid by the insurance company in case
of surrendering the policy during the policy term after the policy acquires a surrender value. Guaranteed
surrender value is generally a certain percentage of total premiums paid excluding the additional premiums
paid for riders if any. Percentage may vary depending on the policy term and the policy year at which you
are surrendering the policy. Percentage or the surrender value factor increases with policy terms. That
means percentage applicable will be more as the policy nears maturity.
In most of the policies, along with guaranteed surrender value, the surrender value of vested bonuses will
also be paid (if applicable). Based on the policy year of surrender, percentage of vested bonus payable
varies.
For example, let’s say you have invested in LIC’s New Jeevan Anand plan for 15 years. Let’s say you are
paying a yearly premium of INR 40,000 (net of tax). In case, after the third policy year you wish to
surrender, your policy’s guaranteed surrender value will be 30 % (surrender value factor applicable) of total
premiums paid. Following will be the guaranteed surrender value:
Guaranteed surrender value = Surrender value factor X Total premiums paid
= 30% X (40,000 X 3) = INR 36,000
Let’s say, vested bonus for your policy at the time of surrender is INR 61,500. Surrender factor applicable
for accrued bonuses is 17.66%, then surrender value of vested bonuses will be:
The surrender value of vested bonuses = Applicable surrender factor X Accrued bonuses
= 17.66% X 61,500 = INR 10,861

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The Insurance Regulatory and Development Authority of India, (IRDAI), has issued new guidelines for unit-
linked insurance plans (ULIP) and traditional life insurance policies which will come into effect from
February 1, 2020.

1. Increase in time period allowed for policy revival

According to the new guidelines, IRDAI has asked insurers to increase the time period allowed for the
revival of life insurance policies. To comply with the 'revival of policy' provision, insurers have to increase
the time period allowed for the revival of ULIPs to three years from the date of the first unpaid premium.
For non-linked (Traditional insurance) products, the time period allowed for the revival of policy will be five
years.

2. The minimum sum assured for buying ULIP & Traditional policies reduced from 10 times to 7 times
the premiums paid

The minimum Sum Assured on the death during the entire term of the policy shall not be less than
 7 times the annualized premium, for limited or regular premium products.
 1.25 times the single premium for single premium products.
 105% of the total premiums received up to the date of death.

For policies issued on minor’s life, the date of commencement of risk may start anytime on or up to two
years from the date of commencement of the policy or on the policy anniversary after attainment of
majority, whichever is earlier.

How it will impact you: A lower sum assured could result in better returns as lesser amount of mortality
charges will get deducted. However, going for a lower sum assured, that is, less than 10 times of the annual
premium paid will not help you avail tax benefits. Currently, you can avail tax benefit on policies which have
a sum assured of 10 times the annual premium or more.

3. Withdrawal limit from pension plans increased to 60 percent

To improve flexibility and liquidity for policyholders, insurers are now mandated to allow beneficiaries to
withdraw a larger lump sum of 60 percent at vesting, surrender or death, as opposed to the current 33
percent. However, when you withdraw a lump sum from pension plans, only one-third of the corpus will
remain tax-free (as is the case now), not the entire 60 percent.
Around 25 per cent of the insured value can also be withdrawn by the policyholders in Pension plan during
an emergency situation that includes a serious illness, marriage and the education of their children.
Also, in pension plans the compulsion to give guaranteed return is also now removed.

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What are the new ULIP GUIDELINES?

• Lock in for Five Years and Premium Payment Term: Minimum lock-in period is 5 years and barring
single premium policies, the minimum payment term has also been raised to 5 pay. In case of Top
up premium lock in premium is same 5 year. It means you cannot top up in last 5 years of the policy.

• Net Reduction in Yield for Every Year: This guideline stipulates the maximum net reduction in yield
(due to charges) is 3% for policy term up to 10 years and 2.25% for policy term above 10 years.

• Cap on Discontinuance Charge: IRDA has introduced a cap on surrender charge, now termed as policy
discontinuance charge, basis the year of discontinuance and annual premium. This allows life insurers
to charge only a small penalty on early surrender of policy.

Taxation of pension plans issued by life insurance companies:

In a typical pension plan, you invest at regular interval in your working life and out of that amount there will
be a corpus that will be accumulated on retirement and from that corpus a regular stream of cashflow
(pension) is given in your post retirement period. Now we will look at taxation of each of these
components:

• Taxation of investment made in pension plan:

The investment that you make in your pension plan are eligible for tax deduction under Sec 80CCC. These
provisions are similar to provisions we saw for deduction under 80C for life insurance premiums paid. Also,
maximum deduction u/s 80C, 80CCC & 80CCD (1) combined is Rs 150000.

• Taxation of corpus accumulated on retirement:

Total 60% of accumulated balance, Policyholder can withdraw at vesting age. However, 1/3rd of
accumulated corpus can be received as tax free. Pension received from pension plans is added to your
income and taxed as per slab.
If Death happens within policy term most pension plans from insurance company give death benefit – this
will be tax free in hands of family member.

Taxation of surrender value if you surrender your pension plan mid – way.

If you surrender policy mid – way, surrender value received will be added to your income and you will have
to pay tax on it according to your tax slab.

Human Life Valuation

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Assigning a value to the Human Life is next to impossible job as each individual can be valued differently,
each individual is at different stage of his life and each individual aspires to reach a particular goal in life.
Though human life cannot be given a monetary value however his income earned per annum can be
capitalized and discounted at present value to arrive at a fair estimate of the earning capacity of the individual

Computation of Human Life value requires a detailed analysis of many factors. Some of them are –

1. Annual Income of the life

2. Balance of active earning period till retirement
3. Personal Expenses
4. Inflation
5. Future increase in salary, etc.

Capitalization of Income method:

The first step towards computation of Human life value would be to determine the net annual income of the
person after deducting the amount spent by him for his personal use like premium for insurance policies,
maintenance expense, income tax, etc. This amount will be the amount that he affords to his family annually.
The economic value of this life again depends on the length of his active earning period.

Let us assume that the person is 25 years of age and his annual income after deducting all his personal and
other expenses sums up to Rs.2,00,000. Assuming that he would continue with the existing job till his
retirement up to an age of 55 years, then his income to his family will continue for 30 years, provided he
survives till retirement. So, if he survives to his retirement, then the family would get Rs.200,000 for 30 years,
i.e. 200,000 * 30 = 6,000,000 ( discounted by time value of money). This will be the amount that the family
will lose on his premature death.

Capitalization of expenses method:

Dependents needs: In the event of death of the earning individual the dependents require a regular stream
of expenses for the essential basic needs of the survival of the family. Also, certain amount of regular income
will be required to continue with the lifestyle and the standard of living which was maintained before the
death of the earning member.

Educational needs & other Goals: Parents may have aspiration for higher education for their children. With
the rising cost of education, it becomes important to start saving from as early as possible

Funds to pay back loans: The individual must have exposed to a home loan mortgage where he will require
funds to pay back the loan.

Married Women's Property Act

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The Married Women's Property (MWP) Act was enacted with a view to protect the properties of women
against the creditors. Under MWP Act all the properties that belong to the women gets insulated and
protected from all the other court attachments or any income tax department attachments that the
husband has run up. Let's take an example a business family; the family could be a trader or a manufacturer
or any other business. In due course of business there are some credit limits or there are bank loans, which
have been taken by the business. The bank secures these credit limits against the assets of the business and
also takes a personal guarantee of the owner of the business which could be the husband or the family.

In case of the untimely death of the husband the bank starts recovering their loans and, in the process, they
liquidate the assets of the business and also, they attach the properties that belong to the guarantor, which
in this case is the husband.

In order to protect the family; the wife and the children, the life insurance policies that the husband takes;
he should make sure that these policies at the time of taking the policies should be taken under the MWP
Act because life insurance policies are also entitled to be attached, which means that the claims that paid
out on the death of the husband, goes to the bank and not to the surviving members.

The process of taking the policy under MWP is very simple. At the time of making an application one has to
fill in MWP addendum. This form is also provided by life insurance companies. In the form one has to fill in
the details of his wife and children, whoever he wishes to make beneficiaries in the policy. In case of death,
the policy proceeds do not go to anybody else other than the beneficiary as named by you in the policy.
There is no attachment because the policy does not belong to the husband.

We talk about life insurance as means of financial protection. What is the sense if the money does not go to
the family and gets attached for some other reasons? Let me make a point here, all kind of life insurance
policies whether online term policies or any other form of life insurance policies are entitled to be issued
under MWP Act and one should definitely make a point that he issues a policy under MWP Act to protect
his family.

Q: Can I get an addendum to an existing life insurance policy?

A: No. The MWP addendum can be attached only at the time of taking the policy. However, to answer the
question, if one still wants to protect his family against this then he can do an absolute assignment of the
policy even today; after taking the policy even if he is five-ten years down the policy, he can make an
absolute assignment of the policy in favor of his wife. So, it does not anymore belong to him, it is not his
property so it cannot be attached.

Key man Insurance

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Keyman insurance can be defined as an insurance policy where the proposer as well as the premium payer is
the employer, the life to be insured is that of the same employer's key employee (Keyman) and the benefit,
in case of a claim, goes to the employer. The `Keyman' here can be any employee, having a special skill set or
substantial responsibilities, who contributes significantly to the profits of that organization. It is not a special
plan of insurance but just application of life insurance to fulfill a special need.

Only term insurance is allowed to be bought as Keyman insurance. The term of the policy usually coincides
with the retirement age or the contract period of the key employee. Loan against policy and riders are not
permitted. In this policy, nomination can be done only in favor of the company.

Basic conditions required to be fulfilled in order to buy a Keyman policy

1. The 'key-man' should hold less than 51% of the company's shares.
2. The total number of shares of the company held by the Keyman and his family together should be less
than 70% of the company's shares.
3. Some proof of the critical role that the proposed life (the Keyman) plays in the business of the company,
is required.
The maximum sum assured for Keyman insurance is lower of:
1. Ten times the keyman's annual compensation package.
2. Three times the average gross profit of the company for the past three years.
3. Five times the average net profit for the past 3 years.

Keyman insurance is normally not issued if a company's profit or turnover is declining unless there are very
special circumstances. Factors like age limit and coverage term varies from one insurance company to
another. Loss making companies cannot buy Keyman insurance.

Taxation aspects of Keyman insurance:

a) The premium paid by the company buying the Keyman insurance policy is an allowable business
expenditure for the company under section 37(1) of the Income-Tax Act.

b) Premiums paid by the company on the life of a keyman would not be treated as perquisites in the
hands of such a keyman.

c) Death benefit received by the company are taxable. In case there is a claim (on death of the insured),
the claim proceeds are taxable as business income in the hands of the company.

d) On death of Keyman, Company can pay Ex-gratia payment to dependents of that key man without
any limit. This Ex – Gratia payment is allowed as expenses as per Income tax and on the other side Ex
– gratia payment received in lump sum from employer is tax free in the hands of dependents of Key
man.

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Employer – Employee Insurance Scheme

Employer-Employee Insurance Scheme is an insurance arrangement between the two, where, the employer
purchases an insurance policy for the employee. This arrangement is based on the principle that the employer
has an insurable interest in his/her employees. The interesting fact is that both the employee and the
employer is benefited through this arrangement.

Eligibility :

 Combined shareholding of the employee and his or her relatives such as a spouse, children, in-laws,
parents, siblings, etc. in the employer company should not exceed 51 %.
 There should be a relationship between employer and employee as the employee earns a salary for
his services provided to the employer.
 Any company, Partnership firm, or even proprietary concern shall be eligible for taking insurance for
their employees under this scheme.
 Even a loss-making company can get the benefit of this scheme.
 All plans and all modes are allowed for this scheme.

Benefits to the Employer

 The employee will feel to be more secured and honored and naturally, the loyalty to the employer is
enhanced & It helps to minimize employee attrition rate.
 The employer is entitled to get exemptions for the premium amount (whether it is under single or
non-single mode) u/s 37(1) of Income Tax act as business expenses of the firm.

Benefits to the Employees

 This scheme works as a reward program for employees and helps in raising their morale.

 At the time of assignment, surrender value is taxable in the hands of employee as

perquisite as per section 17(2) (V) of the IT Act

 Premium paid by the employer (after assignment) is treated as perquisite in that

financial year and will be added in income accordingly.

 Post assignment, even though the premium amount is paid by his employer, the
employee can claim income tax exemption u/s 80C.
 Post Assignment, Maturity proceeds will be available to the employee only.

 Death claim, if any, shall be paid to the nominee, nominated by the employee

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Tax deferment - strategy for profit making companies

 Company takes a policy for its director(s) under employer- employee.

 Premium paid is treated as business expenses of the company u/s 37(1) of Income Tax Act and the
company need not pay tax on it.
 No Assignment – As long as the policy is not assigned, no perquisite for the life assured and the
director/employee is not taxed for perquisites.
 As assignment is not done, maturity amount goes to the company. The maturity amount will be
considered as business income and the company will have to pay tax on the maturity amount.
 In order to defer the tax liability, company can take a new insurance policy in the name of the
director itself in single premium mode, using the maturity amount. As new premium paid is
considered as the business expense of the company, no tax liability will be there.

Tax deferment - Future of the company – possibilities

 Possibility 1 - Company continues to make profit.

a) Tax liability is postponed till maturity.

b) Tax liability can be postponed again by purchasing a new policy.

 Possibility 2 - Company makes losses

a) Maturity can be used to set off losses.

b) Get surrender value if situation is worse.
c) Make the policy paid up and get paid up value at maturity and set off losses.

 Possibility 3 - Director of the company dies

a) Company gets the death benefit.

b) Death benefit will be considerably higher than the total premium paid.
c) Tax liability can be borne by the company from the maturity amount.

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Employer-Employee Insurance - Assignment

 Employee quits the job: Employer can either surrender the policy and get the surrender value or
absolutely assign the policy to the employee as a part of his terminal benefits.

 Death of the Employee: The death benefit has to be passed to the nominee of the employee unless
it is specifically mentioned in the agreement.

 Policy matures without being assigned to employee: Maturity proceedings shall be received by the
company but will be treated as the income of the company and will be taxed and TDS will be
applicable.

At the time of assignment surrender value of policy is taxable in the hands of employee as profit in lieu of
Salary.

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Risk Analysis and Insurance Planning – Question for Practice

1) Surinder wants to know the logic behind calculation of risk premium for Life Insurance of a person his
age, given that in a population of 1,000 persons aged 46 years and are healthy. It is expected 6 persons
die during the year. If the economic value of the loss suffered by each family of the dying person is Rs.
5,00,000, calculate the pure risk premium for each person per thousand sum assured.
a) Rs. 60
b) Rs. 300
c) Rs. 30
d) Rs. 6
2) Ravi has a Motor Insurance policy for his with an excess clause of Rs. 5000/- on damage by accident. This
year he was involved in a car accident. The damage to Ravi’s car was worth Rs 16000/- and the damage to
the other car was Rs 9500/-. Ravi’s insurance company admitted the liability. Ravi wants to know how much
amount would be payable under this policy by the insurance company in this case?

a) 11000
b) 25500
c) 16000
d) 20500

3) You have advised Veeru to purchase a Rs. 50 lakh Life insurance Term Plan. He wants to know whether
it is necessary to mention the details of his other Life Insurance policy purchased from different
insurance companies. In case he fails to mention the same in the proposal form and subsequently dies
due to an accident, under which principle his claim could be questioned by the Insurer, if facts of the
other existing insurance policy become known to the insurance company at the time of claim
settlement.
A) Principle of Insurable Interest
B) Principle of Utmost Good Faith
C) Principle of Waiver and Estoppel
D) Principle of Indemnity

4) Shahrukh wants to purchase a Child Plan from a Life Insurance company to meet Himanshu’s
educational needs. He wants to know, if he gets permanent physical disabled due to accident which would
hamper his income pursuits, by what means can the policy be kept in force without payment of further
premium but retaining intended benefits. You advise.
A) Payor Rider
B) Dreaded Disease Rider
C) Living Benefit Rider
D) Survivor Purchase Option Rider

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5. Priyanka has told you that before divorce Amit had bought a single premium life insurance policy on
his own life and expressed on the face of it to be for the benefit of his wife and children as per Section
6 of Married Women's Property Act, 1874. Now, Amit wants to change the beneficiary of the said
policy. Priyanka asks you whether it is possible.

A) Yes, by making an amendment in the trust deed.

B) No, alteration is not permitted.
C) Yes, but with written consent of Anamika only.
D) Yes, but only by writing a registered Will.

6. Veeru incurred Rs. 10 Lakh on the construction of his house five years ago which has depreciated today
to Rs. 7 Lakh. The cost of construction over the period has gone up by 70%. The depreciated value of
household items is Rs. 2.5 Lakh and their present cost of replacement is Rs. 4 Lakh. He wants to buy a
Householders’ insurance policy in such a way that the house is insured on reinstatement basis and
household goods on the basis of written down value. What is the total amount of sum insured should
he take from insurance company?
a) Rs. 9.50 lakh
b) Rs. 19.50 lakh
c) Rs. 11.00 lakh
d) Rs. 12.50 lakh

7. The market value of Salman’s residential property is assessed at Rs. 75 Lakh. He purchased the plot 10
years ago for Rs. 15 Lakh. He incurred 20 Lakh on construction five years ago. The land prices in that area
have appreciated by 12% p.a. over the ten-year period and the cost of construction over the last 5 years
has gone up by 10% year on year. The rate of deprecation on building is 5 % p.a. You have advised him to
insure his house property. He wants to know for what approximate amount he should insure his house
property on reinstatement value basis.
a) Rs. 20 Lakh
b) Rs. 32 Lakh
c) Rs. 25 Lakh
d) Rs. 28 Lakh

8. Akshay has an accident insurance policy which pays Temporary Partial Disability (TPD) benefit of Rs.
5,000 per week, for up to 104 weeks. He meets with an accident and is disabled and bedridden for 6
months. He has available leave of 4 weeks, after which he is on loss of pay. What benefit amount
will he get from the insurance company?

a) Rs. 1,00,000
b) Rs. 1,10,000
c) Rs. 2,20,000
d) Rs. 1,30,000

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9. Akshay bought a 15-year endowment life insurance policy for Rs. 20 lakh Sum Assured five years ago,
the premium being Rs. 85,750, paid annually. The endowment life insurance policy has accumulated
simple reversionary bonus of Rs.60 per thousand sum assured p.a. in the last five years and the Insurance
Company is expected to declare simple reversionary bonus of Rs. 55 per thousand during the remaining
term of the policy. As per terms of the policy company is expected to give final terminal bonus of Rs. 325
per thousand. Avinash wants to know the expected maturity amount from this policy?

a) Rs. 43.50 lakh

b) Rs. 37.00 lakh
c) Rs. 43.00 lakh

10) Sanjay has also taken money back insurance plan of 20-year term with sum assured of Rs. 5 Lakh for
annual premium of Rs. 23,750. He has paid 16 annual premiums till date before due date. The policy
provides 25% of basic sum assured to insured as survival benefit after 5th, 10th, 15th years from the
start of the policy.
Sanjay gives you information that Insurance Company has declared reversionary Bonus of Rs. 60 per
thousand sum assured for first ten years and Rs. 50 per thousand sum assured for next six years.
According to you, in Sanjay‘s Money back Insurance plan, what amount of death claim would be
received by the nominee in case of any eventuality with Sanjay’s life today?

a) Rs. 5.0 Lakh

b) Rs. 9.5 Lakh
c) Rs. 7.8 Lakh

11) A Life Insurance Agent has approached Sanjay with two types of Term Insurance Plans:
(ii) Plan I, without return of premium, term 25 years, Sum Assured of Rs. 25 lakh, yearly premium
payable Rs. 1.94 per thousand of SA
(iii) Plan II, with return of total premiums paid, on maturity, term 25 years, Sum Assured of Rs. 25 lakh,
yearly premium payable Rs. 2.95 per thousand of SA.
Sanjay is not clear which plan to opt for and she seeks your advice on which policy is beneficial for
her, if discounted by the risk-free rate of 7.5% p.a. (Assuming Sanjay lives till maturity of the Insurance
Policy)

a) Plan I is better as the net present value is higher

b) Plan I is better as the net present value is lower
c) Plan II is better as the net present value is higher
d) Plan II is better as the net present value is lower

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12) Rajnikant has got a proposal for a ULIP plan from his friend, who is an insurance advisor. This plan has
the following premium allocation charges:

Year 6
Year 1 Year 2 & 3 Year 4 & 5
onwards
Premium Allocation Charge 12% 5% 3% 1%

In addition, the following charges shall also be levied;

1) Mortality Charge (charged at the beginning of the year) - Rs.1.51 per thousand sum assured,
increasing 5% year on year

2) Policy Admin Charge (charged at the yearend) - Rs. 720 p.a. , throughout term
3) Fund Management Charge (charged at the yearend) - 1.75% pea, throughout term

The proposal envisages that Rajnikant invests Rs. 35,000 p.a. for 10 years. Premium, less charges, is
allocated to the fund. The fund grows @10% annually. Proposed Sum Assured in this ULIP plan is Rs.5
Lakh which remains the same throughout the term. Under the policy terms, Sum Assured and the
value of units, both are paid on death.

Rajnikant wants to know in case he opts for the ULIP Plan as proposed by his friend what will be the
approximate accumulation at the end of 10 years on his survival and what will be the claim proceeds
if he will be pass away at the end of 5 years since inception of policy?

a) Rs. 5,22,000, Rs. 6,99,000

b) Rs. 5,03,000, Rs. 5,00,000
c) Rs. 5,03,000, Rs. 7,00,000
d) Rs. 5,22,000, Rs. 6,52,000

13) Akshay Kumar, aged 30, life expectancy 75, is working with a leading Indian corporate as a project
manager for the last 7 years in Ahmadabad. His wife, Twinkle, aged 29, life expectancy 80, is a house
wife. You have pointed out to Akshay that presently he is not adequately covered under life
insurance. Considering that he meets an immediate unforeseen event Akshay would like to provide
his family an amount of Rs. 6 lakh p.a., inflation linked, starting from today, till Twinkle is alive. What
approximate amount of life insurance should Akshay be covered for if the proceeds of such a cover
would be invested in long term debt and long-term equity in the ratio 90:10. (Inflation rate :4%pa,
Equity return -15% pa, Debt return – 9% pa)

a) Rs. 113.22 lakh

b) Rs. 109.40 lakh
c) Rs. 106.56 lakh
d) Rs. 104.89 lakh

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14) Abhishek, aged 46 years and Sonali, aged 43 years. The life expectancy of Abhishek and Sonali are 80 and
77 years. Abhishek has total Insurance cover of Rs. 40 lakh. The normal living household expenses for the
family work out to be approximately Rs. 70,000 per month, out of which Rs. 15,000 is of Abhishek’s personal
expenses.

Abhishek wants to know what approximate additional life insurance cover he needs if any eventuality with
his life today, then his family should receive their present household monthly expenses net of Sonali's
contribution as well as adjusted for inflation every month for the remaining expected life of Sonali. Sonali
contributes Rs. 15,000 p.m. towards household expenses. Assume life insurance claim proceeds are invested
by Sonali in risk free instruments yielding 6% pa and rate of inflation is 5% p.a.

a) Rs. 140 lakh

b) Rs. 100 lakh
c) Rs. 150 lakh
d) Rs. 190 lakh

15. The earning member of a family aged 35 years expects to earn till next 25 years. He expects an annual
growth of 8% in his existing net income of Rs. 5 lakh p.a. If he considers an average investment yield of 6%
till his life expectancy of 80 years, what economic value could be ascribed to his life today?
a. 1.01 cr
b. 1.20 cr
c. 1.58 cr
d. 3.50 Cr

16. A single mother, aged 33, earns Rs. 7.5 lakh p.a. out of which taxes and self-expenses account for Rs. 1.5
lakh p.a. Her salary is expected to rise 10% p.a. whereas taxes and personal expenses are likely to rise by 6%
p.a. If she expects to work till 58 years, what economic value can you enumerate on her life, if she is
confident of getting a return of 9% p.a. from investments?

(a) Rs. 1.67 crore

(b) Rs. 1.82 crore
(c) Rs. 2.10 crore
(d) Rs. 1 crore

17. In the Money back insurance policy of Sonali sum assured is Rs.1,00,000, policy term is 15 years, annual
premium is Rs. 9832. He will get a 15% survival benefit at the end of 3rd/6th/9th & 12th year of the
policy and 40% at maturity along with simple reversionary bonus of Rs. 35 per thousand plus a
terminal bonus of 10% of the sum assured. She wants to know the underlying IRR in this policy if a
stand-alone term insurance for Rs.1 lakh is available at an annual premium of Rs. 550 for her.
According to you it is per annum.

a) 2.99%
b) 1.87%
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c) 6.78%
d) 5.74%

18. A life insurance company is offering a life insurance policy for Dharminder wherein 20 annual
contributions of Rs. 50,263 starting from today give anyone of the following three maturity figures
after deduction of total charges and with a sum assured of Rs. 1 Crore for the whole term as follows:

i) Guaranteed Maturity Benefit: Rs. 7,41,741

ii) Non-Guaranteed Maturity Benefit @10% p.a. Rs. 9,08,071
iii) Non-Guaranteed Maturity Benefit @12% p.a. Rs. 14,60,179

The policy has a provision that in case of any casualty with the life insured, the company shall be
paying higher of the then available fund value or applicable sum assured. He wants to know the
minimum and maximum possible IRR in this policy based on above projections as provided by the
company if a stand-alone term insurance of Rs. 1 Crore is available for Rs. 27,000 per annum.
According to you the same is ___________________.

a) 4.25% p.a. and 9.97% p.a.

b) 4.25% p.a. and 6.00% p.a.
c) 6.00% p.a. and 9.97% p.a.
d) (2.99%) p.a. and 3.43% p.a.

19.
Employee's Gross salary per annum 1,000,000 Rs.
Estimated tax during the year 210,000 Rs.
Family's monthly expenses 25,000
Insurance premium (annual) 20,000 Rs.
Existing insurance cover 6,000,000 Rs.
Investment yield available on investing funds till retirement 10% p.a.
Number of remaining years to retirement 28 years

Goal:
The anticipated increase in the Employee's post-tax salary is 5% year on year. The employee consumes 25%
of regular household expenses on self. What should be the amount of additional insurance required to
replace the Employee's income contribution to his family for his remaining year’s employment?

a) Rs. 48 lakh
b) Rs. 51 lakh
c) Rs. 55 lakh

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20. You observe that your client has a life insurance cover of only Rs. 20 lakh. He tells you that living expenses
for the future 30 years for his family must be insured along with his essential goal of medical/higher education
of his son and daughter when they attain their respective age of 18 years. The details are given below:

The rate of return which is expected for the funds to be invested 7% p.a.
Inflation for living expenses 5.50% p.a.

Current household expenses 600,000 p.a.

Age of son 17 years
Medical education of son to begin after a year and required for 5 years

Current Cost of medical education 500,000 Rs. p.a.

cost escalation of medical education 8% p.a.
Age of daughter 15 years
Higher education of daughter to begin after three years and
required for 3 years

Cost of higher education for daughter 300,000 Rs. p.a.

cost escalation of higher education for daughter 10% p.a.

You suggest the client that the aggregate insurance cover should suffice to meet higher education expenses
when due, along with inflation-adjusted living (household) expenses to the extent of 80% of their current
expenses for immediate next 10 years and 50% for the succeeding 20 years. You compute the amount of
additional insurance cover needed, which comes to _____.

a) Rs. 92 lakh
b) Rs. 106 lakh
c) Rs. 126 lakh

21. Aamir, aged 44 years with life expectancy 70 years, is self-employed in Amritsar. Aamir has invested
in a s Unit Linked Pension Plan has total of 15-year premium paying term and the vesting date at his age
of 55 years. The investment is Rs. 36,000 p.a. in the accumulation phase. After which he has an offer to
purchase an immediate annuity pension plan from the same insurance company by investing whole of
the accumulated amount, for which they have projected a fixed pension of Rs. 11,500 p.m. for 15 years
in annuity due mode. This immediate pension plan is ‘without return of purchase price’.

Aamir wants to know if he purchases an immediate annuity pension plan at the time of vesting date
which would be ‘with return of purchase price’, how much premium should he pay further in the
accumulation phase every year starting from today till the remaining premium paying term to be able
to get same Rs. 11,500 p.m. for 15 years in annuity due mode

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Assume the insurance company is able to generate 10% p.a. rate of returns now onwards till the
vesting date and the same rate of returns as projected by them earlier in the immediate annuity
pension. (Please ignore any charges if applicable)

a) Rs. 28,432
b) Rs. 66,702
c) Rs. 53,907
d) Rs. 77,877

22. LIFE INSURANCE COVER: You estimate life cover for your client who is 32 years old, has Rs. 25 lakh in loan
liabilities, has a non-working spouse of age 30 and children of age 7 years and 5 years. Additionally, the client
wants higher education for each of his children Rs. 30 lakh after 15 years and marriage expenses of Rs. 15
lakh after 20 years. Both are considered at current costs. Their present household expenses are Rs. 50,000
per month which includes housing loan EMI of Rs. 15,000. The client consumes per month Rs. 8,000 on self.
You additionally provide for 30 years' living expenses after the spouse's age of 55 considering she would
require only 60% of expenses thereafter. He has an insurance cover of Rs. 40 lakh presently and his financial
investments are Rs. 15 lakh. The additional quantum of life insurance cover is _____. (average inflation of 5%
and the claim amount invested to yield 8% p.a.)

a) 104 Lakh
b) 144 lakh
c) 102 lakh

23. A With profit life insurance policy with a track record of offering bonuses at Rs. 50 per thousand sum
assured (SA) has a premium differential of Rs. 30 per thousand SA from the similar pure term policy. The
corresponding pure term cover of 20 years and SA Rs. 12 lakh is available at Rs. 7,860 p.a. Your client has
recently paid 16th premium in the With Profit policy. You evaluate the differential returns from With Profit
policy in case of mortality today from the perspective of 8% p.a. return. You find that ___.

(a) The return on with profit policy is lower by 3.35% p.a.

(b) The return on with profit policy is lower by 2.22% p.a.
(c) The return on with profit policy is lower by 4.41% p.a.
(d) The return on with profit policy is lower by 5.10% p.a.

24. A company has retirement age as 58 years. An employee at age 35 expected increments of 7% p.a. as
per company policy when his annual net earnings were Rs. 6 lakh. After 5 years, he got next cadre and his
annual net earnings became Rs. 9 lakh. The increments in the revised cadre are at 9% p.a. He had
purchased a life cover by income replacement method at age 35. What additional cover is required if he
expects his investments to yield 9.5% p.a.?

(a) Rs. 48 lakh (b) Rs. 98 lakh (c) Rs. 70 lakh (d) Rs. 57 lakh

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Retirement Planning

Types of Annuities
a) Immediate Annuity – Here, you begin to receive payments from the Insurer immediately. For example,
upon retirement, an individual can purchase an immediate annuity with his accumulated retirement corpus.
An immediate annuity makes fixed payments to the individual at regular intervals (as chosen by him)
determined mostly by an individual’s age, life expectancy and size of annuity payment.
AS per FPSB India, wherever immediate annuity question come use Type 1 in calculation.

b) Deferred Annuity: In this type of annuity contract that delays payments of income, installments or a lump
sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase or
accumulation phase in which you invest money into the account, and the income phase or distribution phase
in which the plan is converted into an annuity and payments are received. Example: Mr. Sham (Age 32) Invest
annually for his retirement corpus till the age of 50. But want to receive from the age of 60. So, period of 50
to 60 without contribution shows deferred annuity.

Annuity/ Perpetuity

• An Annuity is a regular series of payments.

• Payments may continue for a specified period (Annuity Certain) or forever (Perpetuity)
• If payments are made at the end of each time period, they are said to be paid in arrear or ordinary
annuity. If payments are made at the beginning of each time period, they are said to be paid in advance or
annuity due.
• The difference between an ordinary annuity and an annuity due is of one time period only.
Because each annuity payment is allowed to compound for one extra period, the value of an annuity-due is
equal to the value of the corresponding ordinary annuity multiplied by (1+intrest rate) Annuity Due =
(1+i) x Ordinary Annuity

Growing Annuity
In this case each cash flow grows by a factor of (1+g). The future value of a growing annuity (FVA) formula
has five variables, each of which can be solved for
FV(A) = Future value of Annuity at the time N

• A = Initial payment
• R= Interest rate compounded for each period of time
• G= Growing rate compounded for each period of time
• N= Number of payment periods
• FV (A) = A * ((1+r) ^n – (1+g) ^n)/(r-g)
In case of Annuity Due, annuity payment is allowed to compound for one extra period, the value of
an annuity-due is equal to the value of the corresponding ordinary annuity multiplied by (1+i)

Annuity Due = (1+i) x Ordinary Annuity

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Immediate Annuity Plan

It is an Immediate Annuity plan, which can be purchased by paying a lump sum amount. The plan provides
for annuity payments of a stated amount throughout the life time of the annuitant. Various options are
available for the type and mode of payment of annuities.

Type of Annuity:

1. Annuity payable for life at a uniform rate.

2. Annuity payable for 5, 10, 15 or 20 years certain and thereafter as long as the annuitant is alive.
3. Annuity for life with return of purchase price on death of the annuitant.
4. Annuity payable for life increasing at a simple rate of 3% p.a.
5. Annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of
the annuitant.
6. Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of
the annuitant.
7. Annuity for life with a provision of 100% of the annuity payable to spouse during his/ her life time on death
of annuitant. The purchase price will be returned on the death of last survivor.
You may choose any one. Once chosen, the option cannot be altered.

Sample Annuity Rate as on 1st March 2020 of a LIC Plan:

Amount of annuity payable at yearly intervals which can be purchased for Rs. 1 lakh under different options
is as under:

Yearly annuity amount under option given above

Age last (2) (15
birthday (1) years (3) (4) (5) ( 6) (7)
certain)
30 6750 6730 6430 4870 6640 6530 6410
40 7080 7020 6470 5230 6870 6680 6430
50 7710 7530 6520 5900 7330 6990 6470
60 8930 8390 6600 7140 8220 7620 6530
70 11650 9460 6730 9820 10130 8970 6620
80 17410 10080 6920 15440 14170 11940 6760

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Defined Benefit Plans

In Defined benefit plans, benefits to be paid to the employee are defined in advance. Here the employer
funds the plan and the employee reaps the rewards upon retirement. The employer has to use actuarial
assumptions like retirement age, mortality, expected life span, expected compensation increase and other
demographic assumption to estimate the pension liability and accordingly contribute in the pension plan

Defined Contribution Plans

In DC Plans, the contribution to the pension plan by the employee is fixed (say 12% of salary) and the same
is matched by the employer. The money is placed in the investment instruments selected by you in your
investment account. After you retire, these investments along with interest are used to buy pension or
annuity. However, under DC plan, one cannot be sure of the final pension amount at retirement. Ultimately,
the pension benefit that you are going to receive after your retirement will depend upon the performance of
the investment made on your behalf.

Public Provident Fund (PPF)

 The Public Provident Fund Scheme is a statutory scheme of the Central Government of India for 15
years. PPF A/c matures after expiry of 15 years from the end of FY in which the a/c was opened. For.
Exp. If A/c is opened in the FY 2000-01 the A/c will mature on 01- April 2016.
 The applicable interest rate is compounded annually. Interest is notified by Govt. of India, at the end
of each year. Interest shall be allowed for calendar month on the lowest balance at credit of an A/c:
the close of fifth day and end of the month shall be credited at the end of each year.
 The minimum deposit is 500/- and maximum is Rs. 1.5 lakh /- in a FY.
 One deposit with a minimum amount of Rs.500/- is mandatory in each financial year. The account in
which deposits are not made for any reasons is treated as discontinued account and such account
cannot be closed before maturity. The discontinued account can be activated by payment of minimum
deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year
 The deposit can be in lump sum or in convenient installments, not more than 12 Installments in a
year or two installments in a month subject to total deposit of Rs.1,50,000/-.
 Account can be opened by an individual or a minor through the guardian. A person can have only
one A/c in his name. Two a/c at different places anywhere in India are not permitted.
 HUF’s & NRI’s not eligible to open PPF a/c
 Joint account is not permissible.
 The deposit in a minor account is clubbed with the deposit of the account of the Guardian for the
limit of Rs.1.5 lakh/-.
 Pre-mature closure of a PPF Account is not permissible except in case of death.
 The account holder has an option to extend the PPF account for any period in a block of 5 years on
each time.

 In Post maturity continuation, without fresh subscriptions, any amount in part or full can be
withdrawn in installment but not exceedingly once in a year. If you are not informing PO/Bank that

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you are extending PPF A/c with subscription, that extension is by default considered as without
extension and no Interest payable on contribution during extended period.

 For with fresh subscription extension, Subscriber has to intimate concerned PO/Bank by file
application in Form H format for with contribution extension. In Post maturity continuation, with
fresh subscriptions, one can withdraw upto 60% of balance at the commencement of each extended
period in one or more Installments but only once per year.

 The PPF scheme is operated through Post Office and Nationalized banks.
 Deposits in PPF qualify for rebate under section 80-C of Income Tax Act.
 The interest on deposits is totally tax free.
 The balance amount in PPF account is not subject to attachment under any order or decree of court
in respect of any debt or liability.

 In PPF A/c the Investor can borrow any time after the expiry of one year from the end of the year in
which initial subscription is made but before expiry of five year from the end of FY in which initial
subscription is made. The amount of Loan cannot exceed 25% of the balance in A/c at the end of
immediately preceding year in which loan is applied for.

• Partial Withdrawals are allowed in FY calculated by addition of 6 to the FY in which account was
opened and every year thereafter. An account holder can withdraw 50% of his balance at the end of
the 4th or the 1st previous financial year, whichever is lower.

• For example: If the account is opened in Financial Year 2000-2001. You may add 6 years to the
financial year end i.e. 2001+6=2007 (FY 2006-2007). Accordingly, the 4th preceding year will be
2007-4= 2003 (FY 2002-2003) and preceding year will be 2007-1= 2006 (FY2005-2006).

So, the amount of 1st withdrawal in the 7th year, FY 2006-2007 is 50% of the balance to the credit as
on 31-03-2003 or 30-03-2006, whichever is lower.

Employee Provident Fund

Employee Provident fund or EPF is a fund made up of contributions by the employee during the time he has
worked, along with an equal contribution from the employer. In the absence of any social security cover for
the elderly in India, employee provident fund not only provides monetary security and helps them meet daily
living expenses; it also helps them live a life of dignity and respect after retirement.

EPF is open only for salaried employees of private sector organizations. It is compulsory for each employee
of organizations with 20 employees or more. NPS is compulsory for Government employees who have joined
service after April 2004. However, NPS is also open to general public including businessmen, self-employed,
housewives and persons working in organized/un-organized sector. Thus, a private sector employee can do

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his retirement planning by using both the options i.e. EPF as well as NPS but a businessman or a self-employed
person can do his retirement planning only through NPS or in a limited manner through PPF.

The employee contributes 12% of his basic salary in his/her EPF A/c and matching contribution is made by
employer i.e. 12% of basic salary in this fund. Employer’s contribution upto 12% of basic salary is tax free in
the hands of employee. Employee contribution of 12% is eligible for deduction u/s 80 C.

An amount Equal to 8.33% of basic salary is polled into the EPS from Employer’s 12% contribution. In other
words, 3.67% share of Employer’s contribution goes to EPF & remaining 8.67% is go to Employee Pension
Scheme (EPS). The employer has option to contribute 12% of basic salary or Rs. 15000/- pm whichever is
lower, for contribution as per current law.

Employee Pension Scheme is applicable to all members who contribute in EPF A/c. In EPS scheme a pension
is given to member to provide Income when they are no longer earning a regular income from employment.
The pension can be given to member if alive or spouse and two children below 25 years of Age (if member is
not alive).

EPS has lots of restrictions & Capping

The maximum that can go into EPS is 8.33% of Employer’s share but basic pay is capped at Rs. 15000. So, the
amount comes to Rs. 1250 each month. The employee doesn’t know as to how much it grows to. On
retirement, the corpus amount is not available to employee but lifetime pension begins. Now as because the
funding of EPS is capped, the pension that one will get is also capped and based on a formula.

(Pensionable Salary*Service period) /70

The Pensionable salary is capped at Rs. 15000 and service period at 35 years. The maximum monthly pension
would be Rs. 7500.To eligible for pension, one has to work minimum 10 years continuously.

From September 1st 2014, EPS is only for those new members earning less than Rs. 15,000. Therefore, new
employees whose basic salary is more than Rs. 15,000 will not see any diversion of 8.33 % (of employer’s
share) towards EPS. For Older Employees, the diversion will however, continue.

Withdrawal from EPF

EPF Maturity Proceeds is exempt from Income Tax. A person who is a member of Employee Provident Fund
can withdraw money upon reaching the age limit prescribed by the government, as of now, it is 55 years in
India, or upon actual retirement. Additionally, fund may be withdrawn to meet expenses such as construction
or acquisition of property or repayment of loan taken for same, treatment of illness, marriage expenses.
Full withdrawal from EPF before 5 year of service is added in taxable Income & also subject to TDS.

Voluntary Provident Fund (VPF)

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Persons covered under the Employee Provident Fund (EPF) can choose to contribute over and above the
mandatory 12% of the basic and dearness allowance, to their EPF account under the Voluntary Provident
Fund. There will be no employer contribution to match any contribution made by the employee under the
VPF. The investment into the VPF will also be deducted by the employer from the salary and deposited in
the EPF pool. The employer must be given instructions on the percentage of additional deduction that has
to be made from the salary for the VPF. The rate of contribution can be changed by the employee which
will be given effect to from the beginning of the next accounting period of the fund. The VPF will earn the
same returns as the EPF.
Employees can contribute up to 100% of their basic salary and dearness allowance towards the
scheme. It is not mandatory for employers or employees to contribute to the VPF. However, the
scheme has a lock-in period of 5 years. Investment in the VPF has tax benefits under Sec 80 C of the
Income Tax Act, 1961. Interest earned is exempt from tax.
Since the VPF scheme is an extension of the EPF, only salaried employees who receive payments
on a monthly basis in their salary accounts are eligible to invest in the scheme. The rate of interest
of VPF is decided by the Government of India on a yearly basis.
Gratuity

Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services
offered by the employee in the company. As per Payment of Gratuity Act 1972, gratuity is paid when an
employee Complete 5 or more years of full-time service with the employer.

Gratuity is a defined benefit plan and is one of the retirement benefits offered by employer to employee on
leaving his job. An employer may offer gratuity out of his own funds or may approach a life insurer in order
to purchase a group gratuity plan. In case the employer opted for a life insurer, he has to pay annual
contributions as decided by the insurer.

a) For employees covered under the Gratuity Act

There is a formula using which the amount of gratuity payable is calculated. The formula is based on the 15
days of last drawn salary for each completed year of service or part of thereof in excess of six months.

The formula is as follows:

(15 X last drawn salary X tenure of working) divided by 26

Here, last drawn salary means basic salary, dearness allowance and commission received on.

Suppose A's last drawn basic pay is Rs 60,000 per month and he has worked with XYZ Ltd for 20 years and 7
months. In this case, using the formula above, gratuity will be calculated as:
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(15 X 60,000 X 21)/26 = Rs. 7.26 lakh

In the above case, we have taken 21 years as tenure of service because A has worked for more than 6
months in year. Had he worked for 20 years and 5 months, 20 years of service would have been taken into
account while calculating the gratuity amount.

There is an upper limit on the gratuity benefit amount payable to the employees.

For Govt. employees Rs.20 Lakh from 1st -jan-2016 earlier it was Rs. 10 Lakhs

For non Govt employees Rs.20 Lakh from 29th – March -2018 earlier it was Rs. 10 Lakhs

As per the government's pensioners' portal website, retirement gratuity is calculated like this: one-fourth of
a month's basic pay plus dearness allowance drawn before retirement for each completed six monthly
period of a qualifying service. The retirement gratuity payable is 16 times the basic pay subject to maximum
of Rs 20 lakh.

In case of death of an employee, the gratuity is paid based on the length of service, where the maximum
benefit is restricted to Rs 20 lakh.

Tax treatment of Gratuity

The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is
received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head
‘Income from other sources’.
In case of government employees – they are fully exempt from income tax.
In case of non-government employees covered under the Payment of Gratuity
Act, 1972 – Maximum exemption from tax is least of:

I. Actual gratuity received; or

II. Rs. 20,00,000; or
III. 15 days’ salary for each completed year of service or part thereof

Note:
• Here, salary = Basic Salary + Dearness Allowance + commission (if it’s a fixed % of sales turnover).
• Completed year of service or part thereof’ means: full time service of
More than 6 months is considered as 1completed year of service; less than 6 months is ignored.
• Here, number of days in a month is considered as 26. Therefore, 15
days’ salary is arrived as = salary * 15/26
In case gratuity is received from more than one employer during the previous year, maximum exemption
allowed is up to Rs 20 lakh.

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Senior Citizen Savings Scheme:

• Applicable interest rate payable quarterly on 30th June, 30th Sept,31 Dec,31st March
• Minimum Deposit: Rs 1000 and multiples thereof.
• Maximum Limit: 15 Lakhs.
• The scheme is for 5 years and can be extended for a further period of 3 years.
• Premature closure facility is available after 1 year with nominal penalty.
• Individual aged of 60 years and above can invest.
• Retiring employees by VRS aged 55 years and above can invest under scheme. Provided the a/c is
opened within 3 months from the date of receipt of retirement benefits
• Joint account can be opened with spouse.
• Interest income taxable. TDA applicable if Interest Income Exceeds 50K in FY
• Interest rate is applicable, quoted at the time of Investment for five years. In case of Scheme
extension for further five year Interest rate applicable at that time applicable.

Superannuation Benefit
The existing mandatory retirement benefits are very often found to be insufficient to meet the
income replacement required at retirement. Employers provide superannuation plans to augment
the benefits available by contributing to a superannuation fund. The company has to appoint
trustees to administer the scheme and get the scheme approved by the Commissioner of Income
Tax.
A company can offer a group superannuation scheme in two ways:
• Through the constitution of a trust fund where fund managers are appointed by the
trustees to manage the fund.
• Through investment in a superannuation scheme from a life insurance company.

On retirement the employee is allowed to take one third of the accumulation in his account as
commutation. Commutation refers to the exercise of the facility of taking a portion of the annuity
corpus in a lump sum. The balance in the corpus is used to purchase an annuity. Apart from LIC, all
other life insurance companies allow its customers to purchase annuity from any annuity provider.
Income Tax rules restrict the employer’s contribution, whether to the PF or superannuation fund
or a combination of both, to 27% of the employee’s earnings. Also, Employer’s contribution to
Superannuation fund exceeding Rs. 1.5 Lakh p.a. is considered as perquisite for employee for
Income tax purpose.

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National Pension System (NPS) for Government Employees

All central government employees who joined service after January 1, 2004, are enrolled into the
NPS which is a defined contribution pension plan. 10% of the employee’s basic salary plus dearness
allowance is credited to the individual account along with the government contribution. The
individual account is identified by a unique Permanent Retirement Account Number (PRAN). The
balance in the individual account can be withdrawn on retirement at 60, resignation or death while
in service. On retirement, a minimum of 40% of the corpus has to be used to buy a life annuity and
the remaining can be taken as a lumpsum. On resignation, 80% has to be annuitized and the
remaining can be withdrawn. In case of death, the balance in the account is paid out to the
nominees.

Voluntary Retirement Schemes

The mandatory retirement benefits are available only to employees of covered establishments as
defined in the respective regulations. This leaves people in other establishments, self-employed
persons and others out of the coverage of the benefits. Retirement plans are available that an
individual can subscribe to independently. Such schemes can be used to save for retirement by
people who do not have mandatory cover and also by persons who are covered to augment their
retirement benefits. Investment products that can be used to save for retirement voluntarily by any
individual eligible to invest include the National Pension System (All-Citizen Model and Corporate
Model), Public Provident fund, Schemes of mutual funds and insurance companies.

National Pension System (NPS)

The NPS is a defined contribution scheme launched in May 2009 by the Government of India for all
citizens on a voluntary basis. The contributions made by an individual to the fund are managed to
create a retirement corpus. The NPS system consists of the NPS trust, central recordkeeping agency,
pension fund managers, trustee bank and custodian.
NPS Trust
A trust set up under the Indian Trusts Act, into which the contribution of subscribers is pooled and
held in their beneficial interest. The trust has the fiduciary responsibility for taking care of the funds
and protecting the subscriber interests.
Points of Presence (PoPs)
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A PoP is the first point of interaction between the subscriber and the NPS. Subscribers open their
NPS accounts by completing the documentation and formalities with the PoPs. The registered PoPs
have authorized branches to act as collection points and extend services to customers.
Central Record-keeping Agency (CRA)
The CRA is the back-office for maintaining subscriber records, administration and customer service
functions. NSDL e-Governance Infrastructure Ltd has been designated the CRA for the NPS.
CRA- Facilitation Centers
These are entities appointed by the CRA to provide various services to PoPs. CRA-FCs will typically
have multiple branches around the country.
Pension Fund Managers
These are professional fund managers appointed to invest the corpus in a portfolio of securities and
manage them. Currently the fund managers are – ICICI Prudential Pension Funds Management
Company Ltd., LIC Pension Fund Ltd, Kotak Mahindra Pension Fund Ltd., Reliance Capital Pension
Fund Ltd., SBI Pension Fund Pvt. Ltd., UTI Retirement Solutions Ltd, and HDFC Pension Management
Co Ltd, Birla Sunlife Pension Management Ltd.
Trustee Bank
The trustee bank handles the funds side of the transactions between various entities. Axis Bank Ltd
is the designated bank to facilitate fund transfers across subscribers, fund managers and the
annuity service providers.
Annuity Service Providers (ASP)
ASPs are appointed by the PFRDA to provide the annuity to the subscribers through their various
schemes. Investors can choose any ASP from which to buy the annuity and the ASP will provide the
monthly pension to the subscriber for the rest of their lives.
Custodian
The custodian handles the security side of the transactions. The securities bought for the NPS trust
are held by the custodian, who also facilitates securities transactions by making and accepting
delivery of securities. The NPS has appointed the Stock Holding Corporation of India Ltd as the
custodian.
PFRDA (Pension Funds Regulation and Development Authority) is the designated agency
responsible for the regulation and development of pension products.

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Joining the NPS

1. NPS-All-Citizen Model

Any Indian citizen not less than 18 years of age and not more than 65 years of age can join the NPS
by registering at any of the PoPs. On enrolling, the CRA (NSDL/Karvy Computershare) will allot a
Permanent Retirement Account Number (PRAN) to the individual. The first contribution to the
account has to be made at the time of registration.
The minimum amount per contribution is Rs.500 and the minimum contribution in a year is Rs.1000.
The minimum number of contributions in a year is 1. There is no maximum limit. The contributions
can be made by cash, local cheque, and demand draft or through electronic transfer. If the
minimum annual contribution of Rs.1000 is not made to the account, the account becomes
dormant. The account can be revived by depositing the minimum required amount for each year
of default along with the penalty specified from time to time.
2. NPS-Corporate Model:

Companies registered under the Companies Act, Central and State Public Sector Enterprises and
other specified entities can register under the corporate model. The corporate may directly
approach a PoP as an entity for its employees to join the NPS. The employees enrolled by the
corporate (employer) will be registered as subscribers and will each have an account. Choice of
fund manager and scheme may be made by the employer or employee, as agreed.

Types of NPS Accounts

There are two types of accounts that the NPS offers - Tier I account where the contribution cannot
be withdrawn and a Tier II account where the contribution can be withdrawn at any time. To have
a Tier II account the individual must have a Tier I account.
NPS – Investment Fund Options

The funds contributed will be managed according to the investment mix selected by the
contributor. The portfolio thus selected will be created and managed by the fund manager selected
at the time of registering from among the approved fund managers.

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Investors can select from between the Active choice and the Auto choice. The fund options in the
NPS are:
E: High return, High risk – Investments predominantly in equity market instruments
C: Medium return, Medium risk- Investments predominantly in fixed income instruments
G: Low return, Low risk- Investments purely in fixed investment products
A: Investment in Alternative Investment Schemes including instruments such as REITs, Alternative
Investment Funds, Mortgage Backed Securities and other approved investments.

A subscriber can choose to invest the entire corpus in C or G. However, investment in E is capped
at 75 per cent and up to a maximum of 5% in asset class A. Any combination of the funds can be
chosen to apportion the corpus within the limits specified.
Investors who cannot make the choice between options can opt for the Auto Choice Option. The
Auto Choice provides three lifecycle funds where the proportion in the asset class will differ
according to the age of the subscriber.
LC75 is the Aggressive Lifecycle Fund. The exposure to equity starts with 75% till age 35 and then
gradually reduces as per the age of the subscriber
LC50 is the Moderate Lifecycle Fund. The exposure to equity starts with 50% till age 35 and then
gradually reduces as per the age of the subscriber.
LC25 is the Conservative Lifecycle Fund. The exposure to equity starts with 25% till age 35 and then
gradually reduces as per the age of the subscriber.
The default option, if the subscriber does not make a choice, is the Moderate Lifecycle Fund.

Exit from NPS

When a subscriber attains the age of 60 years or superannuates then at the time of exit, the
contributor has to mandatorily utilize at least 40% of the accumulated corpus to buy an annuity for
a monthly or a periodical pension. The remaining sum can be withdrawn as a lumpsum either at
once or in a phased manner.
All subscribers shall have the option to defer the purchase of annuity for a maximum period of three
years, from the date of attainment of sixty years of age or the age of superannuation, as the case
may be. Such subscribers have the option to defer the withdrawal of the lump sum amount until
he or she attains the age of seventy years.

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Exit before turning 60 years is possible through an option to withdraw 20 per cent of the
accumulated savings and compulsorily buy an annuity with the remaining 80 per cent, provided the
subscriber has completed 10 years in the NPS.
Partial Withdrawal before NPS
Yes, NPS Subscriber can withdraw certain amount out of his own contribution. It is considered as
partial withdrawal under NPS, for Conditions of partial Withdrawal,
Following are the conditions of Conditional Withdrawal:

 Subscriber should be in NPS at least for 3 years

 Withdrawal amount will not exceed 25% of the contributions made by the Subscriber
 Withdrawal can happen maximum of three times during the entire tenure of subscription.
 Withdrawal is allowed only against the specified reasons, for example;

• Higher education of children

• Marriage of children
• For the purchase/construction of residential house (in specified conditions)
• For treatment of Critical illnesses

Taxation

At the time of Contribution : Tier 1 A/c

NPS Contributions made by the subscriber is exempt from tax up to a limit of Rs.1.5 lakhs. This limit
covers the deductions available under section 80C, 80CCC and 80CCD(1) and 80 CCD (2).
 Employee’s contribution under Section 80CCD(1) is allowed to an individual who makes
deposits to his/her NPS. Maximum deduction under Section 80CCD (1) allowed is 10% of
salary in the previous year (in case the taxpayer is an employee) or 20% of gross total income
in the previous year (in case the taxpayer being self-employed) or Rs 1,50,000, whichever is
less.
 Under Corporate NPS - The employer’s contribution up to a limit of 10 percent of the basic
salary and dearness allowance is also allowed as deduction under section 80CCD(2) to the
employee.
 An additional deduction on investment up to the extent of Rs.50,000 is allowed under a
section 80 CCD (1B) to all Individual Assesssee.

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Taxation at the time of Exit or Withdrawal in NPS Tier 1 A/c

1. Partial Withdrawal from NPS Is exempt from Income tax

2. 60% of the accumulated corpus can be withdrawn from NPS at the Age and same is also tax free as per
Income tax provisions.
3. Minimum 40% amount required to be invested in Immediate Annuity plan and these annuities are added
in the total Income and taxable at slab rates.

From 1st April 2020, Employer can contribute maximum Rs. 7.5 lakh in a FY in employee’s EPF,
Superannuation and NPS A/c’s. Any amount excess of this Rs. 7.5 Lakh Cap is added as Income in the hands
of employee.

Reverse Mortgage

A reverse mortgage is a loan available to senior citizens to cover their retirement expenses. As its name
suggests, it is exactly opposite of a typical home loan, where repayments are made to the housing finance
company (HFC)/ bank every month until the tenure of the loan. Reverse mortgage is so named because the
payment stream is reversed, that is instead of the borrower making monthly payments to the lender, the
lender makes payments to the borrower.

A Reverse Mortgage Loan will be settled by proceeds obtained from sale of the house property mortgaged.
After the final settlement, the remaining amount (if any) will be given to the borrower or his/her
heirs/beneficiary. However, the borrower or his/her heirs may repay the loan from other resources without
bringing the property to sale.

Process: Once you pledge your house for reverse mortgage with any HFC/ bank, the HFC/ bank estimates
the value of the house. Then, taking into account the cost of credit, it makes monthly payments to you. The
loan is typically settled after the death of the owner/co-owners.

Eligibility Criteria

1. Indian citizen of 60 years or more,

2. Married couples will be eligible as joint borrowers for joint assistance.

In such cases, the age criteria for the couple would be at the discretion of the RML lender, subject to at
least one of them being above 60 years of age and the other not below 55 years of age.

3. Should be the owner of a residential property (house or flat) located in India, with clear title indicating
the prospective borrower’s ownership of the property.

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4. The residential property should be free from any encumbrances.

5. The residual life of the property should be at least 20 years. There is no minimum period of ownership of
property required.

6. The prospective borrower(s) should use that residential property as permanent primary residence.

7. The maximum loan amount is Rs.1 crore along with interest. & Lump sum pay-out is permitted in the
event the borrower or his spouse has to undergo medical treatment. The maximum limit on that is Rs.15
lakhs.

All receipts under RML shall be exempt from income tax under Section 10(43) of the Income-tax Act; 1961.Any
transfer of a capital asset in a transaction of reverse mortgage shall not be regarded as a transfer. A borrower,
under a reverse mortgage scheme, will be liable to income tax (in the nature of tax on capital gains) only at
the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan.

Example: Mr. Sudhir Aged 62 years want to take a reverse mortgage loan from Bank

Property Value(PV) = 1 Crore

LTV Ratio(LTVR)=80%
Loan Disbursement Period=15 Years
Disbursement Frequency=Monthly
Interest Rate(IR) = 10.5 %

Calculations: On the basis of the inputs:

The disbursement frequency selected is Monthly so “rate” will be IR/12(i.e. 10.5%/12)
No. of instalment payments(n) will be calculated monthly e.g. if 15 is selected then the nper=15*12=180
Putting the values in the formula FV : 10000000*80% = 80 Lakh
PV - 0
Type - 1
Instalment Amount PMT =Rs.18272;

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Retirement Planning - Questions for Practice

1. Mr. Govind aged 32 years is an IT Professional. His overall household expenses are 240000 p.a. which is
increase by 3% above inflation every year till he retires as he is not satisfied with his present standard of
living. He wishes to retire at age 55 and life expectancy assumed to be 75 years. Inflation is assumed to be
6% throughout and expected return on investments is 12% p.a. What amount he needs to invest each
month from now each month to build nest egg?

a) 16253
b) 16850
c) 15420
d) 13065

2. Amit, aged 46 years, plans to retire at 60 years of age. The life expectancy of Amit is 80 years. You have
estimated that he will require an inflation adjusted Rs. 1.1 lakh in the beginning of every month post
retirement for household expenses.

He would invest every year Rs. 1, 50,000 in Equity Mutual Funds starting from now till one year prior to his
retirement. He invests in Debt based Mutual Funds after retirement. Amit would set aside 23.79 lakh of his
existing Equity shares portfolio to invest the same for his retirement corpus. What will be the surplus/deficit
in the required corpus at the time of retirement? (Please ignore charges and Taxes if applicable) (Inflation -
5% pa, return on equity MF scheme – 12% pa, Return on Equity shares – 13% pa, return on debt MF – 7% pa)

a) Deficit of Rs. 16 lakh

b) Surplus of Rs. 12 lakh
c) Deficit of Rs. 31 lakh
d) Deficit of Rs. 34 Lakh

3. You advise Govind to immediately start investment for his retirement corpus. Though he is constrained
for funds due to various other priorities, you advise him to invest Rs. 50,000 every year in a Balanced
MF scheme starting from 1st January, 2010. The amount should be increased by 5% in January every
year so as to accumulate the corpus by 31st December, 2031. You estimate that by investing
systematically in this fashion he would be able to accumulate a sizable portion of her targeted
retirement corpus. If the returns from Balanced MF scheme are uniformly distributed during this
period, the accumulation till 31st December, 2031 will be _________. Last Investment will make on 1st
Jan 2031. (Return on balance MF scheme – 12% p.a.)
a) Rs. 73.40 Lakh
b) Rs. 105.40 Lakh
c) Rs. 51.80 Lakh
d) Rs. 25.09 Lakh

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4. Shahrukh aged 42 years, life expectancy 70 years, is software engineer. You suggest him to accumulate
retirement corpus by investing Rs. 50,000 in first year, and increasing at the rate of 6% p.a. in a
Pension plan annually till a year prior to his retirement. The pension plan gives monthly pension till
his life time in annuity due mode, immediately after the retirement age of 60 years. Assume the
pension plan yield 10% p.a. pre-retirement and 8% p.a. post retirement. Shahrukh wants to know
from you, what will be monthly amount he would receive from that pension plan. (Assume that he
starts investing in the Pension Plan with immediate effect. Ignore taxes and charges) Assume rate of
inflation is 6%.
A) Rs. 44,840
B) Rs. 44,300
C) Rs. 40,276
D) Rs. 50,600

5. An annuity product is designed in such a way that it gives first cash flow at 6% of the corpus at the end of
first year and thereafter every year in the form of growing annuity at the rate of 5%. If the cash flows are
guaranteed for 15 years, what rate of return is obtained on the corpus invested?

(a) 3.04% p.a.

(b) 3.91% p.a.
(c) 5.07% p.a.
(d) 6.41% p.a.

6. A retiree has accumulated Rs. 1.86 crore towards his retirement corpus. His current monthly household
expenses are Rs. 90,000 which he needs inflation adjusted for 30 years. If he considers average inflation to
be 5.5% p.a. from now onwards, what rate of return from a 30-year annuity, payable annually and deferred
by one year, should meet his goal?
A. 10.66%
b. 10.13%
c. 9.76%
d. 8.46%

7. Vishal, aged 32 years, an Accountant is employed with a Private Limited company in Mumbai. Vishal and
his wife Harsha, aged 30 years and a house wife. Vishal's monthly household / living expenses are Rs. 18,000.
Provide for household / living expenses in his post retirement period @ 75% of pre-retirement household /
living expenses. He wants such retirement corpus to last Harsha’s life time. He also wishes to be able to retire
early and comfortably at age 52 years.

You have suggested to Vishal to accumulate his retirement corpus by invest an equal amount every month in
Equity Mutual Fund scheme and Debt Mutual Fund scheme. You further advise to rebalance the combined
portfolio after every five years in such a way that the individual portfolios have equal amount of funds. After
his proposed retirement he would invest the combined accumulated corpus in Debt investment only to
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generate inflation linked monthly annuity. What equal monthly amount should he invest in each of Equity
and Debt schemes starting from today?
Vishal’s expected life : 80 years
Harsha’s expected life : 83 years
Inflation : 6.00% p.a.
Equity Returns : 12.00% p.a.
Debt Returns : 8.00% p.a.

a) Rs. 7,766
b) Rs. 17,548
c) Rs. 8,774
d) Rs. 15,532

8.
Retirement age of the individual 60
Life expectancy of the individual 80
A deferred annuity pension plan offers optional one-third commutation on the date of vesting and life
certain level Annuity. The level annuity from uncommuted amount is Rs. 60,000 per month.
The vesting sum of Rs. 1.5 crore is Estimated on retirement of the individual.

Goal: If the individual opts to commute one-third of the expected vested amount and settles for life annuity
from the remaining amount, at what rate of return the commuted amount shall be invested to yield a
total income of Rs. 90,000 per month till he survives?

a) 10.07%
b) 11.19%
c) 12.80%

9.
Current household expenses of a couple 50,000 Rs. p.m.
Current age of the client 33 years
Current age of dependent spouse 30 years
Retirement age of the client 58 years
Life expectancy of the client 78 years
Life Expectancy of dependent spouse 80 years
Estimated retirement corpus the couple is confident to accumulate 30,000,000 Rs.

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Goal: The client wants to know the rate of return which would see the accumulated corpus last till the
spouse's lifetime, if inflation-linked monthly expenses are drawn at 20% curtailment at the time of
retirement. The inflation is considered at 5.5% p.a.

a) 8.07%
b) 10.19%
c) 9.44%

10. Vishal’s father wants to deposit Rs. 15 lakh in Sr. Citizen Saving Scheme in each of his and his wife’s
account. He intends to accumulate this scheme’s interest in Gold ETF which is expected to give an
average monthly return of 0.75% per month (net of expense) and liquidate this investment at the
time of maturity of Sr. Citizen Scheme. What would be the amount at maturity if he deposits a lump
sum amount in Sr. Citizen Saving Scheme today? (Assume rate of Interest on SCSS is 9%)

a) Rs. 46.84 Lakh

b) Rs. 46.58 Lakh
c) Rs. 46.13 Lakh
d) Rs. 63.30 Lakh

11. Shahrukh and Preeti started their PPF A/c. with Rs. 5,000 each on 3rd April 2006. On the first working
day of every month they are depositing Rs. 5,000 from their respective bank accounts in their PPF Accounts.
They have not updated their PPF Accounts Pass Book even for a single year. They ask you what the balance
in their respective account could be as on 1st April 2009, as well as on the maturity of account, if they
continue this investment up to the maximum permissible period in the same manner as they have been till
now. (Consider the rate of interest in PPF A/c. for all current and future calculations to be done at 8.6%
p.a.)

a) Rs. 1,94,784 and Rs. 18,19,457

b) Rs. 2,03,225 and Rs. 16,99,722
c) Rs. 2,04,935 and Rs. 20,02,105
d) Rs. 2,01,925 and Rs. 18,97,300

12. Your client, of age 34 years and aspiring to retire at 60, has Rs. 3.38 lakh in his PPF account as on 31-
Mar-2015. The account matures on 31-Mar-2021. You advise him to invest Rs. 37,500 every quarter in the
first five days of April, July, October and January every financial year till the account's initial maturity, and
extend the PPF A/c after initial maturity till his retirement by regularly investing in the same manner. You
estimate the corpus thus collected through PPF A/c on his retirement. (Consider the rate of interest in PPF
A/c. for all current and future calculations to be done at 8% p.a.)

a) 155,40,750
b) 150,87019
c) 148,24,560

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13. Today is 1st Dec 2009. Ravinder wants to know from you, what is the maximum amount today he can
withdraw from his PPF account as per PPF rules. No Investment has been made by him in this Financial Year
till date. & PPF A/c is opened as on 4 January 2000.
Outstanding as on PPF A/c balance Rs.
31-3-2000 40,000
31-3-2001 85,000
31-3-2002 1,35,000
31-3-2003 2,10,000
31-3-2004 2,95,000
31-3-2005 3,45,000
31-3-2006 4,15,000
31-3-2007 5,05,000
31-3-2008 3,80,000
31-3-2009 4,30,000

a) Rs. 2,07,500
b) Rs. 2,15,000
c) Rs. 1,07,500
d) Rs. 1,90,000
14. Rajesh wants to know from you, in which FY he can first withdraw from his PPF account & what the
maximum amount of withdrawal is as per PPF rules. No Investment has been made by him in this Financial
Year till date. & PPF A/c is opened as on 4 Feb 2003.

Outstanding as on PPF A/c balance Rs.

31-3-2003 40,000
31-3-2004 85,000
31-3-2005 1,35,000
31-3-2006 2,10,000
31-3-2007 2,95,000
31-3-2008 3,45,000
31-3-2009 4,15,000
31-3-2010 5,05,000

a) FY 2008-09 & Rs. 67,500

b) FY 2009-10 & Rs. 1,05,000
c) FY 2010-11 & Rs. 2,02,500

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15. An investor who opened his PPF account on 9th January 2011. Today he is 32 years old and as on 31-03-
2015 he has Rs. 3.82 lakh in his PPF account. He aspires to retire at age 58 years. You advise him to contribute
every year maximum permissible amount towards the end of every financial year in PPF account. The PPF
account after its initial maturity would be extended till his retirement with the same discipline of maximum
contributions. The rate of interest in PPF is considered to average 7% in the period until his retirement. What
amount of corpus would thus be accumulated in his PPF account?

d) 12519879
e) 12405060
f) 13405300

16. A professional just retired has accumulated Rs. 45 lakh. He invests this corpus in an investment
instrument giving return of 8% p.a. His current annual household expenses are Rs. 5 lakh, escalating at
inflation of 6% p.a. He would rent out his other fixed property at an expected annual rent of Rs. 1.80 lakh,
the rentals increasing at 6% p.a. The balance expenses are met by withdrawing from the invested corpus.
The commercial property, currently valued at Rs. 50 lakh, is expected to appreciate at 8% p.a. He expects to
sell the property after 15 years to create a fresh corpus for his living expenses. How long the total funds
available are expected to last after 15 years?

(a) 15 years 2 months

(b) 16 years
(c) 18 years 7 months
(d) 16 years 9 months

17. A retired person has contracted a 20-year immediate annuity plan which provides an annual stream of
income, increasing year-on-year at 5%. He is due to receive 5th instalment of Rs. 5.50 lakh which is 6% of the
balance corpus remaining in annuity. He wants the term of the annuity to increase. He estimates that Rs.
4.75 lakh would be sufficient for his current living expenses. He proposes this to the annuity provider with
other terms remaining as originally agreed. If the yield of the annuity is 6.5% p.a., how many more
instalments would get added in the restructured annuity than the original?
(a) 5.36 instalments
(b) 6.36 instalments
(c) 3.04 instalments
(d) 7.39 instalments

18. A person at age 57 has accumulated Rs. 50 lakh towards retirement funds and opts for premature
retirement. He purchases an immediate annuity for a total term of 20 years, a fixed monthly amount for the
initial period of 10 years and a provision to double the monthly amount in the second 10-year period. If
the minimum yield guaranteed in the annuity is 8% p.a., what monthly amount he is expected to receive in
the subsequent 10-year period?
a. 30910
b. 61821

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c. 33906
d. 63982

19. An executive planning for purchase of an annuity, when he was of 53 years and had in dependents a
non-working spouse of age 48 and a son of age 25. On reaching age 60, he expects at least one, himself or
his spouse, to survive till 85 years and contracts an immediate life annuity with return of purchase price at
Rs. 10.15 lakh p.a. vested against the purchase price of Rs. 1.61 crore. What return is expected from the
vesting date?

(a) 6.73% p.a. (b) 5.76% p.a. (c) 4.25% p.a. (d) 6.304% p.a.

20. A 45-year old man spends Rs. 7.5 lakh p.a., almost the amount he earns, to maintain his family. He
expects his expenses to rise by 7% p.a. He has not saved for retirement. He has a second house which he
wants to rent at Rs. 20,000 p.m. immediately, the rent expected to increase by 7 % p.a. You advise him to
create a corpus by his age of 60 by investing the rent received in an instrument yielding 9% p.a. at the end
of every year. You estimate the number of years the accumulated corpus would last taking the received
rents post-retirement into account. The same is

(a) over 4 years (b) over 7-1/2 years (c) 8 years (d) over 3 years

21. A 40-year-old person spending Rs. 3 lakh p.a. plans to retire at age 63 and expects to live till 75 years.
The basic inflation at 7% p.a. and lifestyle inflation at 1.75% p.a. are expected in the pre-retirement period.
He starts investing for retirement at Rs. 30,000 p.a. in a 10% p.a. return instrument with immediate effect,
and increases the contribution by 20% every year of the prior year investment amount. If the expenses
post-retirement are curtailed by 20%, what maximum inflation would sustain his corpus till he survives, if
the corpus is invested at 7% p.a.?

(a) 1.56% (b) 4.18% (c) 7.88% (d) 6.07%

22. A 55-year-old individual could not save for retirement while he met his children’s education and
marriage. In the next 5 years he would have Rs. 35,000 per month investible surplus. The couple has
household expenses of Rs. 27,000 per month. They have a second house which earns Rs. 18,000 per month
in rental income. You direct their monthly savings to an 8 % p.a. instrument. Considering this return as
sustainable after retirement also, inflation at 6% p.a., rental increments at 6% p.a., you estimate the period
after retirement at 60 years when they may have to start curtailing their expenses. The same is ____.

(a) 13 years 5 months (b) 21 years 7 months (c) 31 years 5 months (d) 16 years 8 months

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23.

Current age of the client (as on 1st April 2015) 45 years

Retirement age of the client 60 years
PPF account balance of client as on 31-March-2015 (maturity 1-
Apr-2020) 500,000 Rs.
PPF a/c balance of the spouse as on 31-March-2015 (maturity 1-
Apr-2020) 300,000 Rs.
Expected interest rate on PPF 8.00% p.a.

Goal:
As part of the retirement strategy, you advise client to invest a sum of Rs. 40,000 and Rs. 20,000
immediately in his and spouse’s PPF account respectively and increase this investment by 20% every
year in the beginning of the Financial year in all future years till normal maturity. The contributions are
rounded up to the nearest thousand.
You also advise to extend their respective accounts for two terms of 5 years each beyond the normal
maturity by Contributing maximum permissible amounts in both the accounts. Find the combined
corpus of accounts when the Client retires.

a) Rs. 84,19,342
b) Rs. 88,75,270
c) Rs. 78,55,740

24. You advise your client aged 31 years to accumulate corpus of for retirement. The client already has in
Balanced MF scheme Rs. 1.60 lakh which you advise to extend to achieve this goal. You advise him to start
SIP of Rs. 5,000 every month till his age of 35 years, thereafter increase the same to Rs. 7,500 p.m. till his age
40 years, Rs. 10,000 p.m. between 40 – 50 years, and Rs. 15,000 p.m. between 50 – 56 years.

You advise him to switch 25% of outstanding Balanced MF portfolio every year to Liquid schemes from age
57 until full redemption on retirement at age 60. How much of the retirement corpus would he be able to
accumulate?
(Rate of return Balanced MF 9% p.a., Liquid MF 5.5% p.a.)

a. 13558325
b. 13757863
c. 12769876

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25.
Current age of Mr. A 28 years
Current age of the spouse of Mr. A 26 years
Retirement age of Mr. A 60 years
Current house hold expenses 25000 Rs. Per month
Life expectancy of each of Mr. A and spouse 80 Years
Post-retire expenses needed till Spouse's survival as % of pre-
retire. exp. 75%
Current investment available to be utilized towards retirement
corpus 300,000

Mr. A desires to have additional cushion of Rs. 1 crore, as terminal value from the date of last survivor towards
bequest. The retirement solution can be managed at yield of 12% p.a. in the initial 10 years, moderated to
return 9% p.a. in the next 10 years. In the remaining years to retirement and continuing into retirement the
funds could be managed to yield 7% p.a. Inflation is considered 5.5% p.a. in the pre-retirement period and is
expected to moderate at 4% p.a. in the post-retirement period. Estimate the viability of achieving this goal
by investing Rs. 62,000 p.a. in the current available investment, starting immediately, which would be
incremented by 5% in the beginning of every year. You analyze that _______.

Ans:

Achievable value of Bequest 4,149,381

The provision of Rs. 1 crore on bequeath is not sustainable, it could be to the extent of
Rs. 40 lakh approx.)

26. Mr. A has invested annually Rs. 2 lakh towards his retirement in an aggressive fund from his age of 40
onwards. After initial high returns, the fund could generate return of just 3.5% p.a. in 10 years. He can
direct a higher amount towards retirement goal in the remaining 10 years to retirement. You advise to
switch half of the accumulated funds along with fresh investment in a debt fund with indicative return of
8% p.a. in the future. To achieve a target corpus is Rs. 1.2 crore, what revised amount should be invested
every year if the future expectation from aggressive fund is 11% p.a.?

(a) Rs. 5.33 lakh (b) Rs. 4.62 lakh (c) Rs. 1.06 lakh (d) Rs. 3.79 lakh

27. Pyare Mohan, aged 29 years, working with a life Insurance company since Dec 2013. Salary for calculation
purpose is taken at Rs. 54,000 p.m. He has been receiving offers from competing Life Insurance companies
and plans to resign from the present company by the beginning of April 2019. He wants to know whether he
is eligible for Gratuity under the payment of Gratuity Act, 1972 and what shall be the gratuity payable in this
case? (Assume organization is covered under the payment of Gratuity Act, 1972).

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a) No, he is not eligible for Gratuity

b) Yes, Rs. 1,55,770
c) Yes, Rs. 1,03,850
d) Yes, Rs. 3,50,000

28. Radha had joined this private bank on 01-08-2000, her first job, as a relationship manager and is currently
posted as senior manager. She wants to know from you in case she resigns from her job on 31st March 2019,
what gratuity will she receive from her employer? She has informed you that she had availed maternity leaves
from 1st November 2011 to 28th February 2012 and from 1st December 2015 to 15th February 2016.
Assuming her employer is covered under the provisions of Payment of Gratuity Act, 1972. Salary for
computation purpose is Rs. 84,000 pm.
a) Rs. 3,50,000
b) Rs. 9,20,770
c) Rs. 8,72,307
d) Rs. 10,00,000

Reverse Mortgage

29. A retiree of age 60 wants to enter into the reverse mortgage scheme by mortgaging his self-occupied
house which is valued at Rs. 80 lakh. An approved lending institution agrees to provide periodic monthly
payments under the scheme considering a loan to value ratio of 80% and at a rate of interest of 13.75% p.a.
If the retiree opts for a 15-year term of reverse mortgage, what fixed periodic monthly payments he stands
to receive under the scheme?
A. 13379
b. 10,703
c. 10826
d. 13532

30. A retiree of age 65 has fixed pension of Rs. 15,000 per month. His household expenses have exceeded
his pension of late and are Rs. 16,000 per month now. He has approached an approved lending institution
under Reverse Mortgage Scheme. He is offered fixed monthly payments for 15 years at a rate of interest of
13.75% on Rs. 64 lakh eligible value of his home. He meets his annual expenses as increased by 6% inflation
every year and invests the excess amount from his two fixed annuities: fixed pension and reverse mortgage
stream, in an investment yielding 10% p.a. at the end of every year starting from this year onwards. You
assess at the end of five years thus accumulated fund against the total liability under Reverse Mortgage and
find that _

(a) Rs. 3.34 lakh net liability due to Reverse Mortgage Loan
(b) Rs. 3.10 lakh net liability due to Reverse Mortgage Loan
(c) Rs. 3.51 lakh net liability due to Reverse Mortgage Loan
(d) Rs. 66,097 net liability due to Reverse Mortgage Loan

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Investment Planning

How investment planning is different from selling investment products

Investment Planning is the process of determining how to invest the current assets and future savings which
depends on the current financial position, the risk appetite, the tax status and finally the ultimate goal of life.
Investment planning is a subset of the Overall Financial Planning.

Financial Advisor is like a Doctor & the Distributor of Financial Products is like a Chemist. It becomes necessary
to differentiate between the approach of an Advisor and a Product Seller. Financial Advisor will first consider
the financial position of the investor and calculate its risk profile. He will not only understand the finances of
the investor but also the various financial products available in the market to compare as to which will be the
best suiting to the client. This calls for a great fiduciary responsibility in the interest of the Investor and the
compensation for the services is obtained in the form of fees from the investor.

Investment Strategies

Investing strategies are like food diets: There is no "best investment strategy" except the one that works
best for you. You don't need anything expensive or tailor-made; you need something comfortable that will
last a long time, especially if your investment objective is long-term (10 years or more).

So before making a commitment to anything, whether it be food diets or investing strategies, see which
works best for your personality and style. You can start by considering the top 7 investing strategies, some
of which are theories, styles or tactics, which can help you to build a portfolio of Stocks & mutual funds.

1. Fundamental Analysis

We begin with fundamental analysis because it is one of the oldest and most basic forms of investing
styles. Fundamental analysis is a form of an active investing strategy that involves analyzing financial
statements for the purpose of selecting quality stocks. Data from the financial statements is used to
compare with past and present data of the particular business or with other businesses within the
industry. By analyzing the data, the investor may arrive at a reasonable valuation (price) of the
particular company's stock and determine if the stock is a good purchase or not.

2. Value Investing

The value investor is looking for stocks selling at a "discount;" they want to find a bargain. Rather
than spending the time to search for value stocks and analyze company financial statements, a
mutual fund investor can buy index funds, Exchange Traded Funds (ETFs) or actively-managed funds
that hold value stocks.

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3. Growth Investing

As the name implies, growth stocks typically perform best in the mature stages of a market cycle when
the economy is growing at a healthy rate. The growth strategy reflects what corporations; consumers
and investors are all doing simultaneously in healthy economies--gaining increasingly higher
expectations of future growth and spending more money to do it.

A nuanced version of growth investing can be found in the momentum investing strategy, which is a
strategy of capitalizing on current price trends with the expectation that momentum will continue to
build in the same direction. Most commonly, and especially with mutual funds designed to capture
the momentum investing strategy, the idea is to "buy high and sell higher." For example, a mutual
fund manager may seek growth stocks that have shown trends for consistent appreciation in price
with the expectation that the rising price trends will continue.

4. Technical Analysis

Technical analysis can be considered the opposite of fundamental analysis. Investors using technical
analysis (technical traders) often use charts to recognize recent price patterns and current market
trends for the purpose of predicting future patterns and trends. In different words, there are
particular patterns and trends that can provide the technical trader certain cues or signals, called
indicators, about future market movements. For example, some patterns are given descriptive
names, such as "head and shoulders" or "cup and handle." When these patters begin to take shape
and are recognized, the technical trader may make investment decisions based upon the expected
result of the pattern or trend. Fundamental data, such as P/E ratio, is not considered in technical
analysis where trends and patterns are prioritized over valuation measures.

5. Buy and Hold

Buy and hold investors believe "time in the market" is a more prudent investment style than "timing
the market." The strategy is applied by buying investment securities and holding them for long
periods of time because the investor believes that long-term returns can be reasonable despite the
volatility characteristic of short-term periods. This strategy is in opposition to absolute market
timing, which typically has an investor buying and selling over shorter periods with the intention of
buying at low prices and selling at high prices.

The buy-and-hold investor will argue that holding for longer periods requires less frequent trading
than other strategies. Therefore, trading costs are minimized, which will increase the overall net
return of the investment portfolio. Portfolios employing the buy and hold strategy have been called
lazy portfolios because of their low-maintenance, passive nature.

6. Core and Satellite

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Core and Satellite is a common and time-tested investment portfolio design that consists of a "core," such as
a large-cap stock index mutual fund, which represents the largest portion of the portfolio, and other types of
funds—the "satellite" funds—each consisting of smaller portions of the portfolio to create the whole. The
primary objective of this portfolio design is to reduce risk through diversification (putting your eggs in
different baskets) while outperforming (obtaining higher returns than) a standard benchmark for
performance, such as the BSE500 Index. In summary, a Core and Satellite portfolio will hopefully achieve
above-average returns with below-average risk for the investor.

Definition of 'Asset Allocation'

Financial assets vary in returns from each other depending on market conditions and user requirements.
Almost all asset classes are not perfectly correlated with each other, so diversifying across multiple sectors
tends to bring down the overall risk of a portfolio.

Strategic Asset Allocation

This involves allocating fixed weights to various asset classes over the entire investment horizon. The return
of the portfolio is then simply the weighted average return of various asset classes. For example, if you invest
60 per cent of your investments in stocks which have 15 per cent returns and 40 per cent in bonds which
offer 5 per cent returns, then the mean return of the portfolio is 11 per cent.

Tactical Asset Allocation

This strategy allows short term deviations from the ideal asset allocation to capitalize on market
fluctuations or attractive investment opportunities that exist for a small period of time. The investor tends
to remain moderately active and once the short-term profits have been achieved the portfolio is rebalanced
to the original mix.

Dynamic Asset Allocation

This strategy is meant for active investors who monitor their portfolio on a regular basis. The investor tends
to modify the allocation percentage of various assets depending upon the how the markets and the
economy is fluctuating. User may shift the gains from a volatile asset to less risky assets when markets are
correcting or may shift to riskier assets when the markets are booming.

Rebalancing

An effective long-term investment strategy focuses on asset allocation across products and asset classes
keeping in mind the risk-return needs of an investor. This also helps counter market volatility. Over time with
change in asset prices and asset returns, a portfolio’s asset allocation changes and gives rise to the need for
rebalancing. Here are two basic ways through which you can rebalance.

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Periodic, time-based rebalancing

For investors, who don’t actively track asset prices, it is best to adopt a periodic and systematic approach.
You set the frequency for portfolio reviews and rebalance accordingly. You need not rebalance with every
review unless one of two things happen—either the allocation for specific assets has deviated substantially
say in excess of 10% or your original goals and requirements have changed and warrant a change in allocation.
In this strategy, the rebalancing trigger can also be a fixed deviation, say 5% or 10%, from the original
allocation consistently over a period of time.
The frequency will depend on asset characteristics. So, if you have 80% equity in your portfolio, the review
frequency is likely to be at shorter intervals. But if 80% of it is in fixed-return assets, it’s better to space the
review cycles.

Tactical rebalancing

This works better for active investors, who keenly follow asset prices. Although the risk-return pattern of a
portfolio is best viewed in line with the asset allocation, often absolute returns or risk can cloud judgment.
For example, a sharp fall in equity markets for some (risk-taking investors) may create an opportunity to buy
at cheap valuations and for others (risk-averse investors) the panic to sell. This happens despite knowing that
the equity part is meant for long-term goals, which don’t change often, and that short-term volatility in equity
gets evened out over time.
This type of rebalancing relies more on the market environment and external dynamics that affect asset
prices. Given that in the recent years, price volatility across asset classes has increased, there is some merit
in adopting this strategy, but the risk involved is higher as the rebalancing is based on external events rather
than your financial goals and risk appetite.

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Standard Deviation

Standard deviation as a method of measuring the risk of securities calculates how far the returns on the
security deviate from the mean returns provided by the security. Thus, the Variance (square of standard
deviation) is an important factor which calculates the volatility of the returns on the securities. It’s important
for investors to be able to quantify and measure risk. To calculate the total risk associated with the expected
return, the variance or standard deviation is used.

Standard deviation is a measure of the total risk of an asset or a portfolio, including both systematic and
unsystematic risk. It captures the total variability in the assets or portfolios return, whatever the sources of
that variability. A low Standard deviation may be attractive but not sufficient to make the Investment
decision. As an Investor you need to know how security selected by you has performed in contrast to
benchmark Index.
Standard deviations for well- diversified portfolios are reasonably steady across time, and therefore historical
calculations may be fairly reliable in projecting the future. Moving from well- diversified portfolios to
individual securities, however, makes historical calculations less reliable. Fortunately, the number one rule
of portfolio management is to diversify and hold a portfolio of securities, and the standard deviations of well-
diversified portfolios may be more stable.
As an example, the average return on an FMCG stock is say 10% however we observe during the period that
the stocks not only over perform give 20% returns but also post negative returns. The degree of the deviation
from the average of 10% is measured by standard deviation or Variance.

How do we compute the standard deviation?

Period Return from FMCG Stock

1 15
2 12
3 20
4 -10
5 14
6 9

By using excel standard deviation is 10.4

And variance is square root of SD = 10.4^2

Portfolio Expected Return

The expected return on a portfolio is simply the weighted average of the expected returns on the individual
securities in the portfolio:

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Example: A portfolio consist for four securities A, B, C and D with expected returns of 12%,15%,18%,20%
respectively. The proportion of portfolio value invested in these securities is 0.20, 0.30, 0.30 and 0.20
respectively.

The expected return on portfolio is;

12%*0.20+15%*0.30+18%*0.30+20%*0.20
=16.3%

Portfolio Standard deviation in a 2-security case

Computation of standard deviation and variance from a single security we can calculate the standard
deviation and variance of the entire portfolio. The expected portfolio return on a portfolio is the weighted
average return of the Individual securities in the portfolio. Thus, the return on the portfolio can be easily
arrived at.

We have seen that diversification reduces the risk. In general, the lower the correlation of securities in a
portfolio, the less risky the portfolio will be. True diversification is about choosing correct securities that are
negatively correlated rather than mere increase in number of securities. Portfolio risk is not the weighted
average of the risks of individual securities in the portfolio (except when the returns from securities are
uncorrelated).
The SD of portfolio consisting of two securities is calculating by below formula.

Where,
σxy is the portfolio standard deviation
wx = percentage of stock x in the total portfolio value
wy = percentage of stock y in the total portfolio value
σx2 = SD of stock x
σy2 = SD of stock y
COVxy = covariance of stock x and stock y

COVxy = Coefficient of correlation * SD of X Security * SD of Y security

Example: a portfolio consists of two securities X and Y, Weights for stock x and stock y are 0.6 and 0.4
respectively. Standard deviation of the return for stocks X and Y are 10 and 16 respectively. The coefficient
of correlation between the returns on Securities X and Y is 0.5. What is the SD of portfolio?

So portfolio SD will be:

{(0.6)2*(10)2+ (0.4)2*(16)2+ [2*.6*.4*(0.5*10*16)} 1/2

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= (36+40+38.4)1/2
= 10.74

Covariance: Covariance reflects the degree to which the return of the two securities varies or changes
together. A positive covariance means that return of two securities move in same direction whereas a
negative covariance implies the returns of the two securities move in opposite direction.

Coefficient of correlation: Covariance and correlation are conceptually analogous in the sense both reflect
the degree of co-movement between two variables. Correlation coefficient is simply covariance divided by
the product of Standard deviations.

Beta

Beta is the measure of the relation of return on a stock or a portfolio of investments with that of the Financial
Market as a whole. This implies that Beta measures the risk that how far the stock will face the risk in the
market system and thus it is called as the measure of systematic risk.

Beta is a measure of the systematic risk of a security that cannot be avoided through diversification. Beta
measures non-diversifiable risk. Beta shows the price of an individual stock which performs with changes in
the market. In effect, the more responsive the price of a stock to the changes in the market, the higher is its
Beta. Betas can be negative or positive. But generally, betas have been found to be positive which means
that the direction of the movement of individual stock generally tends to be in line with the market: falling
when the market is falling and rising when the market is rising.

–An asset with a Beta of 0 means that there is no relation of the asset with the Financial Market. Whereas
an Index Fund which covers the stocks in same proportion as of that with the Index will be said to have a
Beta of 1 with the respective market index.

Beta = Covariance (Market return & Stock return)/Variance of Market

In simplified terms
Beta = (Risk of Security/risk of Market)*Coefficient of correlation between market & Security

Example: Beta of stock A is 1.5 while that of stock B is 1. If the market is expected to rise then an
aggressive investor would buy:

a. Either A or B; because in a rising market all stocks will rise

b. Stock A because it may deliver superior returns compared to B
c. Stock B because the risk will be less compared to A while the returns would be the same
d. Stock B because it may deliver superior returns compared to A

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Risk-adjusted Returns

Recognizing the necessity to incorporate return and risk into the analysis of portfolio return, three
researchers - William Sharpe, Jack Treynor, and Michael Jensen developed measures of portfolio
performance in the 1960s. These measures are often referred to as the composite (risk-adjusted) measures
of portfolio performance, meaning that they incorporate both realized return and risk into the evaluation.
These measures are still used by mutual funds and money managers.

Sharpe Ratio

When total risk is adjusted and returns are projected, it is called Sharpe ratio. It measures the excess return
per unit of total risk (as measured by standard deviation). Also known as Reward to variability ratio. The
higher the Sharpe ratio better is the performance. This ratio measures the effectiveness of a fund manager
in diversifying the total risk i.e. standard deviation.

Sharpe Total portfolio return - Risk-free rate Portfolio

= standard deviation
Ratio

Market data: Risk Free Return = 5%

Portfolio Data: Portfolio Return = 12% Beta = 1.2
Portfolio Std. Dev = 14 %
Sharpe = (0.12 - .05)/.14 = .50
Measure

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Treynor Measure
Beta is the measure of market risk of the portfolio. Higher values indicate superior performance

Treynor Ratio = Total portfolio return - Risk-free rate

Portfolio Beta

Measures excess return per unit of SYSTEMATIC RISK

Also known as "excess return to volatility" ratio

Market data: Risk Free Return = 6%

Portfolio Data: Portfolio Return = 10% Beta = 0.9

Treynor Measure = (.10 - .06) = 0.044

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Information ratio – To evaluate Mutual Funds

The information ratio measures the risk-adjusted returns of a financial asset or portfolio relative to a
certain benchmark. This ratio aims to show excess returns relative to the benchmark, as well as the
consistency in generating the excess returns. The consistency of generating excess returns is measured by
the tracking error.

The selection of the benchmark is subjective. The most commonly used benchmarks are the yields of
government-issued bonds (e.g., G Sec yield) or a major equity index (e.g., Nifty 50).

Uses of the Information Ratio

The information ratio is primarily used as a performance measure by fund managers. In addition, it is
frequently used to compare the skills and abilities of fund managers with similar investment strategies. The
ratio provides investors with insights about the ability of a fund manager to sustain the generation of
excess, or even abnormal (as in “abnormally high”), returns over time.

The information ratio and the Sharpe ratio are similar. Both ratios determine the risk-adjusted returns of a
security or portfolio. However, the information ratio measures the risk-adjusted returns relative to a
certain benchmark while the Sharpe ratio compares the risk-adjusted returns to the risk-free rate.

Information ratio = Total portfolio return – Benchmark return

Tracking error

Tracking error means : Standard Deviations of Alpha values derived from the portfolio return minus
benchmark return

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Jensen’s Index

Michael Jensen’s measure of portfolio performance was differential return measure (Alpha). It calculated
the difference between what the portfolio actually earned and what it was expected to earn given its level of
systematic risk. Basically, it attempts to measure the constant return that the portfolio manager earned
above, or below, the return of an unmanaged portfolio with the same market risk. Jensen’s measure is an
absolute measure of performance. Alpha is widely used to evaluate mutual fund and portfolio manager’s
performance

Alpha = Actual Rate of Return - Rate of Return predicted by CAPM

Jensen’s Alpha = Portfolio Return – [Risk free return + (Market Return – Risk free
Return) * Beta]

CAPM Required Return

Indicator of Portfolio Manager’s performance.

Higher the Alpha indicate the ability of fund managers to generate
excess returns than the expected market return

Example: Compute the Jenson’s alpha when the stock when the risk-free return is 8% and the expected
return from the market is 12% for a stock with Beta of 1.2 and actual return of portfolio is 16%
Jenson’s Alpha= Actual Portfolio return - (Risk free return+ (beta*(Market return – Risk free rate)))
Jenson’s Alpha =16 - (8%+ (1.2(12-8))
Jenson’s Alpha = 3.2

R – Squared

The R-squared figure demonstrates how much of a fund's movements can be explained by the movements
in its benchmark index. The higher the R-squared figure, the more closely the fund's performance can be
explained by its index, whereas a fund with a lower R-squared doesn't behave much like its index. And the
higher the R-squared, the more relevant the beta figure.
R-squareds can range from zero, meaning there's no degree of performance correlation between a market
benchmark and a given investment, to 100, meaning that an investment is highly correlated with an index.
Not surprisingly, index-tracking funds will have an R-squared figure of exactly 100 or very close to it, while a
fund whose movements diverge widely from its index will have a very low R-squared figure.

For example, A Mutual Fund has a three-year R-squared of just 61.97 with its index, indicating a very low
correlation with that index.

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Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between the expected
return and risk of investing in a security. It shows that the expected return on a security is equal to the risk-
free return plus a risk premium, which is based on the beta of that security. Below is an illustration of the
CAPM concept.

The CAPM formula is used for calculating the expected returns of an asset. It is based on the idea of
systematic risk (otherwise known as or non-diversifiable risk) and that investors need to be compensated
for it in the form of a risk premium. A risk premium is a rate of return greater than the risk-free rate.
When investing, investors desire a higher risk premium when taking on more risky investments.

Expected return on security= Risk free return+ (beta*(Market return – Risk free rate))

Example: Compute the expected return for the stock when the risk-free return is 8% and the expected
return from the market is 12% for a stock with Beta of 1.2.

Expected return of security/portfolio= Risk free return+ (beta*(Market return – Risk free rate))
Expected return of security/portfolio=8%+ (1.2(12-8)
=12.8

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Efficient Frontier

The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined
level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient
frontier are sub-optimal because they do not provide enough return for the level of risk. Portfolios that
cluster to the right of the efficient frontier are sub-optimal because they have a higher level of risk for the
defined rate of return.

 Efficient frontier comprises investment portfolios that offer the highest expected return for a
specific level of risk.
 Returns are dependent on the investment combinations that make up the portfolio.
 The standard deviation of a security is synonymous with risk. Lower covariance between portfolio
securities results in lower portfolio standard deviation.
 Successful optimization of the return versus risk paradigm should place a portfolio along the
efficient frontier line.
 Optimal portfolios that comprise the efficient frontier tend to have a higher degree of
diversification.

Optimal Portfolio

One assumption in investing is that a higher degree of risk means a higher potential return. Conversely,
investors who take on a low degree of risk have a low potential return. According to Markowitz's theory,
there is an optimal portfolio that could be designed with a perfect balance between risk and return. The
optimal portfolio does not simply include securities with the highest potential returns or low-risk securities.
The optimal portfolio aims to balance securities with the greatest potential returns with an acceptable

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degree of risk or securities with the lowest degree of risk for a given level of potential return. The points on
the plot of risk versus expected returns where optimal portfolios lie are known as the efficient frontier.

Selecting Investments

Assume a risk-seeking investor uses the efficient frontier to select investments. The investor would select
securities that lie on the right end of the efficient frontier. The right end of the efficient frontier includes
securities that are expected to have a high degree of risk coupled with high potential returns, which is
suitable for highly risk-tolerant investors. Conversely, securities that lie on the left end of the efficient
frontier would be suitable for risk-averse investors.

Weighted Average Cost of Capital

A firm’s Weighted Average Cost of Capital (WACC) represents its blended cost of capital across all sources,
including common shares, preferred shares, and debt. The cost of each type of capital is weighted by its
percentage of total capital and they are added together.

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Enterprise Value

Enterprise Value (EV) is the measure of a company’s total value. It looks at the entire market value rather
than just the equity value, so all ownership interests and asset claims from both debt and equity are
included. EV can be thought of as the effective cost of buying a company or the theoretical price of a target
company (before a takeover premium is considered).

The simple formula for enterprise value is:

EV = Market Capitalization + Market Value of Debt – Cash and Equivalents

The extended formula is:

EV = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash and
Equivalents

Why is Enterprise Value used?

Enterprise Value is often used for multiples such as EV/EBITDA, EV/EBIT, EV/FCF, or EV/Sales for
comparable analysis such as trading comps. Other formulas, such as the P/E ratio, usually don’t take cash
and debt into account like EV does. Hence, two identical companies that have the same market cap may
have two different enterprise values.

For instance, Company A has $60 million in market cap, $20 million in cash, and carries no debt. Company
B, on the other hand, also has $60 million in market cap, but has no cash, and carries $30 million of debt. In
this simple scenario, we can see that Company A is cheaper to buy because it doesn’t have any debt to pay
off creditors.

Enterprise Value is very useful in Mergers and Acquisition situations, especially with controlling ownership
interests. In addition, it is useful for comparing companies with different capital structures because a
change in capital structure will not affect the amount of enterprise value.

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Valuation of Bonds

In respect of longer-term securities, the time between receipts of interest income becomes a significant
factor in its valuation. In respect of dated securities and bonds interest payments are made at specified
intervals. The amount of interest and the timing of these payments will affect the price of a longer-term
security.

What determines the price of a bond?

Coupon rate What amount will the investor receive as

interest payment?

Maturity What amount of money a holder will receive

Amount back once a bond matures?

Maturity date On what future day will be the investor's

principal repaid?

Yield to What is the rate of return if the bond is held

Maturity until the maturity date?

Current Yield - The Coupon rate divided by the purchase price.

Yield to maturity - The YTM is equal to IRR which is calculated by outflow (purchase price of Bond) & all cash
flow receivable from owning the bond including maturity.
Yield to call: Some bonds carry features that entitle the issuer to call (buy back) the bond prior to the stated
maturity date. Yield to call is calculated in the same way like YTM but the tenure and maturity value is
changed.
Yield to Put: Some bonds carry features that entitle the bond holder to ask from issuer for buy back the bond
prior to the stated maturity date. Yield to put is calculated in the same way like YTM but the tenure and
maturity value is changed.

Modified Duration : Modified duration, a formula commonly used in bond valuations, expresses the change
in the value of a security due to a change in interest rates. In other words, it illustrates the effect of a 100-
basis point (1%) change in interest rates on the price of a bond.

Modified duration illustrates the concept that bond prices and interest rates move in opposite directions –
higher interest rates lower bond prices, and lower interest rates raise bond prices. A bond with a higher
Modified duration will be more sensitive to changes in interest rates.

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Weighted Average Maturity :

This is more commonly referred to as the average maturity of a debt fund. It is the average time it takes for
securities in the portfolio to mature, weighted in proportion to the amount invested.

E.g.: Rs 1,000 invested in Bond A matures in 5 years Rs 2,000 invested in Bond B matures in 10 years

Total investment in debt portfolio = Rs 3,000 WAM = (1000/3000)*5 + (2000/3000)*10 = 8.33 years

Average maturity indicates the sensitivity of the portfolio to interest rate changes. The higher the average
maturity, the greater is the volatility of returns in the fund. This is seen in debt funds with longer
investment horizons. On the other hand, average maturities in liquid funds have been restricted to 90 days
while ultrashort funds could go higher but are usually less than a year, making them less volatile to interest
rate movements. The average maturity of a scheme gives you a broad guideline in terms of finding a debt
fund suitable for the time horizon of your investment.

Valuation of real estate

It is important to have a clear idea of valuation of a property both at the time of purchase as well as at the
time of sale. The parameters of valuation are complex and the valuations are many times highly subjective.
The price for a property is arrived at mutually by the buyer and the seller while the value could be different.
They tend to be very close to each other if both the buyer and seller are making informed decisions.

1. Capitalization approach

It is important to find out based on a market research what kind of yields are obtainable on comparable
properties. Secondly it is required to work out the net income derived from the property by deducting
expenses like repairs, insurance, etc. from the gross income and finally capitalize the net income for the
market yield on the property.

Value of Property = Net Operating Income/Yield

Example
Let’s presume that rent fetched is generally around 3.5% of property values.

If rental income of say Rs. 20,000/- p.m. is earned on a property and expenses to the tune of say Rs. 20,000/-
are incurred every year on insurance, repairs, etc. then the net annual rental income from the property would
amount to
12*20000 -20000 = 220000/-

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Capitalizing net income of Rs. 2,20,000/- for a yield of 3.5% as follows, we get the capital value of the
property: 2,20,000/0.035 = Rs. 62,85,714/-

2. Discounted cash flow method

If the proposed property earning regular income on a year on year basis, we have to work out the present
value of cash flows using our standard formula used in annuity calculations. Value of the property is the
present values of all cash flows to be received by owning the property as well as expected cash flow on sale
of the property after a definite period of time. If we have an idea of expected price at which the property will
be sold after a few years and the quantum of rental income on a yearly basis and idea of required rate of
return on this investment then, the property can be valued in present terms.

Example

An investor wants to purchase a property which will fetch him a net rental income of Rs. 25,000/- p.a. steadily
for the next 3 years at the end of which he will be able to sell the property for Rs. 3 Lakh. If the investor wants
a return of 12% p.a. what price he should pay for the property?

PV = [25000/(1.12)] +[ 25000/(1.12)2]+ [(25000+300000)/(1.12)3]

= 22321.42 +(25000/1.2544)+(325000/1.405)
=22321.42 +19929.84 + 231316.72
= 273356.98 say Rs. 2,73,400/-
Better to calculate by excel

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Valuation of Equity shares – Dividend discount model

Dividend discount model, conceptually a very sound and appealing model, the value of an equity share is
equal to the present value of dividend expected from its ownership plus the sale price expected when the
equity share is sold. Investors would like to buy “under-valued” stocks and sell ‘over-valued’ stocks held by
them.

Single period valuation model

Let us begin with the case where the investor expects to hold the equity share for one year. The price of the
equity share will be;

Where,
P0 = current price of the equity share
D1 = dividend expected a year hence
P1 = price of the share expected a year hence
r = rate of the return required on the equity share
The underlying assumptions are the dividend of D1 will be paid at the end of the year and the share can be
sold after one year at a price P1

Example
If an investor expects to receive a dividend of 2.50 per share and year end price to be Rs. 150 and needs a
return of 15% p.a. on his share investment at what price should he buy this share?

Multi period valuation model

We have considered for a single period of one year; we can extend the same to multi periods where the
present value of each year’s dividend will be discounted at the required rate of return and so will be the
sale price at the end of the period. Stock prices and dividends have a tendency to grow over a period of
time; we can factor in these growth rates in our calculation of share value:

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Constant growth model (Gordon Model)

In Gordon Model, we assume the dividend per share grows at constant rate. The value of a share under this
assumption is
Current price of equity share = D1/r-g

D1 = dividend expected a year hence

r = rate of the return required on the equity share
g = growth rate

Example -1
The dividend paid out by a company has been growing at the rate of 10% p.a. over the last few years. The
next year’s dividend is expected to be Rs. 2/- per share. The expected return is 16%. At what price should
we buy the stock?

Example - 2
If a company has been currently paying dividend at the rate of Rs. 2/- per share and if the growth rate is
10% and expected return is 15% what should be present price of the share?

Two Stage growth Model

The simple extension of constant growth model assumes that the extraordinary growth (good or bad) will
continue foe a finite number of years and thereafter the normal growth will prevail indefinitely.
Example: The current dividend on the equity share of Pasco ltd. is Rs. 2.00. Pasco is expected to enjoy an
above normal growth rate of 20%in dividends for a period of 6 years. Thereafter the growth rate will fall and
stabilize at 10%. Equity Investors require a return of 15%. What is the intrinsic value of equity share of Pasco?

Ans: Rs. 70.76

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Derivatives: Futures

Futures contracts are organised/ standardised contracts, to buy or sell a specified quantity of financial
instrument /commodity at a designated future date at a price agreed upon by the buyer and seller.

Features –
 These contracts are traded on the exchanges.
 These contracts, being standardised and traded on the exchanges are very liquid in nature.
 In futures market, clearing corporation/ house provides the settlement guarantee.
 Mark-to-market.
 Mark-to market means that the broker is tracking your position every day. Every loss on daily
closing is debited to your account, even though you are not closing your position.

Derivatives: Options

Option are deferred delivery contracts that give the buyers the right, but not the obligation, to buy or sell a
specified underlying at a set price on or before a specified date.
 Deferred Delivery Contracts
 Give the buyer a right
 Not the obligation
 To buy or
 Sell
 A specified underlying
 At a set price
 On or
 Before a specified date

Types of Options

 Call Option: A call gives holder the right to BUY an asset at a certain price within a specific period of
time. Calls are similar to having a long position on a stock where the buyers are bullish on the asset.

 Put Option: A put gives the holder right to SELL an asset at a certain price within a specific period of
time. Puts are similar to having a short position on a stock where the buyer is bearish on the asset.

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Investment Planning Questions

1. An investment analyst has told Akshay to invest in a portfolio after evaluating on the following parameters
-
(1) The performance of portfolio adjusted by the return of risk-free assets over the risk of portfolio
(2) Measure of the volatility in a portfolio as compared to the entire market (index) as a whole
(3) Measure of how many individual elements tend to deviate from the average
(4) Measure excess return on an investment over the benchmark with same degree of risk
(5) The proportion of variability in a portfolio compare to benchmark
The analyst also used a lot of terminology which confused Akshay. He wants to know how the
terminology used fits into these evaluation parameters. You advise the terminology, respectively,
as_______.

a) Beta, Sharpe Ratio, Standard Deviation, Alpha, R2.

b) Sharpe Ratio, Beta, Standard Deviation, Alpha, R2.
c) Alpha, R2, Standard Deviation, Sharpe Ratio, Beta.
d) R2, Sharpe Ratio, Standard Deviation, Alpha, Beta

2) Aamir wants to know whether his Mutual Fund portfolio's returns are due to smart investment decisions
by the fund manager or a result of excess risk. As he is of the opinion that one portfolio or fund can reap
higher returns than its peers, it is only a good investment if those higher returns do not come with too
much additional risk. He wants his Mutual Fund to give him better risk-adjusted performance. You
would suggest him to look for ________ Ratio.
a) Alpha
b) Sharpe
c) Beta
d) R-Squared
3) You have suggested Aamir to look for few important risk measures which measure different types of
risks. When comparing two or more potential investments, an investor should always compare such
measures. These are ________.
a) CAPM, Treynor Ratio, Beta, Standard Deviation and the Sharpe Ratio
b) Alpha, Beta, R-squared, Standard Deviation and the Sharpe Ratio
c) Quick Ratio, Alpha, Beta, Sharpe Ratio and Retention Ratio
d) Debt/Equity Ratio, Current Ratio, Sharpe Ratio, Alpha and Standard Deviation

4) While explaining the basics of selecting a Mutual Fund scheme you have asked Shahrukh to analyze
the Mutual Fund Portfolio by five main indicators that apply, one of these is __________ which is a measure
of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

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a) R-Squared
b) Alpha
c) Beta
d) Sharpe Ratio
5) Shahrukh is planning to invest in two companies’ ABC and XYZ. The coefficient of correlation between the
two stocks ABC and XYZ is 0.7. The standard deviation of returns for ABC is 18% and the standard deviation
of returns for XYZ is 22. The expected return for XYZ is 18 and the expected return for ABC is 15%. Calculate
the expected returns and standard deviation of Shahrukh’s portfolio for which he plans to invest Rs. 4 lakh in
XYZ Company and Rs. 2 lakh in ABC Company.

a) 16.33% and 18.83

b) 17.00% and 19.34
c) 19.01% and 20.77
d) 16.95% and 19.38

6) Aishwraya wants to assess the volatility of the stock XYZ Ltd in the market. You measure the same
relative to the Nifty Index. You have found out the relevant parameters of the stock XYZ Ltd and
Nifty Index as follows:
i) Standard Deviation of XYZ Ltd: 2.2
ii) Standard Deviation of Nifty Index: 1.90
iii) Correlation Co-efficient of XYZ Ltd with Nifty Index: 0.90
You find the volatility of stock XYZ Ltd. relative to Nifty Index to be

a) 4.62
b) 1.04
c) 0.78
d) 1.29

7) Veeru’s Mutual Fund investments consist of four different funds. Performances of these funds are as
follows:
Mutual Fund Return of 5 years Beta
Fund
A 18% p.a. 1.25
B 14% p.a. 0.85
C 16% p.a. 1.02
D 17% p.a. 1.20
How would you rank these funds from the best to worst on the basis of Jensen's Alpha? (Assume risk free
rate is 4% and return from market is 15%)

a) A, D, C & B
b) A, B, C & D

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c) C, B, A & D
d) D, A, B & C

8. Salman’s Mutual Fund investments consist of four different funds. Performance of these funds is as follows:
Mutual Fund Fund Return of 1 year Standard
deviation
A 15.33% 42.76
B 12.54% 37.15
C 10.25% 23.78
D 9.06% 15.26
He wants to know whether the return on these mutual funds is due to smart investment decisions
as a result of excess risk. How would you rank these funds from the best to worst on the basis of
Sharpe ratio? (Assume risk free Rate is 6%)

a) B,C,D,A
b) A,C,D,B
c) A,D,C,B
d) B,D,C,A

9. You are evaluating the rankings based on Jenson’s Alpha of three funds A, B and C . The average returns
obtained from funds A, B and C have been 16%, 19% and 14%, respectively against the market return of
13%. The standard deviations of fund returns have been 17, 22 and 16, respectively versus the market
return standard deviation of 15. If the beta reported of these funds is 1.2, 1.4 and 1.1, respectively and the
risk-free rate of return is 5.5%, what are your rankings in the order of best to worst?

(a) B,A,C
(b) A,B,C
(c) C,B,A
(d) A,C,B

10. You are evaluating the rankings based on the basis of Sharpe ratio of three funds A, B and C . The
average returns obtained from funds A, B and C have been 16%, 19% and 14%, respectively against the
market return of 13%. The standard deviations of fund returns have been 17, 22 and 16, respectively versus
the market return standard deviation of 15. If the beta reported of these funds is 1.2, 1.4 and 1.1,
respectively and the risk-free rate of return is 5.5%, what are your rankings in the order of best to worst?

(a) B,A,C (b) A,B,C (c) C,B,A (d) A,C,B

11. On 10th March 2008 Aamir had taken an open short position of 10 lots of Nifty futures, with an average
price of Rs. 4,450. On 10th March 2008, Nifty closed at Rs. 4,520. However, he did not square off his
position until 11 March 2008 when Nifty dipped to an intraday low of Rs. 4,395. He squared off his
position of 4 lots at Rs. 4,495 & remaining 6 lots on an average price of Rs. 4,410. On 11th March 2008,
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Nifty closed at Rs. 4,460. The lot size of a Nifty future is 50. What profit or loss was booked by Aamir
on his entire position? (Assume Brokerage and taxes per lot is Rs. 50 on each side, while buying as
well as selling)

a) Profit of Rs. 2,000

b) Loss of Rs. 2,000
c) Profit of Rs. 3,000
d) Loss of Rs. 4,000

12. Aamir is considering a proposal for investment in commercial real estate property to earn rental income.
The following data is available for the property selected by him:
Asking price : Rs. 21,00,000
Annual rental income : Rs. 1,60,000
Insurance expenses : Rs. 5,500
Annual Maintenance : Rs. 10,000
Market yield : 4%
What according to you is the value of property as per capitalization approach?

a) Rs. 37,50,000
b) Rs. 36.12.500
c) Rs. 38,40,000

13. Ashwin currently aged 45 years acquired bonds face value each bond Rs. 1000 today with a coupon of 8%
with 5 years remaining until maturity (Interest is paid semiannually). He acquired the bond for Rs. 1080.
Ashwin want to know from you, yield to maturity (annual effective yield) on this investment?

a) 6.12%
b) 6.40%
c) 6.25%
d) 6.21%

14. Shahrukh invests in 20-year maturity, 12% coupon bond (Face value Rs. 1000) paying coupons semi-
annually is callable after ten years at a call price of Rs. 1,050. The bond traded in market at a Yield to Maturity
of 10.5% immediately after five years from the issue date. He invests next day of coupon payment at YTM of
10.5% . The yield to call of this bond is

a) 9.61%
b) 5.25%
c) 4.81%
d) 4.19%

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15. Today is 16th Jan 2011; Meghna has invested in 500 Zero coupon bonds of face value of Rs. 1,000 each & 5
year term, maturing on 15/01/2013.Bonds were issued at Rs. 670 per bond. The bonds also have an option
that after 3-year investor can ask for repayment and company shall refund Rs. 840 on each bond. Meghna
wants to know the yield if he asks for repayment after three years.
a) Yield to call is 8.34% p.a.
b) Yield to put is 7.83% p.a.
c) Yield to put is 8.34% p.a.
d) Yield to call is 7.83% p.a.

16. Sham purchased Zero coupon bonds at Rs. 8500 per bond, A maturity value of Rs. 2 Lakh per bond was
offered after the term of 25 years. The bond has an inbuilt option that 5 year the investor can ask for
repayment and company shall refund Rs. 12,600 on each bond while after 10 years the company can buy back
the bond after paying Rs. 19400 on each bond to the investor. Sham wants to know rate of return in both the
cases:
a) Yield to call is 8.19% p.a. while yield to Put is 8.60% p.a.
b) Yield to Put is 8.19% p.a. while yield to call is 8.60% p.a.
c) Yield to call is 8.60% p.a. while yield to put is 13.47% p.a.
d) Yield to put is 8.60 % p.a. while yield to call is 13.47% p.a.

17.

Situation: Bond valuation and return

Face value of the Bond 1,000 Rs.

Coupon Rate (coupon payable at the end of every year on 31-
December) 9% p.a.
Date of maturity 31-Dec-19

Current market price (as on 1-Apr-2015) 1,078 Rs.

What would be the effective return if an investment is made in the bond today and held till maturity?

a) 7.09%
b) 7.54%
c) 8.17%

18. Salman wants to invest in equity shares of PQR Ltd. The company PQR Ltd. has paid a dividend of Rs. 12.00
per share in current year. The dividend is expected to grow @11% p.a. for the next 3 years and thereafter it
is expected to grow @8% p.a. forever. He wants to know the intrinsic value of share today as per dividend
discount model, his required rate of return on PQR Ltd.’s equity is 15% p.a.?

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a) Rs. 200
b) Rs. 178
c) Rs. 211
d) Rs. 252
19. Reliable Ltd. ‘s dividends have been growing at a rate of 18% per annum. The growth stock is expected to
continue for 4 years. After that the growth rate will fall to 12% for the next four years. Thereafter the
growth rate is expected to be 6% forever. If the last dividend per share was Rs. 2.00 and investor required
rate of return on equity is 15% p.a. Calculate what is the intrinsic value per share?

a) 40.32
b) 88.60
c) 71.84
d) 42.80
20. A stock of face value Rs. 10 is currently priced at Rs. 175. The company paid a dividend of 125% in the
previous fiscal year and the absolute amount of dividend is expected to grow by on an average 5 % year-on-
year. It has a beta of 0.8 . You expect the market to give a return of 12% while the risk-free rate is 5%. You
find out the extent of undervaluation or overvaluation of the stock by dividend discount method, and state
that ______.

(a) the company’s stock is undervalued by 38%

(b) the company’s stock is overvalued by 56%
(c) the company’s stock is undervalued by 153%
(d) the company’s stock is undervalued by 25%

21. Rajesh wants to understand the extent of correlation between the Gold prices internationally and the gold
prices in India. You opine the foreign exchange fluctuations play a major role here. Interestingly, the rise in
gold prices internationally is accompanied by a dollar weakness, thereby smoothening out to a large extent
Rupee price appreciation in gold. Currently, the price of gold per troy ounce is US $ 1113. Currently exchange
rate is 1US $ = INR 46.22. She presumes a scenario where the price of gold after 6 months is US $ = 1250 per
troy ounce. But US $ deprecates against Rupees to I US $ = INR =44.00.
She wants to know percentage appreciation happen in gold in Rupees prices as per above situation. (Assume
no other factor affect Gold prices) (1 troy ounce = 31.1035 gram)
a) 7.17%
b) 6.91%
c) 7.51%
22. You manage a Rs. 10,00,000 portfolio. You are expecting to receive an additional Rs. 6,50,000 from a
new client. The existing portfolio has a required return of 10.25 percent. The risk-free rate is 5 percent and
the return on the market is 9.5 percent. If you want required return on the new portfolio to be 11 percent,
what should be the average beta for the new stocks added to the portfolio?

(a) 1.25 (b) 1.59 (c) 1.76 (d) 1.47

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Income Tax Planning as per AY 2020-21

Taxes have inherently been a complex and confusing subject. This being the case the common man doesn’t
even try to understand the nitty-gritty of this baffling subject but prefers to outsource their tax matters to
their advisors or chartered accountants. Hence, this subject assumes paramount importance in the service
offerings of every investment advisor.
Income tax, Heads of Income and other Rules
Taxes basically represent the sum of money charged by the Government at the prescribed rates in lieu of the
various services provided. Taxes form the basic source of revenue to the Government. There are mainly two
types of Taxes, direct tax and indirect tax as depicted below:
Direct Taxes are those which are directly collected from the Tax payers i.e. the impact and incidence of direct
Taxes fall on the same person Example: Direct Tax, Wealth tax & Professional Tax. On the other hand, the
impact and incidence of indirect Taxes fall on different persons since the Tax payer recovers the indirect Taxes
paid from their consumers/ buyers/ clients, as the case may be. Example of Indirect tax is GST & Custom
duties

Tax Planning

‘Tax Planning’ is essentially a legal recourse for minimizing one’s Tax liability. It can be defined as a systematic
exercise undertaken within the scope of law to minimize one’s Tax liability with the optimum use of available
exemptions, deductions, reliefs and allowances. Since Tax planning is within the framework of the legal
provisions, a Tax payer is legitimately entitled to arrange his affairs in a manner so as to reduce his Tax liability
to the minimum. Further, this position has been time and again upheld by the Courts through various judicial
precedents.
However, it is pertinent to note that under the pretext of Tax planning, a Tax payer cannot indulge in ‘Tax
avoidance’ or ‘Tax evasion’ as the line between the two is extremely fine. While the result of both is same
(i.e. minimizing Tax outgo) in case of Tax evasion or Tax avoidance the transactions are arranged in a manner
so as to circumvent the provisions of law with the mala fide intention of not paying Taxes. Tax evasion or Tax
avoidance means illegally avoiding paying Taxes through fraudulent techniques to circumvent the Tax laws –
wilful under reporting of income or inaccurate claim of deduction would be an example of Tax evasion. Such
Tax evasion measures are not permissible by law and invite penal consequences.
Thus, advisors need to be cautious at the time of devising Tax planning measures for their clients. While
necessary strategies need to be undertaken to ensure that the client does not miss out on any legitimate
claim, simultaneously precaution should be observed so that the planning measures are not construed as Tax
evasion or Tax avoidance.

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BASIC CONCEPTS

The basic chargeability of Income-tax can be understood as: Any person whose total income for the previous
year exceeds the basic amount not chargeable to tax is an Assessee and is liable to tax at the rates of Income-
tax in force for the Assessment Year. The scope of total income is determined on the basis of the person’s
residential status.

Person [Section 2(31)

Under the Income Tax Act (ITA), a person is understood as a unit liable to pay taxes and includes the following:
i. an individual,
ii. a Hindu undivided family,
iii. a company,
iv. a firm,
v. an association of persons or a body of individuals, whether incorporated or not,
vi. a local authority, and
vii. every artificial juridical person, not falling within any of the preceding sub-clauses.

Income [Section 2(24)]

Income-tax is levied as a charge on income, so it is equally important to first understand the meaning of
income as defined under the Income Tax Act, 1961 (the Act). Here it is of utmost importance to understand
the difference between ‘receipt of money’ and ‘income’. All moneys received by an individual may not be
income but every income received is definitely a receipt of money. Income has been inclusively defined under
section 2(24) of the Act to mean and include the following among others:
i. Profits and gains;
ii. Dividends;
iii. Value of any perquisites or benefits received by an employee;
iv. Value of any perquisites or benefits received from any business or profession;
v. Capital gains;
vi. Prize money from lotteries, crossword puzzles, card games, TV shows, races including horse races, etc.

Income may be in cash or kind, and illegal income is also taxable. Income earned by a person should be real,
in other words, a person cannot make profit out of its own self by transferring money from one bank account
to another. All income earned by a person need not be taxable. Therefore, if a receipt of money qualifies as
income, the next step is to ascertain whether the income is taxable or not.

Previous Year [Section 3]

Previous year has been defined to mean the financial year immediately preceding the Assessment year. The
previous year can also be understood as the year in which the income is earned by a person. For instance,
the period from April 1, 2019 to March 31, 2020 will be referred to as the previous year. All the income earned
during this period shall be clubbed at the end of the year and offered to tax as income for the assessment
year 2020-21.

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Gross Total Income

The Gross Total Income of an individual consists of the income under all the various heads.
After arriving at the gross total income, adjustments are made for set-off and carry forward
provisions as applicable. Section VI-A, of the Income Tax Act, specifies the deductions
allowed from the total income of an individual. These deductions are provided under
sections 80C to 80U of the Income Tax Act. Such deductions are allowed only against
specific expenditures and payments made during the financial year. Deductions allowable
under the Income Tax Act cannot exceed the total income of the individual.

Rates of Taxation
After arriving at the net income liable to tax and after taking into account all deductions
allowable, one needs to apply the respective tax rate to arrive at the income tax payable.
Rates of taxation are different for different types of assesses and are declared each year in
the Finance Bill which is further approved and passed as the Finance Act. Income tax rates
are structured slab wise, based on lower tax for lower income and higher rate of tax for
highest of income.
Rates applicable to Assessment Year 2020-21 are as follows:

a. Individuals below 60 years of age

Income Slabs Income Tax rates

Where taxable income does not exceed Nil
Rs.250000
Where taxable income exceeds Rs.250000 5% of the amount by which the income
but does not exceed Rs.500000 exceeds Rs. 250000
Where taxable income exceeds Rs.500000 Rs. 12500 + 20% of the amount by
but does not exceed Rs.1000000 which the income exceeds Rs.500000
Where taxable income exceeds Rs.1000000 Rs.112500 + 30% of the amount by
which the income exceeds Rs.1000000

b. Individuals 60 years and above but below 80 years of age

Income Slabs Income Tax rates

Where taxable income does not exceed Nil
Rs.300000
Where taxable income exceeds Rs.300000 5% of the amount by which the income
but does not exceed Rs.500000 exceeds Rs. 300000
Where taxable income exceeds Rs.500000 Rs. 10000 + 20% of the amount by
but does not exceed Rs.1000000 which the income exceeds Rs.500000
Where taxable income exceeds Rs.1000000 Rs.110000 + 30% of the amount by
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which the income exceeds Rs.1000000

c. Individuals above 80 years of age

Income Slabs Income Tax rates

Where taxable income does not exceed Nil
Rs.500000
Where taxable income exceeds Rs.500000 20% of the amount by
but does not exceed Rs.1000000 which the income exceeds Rs.500000
Where taxable income exceeds Rs.1000000 Rs.100000 + 30% of the amount by
which the income exceeds Rs.1000000

Surcharge
The amount of Income tax shall be increased by a surcharge for the purposes of Union calculated at
following rates

Income Slabs Surcharge rates

Where the total income exceeds Rs. 50 L 10% of such Income tax
but does not exceed Rs. 1 Cr
Where the total income exceeds Rs. 1 Cr 15% of such Income tax
but does not exceed Rs. 2 Cr
Where the total income exceeds Rs. 2 Cr 25% of such Income tax
but does not exceed Rs. 5 Cr
Where the total income exceeds Rs. 5 Cr 37% of such Income tax

Health and Education cess on Income tax at the rate of 4 % of income tax ( inclusive of surcharge if
applicable)

Rebate u/s 87 A

You can claim tax rebate under this provision if you meet the following conditions:

1. You must be a RESIDENT INDIVIDUAL; and

2. Your Total Income after Deductions (under Section 80) doesn’t exceed Rs 5 lakh.
3. The rebate is limited to Rs 12,500. This means that if the total tax payable is lower than Rs 12,500,
then that amount will be the rebate under section 87A. This rebate is applied to the total tax before
adding the Education Cess (4%)

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Tax Slab Rate for Domestic Company:

(a) if the total turnover or gross receipts from the Previous year 2018-19 does not exceed Rs. 400 CR then
25%
(b) In all other cases – 30%

Plus: Surcharge: 7% of tax where total income exceeds Rs. 1 crore

12% of tax where total income exceeds Rs. 10 crore
Health & Education cess: 4% of tax plus surcharge
Tax Rate for Partnership Firm:
A partnership firm (including LLP) is taxable at 30%.
Plus: Surcharge: 12% of tax where total income exceeds Rs. 1 crore
Education cess : 4% of tax plus surcharge

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RESIDENTIAL STATUS & SCOPE OF INCOME

Scope of total income

The scope of the total taxable income for a person for a previous year is dependent on his residential status
– which may be (a) resident (b) non-resident.
A resident’s total income comprises all his income accrued/ received or deemed to accrue/ received within
and outside India. In simpler words, a resident’s global income is taxable in India.
A non-resident’s total income comprises only that income which has accrued/received or is deemed to have
been accrued/received in India. In other words, a non-resident shall not be liable to pay tax in India for any
income accruing or arising outside India.

Residential status
Residential status is the principal factor on which the tax liability for an assessee is determined. The rules for
determining the residential status for the different categories of persons are different. Please note that the
residential status is determined separately for each year and thus an individual may have different residential
status in different years.
An individual may be either resident or a non-resident. An individual will be resident in any previous year, if
he satisfies at least one of the following basic conditions:

i. He is in India during the previous year for a period of 182 days or more; or

ii. He is in India during the previous year for a period of 60 days or more and has been in India for 365 days
or more days during the four years immediately preceding the previous year.

Exception:

However, if the individual is an Indian citizen and leaves India in any previous year as a member of the crew
of an Indian ship or for the purpose of employment, he will have to stay in India for at least 182 days (and
not 60 days as in condition (ii)) to qualify as a resident.
Similarly, if any Indian citizen or a person of Indian origin who is living outside India and comes on a visit to
India in the previous year, he will have to stay in India for 182 days (and not 60 days as in condition (ii)) to
qualify as a resident.
If an individual doesn’t satisfy any of the two conditions as specified above, he shall be treated as a ‘Non-
resident’.

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Exempt Income
The ITA has enumerated a list of incomes under section 10 which are totally exempt from tax. In other words,
these incomes do not get added to a person’s total income. The foregoing paragraphs lists out some of the
most common incomes which have been exempted from tax under section 10 of the Act.

Agricultural income [Section 10(1A)]

Agricultural income means:
a. Any income derived from agricultural land which is situated in India and used for agricultural purposes;
b. Any income derived from agricultural operations including processing of the agricultural produce;
c. Any income from farmhouse.

However, in case of individuals having net agricultural income exceeding Rs. 5,000 and non-agricultural
income exceeding the basic amount not chargeable to Tax, will have to follow the prescribed procedure for
the partial integration of agricultural income and pay the incremental Taxes on the same accordingly.

Partner’s share of profit from a firm and Income received from HUF
A partner’s share of profit in the income of a partnership firm or Income received from HUF will be exempt.

Gratuity, Pension, Encashment of Leave Salary, Retrenchment Compensation and Voluntary Retirement
Compensation
All of the above constitute the retirement dues receivable by an employee at the time of retirement or
resignation. Any amount received under these headings would be exempt subject to the prescribed limits.
The Taxable amount shall be taxed under the head “Income from Salaries”.

Amount received under a Life Insurance Policy [Section 10(10D)]

Any sum received under a life insurance policy, including the bonus, will be exempt.

Income of minor child [Section 10(32)]

Any income of a minor child that is clubbed with the income of parent is eligible for an exemption of the
actual amount or Rs. 1,500, whichever is less, in respect of each child.

Reverse Mortgage scheme [Section 10(43)]

Any amount received by an individual as a loan, either in lump sum or in instalments, in a reverse mortgage
transaction shall be exempt.

Dividends received from mutual funds, on which dividend distribution tax has already been paid, are
exempt from tax in the hands of the investor.

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Computation of Total Income

Any income that is taxable has to be categorized into any one of the five heads of income that have been
notified by the ITA. For all purposes of computing the total income or calculating the Income-tax, income
shall be classified under the following heads of income:

The total income is characterized under five different heads of income

A. Income from Salary
B. Income from House Property
C. Income from Business & Profession
D. Income from Capital Gains
E. Income from Other Sources

Income-Tax under the head salaries

“Employer-Employee” relationship is a must before charging any income under the head “Salaries”. In the
absence of this relationship, the income can never be characterized as salary. For instance, a partner in a
partnership firm is not an employee of the firm, so the salary paid to a partner is not accounted for under the
head Salaries. Similarly, a college teacher doing assessment of papers for the University is not an employee
of the University. So, any honorarium paid to her by the University is not salary.

Chargeability

Any salary due to an employee, whether paid to him during that previous year or not, shall be chargeable to
Income-tax for that previous year. Similarly, if any advance salary is paid to an employee, the same shall be
chargeable to tax in the year of payment, even if the same has not become due to the employee. Thus, salary
is taxed on due or receipt basis, whichever is earlier.
The term salary has been defined to include:
a. Wages;
b. Annuity/ pension (received from former employers);
c. Gratuity (to the extent it is not exempt u/s 10);
d. Other retirement benefits like leave encashment to the extent it is not exempt u/s 10;
e. Fees, commissions, perquisites or profits in lieu of salary;
f. Advance salary;
g. Allowances

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Allowances

An allowance is payment made to an employee in addition to salary to meet specific expenses related to the
performance of duties. The common allowances that are offered to employees in their salary structure are
House Rent Allowances, Children Education Allowance, entertainment allowance, transport allowance,
telephone allowance, medical allowance, dearness allowance, overtime allowance, special allowance, etc.

Tax treatment of allowances

The allowances would be fully taxable, exempt to the extent amount spent by the employee or exempt to
the extent notified by the ITA.
Medical allowance, Overtime allowance, special allowances are examples of allowances which are fully
taxable.
Uniform allowance, helper allowance, conveyance allowances are examples of allowances which are exempt
to the extent of amount received by the employee and the amount spent for the specified purposes,
whichever is lower.

House Rent Allowance (HRA)

Being the most common allowance claimed by employees, merits a brief explanation for the calculation of
exemption here. The HRA received by the employee from the employer is exempt subject to limits prescribed
under Rule 2A of the Income Tax Rules. According to this rule the lower of the following three parameters
will be exempt from Tax and the balance will be Taxable as salary:

a. Actual amount of HRA received;

b. Amount equal to 50% of salary for the relevant period, in case the rented house is situated in the four metro
cities – Mumbai, Delhi, Kolkata and Chennai, and 40% of salary if the house is situated in any other cities;
c. Rent paid in excess of 10% of salary for the relevant period.

Salary for this purpose means basic salary and dearness allowance; to the extent it forms part of salary for
the purpose of retirement benefits. All other allowances and perquisites will be excluded.
However, it may be noted that HRA exemption is not available in case the residential accommodation is
owned by the employee or in case he is not incurring any expenditure on rental payment.

Rules regarding HRA

While the House Rent Allowance (HRA) is offered to almost all salaried individuals by their employers, there
are a few cases in which tax exemption on HRA is not allowed. Listed below are the cases-

 Since HRA is meant to provide for the cost of your rented accommodation, you cannot claim it when
living in a self-owned house.

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 If you are staying with your parents and produce a rent receipt in the name of your parents, you
can claim HRA exemption. However, your parents need to add the same rent into their income at
the time of filing income tax returns.
 You cannot pay rent to your spouse and claim HRA deduction on it.
 Apart from these, you should note that the landlord’s PAN is required for HRA exemption in case
the annual rent exceeds Rs 1,00,000. If the landlord does not possess a PAN, a signed declaration
by them should be submitted.

Leave Travel Allowance (LTA)

Leave Travel Allowance (LTA) is the most common element of compensation adopted by employers to
remunerate employees due to the tax benefits attached to it.

Who and what is covered?

LTA exemption can be claimed where the employer provides LTA to employee for leave to any place in India
taken by the employee and their family. Such exemption is limited to the extent of actual travel costs incurred
by the employee. Travel has to be undertaken within India and overseas destinations are not covered for
exemption. For example, where an employer provides LTA of Rs 25,000, but an employee spends only Rs
20,000 on the travel cost, then the exemption is limited to only Rs. 20,000.

Travel cost means the cost of travel and does not include any other expenses such as food, hotel stay etc.
The meaning of ‘family’ for the purposes of exemption includes spouse and children and parents, brothers
and sisters who are wholly or mainly dependent on you.

An individual would not be able to claim the exemption in relation to his parents, brother or sisters unless
they are wholly or mainly dependent on the individual.

Is exemption available every year?

No. The tax rules provide for an exemption only in respect of two journeys performed in a block of four
calendar years. The current block runs from 1.1.2018 to 31.12.2021.

Proof of travel

The individual needs to submit proof of travel to his/her employer and also keep copies for his or her own
records. Such proofs are helpful at the time of the audit of the tax return of the individual. Proof of travel
could be, for example, tickets, boarding passes, invoice of travel agent, duty slip etc

Perquisites
Perquisites have been defined to mean and include any benefits, amenities, services or facilities granted to
employees over and above the salary. It basically is a personal advantage to employees.

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Taxable Perquisites
Section 17(2) of the Act includes the following benefits granted to employees as perquisites:
i. Value of rent-free accommodation provided to the employee by his employer;
ii. Value of any concession in the matter of rent in respect of any accommodation provided to the employee
by his employer;
iii. Any obligations of the employees being met by the employer;
iv. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by
the employer, or former employer, free of cost or at concessional rate to the assessee;
the amount of any contribution to an approved superannuation fund by the employer in respect of the
assessee, to the extent it exceeds one lakh rupees;
vi. Value of any other fringe benefits.

Tax-free perquisites

Some of the Tax-free perquisites as provided in the Act are given below for a ready reference:

i. Value of any medical facility provided to the employee or any member of his family in a hospital, clinic,
dispensary or nursing home maintained by the employer;
iii. Tea, snacks and other refreshments provided by the employer during office hours will be exempt;
iv. Non-transferable meal vouchers which is usable at eating joints and where the value of each voucher is up to
Rs. 50 per meal;
v. Interest-free or concessional loans to employees up to Rs. 20,000;
vi. Expenditure on telephones, including mobile phones, incurred by employers on behalf of employees.

Standard Deduction – Section 16(ia)

For medical reimbursement and Transport allowance a standard deduction of Rs. 50,000 is
available now without submission of supporting documents.

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Perquisites: Rent Free Accommodation

Accommodation: - For purpose of valuation of the perquisite of unfurnished accommodation, all employees
are divided into two categories: (I) Central Govt. & State Govt, employees; and (ii) others.

• For employees of the Central and State governments the value of perquisite shall be equal to the
license fee charged for such accommodation as reduced by the rent actually paid by the employee.
• For all others, i.e., those salaried taxpayers not in employment of the Central government and the
State government, the valuation of perquisite in respect of accommodation would be at prescribed
rates, as discussed below:
1. Where the accommodation provided to the employee is owned by the employer, the rate is
 15% of 'salary' in cities having population exceeding 25 lakhs as per the 2001 census.
 The rate is 10% of salary in cities having population exceeding 10 lakhs but not
exceeding 25 lakhs as per 2001 Census.
 For other places, the perquisite value would be 7.5% of the salary.

2. Where the accommodation so provided is taken on lease/ rent by the employer, the
prescribed rate is 15% of the salary or the actual amount of lease rental payable by the
employer, whichever is lower, as reduced by any amount of rent paid by the employee.

For furnished accommodation, the value of perquisite as determined by the above method shall be increased
by-

• i) 10% of the cost of furniture, appliances and equipment’s, or

• ii) Where the furniture, appliances and equipment’s have been taken on hire, by the amount of
actual hire charges payable.

The value of Perquisite is reduced by any charges paid by the employee himself. Salary definition for
RFA is Taxable salary (after addition of Taxable allowances, Perks & Annual Bonuses)

Perquisites: Transfer of Moveable assets – Rule 3 (7viii)

Where a movable asset is transferred by an employer to his employee directly or indirectly, the perquisite
value shall be the actual cost to the employer minus the cost of wear & tear @10% for each completed year
during which such asset was put to use. In the case of Motor cars, the normal wear & Tear would be @20%
by the reducing balance method for each completed year of use.

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Employee Stock Option Plan

ESOP’s, imply options/rights of an employee to purchase a certain number of shares in a company at a

predetermined price. Such option/right is vested to the employee over a period of time and the price at which
such an option/right can be exercised is lower than the prevailing market price of the share of the company.

The main aim of any ESOP policy is to encourage an employee to become a stakeholder in the company, so
that with the growth of the company, he/she grows as well. The vesting of the stock option happens over a
period of the employee’s association with the company. Once this option vests with the employee, his/her
decision to buy (or not) such shares have to be conveyed during the vesting period. When this option/right
stands vested, the employee becomes entitled to exercising such an option over a prescribed period, which
would allow subscribing to the shares under the ESOP scheme at the exercise price, which is at a discount to
the prevailing market price. If ESOP’s are exercised, the employee pays the exercise price and is allotted the
shares. At that time, such an employee may sell the stock at a gain or hold on to it in hope of further price
appreciation.

ESOP is taxed in the hands of employee twice

First Level: As a Perquisite when the employer exercises the option (purchase the share from employer). The
perquisite value is computed as the excess of the fair-market value (FMV) of the share on the date of exercise
over the exercise price. The employer is required to withhold tax at source in respect of such a perquisite.

Second level: As a capital gain when employee disposing of the shares, the normal equity taxation
applicable depends upon the holding period & listed/unlisted share.

Professional Tax – Any Professional Tax deducted from an employee’s salary can be reduced from the
annual salary income to arrive at taxable salary.

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Income from House Property

“Income from House Property” is the second head of income as laid down under the scheme of taxation.
The ownership of the property may be direct or even deemed (as per the prescribed provisions).
Computation of income from house property involves determining the annual value of the property under
different scenarios, deductions available from the annual value and some relevant provisions.

Chargeability
Any income earned by a person from properties owned by him/her would be Taxed under this head. The
three most important conditions that are to be fulfilled for charging income under this head are:
i. The person should own the property;
ii. The property should not be used for the purposes of business by the person;
iii. The property should consist of both land and buildings.

In other words, if a person earns any income from a plot of land, whether vacant or not, such income
cannot be counted under this head of income.

Taxability of income in whose hands

The income is always taxable in the hands of the owner/ deemed owner of the property. The income is
chargeable in the hands of a person, even if he is not the registered owner of the property. Transfer of
property to one’s spouse or minor children (except in prescribed circumstances) without adequate
consideration is one example where the transferor is deemed to be the owner of such property for calculating
income under house property.

Computing income

The annual value of the property is the most important factor for calculating the income under this head.
Annual value begins by calculating the Gross Annual Value (GAV) of the property. For determining the GAV,
the higher of the following values will be considered:

a. The sum for which the property might reasonably expect to be let out from year to year based on higher
of municipal valuation and fair rent;

b. In case the property is subject to the Rent Control Act, then the value, determined as above, cannot
exceed the Standard Rent as set by this Act;

c. Where the property is let out and the rent received or receivable is more than the amount determined in
‘a.’ or ‘b.’ above, then the annual value would be the actual rent received;

d. In case of a let-out property, if there is any portion of rent that has remained unrealized, the same will be
deductible from the actual rent subject to fulfilment of prescribed conditions

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e. If an individual is in occupation of a house for the purposes of his residence, the annual value of the
property shall be considered to be nil (provided he does not derive any other benefit from the property).
Such a property is also called as ‘Self Occupied Property’;

f. If the individual has more than two houses for the purposes of his residence, the annual value of any two
of such houses, at his option, would be considered nil. Notional income of the other residential house
would be liable to tax.

Determination of the Net Annual Value

The following amounts are required to be reduced while determining the Net Annual Value:

a. Vacancy Allowance: You can claim vacancy allowance when you have put your efforts, however the house is
still not let out.

b. Unrealized Rent – in case of a let-out property, where any rent is unrealized during the year, the same can
be deducted from the GAV, provided the prescribed conditions are satisfied by the defaulting tenant.

c. Municipal Taxes – Taxes levied by the local authorities, only if they are actually paid by the owner during the
relevant previous year. Taxes, if paid, by the tenant will not be allowed as a deduction for the property
owner;

Deductions from Net Annual Value Under Section 24

a. For let-out properties

In case of let out properties, 30% of the Net Annual Value (also known as Standard Deduction) and the full
interest paid/ payable for the acquisition / construction/repair of the property is allowed as deduction.

b. For self-occupied properties – (Any two of the house considered as self-occupied)

Interest paid/payable for the acquisition/construction of the property is allowed as deduction in aggregate
upto Rs. 2 Lakh per annum.

Interest paid/payable for the repair/renovation of the property is allowed as deduction in aggregate upto
Rs. 30,000 per annum.

In cases where the property is acquired/ constructed using borrowed funds, the interest payable/ paid up
to the period prior to the previous year in which the property is acquired or constructed would be allowed
in five equal instalments starting from the year in which the property is acquired/ constructed (also known
as ‘Pre-construction Period Interest’).

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The pre-construction interest is allowed for deduction from Income under Section 24 in 5 equal annual
instalments. To claim deduction u/s 24 the construction of the house should be completed & ready for
occupation. Limit of total 2 Lakh deduction is aggregate of amount eligible under Current year of Interest as
well Pre construction period 1/5 eligible amount.

Income from Business/Profession

“Income from Business and Profession” is the third head of income when arranged chronologically as per
the sections. The income offered under this head of income is not the gross income earned from business
or profession, but the profits (losses) computed by deducting the eligible expenses.

Chargeability
The profits and gains of any business or profession carried on by an individual at any time during the
previous year shall be chargeable under this head of income. The value of any benefits or perquisites arising
from the business or exercise of a profession shall also be chargeable here. The scope of income under this
head also covers any interest, salary, bonus, commission or remuneration due to or received by a partner of
a firm.

Computation of Income

Profits and gains under this head are computed by deducting the admissible expenses from the gross sale (in
case of a business) and receipts (in case of a profession). Expenses under the Act are broadly classified as
follows:

i. Expenses that are expressly deductible;

ii. Expenses that are generally deductible; and
iii. Expenses that are expressly disallowed.

All the expenses which are incurred wholly and exclusively for the purposes of the business/ profession
carried on during the previous year are generally allowed to be deducted while calculating the profits of the
business.
Some of the expenses that are expressly allowed as deductions are as follows:
i. Rent, rates and Taxes, repairs and insurance for building, plant and machinery, furniture;
ii. Insurance premiums paid against risk of damage or destruction of stocks used for the business;
iii. Bonus or commission paid to employees;
iv. Interest paid on borrowed capital;
v. Depreciation

Expenses not deductible

i. Income Taxes paid on profits or gains of any business or profession;

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ii. Any payment or payments made towards any expenditure, exceeding Rs.10,000 in a day, made by any mode
other than an account payee cheque or an account payee bank draft;
iii. Payment of interest on capital to partners in a partnership firm in excess of 12% p.a.;
Iv. Payment of salary, bonus, commission or any other form of remuneration paid to partners in a partnership
firm in excess of the limits specified under section 40(b) of the Act.

Section 40(b) - minimum of following two

1. amount paid or payable to working partners in as authorised in partnership deed

2.As per Method given
On the first 3,00,000 of book profit or in case of 90% of book profit or Rs. 1.5 lakh whichever is
loss more

On the balance book profit 60% of the book profit

These are just some of the expenses that are not deductible in the computation of profits and gains.

Tax aspects of investment products

Income from investments is subject to tax as per the provisions of the Income Tax Act, as
amended from time to time. The following heads of income from investments are subject to
tax, unless specifically exempt:
 Dividend income
 Interest income
 Realized capital gains

Dividends and interest are paid out by the issuers of securities, while capital gain (or loss) is
realized when investors make the decision to sell or redeem their investment. If the sale or
redemption is at a price that is higher than the cost of purchase, there is a capital gain. If the
redemption price is lower than the cost, there is a capital loss. Interest and dividend income are taxable as
income from other sources. Realized gains are taxable as capital gains.

Types of tax benefits

The form in which a tax benefit may be offered can vary. The following are the three types
of tax benefits that have been offered on investments.

a. Exemption
Certain types of income are exempted from tax. In other words, one need not pay any tax
on such income. If the dividend received from companies on equity shares held is less than
Rs.10,00,000/- then the dividend income is exempt from tax in the hands of the investor. A
tax of 10% (plus applicable surcharge and health and education cess) is applicable in case of
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all resident tax payers such as individuals, HUFs, Partnership firms and private trusts for
dividend income of more than Rs.10,00,000 received from a domestic company or
companies. (not applicable for MF dividends)

b. Deduction
Either the investment made, or the income received on the investment, or both, can be
deducted (usually up to a certain limit) from the taxable income. In other words, the income
on which tax will be calculated gets reduced to the extent that some income received or
investment made. There is a list of eligible investments provided under Section 80C.
Investments in these instruments made up to a maximum limit of Rs.1,50,000 in a financial
year, are available as deduction.

c. Rebate
After income tax is computed, the actual tax payable is reduced, if a rebate is allowed on
account of specific investment that was made. In other words, based on a pre-defined
formula, the amount of tax payable is reduced, since the investor has made certain
investments that are eligible for such rebate. For example, section 87 A provides a rebate of
Rs.12500/- for all individual assesses whose income does not exceed Rs.500,000.

d. Exempt-Exempt-Taxable (EET) Regime

Tax benefits are available to investors either on the amount of investment made, or on the
income earned from their investments, or both. In order to rationalize the tax benefits, the
government has introduced a deferred taxation regime for several investments.

The logic is that investors would enjoy a tax deduction on their investments, earn a tax-free
income on the investment, but pay income tax on the investment when it is redeemed. Such
a tax regime would encourage long term saving, so that the incidence of tax is deferred or
postponed to a later date. This regime is called EET, because:
 Investment made is Exempt
 Income earned is Exempt
 Redemption or sale proceeds are Taxable

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Capital Gains

Any Income derived from a Capital asset movable or immovable is taxable under the head Capital Gains under
Income Tax Act 1961.Profits or gains arising from the transfer of a capital asset is chargeable to tax in the
year in which transfer take place under the head “Capital Gains”.
The Act defines the following concepts as follows:

Transfer (section 2(47)): Transfer in relation to a capital asset includes the following:
 sale;
 exchange;
 relinquishment of the asset;
 extinguishment of any rights in the asset;
 compulsory acquisition of an asset under any law;
 conversion of the asset into stock-in-trade of a business;
 maturity or redemption of a zero-coupon bond.

However, the following modes are specifically excluded from the definition of transfer:
 Gift;
 Distribution of capital assets on partition of a HUF;
 Transfer under a will or an irrevocable trust;
 Conversion of bonds / debentures/ deposit certificates of a company into shares.

Capital Asset (section 2(14)): Capital Asset means property of any kind - fixed, circulating, movable,
immovable, tangible or intangible - whether or not connected with his business or profession.
Exclusions —
• Stock-in- trade, raw materials, consumables stores held for business purposes;
• Personal effects of the assessee (excluding jewellery, archaeological collections, paintings, sculptures, etc.);
• Agricultural land in a rural area;

Based on the period of holding, capital assets are classified as: The Capital Gains have been divided in two
parts under Income Tax Act 1961. One is short term capital gain and other is long term capital gain.

i. Short-term capital asset (section 2(42A)) means a capital asset held by an assessee for not more than 36
months (i.e. 36 months or less) immediately preceding the date of its transfer. However, in case of the
following assets, the aforesaid threshold is reduced to 12 months:
 Listed equity or preference shares in a company;
 Listed Securities; (NCD’s, Bond’s, Debentures)
 Equity MF Units of Mutual Funds;
 zero-coupon bonds.

In following Cases aforesaid threshold is reduced to 24 months :

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 Unlisted Securities
 Immoveable properties

ii. Long-term capital asset: (section 2(29)) means a capital asset which is not a short-term capital asset. Capital
gains are generally charged to Tax in the year in which the ‘transfer’ takes place,

Taxability of short-term capital gains: Section 111A of the Income tax Act provides that those equity shares
or equity-oriented funds which have been sold in a stock exchange and securities transaction tax is chargeable
on such transaction of sale then the short-term capital gain arising from such transaction will be chargeable
to tax @ 15%. Sale of Holding in less than 1 year under Listed Shares is considered STCG.

Short-term capital gains on physical gold, Debt MF units/Gold ETF’s held for less than 36 months will be added
to investor's income and taxed as per the applicable slab rate. Immoveable property and Unlisted share held
for less than 24 months considered as STCG, will be added to investor's income and taxed as per the
applicable slab rate

Long Term Capital Gain: Long term capital gains are arrived at after deduction of (Expenses on transfer,
indexed cost of acquisition and the indexed cost of improvement) from the sale consideration.

The Central govt. notifies cost inflation index for every year. The indexed cost of acquisition is calculated by
multiplying the actual cost of acquisition with C.I.I of the year in which the capital asset is sold and divided by
C.I.I of the year of purchase of capital asset. Similarly, the indexed cost of improvement can be calculated by
using the C.I.I of the year in which the capital asset is improved.

Where the capital asset was acquired before the year 1st April 2001 then the cost of acquisition shall be the
fair market value as on 1st April 2001 or the actual cost of its acquisition whichever is higher. Base year is
taken as 2001-02 with Base value 100 and every year govt release C.I.I to calculate Capital gains.

Taxation of Long-term capital gains: Long term capital gains on various assets like physical gold, Gold ETF,
Debt MF, FMP’s as held for more than 36 months will be taxed at 20% after providing for indexation benefit.
Immoveable property and Unlisted share held for more than 24 months considered as LTCG, will be taxable
@ 20% with Indexation.

Section 87A Rebate up to Rs. 12,500 for Income less than 5 Lakh is not available if taxable income is only
under the head capital gains.

No deduction is allowed from the long-term capital gains from section 80C to 80U. But in case of individual
and HUF where the income is below the basic exempted limit the shortage in basic exemption limit is adjusted
against the long-term capital gains as well as short term capital gains.

Section 112(1) provides that any capital gain arising from a long term capital asset being the listed securities,
or units or Zero Coupon bonds which are sold outside the stock exchange (not suffered STT) and buy back of
share by a listed company the long term capital gain shall be calculated on such securities as below:
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a) Tax arrived at @ 20% on such long-term capital gain after indexation u/s 48 or
b) Tax arrived at @ 10 % on such long-term capital gain without indexation
whichever is less.

Capital Gain on Listed Equity Shares & Equity MF’s

The long-term capital gain on equity shares or units of equity oriented mutual fund which are sold in the
stock exchange and on which securities transaction tax is paid.

Union Budget 2018 declared by Finance Minister Arun Jaitley on 1st February 2018 brought a modest change
in the long-term capital gains tax regime. After this change under section 112 A of Income tax act long term
capital gains arising from transfer of listed equity shares & units of equity-oriented fund will be charged at
10% tax rate without any inflation indexation benefit. The tax will be charged only if LTCG of such nature
exceeds Rs. 1 lakh.

However, the gains made on and before 31st January 2018 will be exempted from this new rule.

If the asset is acquired on or before January 31, 2018, then cost of acquisition shall be
Actual Cost of Acquisition; OR
Lower of “ Actual Sale Value or Fair Market Value as on 31.01.2018”;
Whichever is higher.
The restriction up to “lower of sale value or Fair Market Value” is provided so that no long-term capital loss
shall arise on such computation.

In case of Bonus shares and right shares the period of holding for capital gain purposes shall be calculated
from their date of allotment (means allotment date of bonus shares).

IMP : LTCG on transfer of bonus and rights shares acquired on or before 31 January 2018, shall be
calculated by considering the FMV on 31 January 2018 as the Cost of Acquisition of such shares thereby
exempting gains until 31 January 2018 from tax.

At the time of Sale : First in First Out method is applied to calculate Long term or short term capital gains.

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Taxation of NCDs/Bonds/Debentures/Zero Coupon Bonds :

Interest income from an NCD and tax treatment is exactly similar to any other interest income such as
interest income from FDs. In other words, interest income from NCDs will be subjected to tax at normal slab
rates by including it in 'Income from other sources'.

Long term capital gain If you sell NCDs/Bonds/ Zero Coupon Bonds on the stock exchange after holding for
more than 12 months & Unlisted NCD’s, Bonds & Debenture sold after holding for 3 years. then such gains
are taxable @ 10.40 per cent (including education cess of 4%) without indexation.

Short term capital gain If you sell NCDs/Bonds/ Zero Coupon Bonds on the stock exchange after holding for
less than 12 months & Unlisted NCD’s, Bonds & Debenture sold for holding period of less than 3 years.
then such gains are added in taxable income and taxable at slab rates.

While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on
sale of NCD/Zero coupon bond/Bonds (a listed security) are taxed at concessional rates u/s 112 of IT Act.
However, as the benefit of cost indexation is not available in case of bonds and debentures; therefore, long
term capital gains from NCDs/Bonds/Debentures are always taxable

Dividend Distribution Tax

Dividend distributed by an Indian Company is exempt from income-tax in the hands of shareholder. A
tax of 10% (plus applicable surcharge and health and education cess) is applicable in case of all resident tax
payers such as individuals, HUFs, Partnership firms and private trusts for dividend income of more than
Rs.10,00,000 received from a domestic company or companies. (not applicable for MF dividends)

 The Indian Company is liable to pay Dividend Distribution Tax (DDT) @ 17.65 percent (i.e.
exclusive of surcharge and education cess) on such dividends.

 Income received by unit holders from an Equity Mutual Fund is subject to DDT rate of 11.648%.

 The Mutual Fund deduct DDT @ (29.12% (inclusive of surcharge and education cess) on income
distributed by a money market mutual fund, liquid fund & Debt MF.

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F&O Tax treatment

From the reading of the above it is clear that trading in derivatives including commodity derivatives on a
recognized stock exchange will not be considered as a speculative transaction and hence not treated as
speculative business.
Therefore, since these are not considered as speculative business, therefore income from such transactions
will be considered as normal business income and loss from such transactions will be considered as normal
business loss.
Expenses
Expenses such as postage, conveyance and telephone, incurred for carrying on the business can be claimed
as business expenses. You can also claim depreciation on assets used for the business or profession

Capital Gain in case of Inherited/Gifted property

In case of inherited property, the period of holding is counted from the date of purchase of property by the
original owner who has actually acquired the property, other than by way of inheritance and gift. For an
inheritor, the period for which the property was held by the first owner is included too.

For example, Arun & Ravi inherited a property on May 15, 2019 from their father who purchased the property
on August 30, 1996. Arun & Ravi decide to sell the property on September 30, 2019. Even though the property
is held by them for less than three years, the gains shall be long term since the period for which the property
was held by the previous owner, their father, is included too.

From AY 2015-16, with prospective effect, advance received and forfeited, in connection with transfer of
capital asset, will be treated as income from other sources, and will not be deducted from indexed cost of
acquisition to avoid double taxation. So, any such amount forfeited during FY 2014-15 shall be considered as
income from other sources. However, any such amount forfeited prior to FY 2014-15 shall be reduced from
Acquisition price (or previous owner’s cost of acquisition or fair value) before applying the cost indexation.

This method of computation remains exactly the same in case of gift deed, will or irrevocable trust and
distribution of the assets of an HUF as well.

Capital Gain Deductions U/s 54

In the calculation of capital gains for tax, certain exemptions are provided by the Income Tax
Act. These exemptions are available as deductions from taxable income.

Section 54 exempts long-term capital gains from sale of residential house from tax to the extent that the
gains have been invested in another up to two residential properties purchased or constructed in India. This
exemption is applicable only to individuals and HUFs. The other residential property should
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have been purchased within one year before or two years after sale of the first residential house or construct
one residential house in India with in a period of 3 years after the date of transfer.

Section 54EC, exempts long-term capital gains on the transfer of Land or Building or both if they are
invested in bonds specified for this exemption within a period of six months after the transfer in the
financial year of the transfer or the subsequent financial year. This exemption is available up to a limit of Rs.
50 lakhs. The lock in period is of 5 years.

Section 54 B, Exempts LTCG on transfer of land used for Agriculture purpose to Individual & HUF assessee.
Condition for exemption is that assessee or his parents must have used the land for preceding 2 years for
agriculture purpose and Within a period of two years from the date of transfer of old land the taxpayer
should acquire another agricultural land.

Amount of exemption: Exemption under section 54B will be lower of the following:
1. Amount of capital gains arising on transfer of agricultural land; or
2. Investment in new agricultural land

Section 54 F: Where an Individual transfers any Long-term capital asset (not being a residential house) and
invest the net Sale proceeds to acquire a residential house, the deduction u/s 54 F Can be Claimed provided
following conditions are satisfied.

1. The assessee does not own more than one residential house on the date of transfer of asset (excluding
one purchased to claim deduction u/s 54F).

2. Whole of Proceeds from sale of asset required to invest. Otherwise proportionate capital gain will
exempt.

3. The other residential property should have been purchased within one year before or two years after sale
of the first residential house or construct one residential house in India with in a period of 3 years after the
date of transfer.

Capital Gain Account deposit scheme 1988: - Under Section 54, 54 B & 54 F, Although Assessee has time to
invest the capital to get exemption. However, to get exemption benefit, Assessee has to deposit the capital
gain amount in this specified account before the due date of furnishing of return. The proof of such deposit
shall be attached with the return.

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INCOME FROM OTHER SOURCES

This is the residuary head of income and sweeps in, all such taxable income, profits and gains that fall outside
the other specific heads viz. Salaries, Income from house property, Profit and Gains of Business or Profession,
Capital Gains

Chargeability & nature of income

Any item of income which is not covered in any of the earlier heads of income is included under this head.
The Act enumerates the following types of income which would be chargeable to Tax under this head:

a. Dividends (excluding Dividend income referred to in section 115-O which is exempt);

b. Winning from lotteries, crossword puzzles, races, card games and other games, gambling or betting etc.);
c. Any sum received under a Keyman insurance policy including amount allocated by way of bonus on such
policy, if not chargeable under the earlier heads;

d. Interest on securities if not chargeable under the head business income;

e. Income from letting of machineries, plants or furniture belonging to assessee, if not chargeable under the
head business income;
f. Deemed gifts (discussed separately).

Deemed gifts

In terms of clause (vii) to section 56(2) of the Act, specified gifts received by an individual or HUF is chargeable
to Tax, subject to certain exclusions. The deemed gifts covered by the provision are as follows:

 Any sum of money received without consideration from persons in excess of Rs. 50,000 during a given
year, the whole of such aggregate sum;

 Any immovable property without consideration the stamp duty value of which exceeds Rs. 50,000, the
stamp duty value of such property;

 Any movable property without consideration, the aggregate fair market value of which exceeds, Rs.
50,000, the whole of such fair market value;

 Any movable property for an inadequate consideration, the difference between the fair market value and
the consideration, provided the difference is greater than Rs. 50,000;
(Property means capital assets of the assessee in the nature of land or building or both, shares &
securities, jewellery, bullion, paintings, drawings, archaeological collections, sculptures or any art work)

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Exclusions
The above provision would not be applicable to the money or property received:
a. from any relative
b. on the occasion of marriage of the recipient
c. under a will or inheritance
d. Amount received from any local authority
f. Amount received from any fund or foundation or university or other educational institution or hospital or
other medical institution or any trust or institution

(Relative means spouse of the individual, brother or sister of the individual, brother or sister of the spouse of
the individual, brother or sister of either of the parents of the individual, any lineal ascendant or descendants
of the individual, any lineal ascendants or descendants of the spouse of the individual, and spouse of the
persons referred to hereinbefore below)
Deductions
Any expenditure (not being in nature of capital expenditure or personal expenditure) laid out or expended
wholly and exclusively for the purpose of making or earning income chargeable under the head ‘Income from
Other Sources’, is deductible.
However, in case of income in the nature of winning from lotteries, cross word puzzles and games of any
sorts, etc, no deduction are allowed for expenses or allowances incurred in connection with such income.
Further, in case of pension received by the family of a deceased employee from the employer the deduction
available would be lower of 1/3rd of such pension or Rs.15,000.

Gambling - TDS
If you receive money from winning the lottery, Online/TV game shows etc., it will be taxable under the head
Income from other Sources. The income will be taxable at the flat rate of 30% which after adding cess will
amount to 31.2 %. Incomes from following sources come under this category:
 Lottery
 Game Show or any entertainment program on television or electronic mode
 Crossword Puzzle
 Gambling or betting
 Races including Horse races.

TDS Applicability
If the Prize money exceeds Rs 10,000, then the winner will receive the prize money after the deduction of
TDS @31.2% u/s 194B.It does not matter whether the income of the winner is taxable or not. The prize
distributor is liable to deduct tax at the time of payment. In the case of winnings from horse races, TDS will
be applicable if the amount exceeds Rs 10,000.

TDS applicable on Interest on Bank & Post Office deposits:

No TDS applicable if Interest on Bank & Post Office deposits is less than 40,000 p.a.
CLUBBING OF INCOME

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Sometimes an assessee can transfer his property or income to other related people in such a manner so as
to keep the Tax liability to minimum or even avoid paying Taxes. Such transfers are nothing but attempts to
reduce Tax liability by transferring income or sources of income to people, who are either not paying any Tax
currently or are subject to lower Tax rates than the transferor. In order to curb such practices, the Act has
included provisions for “clubbing of income”. Any income arising to a person out of any money or assets
transferred to him/her by any other person without adequate consideration, then such income shall be
clubbed and assessed as income in the hands of the transferor.
The various provisions that have been covered in the Act under “Clubbing of Income” have been
summarized in the table below:

Section Nature of Transfer Clubbed in the hands of Conditions/ Exceptions

of Income/ Assets

64(1)(ii) Any Salary, Com- Spouse whose total income Clubbing provisions not
mission, Fees or (excluding the referred applicable if:
remuneration paid salary income to be Spouse possesses
to spouse from a clubbed) is greater. technical or professional
concern in which qualification; and
an individual has remuneration is solely
substantial interest attributable to
application of that
knowledge/
qualification.
64(1)(iv) Income from Individual transferring the Clubbing not applicable
assets transferred asset. if the assets are trans-
directly or ferred:
indirectly to the 1. Under an agreement
spouse without to live apart.
adequate consid- 2. Before marriage.
eration 3. Income earned when
relation of husband-wife
does not exist.
64(1)(viii) Transfer of assets Individual transferring the Condition:
by an individual to Asset. The transfer should be
a person for the without adequate
immediate or consideration.
deferred benefit of
his Son’s wife
64(1A) Income of a minor 1. If the marriage subsists, Clubbing not applicable
child in the hands of the parent for:
whose total income is
greater; 2. If the marriage

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does not subsist, in the 1. Income of a minor

hands of the person who child suffering from any
maintains the minor child. specified disability
3. Income once included in 2. Income on account of
the total income of either manual work done by
of parents, it shall continue the minor child.
to be included in the hands 3. Income on account of
of same parent in the any activity involving ap-
subsequent year unless the plication of skills, talent
Assessing Officer is or specialized
satisfied that it is necessary knowledge and
to do so (after giving that experience.
parent opportunity of
being heard)
64(2) Income of HUF Income is included in the
from property hands of individual & not in
converted by the the hands of HUF.
individual into HUF
property.

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SET OFF & CARRY FORWARD OF LOSSES

An assessee may also earn losses during a previous year. The losses that an assessee incurs under any head
of income, is allowed to be set off against other incomes under that head of income or even other heads of
income, subject to certain exceptions. In case the assessee has inadequate or no profits, against which the
losses can be set-off, then the unabsorbed losses may be carried forward to the subsequent years for setting
off against the profits in that year.
The scheme of setting off of losses and their carry forward has been covered in the table below:

Losses under the head ‘Income from House Property’

These losses can be set-off against income from other house properties as well as income under any other
heads in the same year. The losses can be carried forward for a further period of 8 assessment years. Income
tax specified limit of Rs. 2 Lakh Loss from House property to be set off from other heads of income in same
FY.

Losses under the head ‘Business / Profession’

The losses under this head can be set-off against income from any other businesses under the same head or
from income under any other head except for ‘Income from Salaries’. The unabsorbed losses can be carried
forward for 8 assessment years. Business losses, arising on account of depreciation (also referred to as
unabsorbed depreciation) however can be carried forward without any limitation of time.
The Act also makes a distinction between speculative and non-speculative business profits and losses. As per
the provisions of the Act, losses arising from speculative businesses can be set-off only against profits arising
from speculative businesses and not against any other income. Any unabsorbed speculative losses can be
carried forward for a period of 4 assessment years only.

Losses under the head ‘Capital Gains’

Any losses arising out of the transfer of short-term capital assets can be set-off against short-term capital
gains and long-term capital gains, if any, during the relevant previous year. Long-term capital losses, however,
can be set-off against long-term capital gains and not against any short-term capital gains. Any unabsorbed
long-term and short-term capital losses can be carried forward for a further period of 8 assessment years.

Any long-term capital losses, arising out of the sale of equity shares, through a recognized stock exchange or
from the redemption of units of equity oriented mutual funds can be set-off against only long-term capital
gains.

Short term Capital Losses can be set off against Short term as well Long-term capital gain in current FY and
can be carried forward upto 8 assessment years to set off from Long term as well short-term capital gains.

Losses under the head ‘Income from Other Sources’

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Any losses arising under this head can be set-off against income under any other head, but any unabsorbed
losses are not allowed to be carried forward.
A specific source of income covered under this head – profits/losses from the activity of owning and
maintaining race horses needs a special mention here. Any losses from this activity can be set-off only against
the income from the same activity and not against any other income under any other head. The unabsorbed
losses from the referred activity can be carried forward for a period of 4 assessment years.

Dividend stripping provisions

U/s 94(7) of Income Tax Act, IF following three conditions are satisfied then that is case of dividend
Stripping

i. He has bought the units within a period of three months prior to the record date; and

ii. transfers/ sells such securities within 3 months of such record date or transfers/sells mutual fund units
within period of 9 months of such record date,

iii. The dividend on such units received by him is exempted from tax

then the short-term loss arising to the extent of the amount of dividend received is not considered. It means
that short term loss is not available for set off from other capital gains.

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DEDUCTIONS UNDER Unit VI-A

In computing the total income of an assessee, deductions specified under sections 80C to 80U will be allowed
from his Gross Total Income. All the deductions under these sections are grouped under Unit VI-A of the Act.
However, the aggregate amount of deductions under this unit shall not, in any case, exceed the gross total
income of the assessee.
The deductions under this Unit are allowed for certain specified expenditures & payments made by the
assessee during the previous year.

Some of the important deductions are discussed here:

1. SECTION 80C - DEDUCTION IN RESPECT OF LIFE INSURANCE PREMIA, CONTRIBUTIONS TO PROVIDENT

FUND, ETC.

Any sums paid or deposited in the previous year by the assessee towards any or all of the following is allowed
as a deduction under section 80C:

Extent of deduction: 100% of the amount invested or Rs. 1,50,000/- whichever is less.

1. Life Insurance premiums for self, spouse and any child in case of individual and any member, in case of
HUF. (Up to the extent the premiums paid is not in excess of 10% of actual capital sum assured).

2. Payment towards a deferred annuity contract on life of self, spouse and any child in case of individual.

3. Contributions towards Statutory Provident Fund or Recognized Provident Funds or Approved

Superannuation funds;

4. Contributions to Public Provident Fund scheme, 1968, in the name of self, spouse and any child in case of
individual and any member in case of HUF.

5. Subscription to the NSC (VIII issue) & Accrued Interest every year on the Investment

6. Subscription to any units of any Mutual Fund referred u/s. 10(23D) (Equity Linked Saving Schemes).

7. Tuition fees (excluding any payment towards any development fees or donation or payment of similar
nature), to any university, college, school or other educational institution situated within India for the
purpose of full-time education of any two children of individual.

8. Towards the cost of purchase or construction of a residential house property (including the repayment of
loans taken from Government, bank, LIC, NHB, specified assessee’s employer etc., and also the stamp
duty, registration fees and other expenses for transfer of such house property to the assessee). The

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income from such house property should be chargeable to Tax under the head “Income from house
property”.

9. Term Deposit (Fixed Deposit) for 5 years or more with Scheduled Bank in accordance with a scheme framed
and notified by the Central Government.

10. Account under the Senior Citizen Savings Schemes Rules, 2004.

2. SECTION 80D – Deduction in respect of Medical Insurance Premium

Deduction of Rs. 25000/- is allowed if the same is paid as premium for Medical Insurance taken for self,
spouse, parents or children of the assessee in the case of Individual; or towards preventive health check-
up (max Rs. 5000). In case any of assessee is a senior citizen, the deduction allowed is Rs. 50000/-

Additional Rs. 25000/- is allowed as deduction if the same is paid as premium for Medical Insurance taken
for parents. In case the parent is a senior citizen, the deduction allowed is Rs. 50000/- .

Deduction on account of medical expenditure incurred (instead of sum paid to effect any insurance of
health) to be allowed in case of a senior citizen – maximum Rs. 50,000.

3. 80 E - DEDUCTION IN RESPECT OF INTEREST ON LOAN TAKEN FOR HIGHER EDUCATION

Applicable only for Individuals

Any amount paid by way of interest on loan taken from any financial institution or any approved charitable
institution for his/her higher education or for the purpose of higher education of his/her spouse and
children.

Relevant Conditions/Points

1. Amount should be paid out of income chargeable to tax.

2. Any course of study pursued after passing the Senior secondary examination or its equivalent from any
school, board or university recognized by the central govt. or state govt. or local authority or by any other
authority authorized by the central govt. or state govt. or local authority to do so.

3. The deduction is allowed in the initial assessment year (i.e., the assessment year relevant to the
previous year, in which the assessee starts paying the interest on loan) and 7 assessment years
immediately succeeding the initial assessment year or until the interest is paid in full whichever is earlier.

Extent of deduction: Entire amount of Interest

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4. SECTION 80G - DEDUCTION IN RESPECT OF DONATIONS TO CERTAIN FUNDS, CHARITABLE

INSTITUTIONS, ETC.

Any sums paid in the previous year as Donations to certain funds, charitable institutions etc. specified u/s.
80G (2). Donation in kind is not eligible for deduction and this deduction is applicable for all type of
assessee. Deduction amount 100% or 50% is depend upon approval given by IT dept.

No Deduction shall be allowed under this section in respect of donation of any sum exceeding 2000/- unless
such sum is paid by any mode other than cash & receipt for such donation also need to produce to get
deduction.

5. 80 GG - DEDUCTION IN RESPECT OF RENT PAID

Any assessee who is not receiving House Rent Allowance can claim - Any expenditure incurred by him on
payment of rent (by whatever name called) in respect of any furnished or unfurnished accommodation

Relevant Conditions/Points

1. Such accommodation is occupied by him for his own residence.

2. This section shall not apply to an assessee if residential accommodation is owned by the assessee or
by his spouse or minor child or where such assessee is member of HUF, by such family, at the same
place where he is paying rent for residence.

Extent of deduction:

(a) Rs. 5,000 per month

Section 80 TTA – provides deduction for interest earned from saving bank A/c’s up to a limit of Rs. 10,000/-

80TTB in order to provide that Senior Citizens are allowed a deduction of up to INR 50,000 in respect of
Income earned by such Senior Citizens from Deposits (Saving Account, Fixed Deposits and Time Deposits).

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Assessment Procedure

a. Belated return u/s 139 (4)

In case the return is not filed within due date, a belated return can be filed at
(i) before the end of relevant assessment year or
(ii) before the completion of assessment
whichever is earlier.

b. Revised return

In case of any error or omission, the assessee is entitled to revise the return, provided the return has been
filed within the aforementioned due date. Assessee may furnish a revised return
(i) before the end of relevant assessment year or
(ii) before the completion of assessment

whichever is earlier.

But, where the assessee has some capital loss or loss from business or profession to be carried forward he
should file his return of income within the due date as prescribed u/s 139(1). Only Loss under the head
house property can be carry forward if income tax returns not filled before the due date.

It should also be noted that where a belated return is filed u/s 139(4), revised return u/s 139(5) can be
filed after that belated return if the assessee discovers any omission or wrong statement in initially filed
return.
Where return of income is filed after the due date, interest @ 1 % per month u/s 234A will be payable start
from the next day of due date of filling of return.

Fee for default in furnishing return of Income ( Section 234 F)

(a) Rs. 5000 if the return is furnished on or before the 31st December of the assessment year.
(b) Rs. 10,000 in any other case.

However, the total income of the person does not exceed Rs. 5 Lakh, the fee payable under this section
shall not exceed Rs. 1000/.

Penalty for underreporting of Income

Penalty for concealment of income or furnishing inaccurate particulars of income. Many times, a taxpayer
may try to reduce his tax liability by concealing his income or by furnishing inaccurate particulars of his
income. In such a case, by virtue of section 270 A, the taxpayer will be held liable to pay penalty for under
reporting at the rate of 50% of tax payable and for misreporting of income at the rate of 200% of the tax.

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Misreporting of income is defined in Section 270A(9) as follows:

“The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:
(a) misrepresentation or suppression of facts;
(b) failure to record investments in the books of account;
© claim of expenditure not substantiated by any evidence;
(d) recording of any false entry in the books of account;
(e) failure to record any receipt in books of account having a bearing on total income; and
(f) failure to report any international transaction or any transaction deemed to be an international transaction
or any specified domestic transaction, to which the provisions of Chapter X apply.”

Cost Inflation Index for Capital gain calculations

Financial year Cost Inflation Index

2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-10 148
2010-11 167
2011-12 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289

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Tax Planning – Questions

Tax computation

1. Annual Salary Breakup of Mahesh (age 38 years) for FY2019-20

Basic Salary 4,16,000

House Rent Allowance 2,70,000
Dearness Allowance 1,50,000
Transport Allowance 40,000
Medical Allowance30,000
Entertainment Allowance 42,000
He paid monthly rent of Rs. 18000 per month.
Calculate taxable HRA for FY2019-20. Assume Mahesh Lives in Mumbai. 100% of DA received forms part of
salary for retirement benefits.

a) Rs. 159400
b) Rs. 110600
c) Rs. 54000
d) Rs. 95600

2. Ashwin Agarwal’s (age 42 years) monthly salary for FY2019-20 is:

Basic Salary: Rs. 48,000

Dearness Allowance1: 50% of Basic salary
House Rent allowance: Rs. 12,000
Transport Allowance: Rs. 4,000
Medical Allowance : 1,250
Entertainment Allowance: Rs. 5,000
PF & Superannuation: 12% of Basic Salary

Calculate his tax liability for AY2020-21. He is eligible for deduction u/s 80 C(including PF Contribution)
80,000 & paid monthly rent of Rs. 18000 per month. Assume he has no other Income. Assume he lives in
Mumbai. 100% of DA received forms part of salary for retirement benefits.

a) 86780
b) 90250
c) 92330
d) 118000

3. Mrs. Sumedha’s (age 42 years) monthly salary for FY2019-20 is:

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Basic Salary: Rs. 7,30,000

Dearness Allowance: 30% of Basic salary
House Rent allowance: Rs. 80,000
Transport Allowance: Rs. 16000
Executive Allowance: Rs. 7,5000

Calculate her tax liability for AY2020-21. She has paid 28,000 premiums for medical Insurance of her family
floater policy. Assume she has no other Income. She lives in her own house with her family. 100% of DA
received forms part of salary for retirement benefits. He has 1.5 Lakh eligible investment under section 80
C.

a) Rs. 44,83,710
b) Rs. 38,98,900
c) Rs. 45,17,290
d) Rs. 35,87,900

4. Anita’s ( aged 45 years) taxable income under the head salary for the Financial Year 2019-20 is Rs.
14,84,000 ( before deduction u/s 80 C). She also earns Rs. 1,80,000 as agriculture income during the same
year. What is the Income Tax liability of Anita for the FY2019-20 ? Assume She made investments of Rs.
1,35,000 in all, which qualifies under section 80C.

a) Rs. 272,690
b) Rs. 262,200
c) Rs. 217200
d) Rs. 280500

5. Aslam pays Rs. 28,000 annual premium for his family floater medical insurance policy and Rs.42, 000
annual premiums for his father’s (aged 62 years) medical insurance policy by cheque. What deduction is
available to Aslam under/section 80 D of the Income Tax Act as per AY 2020-21.
a) Rs. 55,000
b) Rs. 70,000
c) Rs. 67,000
d) Rs. 58,000

6. Surinder had taken a loan of Rs. 6,00,000 in the year 2016-17 from a Bank to fund education expenses of
B.Tech studies of his son Gautam in India. During the year 2019-20, he repaid total principal component of
Rs. 35,000 and interest component of Rs. 55,000. What deduction would be available under Section 80 E of
Income tax Act to him for AY2020-21?

a) Rs. 55,000
b) Rs. 35,000

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c) Rs. 90,000
d) Deduction is available on interest part on Loan taken for the purpose of self-education

7. Anurag bought his present car from his employer on 24-8-2019 for a favorable price of Rs. 2,50,000. The
employer had bought this car for Rs. 6,50,000 on 17-9-2016. What would be the tax treatment for this
transaction in computation of his tax liability for A.Y. 2020-21?
a) Rs. 1,66,000 is taxable under the head of Salary
b) Rs. 1,66,000 is taxable under the head of Income from other source
c) No Income is added for this transaction
d) Rs.82,800 is taxable under the head of salary

8. Pyare Mohan is presently staying in Mumbai in a furnished accommodation provided by his employer a
public limited company. He earned following monthly salary for the FY2019-20: He has two children Rajan &
Ravi.

1. Basic Salary Rs. 130,200

2. D.A (forming part of retirement 50% of basic salary
benefits)
3. Conveyance Allowance Rs. 9000
4. Executive Allowance Rs. 5000
5. Transport allowance Rs. 4,800
Special pay 20000

Further, He shall also receive a performance bonus of Rs. 860,000 from his employer for this year Compute
the Value of Rent Free Accommodation for FY2019-20.(assuming the population of Mumbai city is more
than 25 lakh (as per 2001 Census). Employer taken this accommodation on lease of Rs. 60,000 per month.
Furniture & Fixture provided by employer is worth Rs. 12 Lakh.

a) Rs. 6,90,380
b) Rs. 6,62,880
c) Rs. 584,600
d) Rs. 5,50,380

9. Rakesh aged 57 years had worked in a Private Hospital as a senior surgeon in Chandigarh from last 27 years
& retired on 30/09/2019. What would be the taxable value added in Rakesh’s income for Gratuity receipt
of Rs 12 Lakh at the time of retirement. He is covered under the Payment of Gratuity Act 1972. Salary for
FY2019-20 is Rs. 60,000 p.m.
a) 200000
b) 265385
c) 934615
d) 452650
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Gift taxation & Assessment

10. Anurag has received few gifts in the financial year FY2019-20 and he wants to know about the
taxation of the same. He received a gift of Rs. 63,000 from a friend and another gift of Rs. 24,000
from his neighbor. He wants to know, what is the total taxable amount from the above receipts on
which Anurag will have to pay tax.

a) Rs. 63,000, as any amount received in excess of Rs. 50,000 is taxable.

b) Rs. 13,000, as the amount received over the limit of Rs. 50,000 is taxable.
c) Rs. 37,000, as the total amount in excess of the limit Rs. 50,000 is taxable.
d) The whole amount of Rs. 87,000, as the aggregate value of gifts received from one person or
more than one person exceeds Rs. 50,000.

11. Deepak wants to gift Rs. 5 lakh to his son Veeru to buy a house. Veeru wants to know how this
receipt will be treated in his hands from Income Tax perspective.
a) No tax to be paid by Veeru as it is gifted to him to buy a house.
b) No tax to be paid by Veeru as gift from a father to son is tax free.
c) Entire receipt will be taxable in the hands of Veeru as it is more than Rs. 50,000.
d) Gift to major son is taxable

12) Rajesh had submitted return of his income to the extent of Rs. 21.50 lakh for the AY 2020-21. The
Assessing Officer has found misreporting of income of Rs. 1.50 lakh in the return submitted. What is
penalty applicable u/s 270 A of the Income Tax Act, if he fails to convince the Assessing Officer?
(Ignore surcharge and cess in calculations)
a) Rs. 3,00,000
b) Rs. 90,000
c) Rs. 1,50,000
d) Rs. 45,000

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Income from Capital Gains

13. Your client has in his portfolio 500 shares of an unlisted company. 100 shares were originally acquired on
1st May, 1998 for Rs. 50 each. The fair market value of the company's share was Rs. 80 each as on 1st April,
2001. 100 bonus shares were allotted on 20th November, 2016. The fair market value was Rs. 140 each as on
20th November, 2016. The remaining 300 shares were purchased on 30th May, 2014 at Rs. 350 each. Your
client has got an offer on 1st July 2019 to sell the shares of the company at Rs. 500 each. You compute the
capital gains in this transaction, in case the offer is accepted at the given price. The same is ______.

Cost Inflation Index (CII) for 2001-02 100

Cost Inflation Index (CII) for 2009-10 148
Cost Inflation Index (CII) for 2016-17 264
Cost Inflation Index (CII) for 2019-20 289

a) capital gain 100443

b) No capital gain applicable in case of equity share
c) Capital gain 105240

14) Rajesh transferred shares of X Ltd, a listed Security to Avinash in an off-market transaction for a
consideration of Rs. 30 lakh on July 1, 2019. The shares were held by him in physical form. He had
purchased these shares on April 1, 2011 for Rs. 15 lakh. What will be the Long Term Capital Gains tax
payable by Rajesh on the above transactions? Ignore surcharge or any other taxes, if applicable.

a) Rs. 1,50,000
b) Rs 1,28,800
c) Rs. 1,26,500
d) No tax on equity capital gain

15. Priyanka sold 500 Gold ETF units @ Rs. 1,585.27 per unit on the stock exchange on 27th October, 2019.
These units were acquired in the initial offering of Gold ETFs as on 17th Oct 2017 @ Rs. 983 per unit. She
asks you to advise her on the tax to be paid on such disposal of such units. The same is ___________.

a) STCG 301135 taxable at slab rates

b) LTCG 30115
c) STCG 67500 taxable @ 20%

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16.
Situation: Taxation of Gold Exchange Traded Fund (Gold ETF)
units
Number of units 500 units
Cost of acquisition (17-Oct-2006) 995 Rs. per unit

Sale Price (1-April, 2019) 2,415 Rs. per unit

CII Index for the year 2006-07 122
CII Index for the year 2019-20 272

If all the units are sold at the sale price prevailing on 1st April, 2019, what would be the post-tax gains in
the transaction?

a) 7.89%
b) 7.83%
c) 6.30%
d) 7.33%

17. Today is Feb 2020, Anurag needs more funds for his manufacturing business; meanwhile he has received
a good offer to sell his second house, for Rs. 47 lakh. The brokerage charges to be incurred on sale transaction
are 1.5% of sale amount. Anurag wants to know from you the amount of capital gains on this sale transaction
as per AY2020-21?
He purchased this house in May 2009 for Rs. 18 lakh for investment purposes and further spent Rs. 3.15 lakh
in August, 2010 on its renovation. He entered into an agreement for sale of this house for Rs. 35 lakh in March
2016 and received Rs. 2 lakh towards advance. However, the buyer could not meet his commitment and the
advance was forfeited by Anurag.

Cost Inflation Index (CII) for 2009-10 148

Cost Inflation Index (CII) for 2010-11 167
Cost Inflation Index (CII) for 2019-20 289

a) Long term Capital gain of Rs. 369515

b) Long term Capital gain of Rs. 569515
c) Long term Capital gain of Rs. 443000
d) Long term Capital gain of Rs. 532280

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18.Today is 15 Feb 2020. Rajeev had invested Rs. 1 lakh to buy 200 shares of a listed company, Info
Systems, in the year 2007-08. The Company had issued Bonus shares in the ratio 1:1 on 1st August 2017.
Rajeev also subscribed to the Company’s Rights issue of one share for every four shares held at a price of
Rs. 2250 per share in Jan 2020 Rajeev wants to generate funds for his business by selling the entire shares
of Info Systems at the prevailing market price of Rs. 2500 per share through a recognized Stock exchange.
What is the amount of Capital Gains for Rajeev on sale of these shares if provisions of AY 2020-21 are
applicable today? Fair market value as on 31-_jan-2018 is Rs.1500)
a) Long Term Capital Gain of Rs. 1,25,000 and Short term capital gain 25,000
b) Nil
c) Long Term Capital Gain of Rs. 4,00,000 and Short term capital gain 25,000
d) Long Term Capital Gain of Rs. 7,00,000 and Short term capital gain 25,000

19. Rajeev also invested Rs. 4 lakh in an Urban Agriculture land. Rajeev has received an offer to sell his
agricultural land for Rs. 11 Lakh. He wants to know; which condition is not applicable to avail the exemption
u/s 54 B of Income tax Act for capital gain arising on sale or transfer of agricultural land.

a) The agricultural land is sold by Rajeev in his individual capacity.

b) The agricultural land has been used by Rajeev or his parents for agriculture purposes during the 2-
year period immediately preceding the date of sale.
c) Rajeev will purchase another agricultural land from the amount of capital gains within a period of 2
years after the date of sale of agricultural land.
d) Full consideration received from sale of agricultural land will be used in purchase of another
agricultural land otherwise proportionate capital gain would be eligible for exemption.

20. In February, 2012, Rajeev’s Father-in-Law gifted him plot of land with fair market value at the date of the
gift was Rs. 3,50,000. He had himself purchased this plot in Sep 2003 for Rs. 1,50,000. Rajeev had sold
this plot in July 2019 for Rs.6,50,000. An expense on sale of plot is 2% of the sale proceeds. Rajeev wants
to know from you, for calculating his Income Tax liability for financial year 2019-20, what is the amount
of capital gain taxable in his hands for sale of plot of land?

a) Long Term Capital Gain of Rs. 2,52,300

b) Long Term Capital Gain of Rs. 2,99,780
c) Long Term Capital Gain of Rs. 2,39,300

21. On May 2006, Hema had invested Rs. 2,00,000/- in 10,000 shares having face value of Rs. 10 per
share which is a listed company. The subsidiary company gave an offer on 15 September 2019 to buy
back such shares at Rs. 93.50 per share. Hema accepted the buy-back offer and has recently got an
amount of Rs. 9.35 lakh. He seeks your advice on taxability of such sum received as per provisions of
AY 2020-21. (Exclude Surcharge & Cess)

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a) 92,250
b) 73500
c) No tax applicable on Equity Capital Gain

22. Imran wants to know relative advantage of having exposure to Gold as an asset class through Gold
Exchange traded funds which can be purchased and traded as units through the demat a/c. Which
of the following is not appropriate in this context?

a) In case of Investor holding Physical Gold, the purity of gold is a big concern of Investor.
b) Most of the Gold ETF schemes available in India reflect International prices of Gold and insulated
from local demand supply factors
c) Securities Transaction Tax (STT) is applicable on purchase & sale of Gold ETF.

23. Imran‘s father acquired his flat at Bangalore on 2003-04 for Rs. 10 lakh. After the death of Imran’s
father such house is transferred to Imran through Inheritance in FY 2009-10 & the market value at
that time was Rs.18 Lakh. If he had sold this inherited house on 15-02-2020 for Rs. 60 Lakh and shift
to his own house then compute the capital gain For AY 2020-21 (assuming expenses incurred on sale
of house by him was Rs. 1 lakh)?
a. LTCG of Rs. 25.92 Lakh
b. LTCG of Rs. 35.46 Lakh
c. LTCG of Rs. 32.48 Lakh
24. Surinder purchased 7,000 Units of Equity Mutual Funds @Rs. 50 per unit on 2nd April 2019. The Equity
Mutual Fund declares a dividend of Rs. 10 per unit. The record date for the dividend was 15th June
2019. Surinder sells 1,000 units on 5th March 2020 at Rs. 46 per unit. He wants to know the amount
of short term capital loss he can claim in AY2020-21?

a) He gets short Term Capital Gains of Rs. 14,000

b) He gets Short Term Capital Gains of Rs. 6,000
c) He can claim Short Term Capital Loss of Rs. 4,000
d) He cannot claim any Short Term Loss for Tax computation
25. Ms. Charu has observed that in the previous 12 months a total sum of Rs. 4.80 lakh has been received
on account of dividend from various equity shares. Ms. charu wants to know the taxability aspect of this
payment stream. You advise that _____________
a. after payment of dividend distribution tax @17.65% (excluding surcharge & cess) by
companies on the respective dividend paid, the dividend received is tax free in the hands
of investor
b. tax is payable on such dividend stream at the maximum marginal rate in the hands of
investor
c. after payment of dividend distribution tax @12.5% (basic rate) by companies on the
respective dividend paid, the dividend received is tax free in the hands of investor
d. tax is payable at a flat rate of 15% on such dividend received by the investor
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26. A businessman sold Rs. 85 lakh value of commercial plot on 20th December 2019. These shares were
acquired in April 2012 for Rs. 20 lakh. He invested Rs. 40 lakhs from these proceeds in February 2020 in his
first residential house to avail benefit under Section 54F of the Income-tax Act, 1961. What approximate
amount of bonds specified under Section 54EC should he purchase and by what date so as to make his
capital gains liability almost ‘Nil’ towards these transactions? Cost inflation index for FY 2012-13: 200, 2019-
20: 289
(a) Rs. 16.19 lakh, 30th June 2020
(b) Rs. 42.97 lakh, 30th July 2020
(c) Rs. 29.70 lakh, 19th June 2020
(d) Rs. 30.60 lakh, 31st March 2020

27. A private sector employee aged 58 has retired in March 2019 with a retirement corpus of Rs. 2.05 crore
accumulated with the Company. His company is covered under the Payment of Gratuity Act,1972. He
decides to commute one-third of his retirement fund, the rest being utilized by his employer to pay him a
fixed immediate monthly annuity for 20 years through a pension product which gives an effective annual
yield of 7.5%. If he saves maximum eligible sum under Sections 80C and 80D, what would be his tax liability
for AY 2020-21? (Assume Annuity received in annuity due mode)

(a) Rs. 1,51,040

(b)Rs. 1,52,510
(c) Rs. 1,62,370
(d)Rs. 2,62,630

28. An investor purchased 2,000 shares of a listed company at Rs. 125 per share on 28th December 2018.
The Company declared a dividend of Rs. 8 per share, the record date was 25th March 2019. He sold 900
shares on 12th May, 2019 at a price of Rs. 113 per share and the balance on 27th January 2020 at a price of
Rs. 135 per share. He had no other transactions during FY 2019-20. What is the taxability of his transactions
for AY 2020-21?

(a) Short term Capital Loss Rs. 10,800

(b)Short term Capital Loss Rs. 3,600
(c)Long term Capital Gain Rs. 200
(d)Long term Capital Gain Rs. 7,400

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Income from House property

29. Rajinder has given his second house at Bhuj on monthly rent of Rs. 12000. He wants to know the taxable
Income from house property for AY2020-21. The Municipal value of the house is Rs. 90,000, Fair rent Rs.
1,40,000, Standard rent Rs. 1,20,000. The house was vacant for one month during the previous year 2019-20
and the rent has not changed since then. Municipal taxes paid in previous year Rs. 3500.
a) Rs. 1,40,500
b) Rs. 1,28,550
c) Rs. 89,950
d) Rs. 1,32,000

30. Radha had taken a housing loan of Rs. 20 lakh at an interest rate of 9% p.a. on 1st December, 2010 for
a term of 15 years. The first EMI was paid on 1st January, 2011 and thereafter on 1st of every month
regularly. Radha wants to know the interest portion allowable as deduction under section 24 of the
Income Tax Act for the AY 2020-21.
a) 104910
b) 103872
c) 150000
d) 119520

31. The construction of Surinder’s house was completed on 31st March 2019. The bank started recovery
of EMI’s after that, the first EMI recovered on 1st May 2019. Prior to 31st March 2019, Surinder paid
only the interest on his loan which was disbursed in full by the bank on 1st Aug 2017, when the
construction started. He wants to know the interest portion allowable as deduction under section
24 of the Income Tax Act for the AY 2020-21.The Principal amount of loan is Rs. 6,00,000 taken on
1st Aug 2017.The applicable rate of Interest is Rs. 8.5% per annum fixed for a term of 20 years from
the date of construction completed.

a) 50542
b) 67542
c) 68530
d) 45690

32. A trust is created by a son, the Settlor, for the survival expenses of his retired parents each having equal
beneficial interest. Both husband and wife have separate fixed pension of Rs. 35,000 per month and Rs.
30,000 per month, respectively. The trust property has generated a net annual value of Rs. 5.12 lakh in the
financial year 2019-20. The trustee as well as the Settlor is in the 30% tax bracket. Find the tax payable by
the trustee as representative assessee.

(a) Rs. 79,100 (b) Rs. 46,760 (c)Rs. 1,01,350 (d) Rs. 72,180

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33. What is not correct about SGB’s?

a. Investor can take loan against SGB

b. Pre-mature redemption of the Bond is permitted from fifth year of the date of issue on the interest
payment dates.
c. Proceeds from SGB at maturity are exempt from tax.
d. These bands are tradeable & bought/sold@ premium/discount to their face value in the market
immediately after the issue date.
e. Maturity period is 8 years from the investment date
f. Interest coupon is taxable under head Income from other source.
g. SGB’s coupon rate fixed at the time of issue by RBI
h. Individual investment limit: Minimum investment is 1 gram and maximum investment 4 Kg for an
Individual.
i. No Indexation allowed in case of Long term capital gain if bonds sold before maturity date.

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Estate Planning

What is Estate Planning ?

Estate planning refers to the organized approach to managing the accumulated assets of a person in the
interest of the intended beneficiaries. Wealth may be accumulated with a specific purpose of being passed
on to heirs, to charity, or to any other intended purpose. Without formal structures that ensure that these
purposes are met, there could be disputes, conflicting claims, legal battles, avoidable taxes and
unstructured pay-offs that may not be in the best interest of the beneficiaries.
Estate planning covers the structural, financial, legal and tax aspects of managing wealth in the interest of
the intended beneficiaries.
The term ‘estate’ includes all assets and liabilities belonging to a person at the time of their death. This may
include assets as well as claims a deceased is entitled to receive or pay. The term estate is used for assets
whose legal owner has deceased, but have not been passed on to the beneficiaries and other claimants.
Once transferred, the estate becomes the assets of the beneficiary who has received the legal ownership.
Estate can also be passed on to a trust and managed by trustees, in which case ownership is with a distinct
entity, but periodical benefits from the estate is passed on to beneficiaries

What inheritance laws apply in India?

No uniform codified inheritance laws apply in India.

The Constitution of India provides freedom of conscience (i.e., religious faith as a fundamental right). Family
law has always been a part of religious law. This means that no uniform code for civil law exists in India, even
though it has been put into the Directive Principles of State Policy of the Constitution of India. Since laws of
marriage and succession are the most intricate amongst the religious laws, inheritance issues in India are very
complicated.
Different religious groups in India subscribe to different laws. Hindus have their own codified law (Hindu
Succession Act), Muslims have their own textual law of inheritance (Islamic Law on Succession), Parsees come
under the Indian Succession Act, as do Christians, as well as others (e.g. spouses with different religions
married under The Indian Marriage Act).
The civil court of the district deals with all matters relating to inheritance.
Inheritance issues are dealt with by the principal civil court of original jurisdiction (district judge’s court)
where the property lies, or where the deceased used to live in India before death, or before departing the
country.
As per Hindu Succession Act, 1956 Order of intestate succession
The following is an outline of the orders of succession and the shares of inheritance for heirs in different
groups in India:

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1. If the deceased is a Hindu male (including Buddhists, Sikh, Jain, and all those who are not Christian,
Muslim or Parsi):
Class I heirs of a male Hindu who shall simultaneously inherit are:
1. Mother being alive (1 share)
2. Widow (1 share)
3. Living sons (1 share each)
4. Living daughters (1 share each)
5. Predeceased son having the following relations (1 share)
a. widow
b. sons
c. Daughters – each to be equally divided.
If a predeceased son of this predeceased son leaves a widow, the living sons and living daughters
each shall equally share the share of the predeceased son of the predeceased son who has one
share with living sons and daughters. Predeceased daughter (1 share) to be equally shared by sons
and daughters of the predeceased daughter.
In case there is none in the class I schedule, the property shall go to the class II-based order. The
earlier order is preferred over the later, (i.e. if an earlier order is present, the later orders would not
inherit):
Order I: Father (whole in the absence of anybody in class I)
Order II: Son’s daughter’s son; son’s daughter’s daughter, Brother, Sister ( all in equal proportion)
Order III: Daughter’s son’s son, daughter’s son’s daughter, daughter’s daughter’s son, daughter’s
daughter’s daughter (equally)
Order IV: Brother’s son, brother’s daughter, sister’s son and sister’s daughter
Order V: Father’s father, Father’s mother (equally)
Order VI: Father’s widow, brother’s widow
Order VII: Father’s brother, Father’s sister
Order VIII: Mother’s father, mother’s mother
Order IX: Mother’s brother, mother’s sister
2. If the deceased is a female Hindu dying intestate: -
Entry A: Sons (1 share each), Daughters (1 share each), husband (1 share), son and daughter of
predeceased son (equally together 1 share), son and daughter of predeceased daughter (equally
together I share).
Entry B: Heirs of Husband:
Entry C: Father and Mother
Entry D: Father’s heir
Entry E: Heirs of the mother

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Elements of Estate Planning

Estate planning involves the following broad set of activities:

a) Identifying the beneficiaries and their claim to the estate through a comprehensive documentation such
as the legal Will.
b) Creating tax-efficient structures such as trusts to manage the estate and make periodic payouts to
beneficiaries.
c) Creating organizational structures including trustees, executors, guardians, power of attorney to
perform identified functions in administering, protecting and managing the estate.

Wills
“Will” is defined in Section 2(h) of the Indian Succession Act 1925 to mean the “legal declaration of the
intention of the testator with respect to his property, which he desires to be carried into effect after his
death.”
The person making the will is the testator, and his rights extend to what are legally his own. The will comes
into effect only after the death of the testator.
The person who is named in a will to receive a portion of the deceased person’s estate is known as a
legatee.
The person named in the will to administer the estate of the deceased person is termed as an Executor.
a. Essential Features of a Will
 A testator can only dispose-off what he owns and what is essentially legally transferable.
Example: Arvind and his wife are joint owners of their house, funded by a joint loan. Arvind wills the house
to his only son, who asks his mother to vacate the house after Arvind’s death. Arvind’s wife can contest this
will on the grounds that she is the joint legal owner of the house, having paid valid consideration. Arvind
cannot bequeath to his son, what he does not own.
 A testator can change the contents of the will any number of times, before his death. Such changes
to the will are called ‘Codicils’. A will can also be revoked by the testator at any time before his
death.
 A will can only be made by a person competent to make it. A minor or a person of unsound mind
cannot make a will.
 Only using the words ‘will’ without making reference to disposal of property upon death of testator
is not a will.
 A will has to be written and signed in the presence of two witnesses. However, subject to certain
conditions, persons working in the armed forces can make an oral Will.

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b. Contents of a Will:
A will must have the name and address of the testator and a statement that the will is being made
voluntarily. The beneficiaries under the will must be clearly listed as must the property that is being
bequeathed. The will has an executor. It must be signed by the testator and attested by two witnesses.
A will has to be unambiguous and certain as to its intent to bequeath. To avoid disputes only a single
copy of latest valid will should be in existence, witnesses should sign in the presence of each other, a
residuary clause that leaves all assets that remain uncovered in the bequests to an identified beneficiary
should be included in the will and a statement stating that the current will revokes all previous bequests
of any nature should be included in the will.
c. Registration of Wills:
It is not compulsory to register a will. However, it is usually a good practice to register a will. A
registered will cannot ordinarily be tampered with, destroyed, mutilated, lost or stolen. If a will is
registered, no person can examine the will and copy the contents without an express permission in
writing of the testator.
d. Probate:
Probate is defined in section 2 (f) of the Indian Succession Act to mean the copy of a will certified under
the seal of a court or competent jurisdiction. A probate certifies that a particular will was proved on a
certain date and is given attaching copy of the will of which probate has been granted.

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Nomination
Nomination is the right conferred upon the holder of an investment product to appoint the person
entitled to receive the monies in case of the death. A nomination is seen as a formal bequest authorized
by the holder of the asset, though in the event of a dispute the nominee’s position is reduced to being
the trustee of the bequest, the final owners being decided according to the applicable laws of succession.
Only an individual can nominate. Non-individuals including corporate bodies, partnership firms, trusts,
Karta’s of Hindu Undivided Families (HUFs) and power of attorney holders, cannot nominate. Nomination
can be done either at the time of making the investment or entering into an insurance contract or
subsequently at any time. Nominations can be modified any number of times.

Nominee can be an individual, company or trust, depending on the terms of investment or asset. A minor
can be a nominee, but a guardian will have to be named. Nominations to NRIs will be honored subject to
repatriation rules. Multiple nominees may be allowed, with percentage of interest defined for each
nominee.

Different rules for nomination apply for different types of assets

The purpose of nomination is simplification of payment process in the event of the death of the holder
and not the equitable distribution of estate.
Payment to nominee is a valid discharge in case of all financial products. The onus of proving any rights
to legacy of the investment so transmitted is on those that contest such transmission. A will
supersedes a nomination, but the company or mutual fund can still make payment of proceeds to the
nominees. The nominee is not a legatee or beneficiary under the Indian Succession Act. The nominee
takes the amount subject to any claim or right of the owners/heirs or other persons. The nominee
may only receive the proceeds, but title to the assets is not absolute.

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Private Trusts

A trust is said to be an instrument of safeguarding the interests of beneficiaries especially when the
beneficiaries are minor and not capable of protecting their interest. The term 'trust' essentially means that
the donor divests himself of all the beneficial interest in the property for the benefit of the beneficiaries. A
private trust is governed by the Indian Trusts Act, 1882 and could either be structured as revocable or
irrevocable. The type of trust you will choose to create for your family will depend on your family's needs and
intentions.

 The person who declares the confidence is called the Author of the Trust. In other words,
settlor is a person who settles property on trust law for the benefit of beneficiaries.

 The person who accepts the confidence is called the Trustee. Trustee is a person or
a firm that holds or administers property or assets for the benefit of a third party.
Trustee has obligation to pay tax in the capacity of a representative assessee.

 Beneficiary: the person for whose benefit the confidence is accepted is called the
Beneficiary.

 A registered document called as trust deed is necessary to set up trust and should
be registered with the Registrar. The deed should be executed on a stamp paper

The above terms can be easily understood with an example: -

Mr. A wants to pass his property to Mr. C for the benefit of his minor granddaughter. Mr. A passes his
property to C, because he reposes (has) confidence on C. In this case, Mr. A is author of trust, Mr. C is trustee,
Minor Granddaughter is beneficiary and property is Trust Property.

A couple of examples: Mr. A, promoter of a renowned listed company has recently settled his shareholding
in a revocable trust, mainly because it serves a two-fold purpose - he is able to retain control over the
company shareholding settled into the trust and at the same time the shares will pass on to the intended
beneficiaries after his demise.

Mrs. B, a professional, who has substantial assets held in shareholding received through ESOPs, also has
settled his assets into a revocable trust. He wants to ensure that his two children and spouse are protected
and a scenario in which he is incapacitated is catered to in the most hassle-free manner.

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Under a revocable trust, the settlor of the trust, during his lifetime, has the power to revoke the trust funds
settled by him and he may also be added as a beneficiary and reap the benefits of his own assets under the
trust. A revocable trust offers flexibility to the settlor to have complete control over his assets and at the
same time is an effective tool for consolidation of assets.
On the other hand, in an irrevocable trust, once the settlor has settled his assets, he cannot revoke the same.
In an irrevocable trust, no control or power is retained in the hands of the settlor and, if structured
appropriately, it could ensure that settled assets are ring-fenced or protected.
Income from private trusts is available to specified beneficiaries and not the public at large. Private trusts are
of two basic types for Income tax purposes:

• Specific trusts– where the individual shares of the beneficiaries are known and ascertainable for e.g. Mr. X
creates a trust for his 5 sons and the share of each son is mentioned in the deed as 20% each, then such trust
is known as specific trust.
• Discretionary Trust: In this no individual shares of the beneficiaries are mentioned in the deed and income
is distributed to them on the “discretion” of the trustee.

II. Advantages of Trust form of Estate Planning:

 Trust creation helps in bypassing probate process

 Trust creation helps in safeguarding interests of family members, especially those with special needs
 Conditions can be attached to assets gifted to a Trust, for example, on attaining majority by
beneficiary
 Future capital gains tax on assets transferred to trust could be lower

Taxation of private trusts:

In the case of private trusts, if the individual shares of the beneficiaries are ascertainable, they are included
in the individual taxable incomes, the tax assessment being made either directly on the beneficiary or on the
trustee as a representative of the beneficiary.
When the individual shares of the beneficiaries are indeterminate (i.e., discretionary trust), the entire income
is taxed in the hands of the trustees, in most cases at the maximum marginal rate applicable to individuals.

In case of Revocable Trusts : The Trustee is the legal owner of property transferred to a Revocable Living
Trust. However, the income of a Revocable Living Trust is taxed in the hands of the Settler.

Sec 161 (1A) stipulates that a trust, specific or discretionary, will be taxed at maximum marginal rate if its
income consists of or includes profits & gain from business.

Exception : Maximum Marginal Rate will not apply if a trust has been declared by way of a will from which
business income is derived by any person and is exclusively for the benefit of any relative dependent on him
and also such trust is the only trust so declared by him.

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Example : There are two beneficiaries (Age above 40) with an equal share in an Irrevocable specific private
trust . The beneficiary may have their own respective incomes. The trust income is distributed in the specified
ratios to each of them. One beneficiary after accounting for trust income remains in the 10% bracket, while
the other jumps to the 20% bracket. The individual tax amounts on only the trust income allocated to each
of the beneficiaries is calculated in their respective tax slabs. These individual tax amounts are then added to
compute the tax payable by the trustee as representative assessee.

Public Trusts

Public trust is express or constructive trust for either a public religious or charitable purpose or both. There
is general misconception that the income of trust enjoys total freedom from tax. Unconditionally 15% of the
Income of these charitable trust/societies is exempt from tax. However, the remaining 85% of Income must
be used for the charitable purpose defined in their constitution. The beneficiaries in charitable trust must not
be able to demand or claim any benefit.

Hindu Undivided Families

Hindu undivided family (HUF) is an Indian structure where the assets belonging to a family is managed
centrally. To form a HUF, ancestral property or specific income that can be attributable to the HUF and not
an individual, should be in existence to begin with. Other assets including investments can then be acquired
by the HUF, using the funds at its disposal.

A HUF is defined under the Hindu Law as a family that consists of all persons lineally descended from a
common ancestor, including wives and unmarried daughters. The Karta is the head of the HUF and has to be
the senior-most male member of the family, unless he gives up his right in favor of another senior male
member of the family. The male members of the HUF are called co-parceners and female members are called
members. For purposes of taxation, an HUF is treated like an individual investor, provided it has at
least three co-parceners. The income of the HUF should accrue from its own assets. Any income arising from
assets transferred by a member or co-parcener will be clubbed to their respective incomes and taxed as such.
They will not be treated as the income of the HUF.

HUF – Mitakshra School (Applicable in all states Except Bengal, Assam & Orrisa)

A HUF Consisted of Coparceners i.e. the sons, grandsons & great grandsons of the holders of the joint
property. Female members were not coparceners and had no right to demand partition. The Wives and
unmarried daughters entitled to maintenance out of their family property. The senior most male member of
the family usually managed the affairs of the family as Karta. However, the wife of a Karta had an equal share
with all the coparceners (in case of Karta expired).
The Hindu Succession Act, 1956 has been amended w.e.f. 6.9.2005 mainly Sec 6, accordingly, -

A daughter of a coparcener shall by birth become a coparcener in the HUF in her own right in the same
manner as the son. She has the same rights in the coparcenary property as she would have had if she had

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been a son. Such a right is available only to daughters and not to other members of the family such as mother,
wives & daughter in law.
For Clarity Let us take the instance of HUF of X married to Y. They have a son (S) and daughter (D). The son
has two children A and B. The daughter (D) has two children E and F. This means that there are 7 coparceners.
The Wives are certainly members of HUF but they are not the coparceners. Husband of (D) is not a member
of HUF.
Now suppose there is a partition: the property will get divided differently in different situations:

1. All are Alive - 1/3rd to X, S and D

2. X has expired – 1/3rd to Y, S and D
3. S has expired – 1/3 to X and D and 1/6 to A and B
4. X and S have expired - 1/3 to Y and D and 1/6 to A and B
5. X and Y have expired - 1/2 to S and D
6. X, Y and S have expired - 1/2 to D and ¼ to A and B
7. X, Y and D have expired - 1/2 to S and ¼ to E and F

Any distribution of Capital assets to the members on the partition of HUF is not regarded as transfer & no
capital gain applicable.

Although the 2005 amendment provides equal rights to daughters in the coparcenary as compared to the
sons, an important question was still left unanswered - Can women or daughters be allowed to become
managers or karta of the Hindu Undivided Family?

The landmark Delhi High Court judgement in Mrs. Sujata Sharma v Shri Manu Gupta. has, after the 2005
amendment to Hindu Succession Act, 1956, brought the next step to realising equality of women in the Hindu
Undivided Family. The court found that while females have equal rights to HUF property (post HSA), they also
have the right to manage the same property as Karta. Also, the court found no restrictions regarding a female
Karta in Section 6, Hindu Succession Act.

Thus, after demise of the father in a HUF, if the eldest is a daughter then she becomes the Karta of that same
HUF, with the mother and siblings (if any) as members of the HUF.
Hence, married or unmarried daughters may not only claim coparcenary in HUF property but may also claim
rights to manage the same HUF property as Karta, provided they are the eldest.
This means that just as a son can be a Karta, by virtue of being born the eldest, a daughter can also be a Karta
given that she was born eldest. Also, even after being married a daughter retains her right to coparcenary
and also the right to be Karta.
In fact, a woman may even be a de facto Karta in the family where she marries, provided that she is a widow
and is the only major in the family she married into.

With this judgement the equal rights of daughters in their HUF have been fully realized. Daughters would
have the same rights and liabilities as sons regarding the HUF property for all means and purposes.

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Estate Planning

1) Sham wants to know according to which Act his father’s estate would be distributed in case he dies
Intestate.

a. Hindu Succession Act, 1956, under which people belonging to Sikh, Hindu, Buddhist, Jain religion are
covered
b. Hindu Succession Act, 1956, under which people belonging to Sikh, Hindu, Parsi & Jain religion are covered
c. Indian Succession Act, 1925, under which people belonging to Sikh, Hindu, Buddhist, Jain & Parsi religion
are covered
d. Indian Succession Act, 1925, under which people belonging to Sikh, Hindu, Jain, Parsi, Christian & Jews
religion are covered

2. Irawati wants to create a private trust in the name of her children. According to you, which of the following
are true in case of a private trust?

(I) A trustee shall be any known person capable of holding property

(II) A trust has to be declared by a non – testamentary instrument in writing, signed and registered or by the
will of the author of the trust or of the trustee in case of an immovable property
(III) A trustee would be taxed in his hands in a representative capacity where the beneficiary is a minor,
lunatic or idiot or specifically entitled to receive the income from the trust
(IV) The author of the trust can be the trustee himself

a. (III) and (IV)

b. (II) and (III)
c. (II), (III) and (IV)
d. (I), (II) and (IV)

3. Ravi, who is a Hindu, wants to know according to which Act his father’s estate would be distributed in case
he dies Intestate.

a. Hindu Succession Act, 1956

b. Indian Contract Act
c. Indian Succession Act, 1925
d. Transfer of Property Act

4. Balchandar Pathak and Manorama married couple has no estate plan till date. Their family constitutes
three sons, two daughters in which one of the daughters is married. As per prevailing Hindu Succession law
in India, how much share is their eldest son eligible to get from the estate of Balchandar in case he dies
intestate?

a. One sixth (three sons + 2 daughters + 1 wife)

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b. One fifth
c. One third
d. All Property rights goes to Manorama and after her death Devendra will would get his share of the
Property

5. Devendra’s father-in-law is a well-established businessman and Sandhya is their only child. He wants to
include Devendra as a member in their HUF. Is it possible?

a. Yes
b. No
c. Yes, but with prior permission from IT department
d. Yes, but first Davendra’s father-in-law should prepare a non-revocable Will in favour of
Devendra

6. Somya wants to adopt a child and part with some of her properties in favour of the child. She wants to
plan her Estate as she will remain a spinster throughout her life. But she is afraid that after her death her
brother may challenge such transfer. You would advise her __________.

a. not to do any Estate Planning

b. to prepare a WILL
c. to create a Registered Living Trust where the child would be the beneficiary
d. to prepare a Power of Attorney in favour of her father to manage her property for the benefit
of the Child

7. Umang’s brother in law is an NRI. He wants Umang to make some investments on his behalf whenever the
right opportunity arises. You suggest:

a. Umang’s brother in law should prepare a Notarized affidavit in Umang’s favour.

b. Umang’s brother in law should prepare a Special Power of Attorney specifying transactions
that can be carried out by Umang.
c. Umang should prepare a General Power of Attorney that gives him the right to do transactions
on behalf of his brother in law.
d. Umang should not get into such an arrangement due to complex tax laws related to NRI
Investments.

8. Umang has not done any Estate Planning as of now. Even his father has not prepared any Estate Planning
documents. As Umang is the only son of his parents, along with his 3 sisters, what is most suitable for him?

a. Umang’s father should first prepare his Will and on the basis of that Will Umang should prepare his own
Will.
b. Umang should prepare his own Will without waiting for his father’s Will.
c. There is no need for any Estate Planning as Umang is the only son of his parents.

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d. Umang should prepare his Will by including his father’s property but with an inbuilt provision for his
sisters on account of that property.

9. Recently in an unfortunate event, one of Surinder’s brothers died in a road accident. He was a
bachelor and he died intestate. Surinder’s parents were living with his deceased brother. Apart from
Surinder there are three other siblings of the deceased. He wants to know the applicable order of
priority as per Hindu Succession Act for the disposition of his deceased brother’s property.

a) Both parents will get the priority over all siblings of Surinder including Surinder himself.
b) All siblings of Surinder will get the priority over their parents.
c) Surinder’s mother will get priority over others.
d) All of them will have equal right over the property of the deceased
10. Narinder wants to make a Will and understand its procedures; you explained that the ________ is the person
responsible for offering the Will for probate.
a) Testator
b) Executor
c) Lawyer
d) Beneficiary

11. Narinder’s father has made a Will deed for distribution of his assets. Narinder discusses with you
regarding Probate process, as per you which is not a feature of Probate process?

a) The assets are gathered, applied to pay debts, taxes and expenses of administration and
distribute to those designated as beneficiaries in the Will.
b) Executor or Personal Representative named in the Will is in charge of this process.
c) All legal heirs will receive notices from the court to file objections.
d) The court will give orders to distribute the assets to the heirs as per intestate succession Act.

12. Ananya, aged 42 years is a divorcee. She has two children; daughter Reeta aged 13 years and son
Gourav aged 11 years. You have advised Ananya to do Estate Planning. According to you what
should be the most preferred way for her Estate Planning?

a) She should devolve all of her personal properties to her personal HUF.
b) She should prepare a Will naming her children as the sole beneficiaries in the same.
c) She should prepare a Will naming her children as the sole beneficiaries as well as designate
one or more guardians with their prior consent.
d) She should transfer all of her existing properties in the names of her children and nominate
her both children equally in all her legal documents

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13. Devang would like to know how the property would devolve if a person dies intestate and also the
importance of Estate Planning. According to you, which of the following is not appropriate in Estate
distribution when a person dies intestate?
a) A Succession Certificate is applicable when there is no valid Will.
b) Legal Heirs will apply to the civil court for grant of a Succession Certificate.
c) Law of Inheritance is applicable in Estate distribution.
d) Legal Heirs get Estate rights on the basis of probate

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Financial Planner Code of Ethics & Professional Responsibility

FPSB India adopted the Code of Ethics to establish the highest principles and standards. These Principles are
general statements expressing the ethical and professional ideals CFP Certificants are expected to display in
their professional activities.

Rules that Relate to the Code of Ethic of Integrity

CLIENT FIRST – Rules that relate to the Principle of Client First

Placing the client’s interests first is a hallmark of professionalism, requiring the Financial Planning
professional to act honestly and not place personal gain or advantage before the client’s interests.

Rule 101

A CFPCM Certificant shall at all times place the interest of the client first.

Rule 102

The CFPCM Certificant shall at all times place the interest of the client’s first, followed by the best interest of
employer or organization while rendering professional advice.

INTEGRITY – Rules that relate to the Principle of Integrity

Integrity requires the quality of being open and honest; frankness (candour) in all professional matters.
Financial Planning professionals are placed in positions of trust by clients, and the ultimate source of that
trust is the Financial Planning professional’s personal integrity. Allowance can be made for legitimate
differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles. Integrity
requires the Financial Planning professional to observe both the letter and the spirit of the Code of Ethics.

Rule 201

A CFPCM Certificant shall not solicit clients through false or misleading communications or advertisements:

(a) Misleading Advertising: A CFPCM Certificant shall not make a false or misleading communication about the
size, scope or areas of competence of the CFPCM Certificant’s practice or of any organization with which the
CFPCM Certificant is associated; and

(b) Promotional Activities: In promotional activities, a CFPCM Certificant shall not make materially false or
misleading communications orally or in writing to the public or create unjustified expectations regarding
matters relating to financial planning or the professional activities and competence of the CFPCM Certificant
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or of any organization. The term “promotional activities” includes, but is not limited to, speeches, interviews,
books, printed or electronic publications, seminars, radio and television shows, and video cassettes; and

(c) Representation of Authority: A CFPCM Certificant shall not give the impression that one is representing the
views of an individual or particular group unless the CFPCM Certificant has been authorized to do so. Personal
opinions shall be clearly identified as such.

Rule 202

In the course of professional and business activities, a CFPCM Certificant shall not engage in conduct involving
dishonesty, fraud, deceit or misrepresentation, or knowingly make a false or misleading statement to a client,
employer, employee, professional colleague, governmental or other regulatory body or official, or any other
person or entity.

Rule 203

A CFPCM Certificant has the following responsibilities regarding funds and/or other property of clients:

(a) In exercising custody of or discretionary authority over client funds or other property, a CFPCM Certificant
shall act only in accordance with the authority set forth in the governing legal instrument (e.g., special power
of attorney, trust, letters testamentary, etc.); and

(b) A CFPCM Certificant shall identify and keep complete records of all funds or other property of a client in
the custody of or under the discretionary authority of the CFPCM Certificant; and

(c) Upon receiving funds or other property of a client, a CFPCM Certificant shall promptly or as otherwise
permitted by law or provided by agreement with the client, deliver to the client or third party any funds or
other property which the client or third party is entitled to receive and, upon request by the client, render a
full accounting regarding such funds or other property; and

(d) A CFPCM Certificant shall not commingle client funds or other property with a CFPCM Certificant’s personal
funds and/ or other property or the funds and/or other property of a CFPCM Certificant’s firm. Commingling
one or more client’s funds or other property together is permitted, subject to compliance with applicable
legal requirements and provided accurate records are maintained for each client’s funds or other property;
and

(e) A CFPCM Certificant, who takes custody of all or any part of a client’s assets for investment purposes, shall
do so with the care required of a fiduciary.

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OBJECTIVITY – Rules that relate to the Principle of Objectivity

Objectivity requires intellectual honesty and impartiality. Regardless of the services delivered or the capacity
in which a Financial Planning professional functions, objectivity requires Financial Planning professionals to
ensure the integrity of their work, manage conflicts and exercise sound professional judgment.

Rule 301

A CFPCM Certificant shall not mislead or omit any financial records or material or fact while rendering
professional advice for self-interest.

Rule 302

At the earliest point in the relationship, a CFPCM Certificant shall disclose in writing to the client if the CFPCM
Certificant is only authorized to sell or advise on a restricted range of products, and any other limitation of
their capacity to serve the client.

Rule 303

In the provision of any written recommendation contained in a financial plan, a financial planning practitioner
shall make timely written disclosure of all material information prior to entering into a professional
relationship. Disclosures that include the following information are considered to be in compliance with this
Rule:

(a) An accurate and understandable statement of compensation, which in detail discloses the source(s) and
any contingencies or other aspects material to the fee and/or commission arrangement. Any pecuniary or
non-pecuniary benefit whether direct or indirect, received or receivable by the CFPCM Certificant, the CFPCM
Certificant’s firm, or an associate in connection with the financial planning service should be fully disclosed,
any other costs borne by the client should they accept all or part of the recommendation. The disclosures of
the particulars may be made either in percentage terms or in monetary terms and any estimates made shall
be clearly identified as such and shall be based on reasonable assumptions. Referral fees, if any, shall be fully
disclosed; and

(b) A statement describing the nature and extent of any significant financial relationships or connections a
CFPCM Certificant has with product suppliers and the fees or commissions resulting from such relationships;
and

(c) Any information that the client might reasonably want to know in establishing the scope and nature of
the relationship, including, but not limited to information about the CFP professional’s areas of expertise;
and

(d) A general summary of likely conflicts of interest between the client and the CFP professional, the CFP
professional’s employer or any affiliates or third parties, including, but not limited to, information about any
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familial, contractual or agency relationship of the CFP professional or the CFP professional’s employer that
has a potential to materially affect the relationship with the client;

(e) Contact information for the CFP professional and, if applicable, the CFP professional’s employer.

Rule 304

If financial planning services are provided orally, a CFPCM Certificant must disclose orally to the client the
particulars described in Rule 303.

Rule 305

Should conflict(s) of interest(s) develop after a professional relationship has been commenced, a CFPCM
Certificant shall promptly disclose in writing the conflict(s) of interest(s) to the client. The CFPCM Certificant
must be able to demonstrate that the client was made aware of any actual or potential conflict of interest.

Rule 306

In addition to the disclosure by financial planning practitioners regarding sources of compensation required
under Rule 303, such disclosure shall be made annually thereafter for ongoing clients. The annual disclosure
requirement may be satisfied by offering to provide clients with the disclosure called for by Rule 303.

Rule 307

A CFP professional shall not borrow money from a client. This Rule does not apply when:

(a) The client is a member of the CFP professional’s immediate family;

(b) The client is an institution in the business of lending money and the borrowing is unrelated to the
professional services performed by the CFP professional.

Rule 308

A CFP professional shall not lend money to a client. This Rule does not apply when:

(a) The client is a member of the CFP professional’s immediate family;

(b) The CFP professional is an employee of an institution in the business of lending money and the money
lent is that of the institution, not the CFP professional.

COMPETENCE – Rules that relate to the Principle of Competence

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Competence requires attaining and maintaining an adequate level of abilities, skills and knowledge in the
provision of professional services. Competence also includes the wisdom to recognize one’s own limitations
and when consultation with other professionals is appropriate or referral to other professionals necessary.
Competence requires the Financial Planning professional to make a continuing commitment to learning and
professional improvement.

Rule 401

A CFPCM Certificant shall be updated of developments in its areas of specialization and participate in
continuing education throughout the professional career to improve professional competence. As a distinct
part of this requirement, a CFPCM Certificant shall satisfy all continuing professional development
requirements established for CFPCM Certificants by FPSB India from time to time.

Rule 402

A CFPCM Certificant shall offer advice only in those areas in which the CFPCM Certificant has competence. In
areas where the CFPCM Certificant is not professionally competent, the CFPCM Certificant shall seek the
counsel of qualified individuals and/or refer clients to such professionals.

Rule 403

A CFPCM Certificant shall have reasonable and appropriate standards for the appointment of Representatives.

FAIRNESS – Rules that relate to the Principle of Fairness

Fairness requires providing clients what they are due, owed or should expect from a professional relationship,
and includes honesty and disclosure of material conflicts of interest. It involves managing one’s own feelings,
prejudices and desires to achieve a proper balance of interests. Fairness is treating others in the same manner
that you would want to be treated.

Rule 501

In rendering professional services, a CFPCM Certificant shall ensure that prospective clients are clearly
informed in writing about:

(a) The identity of the Company responsible for the advice and, if the advice is provided through a
Representative, the identity of the Representative;

(b) The nature of services offered;

(c) The information required by all laws applicable to the relationship in a manner complying with such laws;

(d) Access to internal and external complaint handling mechanisms.

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Rule 502

A CFPCM Certificant’s compensation shall be fair and reasonable on the basis of level of competency and
recognition.

Rule 503

Prior to establishing a client relationship, and consistent with the confidentiality requirements of Rule 601, a
CFPCM Certificant may provide references which may include recommendations from present and/or former
clients.

Rule 504

A CFPCM Certificant shall clearly disclose to all prospective clients the capacity in which they are able to
provide financial planning services.

Rule 505

Whether a CFPCM Certificant is employed by a financial planning firm, an investment institution, or serves as
an agent for such an organization, or is self-employed, all CFPCM Certificants shall adhere to the same
standards of disclosure and service.

Rule 506

Ensure supervision and consistency in the level of services being procured from other subject matter experts
or professionals.

Rule 507

A CFPCM Certificant shall:

(a) Advise the CFPCM Certificant’s employer of outside affiliations which reasonably may compromise service
to an employer; and

(b) Provide timely notice to the employer and clients, unless precluded by contractual obligation, in the event
of change of employment or FPSB India licensing status.

Rule 508

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A CFPCM Certificant doing business as a partner or principal of a financial services firm owes to the CFPCM
Certificant’s partners or co-owners a responsibility to act in good faith. This includes, but is not limited to,
disclosure of relevant and material financial information while in business together.

Rule 509

A CFPCM Certificant shall join a financial planning firm as a partner or principal only on the basis of mutual
disclosure of relevant and material information regarding credentials, competence, experience, licensing
and/or legal status, and financial stability of the parties involved.

Rule 510

A CFPCM Certificant who is a partner or co-owner of a financial services firm who elects to withdraw from the
firm shall do so in compliance with any applicable agreement, and shall deal with his or her business interest
in a fair and equitable manner.

Rule 511

A CFPCM Certificant shall inform his or her employer, partners or co-owners of compensation or other benefit
arrangements in connection with his or her services to clients, which are in addition to compensation from
the employer, partners or co-owners for such services.

Rule 512

If a CFPCM Certificant enters into a business transaction with a client, the transaction shall be on terms that
are fair and reasonable to the client.

Rule 513

A CFPCM Certificant shall clearly identify with the client the assets, if any, over which the CFPCM Certificant will
take custody, exercise investment discretion, or exercise supervision.

CONFIDENTIALTY – Rules that relate to the Principle of Confidentiality

Confidentiality requires client information to be protected and maintained in such a manner that allows
access only to those who are authorized. A relationship of trust and confidence with the client can only be
built on the understanding that the client’s information will not be disclosed inappropriately

Rule 601

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A CFPCM Certificant shall not reveal - or use for his or her own benefit - without the client’s consent, any
personally identifiable information relating to the client relationship or the affairs of the client, except and to
the extent disclosure or use is reasonably necessary:

(a) To establish an advisory or brokerage account, to effect a transaction for the client, or as otherwise
impliedly authorized in order to carry out the client engagement; or

(b) To comply with legal requirements or legal process; or

(c) To defend the CFPCM Certificant against charges of wrongdoing; or

(d) In connection with a civil dispute between the CFPCM Certificant and the client.

For purposes of this rule, the proscribed use of client information is improper whether or not it actually causes
harm to the client.

Rule 602

A CFPCM Certificant shall maintain the same standards of confidentiality to employers as to clients.

Rule 603

A CFPCM Certificant doing business as a partner or principal of a financial services firm owes to the co-owners
a responsibility to act in good faith. This includes, but is not limited to, adherence to reasonable expectations
of confidentiality both while in business together and thereafter.

Rule 604

Unless compelled to by law, or as required to fulfill a legal obligation, any CFPCM Certificant who by reason of
their membership in the FPSB India is exposed to, learns of or has access to information and knowledge
concerning the FPSB India and/or CFPCM Certificants must keep confidential all such information and
knowledge and is not entitled to communicate or divulge that information or knowledge or any part thereof.

Rule 605

A CFPCM Certificant must, when requested to do so by a client, give to the client or another person authorized
by the client, any original document (not photocopies) related to the provision of financial planning advice
for which the client has paid or will pay for. This does not include documents which have been prepared or
received by the CFPCM Certificant in undertaking the advisory task, such as internal notes, memoranda, quotes
or other working documents.

Rule 606

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A CFPCM Certificant shall take prudent steps to protect the security of the client’s information and property,
including the security of stored information, whether physically or electronically, that is within the CFPCM
Certificant’s control.

PROFESSIONALISM – Rules that relate to the Principle of Professionalism

Professionalism requires behaving with dignity and showing respect and courtesy to clients, fellow
professionals, and others in business-related activities, and complying with appropriate rules, regulations and
professional requirements. Professionalism requires the Financial Planning professional, individually and in
cooperation with peers, to enhance and maintain the profession’s public image and its ability to serve the
public interest.

Rule 701

A CFPCM Certificant shall show respect for other financial planning professionals, and related occupational
groups, by engaging in fair and honorable competitive practices.

Rule 702

A CFPCM Certificant shall not engage in any conduct that reflects adversely on his or her integrity or fitness as
a Member, upon the marks, or upon the profession.

Rule 703

A CFPCM Certificant shall not practice any other profession or offer to provide such services unless the CFPCM
Certificant is qualified to practice in those fields.

Rule 704

A CFPCM Certificant shall effect and maintain professional indemnity insurance in accordance with the
requirements prescribed by the FPSB India from time to time. A CFPCM Certificant must notify the FPSB India
in writing immediately of any material change to its professional indemnity insurance.

Rule 705

A CFPCM Certificant shall not misrepresent the status of their Membership of FPSB India.

Rule 706

A CFPCM Certificant shall not misstate their authority to represent the FPSB India. Specifically, a CFPCM
Certificant shall not write, speak or act in such a way as to lead another to believe that one is officially
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representing FPSB India, unless the CFPCM Certificant has been duly informed to do so by the officers,
directors or rules of the FPSB India.

Rule 707

A CFPCM Certificant shall co-operate with FPSB India in all aspects of any investigation or compliance review
as per the disciplinary rules or procedures set out by FPSB India.

Rule 708

A CFPCM Certificant shall not mislead clients or any other party about the potential benefits of the CFPCM
Certificant’s service.

Rule 709

A CFPCM Certificant who is an employee/agent shall perform professional services in compliance with lawful
objectives of the employer/principal and in accordance with the FPSB India’s Code of Ethics, Professional
Standards.

Rule 710

In all professional activities a CFPCM Certificant shall perform services in accordance with:

(a) Applicable laws, rules, and regulations of governmental agencies and other applicable authorities; and

(b) Applicable rules and other established policies of FPSB India including continuing professional
development requirements, to retain the right to use CFP marks.

Rule 711

A CFPCM Certificant shall notify the FPSB India Member in writing of any conviction of a crime (as defined by
the Member), or any professional suspension or revocation within the time specified by the FPSB India
Member after the date on which the CFPCM Certificant is notified of the conviction, suspension or revocation.

Rule 712

A CFPCM Certificant shall notify the FPSB India of changes to contact information, including e-mail address,
telephone number(s) and physical address, if any from time to time.

Rule 713

The CFPCM Certificant shall provide written information and/or discuss with the client the following:

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(a) Role and responsibilities of each party to the engagement at each stage of financial planning

(b) Terms under which the CFPCM Certificant will use proprietary products;

(c) Terms under which the CFPCM Certificant will use other entities/professionals to meet any of the
agreement’s obligations;

(d) The process for terminating the relationship; and

(e) Procedures for resolution of client claims and complaints against the CFPCM Certificant.

Rule 714

A CFPCM Certificant shall know and reasonably apply the Financial Planning Practice Standards that are
relevant to the scope of the engagement with the client. Any conduct by its Representatives or employees
that relates to conduct of the CFPCM Certificant’s financial planning business shall be treated as the conduct
of the CFPCM Certificant.

Rule 715

A CFPCM Certificant shall ensure that information and relevant documents given to or gathered by the CFPCM
Certificant are securely stored to establish at any time that it has complied with the FPSB India’s Professional
Standards and be available for inspection by the FPSB India when required. Such records shall be retained for
seven years from the date the document was last acted upon.

DILIGENCE - Rules that relate to the Code of Ethic of Diligence

Diligence requires fulfilling professional commitments in a timely and thorough manner, and taking due care
in planning, supervising and delivering professional services.

Rule 801

A CFPCM Certificant shall provide services diligently and on a timely basis.

Rule 802

A financial planning practitioner shall enter into an engagement only after securing sufficient information to
satisfy the CFPCM Certificant that:

(a) The relationship is warranted by the individual’s needs and objectives; and

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(b) The CFPCM Certificant has the ability to either provide requisite competent services or to involve other
professionals who can provide such services.

Rule 803

In preparing oral or written recommendations to clients, a CFPCM Certificant shall collect sufficient
information to ensure appropriate advice can be given.

Rule 804

In preparing oral or written recommendations to clients, a CFPCM Certificant shall conduct or have access to
research on financial strategies and products that may be appropriate to achieve the client’s identified needs
and objectives. A CFPCM Certificant may rely upon an investigation undertaken by a third party provided it is
reasonable to place reliance on the quality of such investigation.

Rule 805

In preparing oral or written recommendations to clients, a CFPCM Certificant must take reasonable steps to
place the client in a position to comprehend the recommendations and the basis for the recommendations.
A CFPCM Certificant should also take due care to explain the nature of the investment risks involved in terms
the client is likely to understand.

Rule 806

A CFPCM Certificant must ensure all significant recommendations are made in writing. If any significant
recommendations are given orally, then confirmation must be given in writing as soon as practicable.

Rule 807

A financial planning practitioner shall make and/or implement only recommendations that are suitable for
the client and all agreed recommendations must be implemented in an accurate, efficient and timely manner.

Rule 808

In certain circumstances, Rules 803 to 805 inclusive will not apply where there is an express documented
instruction by a client to limit or restrict the scope of the financial planning service (e.g., an execution-only
transaction service or advice limited to a particular area or product or where a client refuses to provide
information sought). The client must be warned prior to implementing the relevant transactions about the
consequences of the CFPCM Certificant following the instructions.

Rule 809

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A CFPCM Certificant shall not move a client or cause a client to move from an investment to another
investment without explaining to the client, in terms that the client is likely to understand, the reasons for
the move. The CFPCM Certificant must demonstrate that the move is appropriate for the client.

Rule 810

A CFPCM Certificant shall confirm in writing to a client where a subsequent instruction given by that client
significantly alters the financial strategy or balance of an existing portfolio under the supervision of the
Member.

Rule 811

A CFPCM Certificant shall establish and maintain written policies and procedures for the effective control and
conduct of its business.

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What are CFPCM marks?

CFP marks are owned outside the US by US based FPSB Ltd., and FPSB India is the marks licensing authority
for the CFP marks in India, through agreement with FPSB Ltd.

Financial Planning Standards Board Ltd. owns the CFP marks outside the U.S. and permits qualified
individuals to use these marks to indicate that they have met FPSB's initial and ongoing certification
requirements.
FPSB, US has affiliates across 26 countries globally (India is one of them). These affiliates are licensed to
administer the CFP Certification Program in their territories, e.g. the CFPCM Certification issued by FPSB
India is valid to be practiced in India.

Cross Border Use:

The cross-border use of CFP marks requires a CFP professional certified in one country to obtain certification
in another country also where he or she intends to deliver, directly support or supervise the financial planning
process or holds himself or herself out as a CFP professional.
This is required in view of separate laws relating to taxes, companies, securities transactions and investment
advisory prevailing in different countries. A CFP professional certified in one country can therefore apply and
get certified to use the CFP Marks in another territory by obtaining CFP certification from the authorized body
in that territory. He/she can practice Financial Planning in either or both the countries.

Incidental Use:

There is incidental use of CFP marks by a professional certified in one country while he or she is in another
country to the extent of display on business cards, brochures and articles published. The restricted use of CFP
marks requires a CFP professional to communicate the fact that he or she has obtained CFP certification in
one country is certified to advise on financial planning matters in that country. Thus, the display of CFP marks
in a territory other than the one in which he or she was first certified while delivering, directly supporting or
supervising the financial planning process comes under the incidental usage of CFP marks.

Usage of CFPCM marks:

1. Always use CFP in capital letters and without periods between letters, and with the symbol CM in
superscript, as in CFPCM Certification.

For instance, incorrect usages could be

CFPCM C F P C.F.P. cfp

2. Always use CFPCM as an adjective instead of a noun, e.g. always use CFPCM certification, CFPCM certificant,
CFPCM credential, CFPCM designation, CFPCM exam/examination, CFPCM professional, CFPCM practitioner or
CFPCM mark.

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Incorrect usages are CFP advisor, CFP course, CFP education, CFP program, CFP syllabus, etc.

3. Always use CERTIFIED FINANCIAL PLANNERCM in capitals followed by Certification, Certificant,

Practitioner, Professional, Mark, etc. It should always be used as a descriptive adjective.

Incorrect usages could be Certified Financial Planner, certified financial planner

4. Do not use plurals as in CERTIFIED FINANCIAL PLANNERs or CFPs.

The correct usages are

CERTIFIED FINANCIAL PLANNERCM Professionals; CFPCM Practitioners, etc.

5. The CFPCM or CERTIFIED FINANCIAL PLANNERCM Marks may not be used as part of a domain name. They
may appear as text or images throughout the website, in accordance with FPSB Ltd.’s or FPSB India’s rules
for proper use.

For instance, incorrect use is www.rameshcfp.com

6. The CFPCM or CERTIFIED FINANCIAL PLANNERCM Marks may not be used as part of an e-mail address by
the CFPCM certificants.
For instance, incorrect usages are ramesh@cfp.com

ramesh@cfpcfp.com, rameshs@cfp4u.com, etc.

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Ethics Questions

1) You have mentioned to Aamir that you shall ensure all information and relevant documents given to
or gathered by you are securely stored to establish at any time that it has complied with the FPSB
India’s Professional Standards and be available for inspection by the FPSB India when required. Such
records shall be retained for seven years from the date the document was last acted upon. This is
according to the Code of Ethics of __________.

a) Compliance
b) Professionalism
c) Diligence
d) Objectivity
2) At the earliest point in the relationship, you have disclosed in writing to Ashok that you are
authorized to sell or advise on a restricted range of products, and any other limitation of their
capacity to serve him. You have complied with the Code of Ethics of _________.

a) Compliance
b) Objectivity
c) Diligence
d) Competence

3) What is the correct sequence to perform six steps of Financial Planning Process to prepare a financial
plan for the client?

1. Developing and Presenting the Financial plan

2. Analyzing and evaluating the client’s financial status
3. Implementing the Financial Plan
4. Monitoring the Financial Plan
5. Gather client data and determining Goals and Expectations
6. Establishing Client – Planner Relationships

a) 1, 3, 4, 5, 2, 6
b) 6, 2, 5, 4, 3, 1
c) 6, 5, 2, 1, 3, 4
d) 5, 6, 2, 1, 3, 4
4) Anuj before approaching you has also contacted another CFPCM Practitioner for the preparation of
his Financial Plan. In his first meeting with the practitioner, Anuj asked him the sources of
compensation available to the practitioner by making a Financial Plan for him other than fee. But
the practitioner refused to answer this question by saying that this is out of the scope of
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engagement. According to FPSB India’s code of ethics, the practitioner has violated Code of Ethic of
_________.

a) Objectivity
b) Professionalism
c) Fairness
d) Integrity

5) Which of the following shall you avoid while providing Financial Planning services to Anuj and Sushma
in line with the Ethical and Professional Conduct of CFPCM Certificant entailed by FPSB India?
a) Keep the client informed of developments in the field of Financial Planning.
b) Advice the client in those areas in which you have competence.
c) Seek council of qualified individuals for areas in which you lack adequate competence.
d) Alter existing financial strategy promptly, even without confirming to client, if the change in
circumstances materially impacts the client’s financial goals.

6) Which of the following would not be violation of the “Principle of Integrity” in the performance of your
professional service to Veeru?
a) Exercising reasonable and prudent judgment in dealing with Dr. Vijay.
b) Making misleading claims about the scope and areas of your competence.
c) Giving the impression that you are representing the views of FPSB India.
d) Engaging in conduct involving dishonesty, fraud, deceit or misrepresentation.

7) You as a CFPCM Practitioner use the CFPCM mark as a proclamation to the public that you:
(a) can be trusted with the clients’ financial affairs with confidence.
(b) will competently fulfill the responsibilities owed to the client.
(c) are governed by a professional Code of Ethics.
(d) Possess exhaustive knowledge of all financial matters.

a) (a), (b)
b) (a), (b), (c)
c) (a), (c), (d)
d) All of the above

8) Before beginning work on Sanjay’s Financial Plan, you have drafted a “Letter of Engagement” and sought
Sanjay’s consent on the same. Sanjay asked you about relevance of such a letter. In the context of Financial
Planning Profession, you explain about the “Letter of Engagement” as a _________.
a) professional requirement under Code of Ethics of FPSB India

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b) professional requirement under Practice Guidelines of FPSB India

c) legal contract as per Contract Act 1872
d) document for his personal record

9) Sanjay saw your name with CFP Marks; he wants to know different ways in which the CFP Marks in
India can be written.

i) CERTIFIED FINANCIAL PLANNERCM

ii) CFPCM
iii) CFPcm
iv) C.F.P.
v) CFPCM
vi) Certified Financial PlannerCM

a) i) & ii)
b) ii), iii), vi)
c) iv), v) & vi)
d) ii), v) & vi)

10) Before finalizing the Financial Plan, Sudha tells you that she wants to entrust the estate issues to a
solicitor, who is a friend of her husband. Which of the following is your best stand?
a) Estate issues being substantial in the case, you maintain that the Financial Plan cannot be an
integrated one if the same is outside your purview, hence decline.
b) This is permissible subject to such an arrangement finding an explicit mention in the Financial Plan
for the said activity.
c) This is permissible subject to the advice of the solicitor being integrated into the Financial Plan
and monitored along with the Plan.
d) You agree to the arrangement subject to the advice of solicitor made known to you so that you
modify the Financial Plan accordingly.

11) Prior to providing any Financial Planning services, you a Financial Planning practitioner and Vinay, as your
client shall mutually define the scope of the engagement. The letter of engagement would define the scope
of engagement by discussing
i) Identification of the service(s) to be provided
ii) Financial Planning practitioner’s compensation arrangement(s)
iii) Analysis and evaluation of client’s current situation
iv) Determining the clients and the Financial Planning practitioner’s responsibilities;
v) Establishing the duration of the engagement;

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vi) Determine the strategies to achieve financial goals

a) i), ii), iv) and v)

b) ii), iii), iv) and vi)
c) i), ii), iii), iv) and v)
d) i), ii), v) and vi)

12) While entering into a relationship with you, Pardeep assumed that you being a practicing Certified
Financial Planner, you are fully able to take care of the execution of all aspects of his Financial Plan,
i.e. Taxation, Insurance, Investments, etc. As per FPSB India Code of Ethics, what is the best
proposition in this context?

a) This is the right assumption which can be made about all Certified Financial Planners.
b) The scope and limitations of the services of the Certified Financial Planner needs to be disclosed in
the beginning, specifically in writing, by the Certified Financial Planner to the client.
c) A Financial Planner can never take care of all aspects of a Financial Plan.
d) A Financial Planner is concerned with only making a Financial Plan and not its execution.
13) You have already mentioned to Ramesh that you shall confirm in writing to him where a subsequent
instruction given by him significantly alters the financial strategy or balance of an existing portfolio
under your supervision. You have complied with the Code of Ethics of __________.
a) Diligence
b) Compliance
c) Confidentiality
d) Objectivity
14. Rakesh informed you that prior to consultations with you, he had contacted another CFPCM
practitioner who demanded a flat remuneration of 35% of the “Assets under Management” from Rakesh
for providing his services. Is there any violation of “Code of Ethics” as stipulated by FPSB India by the
earlier Practitioner?

A) This is a matter of mutual consent between the practitioner and the client only.
B) This is a violation of Code of Ethics of Professionalism.
C) This is a violation of Code of Ethics of Fairness.
D) This is a violation of Code of Ethics of Compliance

15) Which of the following usages of the certification mark owned (outside the U.S.) by FPSB Ltd. are
correct?
1. CFP Qualification
2. CFP Certification
3. CFP Education
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4. CFP Professional
5. CFP Practitioner
a) 1, 3 and 4
b) 1, 2 and 5
c) 2, 4 and 5
d) 1, 3 and 5

16. In addition to drafting and executing a Financial Plan for them, Raj wants to know whether you can
provide them some additional services regarding accounting / record keeping and day to day cash
management for their entire household / commercial setup. Does FPSB Code of Ethics prohibit the
practitioner from the same?

a) No as it is strictly prohibited by the FPSB Code of Ethics.

b) No because any Certified Financial Planner is not expected to interfere into day to day cash
management of the client.
c) No because this is completely out of the scope of Financial Planning services.
d) Code of Ethics binds a member not to provide such services unless the member is qualified to
practice in those fields and is certified as required by law.

17. In your initial meeting, to make an impression on your client, you discuss the Financial Plan made by you
for a famous doctor and also his spending habits with Arun. Which Code of Ethics prohibits you to
have such a discussion with Arvind?
a) Code of Ethics of Professionalism
b) Code of Ethics of Confidentiality
c) Code of Ethics of Fairness
d) Code of Ethics of Integrity

18. While interacting with you, Shahrukh came to know about your investing style, viz. Direct Equity
investment and some schemes of Mutual Funds. He wants to know whether you can manage some
of his money in your investments and assign him appropriate share in the profits thereof. As per
FPSB Code of Ethics is it possible for you?

a) Yes
b) Yes, but with prior permission from FPSB against a written proposal letter from Sahil
c) Yes, but with a proper written agreement in which all terms and conditions must be stipulated in
advance
d) No

19. You as a CFPCM certificant have made it clear to Shahrukh that you shall enter into an engagement
with him as a client only after securing sufficient information to be satisfied that:
a) The relationship is warranted by Rahul’s needs and objectives; and
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b) You have the ability to either provide requisite competent services or to involve other
professionals who can provide such services.
You have followed the Code of Ethic of __________.

a) Diligence
b) Professionalism
c) Compliance
d) Fairness

20. Sanjay has asked you a practicing CERTIFIED FINANCIAL PLANNERCM about the ownership of CFPCM mark in
the world. You have explained to him that _________________.

a) CFPCM mark is owned by FPSB India

b) CFPCM mark is owned by FPSB across the world
c) CFPCM mark is owned by CFP Board across the world
d) CFPCM mark is owned by FPSB, Denver (US) outside the United States

21. Sanjay, in a business conference met a CFPCM Practitioner who was one of his old friends. Both of
them were discussing about their professions and businesses and during the talks Sanjay asked for some
recommendation on his personal finances from his CFPCM friend. He suggested Sanjay to come to his
office and he will provide the recommendations in writing. Sanjay asked, is it important to have it in
writing? You as a CFPCM Practitioner explained that all recommendations concerning the financial affairs
of a client should be presented in writing because:
1) It is regarded as best practice under the FPSB India code of ethics and rules of professional
conduct.
2) It provides substantial protection to the planner under common laws against any claims arising
thereof.
3) It will not attract the law of contract to determine the civil rights of both the parties.
4) It gives the client the necessary time to fully consider the planner’s recommendations.
a) 1, 2 and 4 only
b) 2, 3 and 4 only
c) 1 and 4 only
d) 1, 2, and 3 only

22) While preparing Anita's Financial Plan, in all your oral or written recommendations, you have taken
reasonable steps to place Anita in a position to comprehend the recommendations and the basis thereof.
You have also taken due care to explain the nature of the investment risks involved in terms she is likely
to understand. You have complied with the Rules that relate to the Code of Ethic of _________.
A) Professionalism
B) Diligence
C) Fairness
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D) Competence

23. Gautam’s friend Dinesh used to take advice on his investments from a Financial Planner certified by FPSB
India who co-mingled the money of Dinesh with his own money. However, the Financial Planner maintained
good records to segregate both cash flows. Which of the following Principles has his Financial Planner
violated?

a) Integrity
b) Objectivity
c) Fairness
d) Professionalism

24) Some time back Gautam’s investment advisor, also a CFP, recommended him a savings product stating
that it offered an assured annual return of 12%. Gautam was skeptic about the returns and did not invest.
You realize that the product has been misrepresented. In reality it is the simple rate of interest with a lock
in period of 10 years. According to you the advisor has violated.

a) Code of Ethics of Fairness

b) Code of Ethics of Integrity
c) Code of Ethics of Professionalism
d) Code of Ethics of Diligence

25) Sameer has asked you about FPSB India’s nature of constitution. You have explained him that FPSB India
is a_________________

a. Self-Regulatory Organization
b. Professional Standards Setting Body
c. Professional Regulatory Organization
d. A Quasi Government Body

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Additional theory Questions: Important

Retirement planning

1. Rishi wants to know whether he is eligible to withdraw from his Employees’ Provident Fund for purchase
of a bigger house.
a) Yes, as he has been a member of the fund for more than 3 years
b) No, as he has not been a member of the fund for more than 10 years
c) Yes, as he has been a member of the fund for more than 5 years, an provided he purchases
the house in his own name or jointly with his wife
d) Yes, as he has been a member of the fund for more than 5 years, and provided he
purchases the house in his own name or in his wife’s name
2. Veeru’s parents are maintaining a joint Senior Citizen Saving Scheme account in which Veeru is the sole
nominee. He wants to know the status of the account after the demise of either of his parents. Which
of the following is not appropriate in this context?
a) The surviving parent may operate the account alone.
b) The surviving parent can receive the amount deposited and close the account.
c) Veeru, being the nominee, will automatically replace the deceased parent in the joint
account along with the surviving parent.
d) The account may be continued for the remaining term with the surviving parent as the
only holder and Veeru as the nominee

3. Shahid is a member of Employees' Pension Scheme. If he decides to leave his present job at 32 years
of age after 8 years of service what will happen to his existing Pension Scheme?

a) He can either take withdrawal benefit or scheme certificate so that his 8 year service can be added to
any future service that he may put in, in any other covered establishment.
b) He cannot take any withdrawal benefit immediately but can add it to any future service that he may
put in, in any other covered establishment.
c) He can either take withdrawal benefit or scheme certificate only on completion of 10 years of service.
d) He can take withdrawal benefit only.

4. Gurpreet has heard about reverse mortgage. He finds it attractive as it provides a person regular cash
flows from the house property by borrowing against is to meet the living expenses during retirement.
He wants to know the features of the same.
I. Reverse mortgage provides the house owner a stream of income against mortgage of house
while owning and occupying it till lifetime, without repayment or servicing of the loan.
II. The loan amount received from the lender can be used for any purpose by the borrower.
III. The lump-sum or periodical payments received from the lender is not subject to tax in the
hands of the borrower.
IV. The borrower' heir may repay the loan with accumulated interest and have the mortgage
released without resorting to sale of the property.
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(a) I, II, III

(b) I, III, IV
(c) I, III
(d) III, IV

5.Gurpreet has not withdrawn any amount from his PPF account till date. What is the amount of
withdrawal he can make from his PPF account? You inform him that an

(a) amount not exceeding 50% of the balance at the end of 3rd year immediately preceding the year in
which the amount is withdrawn or 25% at end of preceding year whichever is lower
(b) amount not exceeding 50% of the balance at the beginning of 4th year immediately preceding the
year in which the amount is withdrawn or 50% at end of preceding year whichever is lower
(c) amount not exceeding 50% of the balance at the end of 4th year immediately preceding the year in
which the amount is withdrawn or 50% at end of preceding year whichever is lower
(d) amount not exceeding 40% of the balance at the end of 4th year immediately preceding the year in
which the amount is withdrawn or 50% at end of preceding year whichever is lower

6. Rajesh’s father Mr. Gurunath has taken a loan under reverse mortgage scheme against his house in
Gurgaon which is valued today at Rs. 20 lakh. Rajesh is curious to know, if the loan amount being
received by his father will be treated as income and whether the alienation (sale) of property for
recovery of loan attracts capital gains?

a) The amount received by Mr. Gurunath shall be treated as his income and it will be taxable in his
hands and for the purpose of alienation (sale) of property for recovery of loan shall attract capital
gain.
b) The amount received by Mr. Gurunath shall not be treated as his income and shall be exempt
from tax and for the purpose of alienation (sale) of property for recovery of loan shall not attract
capital gain.
c) The amount received by Mr. Gurunath shall not be treated as his income hence shall not be taxed,
for the purpose of alienation (sale) of property for recovery of loan shall attract capital gain.
d) The amount received by Mr. Gurunath shall be treated as his income and it will be taxable in his
hands and for the purpose of alienation (sale) of property for recovery of loan shall attract capital
gain but only in case of death of the mortgagor.

7. Rajesh read a draft offer document that PFRDA has come out with a New Pension Scheme (NPS) for all
citizens of India. He is also thinking to invest in NPS but he is confused with regards to the withdrawal
provisions of the scheme in Tier-I. You are required to provide him with the correct details of the
withdrawal.

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i. If he exits before 60 years of age, he will have to invest at least 20% of the pension wealth to
purchase a life annuity and the rest 80% of pension wealth may be withdrawn as a lump sum.
ii. If he exits on attaining 60 years of age, he will have to invest at least 40% of the pension wealth
to purchase a life annuity and the rest 60% of pension wealth may be withdrawn as a lump sum
or in a phased manner between ages 60 and 70 years.
iii. If he exits before 60 years, he will have to invest at least 80% of the pension wealth to purchase a
life annuity and the rest 20% of pension wealth may be withdrawn as a lump sum.
iv. If he exits on attaining 60 years of age, he will have to invest at least 60% of the pension wealth
to purchase a life annuity and the rest 40% of pension wealth may be withdrawn as a lump sum
or in phased manner between ages 60 and 70 years.

a) i & iv
b) i & ii
c) ii & iii
d) iii & iv

Insurance Planning

1. Akshay wants to know, what would happen to the No Claim Bonus on his car insurance after he sells his
car.
a) He can enjoy the No Claim Bonus on the premium for his new car if he buys it within a specified
period from the date of sale of his old car
b) No Claim Bonus is lost after sale of old car
c) He can enjoy only 50% benefit of the No Claim Bonus on the premium for his new car if he buys
it within a specified period from the date of sale of his old car
d) He can avail benefit of No Claim Bonus on premium paid for Insurance taken for other purposes
from same Insurer

2. Sachin wants to invest in ULIP, but he wants to be cautious before entering a long period of contract.
As Per IRDA ULIP Guidelines, if he wants to return the policy within 15 days free look period what
amount would be refunded to him?

a) He shall be refunded the fund value subject to deduction of expenses towards medical
examination, stamp duty and proportionate risk premium for the period of cover.
b) Full Premium paid is returned back to him.
c) Premium paid less commission paid to intermediary is refunded to him.
d) He shall be refunded the fund value.

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3. Shahrukh wants to buy a life insurance policy on the life of his father as well as both his brothers.
However, in case of any eventuality he wants to reserve all legal rights of receiving the policy benefits
in his name. He wants to know whether it is legally possible for him.

a) Yes, he can buy the policy in the desired way.

b) Yes, but he cannot reserve the right to receive the policy benefits.
c) No, in the absence of insurable interest he cannot buy life insurance policy in their name.
d) He can buy the policy only in the name of his father in the desired way

4. Arun working in a Legal Firm as Legal Advisor is always under an apprehension that his profile of giving
legal advice to clients is full of risk. He plans to take Professional Indemnity Insurance to minimize his
professional risk but he is not sure that what is the scope of the policy? He has approached you for your
advice. You advise that the Professional Indemnity Insurance has the following scope:

A) Any error and/or omission on his/her part committed whilst rendering professional service.
B) Any liability arising out of any criminal act or act committed in violation of any law or ordinance
is not covered.
C) Legal cost and expenses incurred in defense of the case.
D) All of the above.

5. Rajnikant proposed to buy another life insurance policy which also offered Critical Illness Rider for an
additional premium. Rajnikant was considering a sum assured of Rs. 10 lakh for the death benefit and
Rs. 2 Lakh under Critical Illness. Before finalizing the same Rajnikant wants to know that in case he is
identified with a disease, covered under Critical Illness Rider, after 2 years of having taken the policy,
what amount would he receive as claim under the Critical Illness Rider?

a) A sum of Rs. 2 Lakh shall be paid when such a disease is identified and certified by a Doctor
b) Actual Expenses, subject to a maximum of the Rider amount, shall be paid after treatment of
disease.
c) Rider benefit is available only in case of death of the Insured person by the disease.
d) A sum of Rs. 2 lakh shall be paid when disease is identified and another Rs. 2 Lakh shall be
paid at the time of death.

6. One of Sahoo’s close friend, who was driving her car, seriously injured a pedestrian crossing the road.
She wants to know whether it is a punishable offence in law or there are other premises which need
to be established.
(a) Her friend needs to establish that it was a freak case of accident which was unavoidable due to the
circumstances.
(b) The prosecution does not have to prove the offence before law that the accident was a result of rash
and negligent driving, it is prima facie an offence to injure a pedestrian.
(c) Her friend having a valid driving license has to prove her innocence by establishing that the pedestrian
was negligent while crossing the road.

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(d) The prosecution has to prove that the accident was the result of rash and negligent driving before the
offence is established.

7. On account of the death of Govind's wife, he needs to file a claim with the insurance company as the
nominee to his wife's insurance policy. He wants to know what the IRDA (Protection of Policyholder's
Interests Regulations) stipulate in respect of claims procedure.
I. The insurer shall state the primary documents which are normally required to be submitted by a
claimant in support of a claim.
II. Any query or requirement of additional documents shall be raised by the Insurer in a piecemeal
manner within a period of 15 days of the receipt of the claim.
III. Where an investigation is necessary, shall be initiated and completed not later than 6 months
from the time of lodging the claim.
IV Where the claim is pending identification of the rightful beneficiary, the insurer shall hold such
amount and accrue interest rate of 2% over the bank rate in the beginning of the financial year.
(a) I, II, III
(b) I,II, III, IV
(c) I, III
(d) II, IV

8. You have advised Avinash to purchase householders Insurance Policy to insure his house as well as
contents of his house. Avinash discusses with you about the features of Householders Insurance Policy. As
per you, which of the following is not a feature of Householders Insurance policy?

a. Loss or damage by the insured’s domestic staff’s direct or indirect involvement in an attempted burglary
is covered.
b. He can make an endorsement to the policy during the currency of the policy to record alteration related
to change of Insurable interest by way of sale or mortgage.
c. Insured can cancel the policy during the currency of policy and get refund of premium paid (after
adjustment of administrative and other exp.) on pro-rata basis.
d. The Building is insured as per the re-instatement value and the contents are insured as per the market
value.

9. Sonali told you that her ex-husband had purchased a life insurance policy under the MWP Act, 1874 prior
to their divorce. The beneficiaries of the policy are Sonali and their two children. Sonali wants to know the
significance and the benefits of this policy.

1) No alterations can be made by the husband once the policy is commenced

2) The proceeds of such a policy cannot be claimed by the husband or his creditors or form part of the
husband’s estate
3) Alterations can be made by the wife once the policy is enforced
4) The life assured is the wife

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a. 1, 2, 4
b. 1, 2
c. 2
d. 1, 4

10. Urvashi has not bought personal accident insurance cover, though her car is covered for damages from
accident. She wears seat belt and drives carefully. You, as a CFPCM professional, had your following
observation about her risk management?

a. Urvashi has insured the property risk; she controls some of her personal risk and retains the rest of the
risk.
b. Urvashi has transferred her personal risk to other drivers of the road, insured her property risk and can
claim damage if accidents are caused by third party negligence.
c. Urvashi has controlled her personal risk and insured her property risk.
d. Urvashi has not done anything to manage her risks and has to immediately go for accident and personal
risk cover. She cannot rely on third party damages alone to cover the risk of the road

11. Rajinder renewed his car insurance which was due for renewal on 18th March, 2009 by sending out a
premium cheque on 14th March, 2009 to the insurer for Rs. 4,500 towards a sum assured of Rs. 1 lakh. He
received a cover note subject to realization of cheque. Rajinder’s car met with an accident on 27th March,
2009. He enquired from the insurer about his insurance policy for the car and was shocked to learn that the
same was not renewed due to dishonour of his cheque. He seeks your advice regarding admissibility of
insurance claim on the basis of cover note received. You advise that _______.

a. Rajinder is not entitled to the claim amount as the renewal premium cheque was not honoured.
b. Rajinder is entitled to the claim as he got a cover note as a proof of his having renewed the policy.
c. Rajinder is entitled to get full sum assured because the company didn’t inform him about the cancellation
of the contract because of dishonouring of his cheque.
d. Rajinder has to get approval from Insurance ombudsman for clearance of his claim from the insurer.

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Investment Planning

1. You have suggested a strategy which aims to invest more when the share price falls and less when the
share price rises. It is done by calculating predetermined amounts for the total value of the investment in
future periods and then making an investment to match these amounts at each future period. You are
indicating a technique known as _________.

a) Rupee Cost Averaging

b) Value Averaging
c) Economic Cost Averaging
d) Weighted Averaging

2. For the marriage of their children, Ashwin and Sumedha wish to gift each child 200 grams of gold
jewelry. You suggest the following strategy to accumulate gold or its equivalent with lowest cost and
without incurring risks other than those related to gold as a commodity.

(a) They should regularly trade in Gold Futures to profit from rising prices and thus build suitable corpus
to buy gold when required
(b) Buy Gold ETF units of 1 gram each systematically over the period and redeem the same at the time of
marriage to buy gold jewelry
(c) They should invest systematically in a risk-free instrument and redeem the same on marriage to buy
gold jewelry
(d) Buy gold jewelry every year in suitable quantity, get the same exchanged for appropriate jewelry at
their marriage

3. You have found that all the stocks in Mrs. Rukmanidevi’s portfolio move together and have a high
correlation. How will that impact the risk and return of the portfolio?

a. The portfolio will have a return that is the average of the stocks included in it, but have a risk
that is lower than the risk of the stocks.
b. The portfolio will have a return that is the average of the stocks included in it, but have a risk
that is higher than the risk of the stocks.
c. The portfolio will have a return and risk, which lies in the range of risk and return of the stocks
included in it.
d. The portfolio will have a return that is lower than the stocks included in it, but have a risk that
is higher than the risk of the stocks.

4. Gurpreet finds it difficult to select an appropriate scheme for an investment as there are a number of
mutual fund schemes floating in the market. In the degree of importance, he would like to know the
factors you would consider while suggesting an appropriate mutual fund scheme to him.
I. Historical Performance of Scheme
II. Asset Allocation

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III. Risk Profile of Gurpreet vis-a-vis Scheme

IV. Cost Structure
V. Investment Objective vis-a-vis Goal.

(a) V, III, II, I, IV

(b) I, V, III, IV, II
(c) I, III, V, II, IV
(d) V, III, I, IV, II

5. Vijay plans to take a loan from a bank for purchasing a house in Ahmadabad. He wants to know, against
which type of mortgage do the banks normally lend home loan?

a. Simple Mortgage
b. Usufructuary Mortgage
c. English Mortgage
d. Equitable Mortgage

6. During the recent period you feel that the stock market has shown a strong bullish run. The Super
Industry Ltd.’s Shares, which Prabhat bought for Rs. 900 per share about nine months back, are now
at Rs. 1,760 per share. He does not want to sell his shares since he is bullish in the long term. He
wants to protect the appreciation on the stock price from the downside which market may face in
the short term. He approaches you to guide him what strategy he should use. CALL Option of Rs.
1,740 is available @Rs. 60, PUT Option of 1740 is available @ Rs. 50.

a) Buy PUT option

b) Sell PUT Option
c) Buy CALL Option
d) Sell CALL Option

7. Shahrukh and Aamir are good friends and take keen interest in the stock market. Shahrukh by nature is
very speculative while Aamir is a conservative in his approach. They both are bullish on the market and expect
the market to go up. Shahrukh therefore took a long position on April Nifty futures at 3,400 while Aamir
bought one lot of April Nifty call option at 3,400 at a premium of Rs. 100 per unit. The lot size is 50. Assuming
the Nifty closes on the settlement day at 3200, which of the following is a correct statement?

a) Shahrukh will incur a loss of Rs. 10,000 and Aamir will incur a loss of Rs. 5,000.
b) Shahrukh will incur a loss of Rs. 10,000 and Aamir has an obligation to deliver the share on the
settlement date.
c) Shahrukh will incur a loss of Rs. 10,000 and Aamir will incur a loss of Rs. 10,000.
d) Shahrukh will gain Rs. 10,000 and Aamir will incur a loss of Rs. 5,000.

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Ethics & Financial Planning Process

1. Irawati had earlier received calls from certain institutions offering free services of Financial Planning
through their Financial Planners by subscribing to their financial products and services. She asks you the
features of CERTIFIED FINANCIAL PLANNERCM practitioner that distinguishes you from other financial
planners. You tell her that__________.

(I) CFPCM practitioner has to go through an internationally accepted curriculum framework and meet the
given competency profile
(II) A CFPCM practitioner, once certified can follow any institution’s guidelines of Financial Planning without
any recourse to FPSB India
(III) CFPCM practitioner has to meet stringent initial certification standards and continuing education to
remain certified
(IV) CFPCM practitioner has to abide by FPSB India’s Code of Ethics and professional guidelines
(V) A CFPCM certificant has to necessarily do a fee-based Financial Planning
Which of the above are correct?

a. (II) and (V) only

b. (I), (III) and (IV) only
c. (I) and (II) only
d. (I) and (IV) only

2. As per the practice guidelines of FPSB India followed by you, being a CERTIFIED FINANCIAL PLANNERCM
practitioner, which amongst the following is the next step after defining and discussing with Urvashi the basic
terms of the financial plan construction?

a. To collect the general quantitative information of the prospective client

b. To inform the prospective client about the terms of the engagement
c. To define the financial goal of Urvashi
d. To share past financial records of your existing clients with your prospective client in order to
make him comfortable with number and success of your clientele funds

3. While interacting with you during the data collection sessions, Gunjan and Neerja became so impressed
with your professional approach and the trust created that the couple requested you to become a whole
time legal guardian of their kids regarding execution of all required financial steps at every stage in future
even without further recourse to the couple.
As per FPSB Code of Ethics, is this possible for you?

a. Yes
b. Yes, but you can do it in your individual capacity and not in professional capacity.
c. Yes, but in that case, you will not be in a position to charge any professional fee from the couple.

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d. No

4. In establishing relationship with the client, which of the following situations of conflict of interest is not
foreseen in the Financial Planning Practice Standards?

(a) Any circumstances or relationships or facts that would place CFP practitioner's interests in conflict with
the client's interests
(b) Any advice that would be in conflict with financial products/services industry's business interests
(c) Any personal conflict that would affect a CFP practitioner's ability to work successfully with the client
(d) Any circumstances or relationships or facts that would place the interests of one client in conflict with
another client

5. Under Financial Planner Code of Ethics and Professional Responsibility, the principle of Fairness is most
appropriately interpreted to mean that a CFP professional would _______.

(a) assess personal prejudices, feelings and desires in ascertaining the treatment he intended in a similar
situation as the client's
(b) owe the client all due services meant to be fairly provided, without prejudices and with proper balance
of interests
(c) be fair in charging, besides the terms of payment, for the services to be rendered outside the scope of
engagement
(d) treat all clients regarding the same service and deliverables fairly equal

6.Which of the following is an infringing use of CFP marks to describe an individual eligible to use them?

(a) CFP certificant

(b) CFP expert
(c) CFP professional
(d) CFP practitioner

7. Which of the following does not correspond to the principle of “Professionalism” under Financial Planner
Code of Ethics and Professional Responsibility?

(a) Enhancing and maintaining the profession’s public image and its ability to serve the public interest
(b) Complying with appropriate rules, regulations and professional requirements
(c) Behaving with dignity and showing courtesy to clients, fellow professionals and business associates
(d) Appearing in executive attire, using latest gadgets of communication, find dining skills, etc

8. Which of the following is not covered under the principle of “Competence” under Financial Planner Code
of Ethics and Professional Responsibility?

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(a) Attaining and maintaining an adequate level of abilities, skills and knowledge in the provision of
professional services
(b)Consulting appropriately with other professionals or referring to them on realizing that one has
limitations in performance of certain tasks
(c)Committing oneself to a continuing learning process and professional development
(d)Competing in all components of financial planning with the best professionals in order to provide the
client professional service

9. You are a Financial Planner and have been approached by Jack & Jill. Their funds are limited and their
needs are many. Some of their needs are:

(a) To start an investment plan for funding their child's education

(b) To set up a Testamentary Trust for their child
(c) To set up a contingency fund amounting to 3 months of living expenses
(d) To start saving for retirement
(e) To purchase life and health insurance. Arrange these needs in the descending order of priority:

a) c, e, a, d, b
b) d , e ,b ,c ,a
c) b , d, e , a , c
d) b, e , a, c, d
10. In order to prevent unnecessary litigation it is preferable.

Select one:

a) To Determine the terms in the presence of witnesses

b) To verbally determine all the terms and conditions
c) To sign a Letter of Engagement before commencing the six-step planning process
d) To charge the client upfront before preparing the Plan

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 Module VI (Exam 5): Advanced Financial Planning (AFP)
(Also the Challenge Status Exam)
Testing Objectives, Learning Objectives & Detailed Topic List Testing
Objectives:
The test presents a simulated environment for the candidate to have an understanding of
the entire financial situation of a client, the household. The immediate and future cash
flow situation, assets and liabilities, financial goals of the client to meet in the near and
long term, the parameters related to the economy, the market and life are all considered
in arriving at appropriate solutions. The emphasis is on recognizing the laid down
strategies as possible alternatives to seek the most appropriate solutions. The strategies
outlined present the situation before a prospective financial planner to assess and analyze
the given information within the ambit of certain constraints and look out for possible
opportunities. Also envisaged is the critical evaluation of the strategies for the desired
pathway to a financial plan as well as the development of alternative strategies to modify
the plan.

Learning Objectives:

The candidate pursuant to qualifying in this exam shall be eligible to receive CFPCM
certification subject to the fulfillment of the experience criterion and the adherence to
laid down Code of Ethics and Professional Responsibility. Post certification, the candidate
shall be entitled to work as CFPCM professional preparing, executing and reviewing
financial plans of the clients. Thus, a candidate should be able to enter into an
engagement with a client to provide services with respect to one or more components of
financial planning or a comprehensive financial plan which may include its execution and
review as well, under a laid down financial planning process.

The detailed testing methodology as required in different sections for a candidate to

prepare is as follows:
Section – I: Financial Planning Process, Practice Standards and Professional Responsibility

Testing Objective Theoretical testing knowledge: ‘Grade 1’

Theoretical testing clarity of concepts or
basic numerical skills: ‘Grade 2’
Total weight to Exam 5 (each 14%
study)

Nature of Test Items 2 items: 2 marks each

1 item : 3 marks
Sub-section 1: Financial Planning environment
Testing and Difficulty grade
‘Grade 1’

Detailed Topics
1.1 The 6-Step Financial Planning Process

1.2 Client engagement rules, conflicts resolution and documentation

1.3 Financial Planning Practice Standards

1.4 Financial Planner Code of Ethics and Professional Responsibility, Model Rules of
Conduct

Sub-section 2: Financial situation analysis, basic risk profiling and Testing and
factors in financial prudence Difficulty grade

‘Grade 2’
Topics
2.1. Risk Profiling of the client

2.2. Asset profiling, its allocation, liquidity and returns profile

2.3. Financial behavior and financial decision making

2.4. Debt Management

2.5. Personal Financial Statement Analysis

2.6. Net Worth and Financial Ratios

2.7. Loan schedules

2.8. Allocation of resources, cash flow to laid down goals

2.9 Basic and goal-specific asset allocation

Section – II: Risk Analysis and Insurance Planning

Testing Objective Theoretical testing knowledge: ‘Grade 1’

Theoretical testing clarity of concepts or

basic
numerical skills: ‘Grade 2’

Numerical testing analytical skills:

‘Grade 3’
Total weight to Exam 5 (each
study) 18%

Nature of Test Items 1 item: 2 marks

1 item: 3 marks
1 item: 4 marks

Sub-section 1: Insurance as a risk mitigation Testing and Difficulty grade

tool, its outreach, legal aspects and
provisions ‘Grade
1’
Topics
1.1 Insurance concepts and perception of risk

1.2 Assessment and identification of risk exposure

1.3 Types of personal risk covers – Assets, Life, Health

1.4 Insurance contracts and their legal discharge

1.5 Insurance provisions and basis of valuation
 Sub-section 2: Risk assessment and basis of various Testing and Difficulty grade
risk covers
‘Grade 2’

Topics

2.1 Assessment and identification of risk exposure

2.2 Selection of insurance products – purpose, type, coverage and duration

2.3 Basis of various risk covers – reinstatement

2.4 Individual health insurance and family health protection covers

2.5 Critical illness and disability covers

2.6 Various business specific covers

Section – III: Retirement Planning and Employee Benefits

Testing Objective Theoretical testing clarity of concepts or basic

numerical skills: ‘Grade 2’

Numerical testing advanced analytical

skills, strategy evaluation & synthesis:
‘Grade 4’
16%
Total weight to Exam 5 (each study)
Nature of Test Items 1 item: 3 marks

1 item: 5 marks
Sub-section 1: Assessment of retirement needs Testing and Difficulty grade
and options at various life stages of a client
‘Grade 2’

Topics

1.1 Retirement solutions appropriate to the life stage of client

1.2 Time horizons pre-and-post-retirement

1.3 Profile of fixed and financial assets on retirement

1.4 Income generating potential of various assets

1.5 Other income streams supporting retirement expenses
1.6 Assessment and analysis of various pension instruments available – Annuities,
NPS, PPF, EPF

1.7 Consistent savings towards retirement and its monitoring

Sub-section 2: Accumulation and management of retirement corpus; factors

influencing decisions - Testing and Difficulty grade ‘Grade 4’

2.1 Critical assessment of all parameters – economic and client-specific

2.2 Financial objectives on retirement and correct estimation of corpus

2.3 Retirement corpus to accommodate charity, gifts during survivaland

bequeathing
2.4 Monitoring of allocated savings to the retirement corpus

2.5 Estimation of required rate of return and risk management

2.6 Estimation of withdrawal rate and possible retrenchment

2.7 Management of retirement funds near retirement with focus oncapital

protection
2.8 Choosing the right annuity product on retirement and diversifyingincome stream
2.9 Tax efficiency of retirement income streams
2.10 Reverse mortgage as a possible retirement income alternative
Section – IV: Investment Planning

Theoretical testing knowledge: ‘Grade 1’

Testing Objective Numerical testing analytical skills: ‘Grade
3’
Numerical testing advanced analytical
skills, strategy evaluation & synthesis:
‘Grade 4’
Total weight to Exam 5
(each study) 32%

Nature of Test Items 1 item: 2 marks

1 item: 4 marks

2 items: 5 marks each

Sub-section 1: Understanding various Testing and Difficulty grade

products and their profile for goal based investing
‘Grade 1’

Detailed Topics
1.1 Investment products – Fixed income, equity, mutual funds,derivatives,
commodities, small savings, etc.

1.2 Investment risks associated with various products

1.3 Risk profiling of products suited to client’s profile and goal

1.4 Real Estate as an asset category and investment class

Sub-section 2: Asset allocation, measurement of

portfolio risk and returns Testing and Difficulty grade
‘Grade 3’

Topics
2.1 Investing funds in the appropriate Asset Allocation

2.2 Changing asset allocation with change in life stages

2.3 Monitoring progress of investment portfolio

2.4 Measurement of portfolio risks and returns

2.5 Valuation of securities

2.6 Performance analysis of securities, market and portfolios

Sub-section 3: Investment strategies; goal- based Testing and Difficulty grade
portfolio construction, analysis, rebalancing and
optimization ‘Grade 4’

Detailed Topics

3.1 Goal-specific investing in strategic asset allocation

3.2 Monitoring of investment portfolio to assess goal achievement

3.3 Analysis of portfolio returns

3.4 Investment strategies – active and passive

3.5 Systematic investments and Value averaging methods

3.6 Investment styles

3.7 Ascertaining appropriate return to meet goals and devisediversified
portfolio

3.8 Income generating potential of portfolios

3.9 Portfolio rebalancing

3.10 Portfolio optimization

3.11 Systematic redemption of portfolio near goals

Section – V: Tax Planning and Estate Planning

Testing Objective Theoretical testing knowledge: ‘Grade 1’

Theoretical testing clarity of concepts or

basic
numerical skills: ‘Grade 2’
Numerical testing advanced analytical
skills, strategy evaluation & synthesis:
‘Grade 4’
Total weight to Exam 5
(each study) 20%

Nature of Test Items 1 item: 2 marks

1 item: 3 marks

1 item: 5 marks each

Sub-section 1: Tax incidence and relative tax Testing and Difficulty grade
efficiency; Understanding and execution of
‘Grade 1’
succession strategies

Topics

1.1 Comparative tax advantage of various investment products

1.2 Tax compliances

1.3 Tax incidence of various transactions

1.4 Tax efficiency in the transfer of assets

1.5 Characteristics and efficiency of various Estate vehicles

1.6 Provisions of Hindu and Indian Succession Act

1.7 Succession efficiency of all asset transactions

1.8 Estate planning for family business and family trust

Sub-section 2: Tax structure of investment, portfolio,

business forms, status, etc. Testing and Difficulty grade

‘Grade 2’

Topics
2.1 Taxability of various securities transactions

2.2 Tax adjusted returns of investments

2.3 Residency rules and taxation aspects of various status

2.4 Treatment of allowances and perquisites

2.5 Incidence of capital gains and their taxation

2.6 Carry forward and netting of capital gains

2.7 Tax structure of business forms

2.8 Trust structure for Estate planning and tax efficiency

Sub-section 3: Tax liability of various income of Testing and Difficulty grade

clients, business income, investment income and
capital gains, transaction ‘Grade 4’
deals

Topics
3.1 Tax aspects of redemption from investments, portfolios
3.2 Tax liability computation of individual clients

3.3 Tax liability computation of business forms

3.4 Income from house property – self-occupied and rented house

3.5 Taxability of mutual funds – income, capital gains of debt schemes
including dividend reinvestment options

3.6 Bonus and dividend stripping rules while computing capital gains

3.7 Taxability of off-market transactions

Case: Roger
(Reference date: 1st April, 2019)
Roger, aged 29 years, is working with a multinational company since December 2012. You are a CFPCM practitioner and a
Registered Investment Adviser. Roger has approached you for preparing his Financial Plan. He is staying in his own house
at Ahmedabad. His wife Angela, aged 31 years, is a fashion designer. She has set up a boutique in a rented space. She
earned a net profit of Rs. 5.5 lakh in the previous financial year. They have a son, Mark of age 4, and a year old daughter,
Stephanie. Roger is also supporting his parents to the extent of Rs. 20,000 per month. They stay at their ancestral house at
Surat. The family’s monthly household expenses are Rs. 40,000 p.m. (excluding insurance premium and EMIs). Roger
normally gets 10% increase in his gross salary year-on-year in the beginning of every financial year, apart from bonus. The
bonus for the previous financial year at Rs. 3.3 lakh (net of tax) shall be credited to his account at the end of this month. He
has taken a family floater Health policy for Rs. 15 lakh (premium paid in the previous year is Rs. 16,268).
Roger’s monthly salary (for FY2019-20):
Basic Salary : Rs. 60,000
DA (forming part of Salary) : 50% of Basic salary
House Rent allowance : Rs. 18,000
Conveyance Allowance : Rs. 6,250
Executive Allowance : Rs. 10,000

Couple’s Current Assets & Liabilities (As on 31st March, 2019)

Assets:
House : Rs. 75.00 lakh (Current market value, purchase cost Rs. 40 lakh)
Car : Rs. 4.00 lakh (Depreciated value)
Public Provident Fund - PPF1 : Rs. 4.90 lakh
Insurance – Money Back policy2 : Rs. 3.00 lakh (Sum assured)
Child Plan – Life insurance3 : Rs. 12.00 lakh (Sum Assured)
4
Gold ornaments : Rs. 4.50 lakh
Equity Mutual Fund schemes5 : Rs. 7.85 lakh
Portfolio of Equity Shares6 : Rs. 3.95 lakh
Bank fixed deposits7 : Rs. 4.00 lakh (Principal, in Angela’s name from her business income)
Bank account – Roger : Rs. 0.75 lakh
Bank account – Angela : Rs. 0.95 lakh
Liabilities:
Home loan8 : Rs. 17.85 lakh (Principal outstanding)
Car Loan9 : Rs. 3.05 lakh (Principal outstanding)

1
Opened in December, 2013 in the name of Roger
2
Purchased on 25th October, 2015; annual premium paid Rs. 14,798; 20-year policy with 20% of sum assured payable on survival on 5th, 10th
and 15th years and the balance on maturity
3
Purchased when Mark was 2 year old; term of 20 years; annual premium Rs. 41,374
4
Gifted on marriage in November 2013 at then value Rs. 1.75 lakh.
5
Three schemes; current assets value in one scheme is Rs. 2.5 lakh, in second Rs. 3.5 lakh with monthly Systematic Investment Plan (SIP) of Rs.
10,000; the third is Equity Linked Saving scheme, invested Rs. 1 lakh in March 2017.
6
The Demat account in which Roger and Angela are respectively first and second holders was started in 2015
7
Three deposits; Rs. 2 lakh made on 1-July-2016 for 3 years at 9.75% p.a., Rs. 1 lakh made on 1-July-2017 for 2 years at rate 9.25% p.a. and Rs.
1 lakh made on 1-July-2018 for 1 year and 1 day at 8.75% p.a. (interest is payable quarterly and is credited to Angela’s account)
8
Home loan of Rs. 24 lakh for a 15-year term taken in April, 2013 at rate of interest fixed for first 3 years at 10% p.a., and floating thereafter at
1.5% above RBI Repo rate.
9
Car loan of Rs. 5.5 lakh taken in April, 2017 at a fixed interest of 11% p.a. for a 4-year term; Car cost Rs. 8 lakh.

1
Goals:
1. Accumulate in a fund, higher education expenses of Mark and Stephanie. Expenses at their respective age of 18 years
are Rs. 4 lakh p.a. (current cost) required for four years, cost escalation 8% p.a.
2. Marriage expenses of Rs. 10 lakh (current cost) for each child at around their respective age of 25 years, cost escalation
9% p.a.
3. Retirement corpus at Roger’s age of 58 years to sustain current equivalent household expenses until the expected life
of last survivor; retirement expenses to be drawn using two asset class buckets.
4. A bigger house valued at Rs. 1 crore today, 5 years from now by disposing of the current house and foreclosing the loan.
5. Build a separate fund for vacation expenses of Rs. 1.5 lakh p.a. (current cost), first expenses to be drawn after 5 years
and thereafter every year continuing up to the year of Roger’s retirement, cost escalation 7% p.a. A suitable investment
regime needs to be devised to achieve this.
Life Parameters:
Roger’s expected life : 75 years
Angela’s expected life : 80 years

Assumptions regarding gross returns in various asset classes:

1) Equity & Equity MF schemes/ Index ETFs : 11.00% p.a.
2) Balanced MF schemes : 9.50% p.a.
3) Bonds/Govt. Securities/ Debt MF schemes : 7.50% p.a.
4) Liquid MF schemes : 6.00% p.a.
5) Gold and linked investments : 6.00% p.a.
6) Real Estate appreciation : 6.50% p.a.
7) Bank/Post Office Term Deposits : 6.50% p.a. (for tenure exceeding 1 year)
8) Public Provident Fund/EPFO : 7.75% p.a.
Assumptions regarding economic factors:
1) Inflation : 4.50% p.a.
2) Expected return in Risk free instruments : 5.00% p.a.

Cost Inflation Index:

FY CII FY CII FY CII FY CII FY CII

2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272
2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280
2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289
2004-05 113 2008-09 137 2012-13 200 2016-17 264

2
1) Before beginning work on Roger’s Financial Plan, you have drafted a document outlining the scope of engagement
and sought Roger’s help to mutually define and determine the activities that may be necessary to pursue. Roger
asked you about relevance of such a document. What do you explain about “Letter of Engagement”?
[2 marks]
A. It is a professional requirement under FPSB’s Code of Ethics.
B. It is a professional requirement under FPSB’s Practice Guidelines.
C. It is a necessary legal requirement as per Contract Act 1872.
D. It is a document for his personal record.

2) You have finished analysis of Roger’s financial situation and risk profile. Which of the following is the next
appropriate step in the financial planning?
[2 marks]
A. Specify financial goals which can be achieved within Roger’s financial situation based on the information
collected
B. Fix the scope of engagement based on the available information already collected
C. Consider such assumptions of investment returns, inflation, tax rates, etc as to maximize the chances of
achieving Roger’s goals
D. Identify other issues that may potentially impact Roger’s ability to achieve financial goals

3) You are constructing a financial plan for Roger in your capacity as a Registered Investment Adviser. Roger asks you
to bring the execution of financial plan also in the “scope of engagement”. What will you tell him?
[3 marks]

A. You can provide execution services outside the scope of engagement, which will not be documented in the
letter of engagement.
B. You can provide execution services through one of your trusted distributors, who you will supervise. The
remuneration aspect will not form part of the scope of engagement for financial planning.
C. In order for you to comply with SEBI regulations, execution services will be provided by one distributor, who is
part of your family. Initial commission received will be shared with Roger, but not subsequent trail
commissions. This shall not be part of the scope of engagement.
D. As a Registered Investment Adviser, you are mandated to comply with segregation of advisory and its
execution at the client level. The execution services can be independently sourced from another professional.

4) Roger wants to insure his own house at Ahmedabad and his ancestral house ay Surat. What should you advise him
as the basis of such insurance?
[2 marks]

A. Insure the houses for values equal to their respective reconstruction cost, used to bring each house back to its
original condition, in case of happening of defined perilous event/s.
B. Insure the houses equal to their respective market values as applicable to similar house/s situated in the same
locality.
C. Insure the houses for their respective stamp duty value considered at the time of registering the property in
the name of Roger and his father.
D. Insure to the extent of the houses’ respective municipal values, on the basis of which house tax is levied by
the local municipal authority.

3
5) The child plan in the name of Mark has a deferment period of 10 years and vesting date being the policy renewal
date after Mark attains majority. 25% of the sum assured can be withdrawn in each of the first three years from
the vesting date. How do you explain this policy feature to Roger?

[3 marks]
A. The sum assured shall be applicable when Mark attains 18 years of age; withdrawal of Rs. 3 lakh each can be
made during age 18, 19 and 20 of Mark, and full maturity on his age 22.
B. The sum assured shall be applicable when Mark attains 10 years of age; withdrawal of Rs. 3 lakh each can be
made during age 18, 19 and 20 of Mark.
C. The sum assured shall be applicable when Mark attains 12 years of age; withdrawal of Rs. 3 lakh each can be
made during age 19, 20 and 21 of Mark.
D. The sum assured shall be applicable when Mark attains 18 years of age; withdrawal of Rs. 3 lakh each can be
made during age 12, 13 and 14 of Mark.

6) You observe that Roger is not covered adequately in case of any exigency with his life. You estimate an exclusive life
cover to sustain 75% of current household expenses, after deducting 20% towards consumption by Roger himself.
Such expenses required shall account for inflation year-on-year and shall sustain until Sumedha’s expected life. You
consider the proceeds of the policy invested in a debt mutual fund scheme, the returns wherefrom have an average
tax impact of 8%. What sum assured of such term insurance do you determine?
[4 marks]
A. Rs. 81 lakh
B. Rs. 86 lakh
C. Rs. 1 crore
D. Rs. 1.08 crore

7) Roger tells you that he did not opt for his employer’s retirement plan. You analyze the current financial situation of
the family in order to independently construct a retirement plan. You have studied and discussed with the family
economic and life parameters. What processes do you find relevant to follow in preparing a retirement plan for
Roger and Angela?
[3 marks]
A. Invest whatever little they can have towards dedicated retirement savings in equity assets; the couple still
more than 25 years left to retire, there can be always be a catch-up with larger contributions later; the
important goals of children’s education, repaying loans, etc. should take precedence.
B. Invest a fixed sum in debt instruments on an ongoing basis up to retirement. Create fixed assets such as a
second house which can be let out prior to as well as post retirement to generate a steady secondary
retirement income.
C. Estimate the size of retirement fund needed on retirement considering life expectancy of the last survivor;
find out the amount of periodic saving that can be directed to an asset allocation for wealth building in the
long term to realize such retirement fund; also identify assets that can be held till retirement which can be
liquidated/converted to yield a supplementary retirement income.
D. Focus on other important goals such as children’s education, Angela’s business, etc. Retirement is still some
30 years away and with good asset base in general, funds can be carved out later to address the retirement
goal.

4
8) You draw a retirement fund strategy, in consultation with Roger and Angela, to draw the retirement expenses
from two buckets: Bucket One has first 5 years of expenses drawn from liquid funds; Bucket Two has the expenses
for the remaining years until the expected life of the last survivor, drawn from debt funds. You suggest that in
order to cover risk of longevity, they should have a buffer of a lump sum Rs. 1 crore available at the expected life
of Roger which should be invested on retirement in the balanced funds. Consider the current household expenses
adjusted for inflation count for retirement expenses, which are drawn year in the beginning for every year from
the respective buckets. What value of retirement corpus do you advise the couple to accumulate?
[5 marks]
A. Rs. 2.90 crore
B. Rs. 3.28 crore
C. Rs. 4.25 crore
D. Rs. 3.04 crore

9) You inform Roger and Angela about taking exposure to Gold as an asset class through Sovereign Gold Bonds (SGB).
Which of the attributes about the SGB is correct?
[2 marks]
A. The Capital Gains on redeeming these bonds on maturity are exempt from income tax.
B. They work like zero-coupon bonds.
C. The quoted prices of SGBs usually are very close to ruling Gold prices.
D. The redemption price on maturity is guaranteed not to be below the issue price of the respective SGB.

10) You make a strategy to provide for the vacation expenses of Roger’s family. Based on his goal what parameters
shall you consider?
[4 marks]
A. The goal being five years from now, Roger is advised to invest in bond funds a certain sum of money every
year. Any windfall of money including bonuses can be directed to this fund to make it self-sustaining.
B. You advise Roger to invest the present value of money required in the fifth year in 5-year fixed deposit of bank
to gain advantage of taxes, and repeat the exercise every year until five years from retirement.
C. The vacation goal is aspirational; has high cost escalation. Roger can consider moderate to high risk
instruments to invest a certain sum of money. He is advised to postpone withdrawal from fund if the corpus
after 5 years is not sufficient. In future, higher amount can be directed to this fund.
D. You advise Roger to invest a lump sum equal to three initial years’ vacation expenses in a liquid fund for tax
efficiency, with a certain sum every year in tune with escalated cost of vacation in the same fund to retain the
tax efficiency of withdrawals towards vacation.

11) Towards the goal of marriage of their children, you suggest Roger to make maximum permissible subscriptions to
his PPF account in the beginning of every financial year and extend the account twice beyond initial maturity for
terms of 5 years each with similar subscriptions. The third term of 5 years is continued without further
contribution. Roger shall withdraw about 50% of accumulation for the marriage expenses of Mark and the
remaining for the marriage expenses of Stephanie. What are the expected individual withdrawals and shortfalls in
meeting the marriage expenses?
[5 marks]
A. Mark Rs. 51.5 lakh, 16% shortfall; Stephanie Rs. 64.8 lakh, 18% shortfall
B. Mark Rs. 50.5 lakh, 17% shortfall; Stephanie Rs. 63.2 lakh, 20% shortfall
C. Mark Rs. 52.3 lakh, 14% shortfall; Stephanie Rs. 65.9 lakh, 17% shortfall
D. Mark Rs. 45 lakh, 26% shortfall; Stephanie Rs. 56.7 lakh, 28% shortfall

5
12) For the higher education expenses for Mark and Stephanie, Roger starts accumulating funds with monthly
investment of Rs. 20,000 in an aggressive asset allocation yielding 12% p.a. After 7 years the allocation is
moderated to yield 9% p.a. and while the investment is raised to Rs. 30,000 p.m. After 12 years, the funds
accumulated are shifted to suitable debt instruments from which distribution towards higher education is made as
proposed. What excess/shortfall of funds you expect after 12 years by following this investment strategy?
[5 marks]
A. Shortfall Rs. 44.72 lakh
B. Shortfall Rs. 20.26 lakh
C. Shortfall Rs. 19.12 lakh
D. Excess Rs. 27.59 lakh

13) Roger asks for your guidance regarding different modes of tax efficient estate planning which can help in creating
and distributing family assets. You opine that a Trust would be a more appropriate option because______.
[2 marks]
A. there is no taxation applicable on trust income
B. they have fixed rate of tax which is far lower than tax rates for individual assessees
C. future capital gains tax on assets transferred to trust could be lower
D. all future earnings from assets transferred to trust are exempt

14) Roger’s equity portfolio has 1,000 shares of M/s. ABC Ltd. which he accumulated very close to the average cost of
Rs. 1,205, transactions conducted between April 2015 and July 2017. The grandfathering price of M/s. ABC Ltd. as
on 31st January, 2018 on the National Stock Exchange was Rs. 1,380. Roger wishes to sell entire holding of the
company at a target price of Rs. 1,650 before April 15, 2019. What would be approximate tax payable on this
transaction in the assessment year 2020-21?
[3 marks]
A. Data insufficient; unless exact dates of purchase and respective cost prices are available, tax cannot be
computed.
B. Long term capital gains of Rs. 2.70 lakh subject to the category exemption of Rs. 1 lakh, taxable at 10.4%.
C. Nil taxation.
D. Long term capital gains of Rs. 4.45 lakh subject to the category exemption of R. 1 lakh, taxable at 10.4%.

15) Angela wants to invest the maturity proceeds of all her fixed deposit investments in a series of Sovereign Gold
Bonds (SGB). You advise her to invest in a series issued in 2016 which is being quoted at 2,900 since long against
its face value of Rs. 3,150 having coupon of 2.75% p.a., with interest payment dates being 30th September and 31st
March. If she could purchase the said SGBs at the given quoted price, what tax liability would she have for AY2020-
21 solely on account of maturity of her fixed deposits and its subsequent investment in SGBs?
[5 marks]
A. Rs. 9,375 is added to Angela's income under "Income from Other Sources" and is taxable at tax slab
applicable to her.
B. Rs. 33,803 is added under "Income from Other Sources" to Roger’s or Angela's income, whichever is higher,
and is taxable at tax slab applicable.
C. Rs. 61,928 is added to Angela's income under "Income from Other Sources" and is taxable at tax slab
applicable to her.
D. Rs. 21,589 is added to Angela's income under "Income from Other Sources" and is taxable at tax slab
applicable to her.
6
Case 2: Ms. Urvashi (Reference Date: 1st April, 2019)
Ms. Urvashi, aged 34 years, is employed in a senior position in a Mumbai-based firm. She has a son Suryansh aged 14
years and a daughter Dhruvi aged 9 years. She is the sole guardian of her children pursuant to her recent divorce. She
is currently residing in a rented house. Suryansh has just passed 8th standard while Dhruvi is studying in 3rd standard.
She has approached you, a CFPCM practitioner, for preparing a Financial Plan for her family. She has plans to retire early
from service at her age of 55 years. She shares the following financial information with you:

Salary Income (2019-2020) Annual (Rs. lakh)

Basic Salary : 25.00
Employer’s contribution to NPS : 2.50
HRA : 5.00
Other allowances and reimbursements : 3.00
Regular Outgoings: Monthly (Rs.)
Basic Household Expenses : 40,000
Services availed : 18,000
School Fees : 25,000
House Rent : 35,000
Power, Telecom & Fuel : 12,000
Car Loan EMI : 18,275
Outgoings towards investment and insurance: (Rs.)
Equity Mutual Fund1 : 25,000 (Systematic Investment Plan - SIP)
Debt Mutual Fund2 : 15,000 (Systematic Investment Plan - SIP)
Insurance Premium3 ` : 38,759
Health Insurance Premium4 : 27,631
Car Insurance Premium : 8,637
Assets: (Valued on 31st March, 2019) (Rs. lakh)
Equity Mutual Fund schemes : 15.45
Debt Mutual Fund schemes : 7.65
Equity Shares in Demat Account : 23.92
Equity Linked Saving Scheme5 : 3.85
National Pension System (NPS) balance : 21.87
Public Provident Fund (PPF) A/c6 : 6.59
Gold & Diamond Jewellery : 10.75
Car7 : 4.50
Bank Account (Salary) : 3.82
Fixed Deposits8 : 6.00
Deposit with House Owner : 3.00

Liabilities: (Outstanding on 31st March, 2019) (Rs. lakh)

Car loan : 5.70

1
Diversified open-ended growth equity schemes; started 3 years ago with initial investment of Rs. 1 lakh; monthly SIP
2
Long duration debt schemes with growth option, started 3 years ago, initial investment of Rs. 1 lakh; monthly SIP
3
Total Cover Rs. 1.5 crore across three policies of Rs. 50 lakh each, all term plans having cover up to Urvashi’s age of 50, 53 and 58 year
respectively; annual premium
4
Total cover Rs. 20 lakh on two policies, one is floater Rs. 10 lakh cover, the other in Urvashi’s name; annual premium
5
Invested Rs. 1 lakh in each of the previous three financial years in March every year
6
Account opened on 21st December 2014
7
Purchased on 1st March 2016 by availing a loan for Rs. 10 lakh (80% loan to value, 6-year, 9.5% p.a.)
8
Six Fixed Deposits each of Rs. 1 lakh at 7.75% p.a. interest, maturing on 1st date of months from April to September 2019, all deposits
created from 15th September 2017 to 20th October 2017 on weekly intervals.
1
Goals:
You, in consultation with Urvashi, have crystallized the following financial goals, for which the strategy is to be devised
and presented to Urvashi:

1. Purchase a house in the next three years costing currently Rs. 1.25 crore; provide for own funds, transfer and
stamp duty expenses to the extent of 30% of market value.
2. Expenses toward professional courses to be pursued by children with current outlay of Rs. 25 lakh each
required at their respective age of 22 years, such costs escalating at 8% p.a.
3. Marriage expenses of Rs. 10 lakh (current cost) for each child at their respective age of 27 years; cost
escalation for such expenses is 6% p.a.
4. Retirement at age 55, to provide for current lifestyle at Rs. 1 lakh monthly till her expected life.
5. Vacation fund for alternate year travel starting from next year until she reaches age 74; current annual costs
are Rs. 5 lakh escalating annually at 7%.
Life Parameters:
Urvashi’s expected life currently estimated : 85 years

Assumptions regarding gross returns in various asset classes:

1) Equity & Equity MF schemes/ Index ETFs : 11.00% p.a.
2) Balanced MF schemes : 9.50% p.a.
3) Bonds/Govt. Securities/ Debt MF schemes : 7.50% p.a.
4) Liquid MF schemes : 6.00% p.a.
5) Gold and linked investments : 6.00% p.a.
6) Real Estate appreciation : 6.50% p.a.
7) Bank/Post Office Term Deposits : 6.50% p.a. (for tenure exceeding 1 year)
8) Public Provident Fund/EPFO : 7.75% p.a.
Assumptions regarding economic factors:
1) Inflation : 4.50% p.a.
2) Expected return in Risk free instruments : 5.00% p.a.

Cost Inflation Index:

FY CII FY CII FY CII FY CII FY CII

2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272
2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280
2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289
2004-05 113 2008-09 137 2012-13 200 2016-17 264

2
1) You are about to present the financial planning recommendations to Urvashi. You have a look at the checklist
of things to do at this stage. What would you do that you could have previously missed?
[2 marks]
A. Present your logic on how risks have been mitigated in your recommendations.
B. Disclose any conflict(s) of interest and how they impact your recommendations.
C. Draw a future roadmap to convince Urvashi on how various goals would be achieved with the
recommendations being made.
D. Seek Urvashi’s approval to the recommendations by presenting instances of your clients who have been
benefited in the past.

2) Urvashi wants to understand the rationale of having the periodic review of financial plan that you propose to
prepare. Which one shall you avoid to mention?
[2 marks]
A. To find out if adjustments to the earlier recommendations are required due to changes in any personal or
economic conditions.
B. To assess the progress towards achieving the goals as per recommendations.
C. To comply with the 6-step financial planning process, the review being the last step.
D. To confirm that the recommendations as agreed are implemented as per roadmap.

3) Urvashi wishes to avail housing loan to the extent of 70% of the value of the desired house in the next 3 years.
She wants to fully repay the loan by the time she intends to retire. You consider 8.5% p.a. as the average
interest rate on the housing loan to be availed. She asks you by how much EMI on the loan would exceed her
current monthly outgo towards house rent.
[3 marks]
A. Rs. 103,653
B. Rs. 44,228
C. Rs. 56,353
D. Rs. 60,703

4) Looking at Urvashi’s various insurance policies and the coverage they provide, what is the most appropriate
conclusion from the following?
[2 marks]
A. Urvashi needs to take cover against disability and critical illness as she is the only earner in the family;
other risks are well covered.
B. Urvashi has to take personal accident cover which is required as she drives her own car.
C. Urvashi’s life cover falls drastically after 53 years of age, she needs additional coverage till 60 years of her
age.
D. Urvashi needs comprehensive householder policy considering that she is single parent, is employed and is
with small children.

5) Urvashi wants to create a Trust that would receive a corpus, in case of any eventuality with her life, towards
managing her children’s living and educational expenses estimated at Rs. 10 lakh annually, inflation-adjusted,
at 8% annual escalation, till her younger child attains 27 years of age. The expenses are supposed to be drawn
from Debt instruments. What additional insurance cover do you estimate?
[3 marks]

A. Rs. 23 lakh
B. Rs. 37 lakh
C. Rs. 1.37 crore
D. None, the existing life insurance cover is enough.

3
6) You, in consultation with Urvashi, adopt a different yardstick for assessing the adequacy of her life insurance.
You estimate that Rs. 15 lakh in current terms would be enough to sustain the children’s sustenance including
their specific goals. Urvashi wishes that this amount be incrementally available year-on-year at 5% escalation
to provide income support until the respective age 30 of each child. You estimate drawing this income stream
from appropriate mix of debt instruments in which the claim amount would be invested in case of Urvashi’s
life exigency. What should be the ideal life insurance cover?
[4 marks]
A. Rs. 2.80 crore
B. Rs. 2.06 crore
C. Rs. 2.51 crore
D. Rs. 2.27 crore

7) Urvashi wants to fix her retirement goal by her age of 45 years by buying a 10-year deferred annuity product
which shall provide cash flow as per her retirement goal. What funds do you estimate to buy the deferred
annuity of yield 6% p.a?
[3 marks]
A. Rs. 2.93 crore
B. Rs. 4.12 crore
C. Rs. 2.17 crore
D. Rs. 2.65 crore

8) Urvashi’s retirement corpus as per her goal takes into account current Rs. 1 lakh drawn from 6.5% p.a. yield
instruments. She expects her NPS contributions to rise by 5% year-on-year with matching contribution from
employer as well. She would invest the maximum permissible subscription in the beginning of every financial
year, starting immediately, in her PPF account and would extend the account till her proposed retirement with
same discipline. You estimate average returns from NPS and PPF in the investment phase to be 7.5% p.a. and
6.5% p.a., respectively. What proximity of achieving Urvashi’s retirement goal do you assess by following this
strategy?
[5 marks]
A. Rs. 1.23 crore
B. Rs. 1.57 crore
C. Rs. 1.50 crore
D. Rs. 1.32 crore

9) Urvashi is investing through systematic investment plan (SIP) in equity and debt mutual fund schemes instead
of taking direct exposure to equity shares and corporate bonds. Which of the following risks are sought to be
reduced in her investment mode?
[2 marks]
A. Concentration risk and liquidity risk
B. Market Risk and interest rate risk
C. Systemic Risk
D. Credit risk, governance and compliance risk

4
10) Urvashi wants to set aside a portion of her equity portfolio for the marriage of her children as per goal. You
advise to redeem a part of such apportioned portfolio 3 years before the marriage of Suryansh and invest in
secured debentures of coupon 6.5% p.a. with 3 years’ maturity. The same strategy shall be repeated for
Dhruvi’s marriage expenses. The interest is cumulated and payable on respective maturity of each series of
debentures. What do you estimate as the size of the equity portfolio to be carved out today to meet marriage
goal expenses using this strategy?
[4 marks]

A. Rs. 8.16 lakh

B. Rs. 11.16 lakh
C. Rs. 11.32 lakh
D. Rs. 9.37 lakh

11) Urvashi wants a lump sum to be invested immediately toward a vacation fund as per her goal. She would
additionally contribute a certain fixed amount this year coinciding with receipt of her bonus and would repeat
it every year until her proposed early retirement. Consider such contributions in June every year and
withdrawal toward vacation to be in December. You consider a portion from equity shares in her demat
account, being ETFs equal in value to Rs. 12.78 lakh today, to dedicate as lump sum immediate investment for
the goal. You consider annual contributions to the same ETFs. What annual contributions should be directed to
achieve this goal?
[5 marks]

A. Rs. 6,28,518
B. Rs. 4,49,932
C. Rs. 4,37,562
D. Rs. 4,08,671

12) Urvashi wants to fund from her equity mutual fund schemes, the professional courses of her children as per
goals. You advise to rearrange her equity mutual fund schemes into four different strategic theme equity
funds to give a combined return of 12.5% p.a. Also, regular monthly investments are started immediately in
the same funds. As per a risk-off strategy made, half of the funds required for each child’s professional course
will be redeemed three years and one year prior to actual requirement in an assured return instrument of
6.5% and 5%, respectively. What do you estimate as the size of monthly investments in rearranged theme
equity schemes in the next 12 years to achieve goals using this strategy?
[5 marks]
A. Rs. 6,716
B. Rs. 75,149
C. Rs. 27,603
D. Rs. 1,11,341

5
13) Urvashi, in case of her life contingency, is apprehensive about managing the affairs of her children. You advise
her to set up a common Minor Beneficiary Trust for Suryansh and Dhruvi. What do you put forth as your
argument?
[2 marks]
A. Such a Trust shall protect assets transferred and shall manage them as per guidelines issued to the
trustee until either or both of her children reach/es a specified age to be defined by Urvashi
B. Such a Trust shall protect and manage assets for her children only until they individually reach majority,
i.e. 18 years of age
C. Such a Trust shall not take further resources/assets/inheritances once the benefits have been
transferred to it and the guidelines specified by Urvashi for their use
D. Such a Trust shall strictly prevent early distribution of assets before both Suryansh and Dhruvi attain
majority, i.e. 18 years of age

14) Urvashi has 7,500 shares of an unlisted company in physical form which he acquired in private equity offering
at Rs. 10 per share in March 2012. She has got an offer to transfer these for a consideration of Rs. 4.25 lakh.
What would be the tax liability of this transaction alone for AY 2020-21?
[3 marks]

A. LTCG tax of Rs. 1,09,200

B. LTCG tax of Rs. 63,898
C. STCG tax of Rs. 36,400
D. STCG tax of Rs. 72,800

15) Urvashi does not want to continue with her investment in debt mutual fund scheme. You observe that the
initial investment was made at NAV of Rs. 17.521 on March 1, 2016 and SIP of 36 months is continued on 15th
of each month since April, 2016. The current NAV at which the fund value is quoted in her assets is Rs. 26.238.
What would be the tax liability for the redemption transaction alone for AY2020-21 if all the units in the debt
mutual fund scheme are redeemed at this NAV today?
[5 marks]
A. Rs. 26,000
B. Rs. 30,960
C. Rs. 23,130
D. Rs. 33,830

6
Case – A:
(Reference date: 1st April, 2019)

Ashwin, aged 34 years, is employed with an oil exploration company since December 2013. He is an
engineer, and works in a team that manages oil rigs worldwide. He tours extensively in this connection.
He has approached you, a CFP practitioner, for preparing his Financial Plan. He is staying in his own
house at Vadodara. His wife Sumedha, aged 31 years, is working in a private sector bank as Manager.
They have a son Prateek aged 4 years, and a year old daughter Aslia. The monthly house hold expenses
of the family are Rs. 70,000 p.m. which exclude loan repayments and insurance premium. The parents of
Ashwin stay in their ancestral house at Bikaner. His father is engaged in a small business.
Remuneration details of Ashwin for the Financial Year 2019-2020 (monthly figures)
Basic Salary : Rs. 60,000
DA or Dearness Allowance1 : 50% of Basic salary
House Rent allowance : Rs. 15,000
Conveyance Allowance : Rs. 7,500
Entertainment Allowance : Rs. 7,500
PF & Superannuation : 12% of Basic Salary
Remuneration details of Sumedha for the Financial Year 2019-2020 (monthly figures)
Basic Salary : Rs. 40,000
Dearness Allowance (DA) : 30% of Basic salary
House Rent allowance : Rs. 10,000
Conveyance Allowance : Rs. 3,000
Executive Allowance : Rs. 7,500
NPS contribution by employer : 10% of Basic Salary + DA
Joint Assets & Liabilities as on 31st March, 2019
Assets: (In Rs. lakh)
House : 75.00 (municipal value)
Car : 3.50 (depreciated value)
EPFO account of Ashwin : 14.69
NPS account of Sumedha : 2.82
PPF account of Ashwin : 6.20 (account matures on 1st April 2026)
2
Insurance – Money Back policy : 4.00 (sum assured)
Child Plan – Life Insurance3 : 20.00 (sum assured)
Gold ornaments : 6.50
4
Sovereign Gold Bonds : 2.90 (quoted value)
Equity Mutual Fund schemes5 : 11.87 lakh
1
100% of DA received forms part of salary for retirement benefits; DA not part of PF contribution
2
Ashwin purchased the 20 year policy on 18th November, 2012; annual premium Rs. 26,864; 20% of sum
assured (SA) payable on survival each on expiry of 5th, 10th and 15th years and 40% of SA payable with
accrued bonuses on survival of the term
3
Purchased by Ashwin on the life of Prateek on his 3rd birthday for a term of 20 years; annual premium
Rs. 44,347
4
Sumedha purchased 100 units @Rs.3,150 in September 2016 Series, maturity date 30th Sep, 2024,
coupon @2.75% p.a. payable on half yearly basis on 30th March and 30th September every year
Balanced Mutual Fund scheme : 3.28 lakh
Debt Mutual Fund Schemes6 : 7.67 lakh
Portfolio of Equity Shares : 18.32 lakh
Term deposits of Sumedha : 3.50 lakh
Joint Cash/Bank Balance : 2.25 lakh

Liabilities: (In Rs. lakh)

Home loan7 : 15.40
Car Loan8 : 2.67
Goals:

1. To provide for higher education of Prateek and Aslia. The expenses, at current cost, required for
each child for 4 years; Rs. 8 lakh at their respective age of 18, and Rs. 3 lakh p.a. for 3
subsequent years; cost escalation 8% p.a.
2. Marriage expenses of Rs. 18 lakh (current cost) for each child at their respective age of 27 years;
cost escalation for such expenses is 7% p.a.
3. Retirement corpus when Ashwin completes 60 years of age; to sustain the same lifestyle till
their expected life time.
4. A bigger house 3 years from now, valued at Rs. 1.40 crore today; a new car in January 2020
worth Rs. 10 lakh then.
5. To start building a separate dedicated fund for annual vacation expenses of Rs. 2 lakh (current
cost) to be utilized during 15 years until Ashwin retires; cost escalation 6% p.a.

Life Parameters:

Life expectancy of Ashwin : 80 years

Life expectancy of Sumedha : 82 years

5
Four schemes out of which one is diversified large cap growth fund (Rs. 5.71 lakh), one is mid & small
cap fund (Rs. 3.83 lakh), and two are sector specific funds on Banking (Rs. 1.26 lakh) and Information
Technology (Rs.1.07 lakh)
6
Two schemes, one is short term debt fund in Growth option (current value Rs. 2.59 lakh) acquired by
Sumedha through Rs. 10,000 monthly SIP continued for 2 years, the last SIP on March 1, 2019; the other
is Gilt fund subscribed by Ashwin in New Fund Offering (May 20, 2016) for Rs. 2 lakh in Growth option
with further contributions of Rs. 1 lakh each on Feb 11, 2017 and on June 17, 2018
7
Home loan of Rs. 20 lakh taken on 1st November, 2013 to acquire a house of 1050 sq.ft. built up area
valued at Rs. 40 lakh then. Loan details: fixed interest of 8% p.a., tenure 15 years, first EMI paid on 1st
December, 2013. Loan shared in 60:40 ratio, major share by Ashwin
8
Car loan of Rs. 5 lakh taken on 1st April, 2017 at a fixed interest of 11% p.a. for a 4-year term. First EMI
paid on 1st April, 2017.
Assumptions regarding gross returns in various asset classes:
1) Equity & Equity MF schemes/ Index ETFs : 11.00% p.a.
2) Balanced MF schemes : 9.50% p.a.
3) Bonds/Govt. Securities/ Debt MF schemes : 7.50% p.a.
4) Liquid MF schemes : 6.00% p.a.
5) Gold and linked investments : 6.00% p.a.
6) Real Estate appreciation : 6.50% p.a.
7) Bank/Post Office Term Deposits : 6.50% p.a. (for tenure exceeding 1 year)
8) Public Provident Fund/EPFO : 7.75% p.a.
Assumptions regarding economic factors:
1) Inflation : 4.50% p.a.
2) Expected return in Risk free instruments : 5.00% p.a.

Cost Inflation Index:

FY CII FY CII FY CII FY CII FY CII

2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272
2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280

2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289

2004-05 113 2008-09 137 2012-13 200 2016-17 264

 CFPCM Certification Exam preparation material

Ashwin Case Study: Questions

1. Ashwin needs your help to plan his retirement. He wants to plan a comfortable retirement for himself and
his wife Sumedha for their entire lives. For this purpose, he wants to use his current investments in the
balanced fund and also invest a fixed amount in his balanced fund at the beginning of every month.

Post retirement he will switch over all his investments to debt. It is estimated that he will not be incurring
any expenses for EMI's or Insurance premium post his retirement. What amount should Ashwin Invest at the
beginning of every month.?

a. 41676
b. 37621
c. 34466
d. 34408

2. Ashwin has decided to make quarterly investments in Equity MF's for his children's education. He also
wants to equally divide the current corpus in Equity MF for this purpose. However, one year before from the
first-time requirement of money in respective A/c required all the money will be shifted into risk free
instruments and no further investments will be made.

There after the corpus will continue to be invested in risk free instruments only. What amount will Ashwin
need to invest for Prateek & Aslia in the allocated A/c’s to achieve the goal?

a. Prateek 23800 and Aslia 18995

b. Prateek 22765 and Aslia 17695
c. Prateek 20965 and Aslia 15605

3. Ashwin decides to make an investment of Rs. 20,000 in PPF every quarter starting from 1st Apr 2019. On
maturity on the account Ashwin intends to extend it for 2 blocks of 5 years, but no investments will be made
in this extended period. what will be the final maturity value of the account?

a) 4817871
b) 3771406
c) 2886570
d) 3059871
4. Ashwin intends to create a dedicated fund for annual vacations goal. For this purpose, he intends to use
50% of his equity share portfolio and also invest a fixed amount every month in an Equity mutual fund & a
debt mutual fund till his first withdrawal.

Ashwin will invest in the ratio of Equity MF and Debt MF ratio of 80:20 for first 5 years, rebalance accumulated
amount in new asset allocation ratio of Equity MF and Debt MF in the ratio of 60:40 and invest in same ratio
for next 3 years and rebalance accumulated amount in new asset allocation ratio of Equity MF & Debt MF in

Email : Info@iifcedu.in www.iifcedu.in Prepared by: Harminder Garg, CFPCM

 CFPCM Certification Exam preparation material
the ratio of 50:50 and invest in the same ratio till first withdrawal. At the time of first withdrawal, you asked
Ashwin to shift entire portfolio in balance mutual fund scheme. What is the monthly investment amount to
achieve this goal?
a) 6,820
b) 7730
c) 7861
d) 7385
5. Ashwin wants to estimate the amount of finance needed to buy the proposed new house after 3 years.
This could be arrived at by utilizing the net amount from the sale proceeds of his existing house after 3 years.
The outgoings from such proceeds would be the outstanding loan amount and a sum of Rs. 5 lakhs towards
meeting capital gains tax liability on existing house and the statutory charges, etc. The quantum of loan
required for a new house could be _____. (Assume Municipal value of house is equal to market value & no
change in home loan interest rate)
a. 95,33,079
b. 94,68,758
c. 96,50,808
d.95,15,890

6. Ashwin want to know annual investment required to build retirement corpus. Post -retirement 30%
curtailment in expenses required, investment in debt portfolio & corpus to be build till Sumedha’s expected
life span. Ashwin require total Rs. 1.5 Cr then value at Ashwin’s age 70 for charity.

You have suggested below asset allocation for investment 1st 12 years in the ratio of 80% Equity MF and 20%
Gold ETF, thereafter double the investment amount to next 12 years in ratio of 60% Equity MF and 40% Gold
ETF; thereafter at age 58 shift entire accumulated amount into risk free rate investments & stop further
regular annual contribution.
You also advise Ashwin to rebalance the portfolio after the interval of 6 years starting from today in the ratio
of Equity MF: Gold ETF 70:30 till age 58.

a. 3,92,570
b. 3,18,680
c. 3,81,550
d. 3,65,833

7. Ashwin want to know annual investment required to build retirement corpus of Rs. 4 Cr. He will increase
his annual investment 7% P.A. as per his income growth till his retirement. You have suggested below asset
allocation for investment 1st 13 years in the ratio of 80% Equity MF and 20% Debt MF, thereafter double the
investment amount to next 13 years in ratio of 60% Equity MF and 40% Debt MF.

a. 118,730
b. 128,430
c. 123,362
d. 184,500

Email : Info@iifcedu.in www.iifcedu.in Prepared by: Harminder Garg, CFPCM

Case – B:

(Reference Date: 1st April 2019)

Gurpreet, aged 43 years is a software engineer in a company based in Mumbai. His spouse passed away
recently. He has twins Roshan and Geet of age 14 years, both study in the 8th Standard. His average
monthly household expenses are Rs. 1.40 lakh, which include rent of Rs. 45,000 on the rented
apartment, but exclude car loan EMI and all insurance premiums. He has approached you, a CFPCM
practitioner, for preparing a financial plan for his family. He has shared the following financial
information with you:
Gurpreet’s Assets & Liabilities (As on 31st March, 2019)
Assets (Rs. Lakh)
Equity Mutual Fund (MF) schemes : 26.47
Balanced MF scheme (equity oriented) : 9.78
Equity shares portfolio1 : 55.92
Gold Jewelry : 2.17
Gold Exchange Traded Fund (ETF)2 : 4.41
Public Provident Fund (PPF) A/c.3 : 7.87
Equity linked savings scheme (ELSS )4 : 26.85
Physical Gold (coins/bars) : 11.25
Car : 4.80
Liquid MF scheme : 10.25
Corporate bonds of M/s.XYZ Ltd.5 : 8.50
Bank account of Gurpreet6 : 103.25
Balance in Employees Provident Fund A/c : 21.86
Liabilities (Rs. Lakh)
Car loan7 : 5.01
Credit Cards : 0.72
Salary Income (Annual) (Rs. lakh)
Basic Salary : 30.00
Dearness Allowance : 9.00
House Rent Allowance : 4.80

1 st
Securities at cost Rs. 35.62 lakh, Rs. 8.27 lakh of which was purchased on or after 1 February, 2018, being fresh
equities and which are valued at 10.19 lakh today.
2
Invested Rs. 1.6 lakh on 17 July 2006 in the NFO of Gold ETF.
3 st
Account maturing on 1 April, 2025.
4
Invested Rs. 1 lakh initially in April 2007 and then every year from 2009 to 2014 in the month February in growth
option.
5
Investment at face value of Rs. 1,000 in bonds of tenure 5 years, purchased on Issue on August 16, 2016; coupon
st st
rate 11% p.a. payable on 1 October and 1 April.
6
Received Rs. 80 lakh value of insurance claim on the life of his deceased wife.
7
Taken in August 2017 at 11% p.a. payable in equated monthly installments over 4 years.

1
 Special Allowance : 0.90
Variable Salary : 6.00
Employer contribution to Provident Fund8 : 3.60
Other cash outflows (Annual) (Rs.)
Term Plan Insurance premium : 52,857 (Total Cover Rs. 1.50 crore)
Endowment Insurance premium9 : 1,75,527 (Sum assured Rs. 30 lakh)
Health Insurance Premium : 32,631 (Annual premium, two policies,
each covering Rs. 10 lakh
Goals:

You, in consultation with Gurpreet, have developed the following financial goals and roadmap:
1. Explore immediately Boarding School study for both the children; estimated cost Rs. 5.15 lakh
per child per annum fixed for 4 years.
2. Invest in a new property of 3 bedrooms, the current cost of such property is Rs. 2.50 crore in the
area of his choice. The loan tenure should be coinciding with his remaining service to retire at
60.
3. Send Roshan for Higher Education abroad after he completes boarding education. The funds
estimated in lump sum then would be Rs. 1.50 crore.
4. Higher education expenses for Geet within India at estimated cost today of Rs. 20 lakh annually
for 4 years; costs escalating at 5% p.a.
5. Retirement at age 60 to provide for current lifestyle at Rs. 85,000 monthly for at least 25 years.
6. Undertake a world cruise trip with both children on their completing boarding education.
Current costs US dollars 35,000 per person, escalation at 3% annual; current exchange rate 70
INR/USD, Rupee expected to depreciate annually at 2%.
7. To accumulate funds for marriage of his children, after their respective age of 27. Each marriage
costs today Rs. 35 lakh, with cost escalation 7% p.a.
8. Suitable Estate Planning to cover all his physical and financial assets.
Life Parameters
Life expectancy of Gurpreet : 85 years

Assumptions regarding gross returns in various asset classes:

1) Equity & Equity MF schemes/ Index ETFs : 11.00% p.a.
2) Balanced MF schemes : 9.50% p.a.
3) Bonds/Govt. Securities/ Debt MF schemes : 7.50% p.a.
4) Liquid MF schemes : 6.00% p.a.
5) Gold and linked investments : 6.00% p.a.
6) Real Estate appreciation : 6.50% p.a.
7) Bank/Post Office Term Deposits : 6.50% p.a. (for tenure exceeding 1 year)
8) Public Provident Fund/EPFO : 7.75% p.a.

8
There is an equal contribution to the Provident Fund by Gurpreet.
9 th
Term of 20 years, purchased on 15 March, 2009.

2
Assumptions regarding economic factors:
1) Inflation : 4.50% p.a.
2) Expected return in Risk free instruments : 5.00% p.a.

Cost Inflation Index (CII):

FY CII FY CII FY CII FY CII FY CII

2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272
2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280

2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289

2004-05 113 2008-09 137 2012-13 200 2016-17 264

3
 CFPCM Certification Exam preparation material

Gurpreet Case study: Questions

1. Gurpreet wants to switch a portion of money from his bank account into debt mutual funds in order
to fund the needs of boarding school education of his twins. How much corpus will he need to switch for
this purpose?

a) 39,78,494
b) 39,50,721
c) 43,15,112

2. Gurpreet allocated his Equity share & Equity MF portfolio & ELSS portfolio to achieve this goal & invested
in the same till first withdrawal. For the higher education expenses for Roshan and Geet, Gurpreet
starts accumulating funds with monthly investment of Rs. 80,000 in an aggressive asset allocation yielding
9% p.a. After 4 years the allocation is moderated to yield 7.5% p.a. & He is investing in this fund till last
withdrawal of higher education requirement. What excess/shortfall of funds you expect at the time of
last withdrawal by following this investment strategy?

a. shortfall of 9,13,400
b. Shortfall of 7,98,790
c. shortfall of 7,55,880
d. surplus of 8,95,530

3. Gurpreet is planning for using the proceeds of his physical gold investments & maturity amount of
Corporate Bond of Mrs. XYZ Ltd. for his world tour with his children. On the date of maturity of Bond, He sold
Physical gold and along with maturity of bond, total proceeds will be invested in a debt fund. By following
this investment strategy, what will be the monthly SIP required starting from today to till the date of goal
requirement to achieve this world tour goal. (Assume only principal value of bond will be allocated for this
goal).

a. 114890
b. 117230
c. 112598
d. 113430

4. Gurpreet has identified an under-construction property that he wants to purchase. The total cost is Rs. 75
lakhs. On 1st may 2018 the property is only 50% constructed, so same proportion amount is payable to
builder at that time. On 1st may 2018, Gurpreet paid a down payment of Rs. 15 lakhs from own funds and for
rest, he took a home loan for 15 years @ 9% p.a. For the further instalments, 15% of property value was
payable to builder after 4th installment, 8th installment and the balance 20% on possession. All of these were
to be disbursed by the bank. The possession of the house was given on 1st June 2019. What will be the EMI
of after full disbursement of loan if first EMI started from 1st June 2018 and this loan product has total tenure
of 15 years and assume rate of interest is not changed.

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 CFPCM Certification Exam preparation material
a. 61300
b. 61800
c. 62,500
d. 62890

5. What will be the total interest liability as per Income tax rules could be allowed for deduction (Ignore
maximum limit) & maximum amount allowed of tax deduction available u/s 24(ii) for interest AY 20-21?
(Refer Question:4)
a. 4,80,500 & 4,80,500
b 546,560 & 2,00,000
c. 4,80,500 & 200000
d. 5,01,000 & 2,00,000
6. For the purpose of wedding of both the children, you have advised Gurpreet to invest monthly in Debt MF
and Equity MF in the ration 30:70 till they complete 19 years of age. Thereafter, further investments are
made in Debt MF and Equity MF in the ratio on 60:40. Gurpreet wants to know how much amount he will
require to invest monthly to fulfill the commitment of his children's marriage.

You stress test that if Investment return in Equity 9%, Debt 7%, inflation 6% and Gurpreet can afford
maximum SIP of Rs.35000 per month. How much curtailment in marriage expenses required after
consideration of change in these factors?

a. 56810 & 55% curtailment

b. 56810& 36 % curtailment
c. 55,322 & 55% curtailment
d. 55322 & 36% curtailment

7. For the purpose of wedding of both the children as per the defined goal, you have advised Gurpreet to
invest annually in existing balance mutual fund scheme. Gurpreet wants to know how much amount he will
require to invest annually to fulfill the commitment of his children's marriage.

a. 5,98,452
b. 5,15,830
c. 5,26,872
d. 4,93,560

8. Gurpreet wants to create a trust that would receive a corpus, in case of any eventuality with Gurpreet’s
life and utilize the corpus as follows. A Sum of Rs. 75 lakh towards purchase of house for the accommodation
of both children’s, 50% of their current living expenses (excluding rent) till Gurpreet’s retirement. Also
accommodate their education expenses as per defined goals. Calculate the value of this corpus today if whole
of the corpus will be invested in a balance fund.
a. 2.00 cr
b. 3.41 cr
c. 3.61 cr
d. 3.48 cr

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Case – C:
(Reference Date: 1st April, 2019)
Ms. Sahanubhuti, aged 34 years, is working in Mumbai. She is likely to be the sole guardian of
Shambhavi, her only daughter aged 12 years, due to an ongoing divorce proceeding with Manohar, to
whom she has been married for 13 years. The divorce terms are not fully settled, exposing Sahanubhuti
to a potential future financial liability of Rs. 20 lakh. She is currently residing in a rented house. Her
daughter has just passed in the 6th Standard. Sahanubhuti does not have much family support and she
wishes to marry sometime during the next two years her long-time colleague Viren, who is never
married and is aged 30 now. She has approached you, a CFPCM practitioner, for preparing a Financial
Plan for her family. She has shared the following financial information with you:
Salary structure (April 2019 to March 2020) : Annual Amounts (Rs. lakh)
Basic Salary : 12.00
HRA : 7.20
Conveyance Allowance : 3.00
Special Pay : 8.98
Variable Salary : 8.00
Employee contribution to Provident Fund : 1.44
Employer contribution to Provident Fund : 1.44
Regular Outgoings Monthly (Rs.)
Basic Household Expenses : 40,000
Services availed : 12,500
School Fees : 12,500
House Rent : 35,000
Power, Telecom and Fuel : 12,500
Car Loan EMI : 25,585
Other Monthly & Annual cash outflows (Rs.)
Equity Mutual Fund (Index Fund) : 15,000 (Monthly systematic investments)
Balanced Mutual Fund : 10,000 (Monthly systematic investments)
Life Insurance Premium1 : 54,324
Health Insurance Premium2 : 27,631
Assets (as on 31st March, 2019) Market Value (Rs. lakh)
Equity Mutual Fund schemes : 32.45
Balanced Mutual Fund schemes : 12.79 (50:50 in Equity : Debt)
Debt Mutual Fund schemes : 5.98
Demat Account3 : 21.92

1
Annual premium, 2 policies, one term and the other money back, total cover Rs. 55 lakh.
2
Annual premium, 2 policies, total cover Rs. 20 lakh.

1
 Provident Fund : 9.93
Public Provident Fund (PPF) A/c.4 : 6.59
Gold & Diamond Jewelry : 15.75
Car5 : 7.50
Cash in Bank (Salary Account) : 2.82
Bank deposits6 : 33.26
Deposit with House Owner : 3.00
Money Back Insurance Plan7 : 5.00

Liabilities (as on 31st March, 2019) (Rs. lakh)

Car loan : 7.99

Goals:
You, in consultation with Sahanubhuti, have identified the following financial goals for her family and
the preliminary Roadmap to achieve them:
1. Send her daughter to a Boarding School this year to complete her studies up to 12th Standard.
The outlay is Rs. 4 lakh p.a. current costs, escalating annually at 8%.
2. Buy a house having three bed rooms costing currently Rs. 1.65 crore, sometime after two years
after remarrying with joint finances from Viren.
3. Invest suitably for the higher education of Shambhavi, such studies are contemplated for 5 years
at current annual cost of Rs. 15 lakh, escalating at 8% p.a.
4. To invest for accumulating marriage funds for Shambhavi over the next 15 years, estimated at
Rs. 30 lakh currently, such costs escalating at 7% p.a.
5. Expected retirement at her age 60, to include joint financing of retirement corpus to fund
retirement expenses equivalent to Rs. 90,000 current and required inflation adjusted
throughout until Viren survives.
6. Vacation fund for alternate year travel starting a couple of years from now until her age 80,
current annual costs are Rs. 4 lakh escalating annually at 6%.
7. A suitable Estate Planning to cover all her physical and financial assets.

3
Includes 100 units of Sovereign Gold Bonds (issue price of Rs. 2,967 in January 2017, coupon 2.5% p.a., maturity 8
th
years, current price Rs. 2650); and 500 bonds of M/s. ABC Ltd. (face value Rs. 1,000 subscribed in issue on 27
March 2016, coupon 9.25% p.a. payable semi-annually over 7 years, listed on exchanges, current price 980).
4
Account opened on 14 April 2008.
5 st
Car purchased out of a loan availed of Rs. 14 lakh on 1 March 2016, interest being charged on reducing monthly
balance for a term of 6 years.
6
Includes Rs. 10 lakh deposited by Manohar, under protest, pursuant to an interim court order in divorce
proceedings.
7 th
Sum Assured (SA) of Rs. 5 lakh, Term of 15 years, Annual Premium of Rs. 45,565, Purchased on 18 September,
2014, terms of money back: 15% of SA at the end of 3rd/6th/9th & 12th year of survival and 40% at maturity.

2
Life Parameters
Life expectancy of Sahanubhuti : 85 years

Assumptions regarding gross returns in various asset classes:

1) Equity & Equity MF schemes/ Index ETFs : 11.00% p.a.
2) Balanced MF schemes : 9.50% p.a.
3) Bonds/Govt. Securities/ Debt MF schemes : 7.50% p.a.
4) Liquid MF schemes : 6.00% p.a.
5) Gold and linked investments : 6.00% p.a.
6) Real Estate appreciation : 6.50% p.a.
7) Bank/Post Office Term Deposits ( > 1 year) : 6.50% p.a. (for tenure exceeding 1 year)
8) Public Provident Fund/EPFO : 7.75% p.a.
Assumptions regarding economic factors:
1) Inflation : 4.50% p.a.
2) Expected return in Risk free instruments : 5.00% p.a.

Cost Inflation Index:

FY CII FY CII FY CII FY CII FY CII

2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272

2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280

2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289

2004-05 113 2008-09 137 2012-13 200 2016-17 264

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 CFPCM Certification Exam preparation material
Sahanubuti Case Study – Questions

1. You calculate Sahanubuti’s additional Insurance requirement by following Income replacement method.
Her expected Gross Salary in current FY is Rs. 40 Lakh which is increase by 5% p.a. during his service tenure.
Such contribution considers income tax payable in the current year of Rs. 10.5 Lakh assuming growing at 5%
per annum.
Her Self consumption is 35% of post- tax Income and assumed investment yield is 9% p.a. for calculation of
this Insurance requirement. What is the additional cover required ? (Ignore Money back policy)

a. 324 L
b. 331 L
c. 281 L
d. 274 L

2 Sahanubuti want to know in her Money back Insurance plan, what amount of death claim would be received
by the nominee in case of any eventuality with her life today.

He gives you information that Insurance Company has declared first reversionary Bonus of Rs. 20 per
thousand sum assured on Pro-rata basis and for succeeding years Rs. 45 per thousand sum assured on every
policy anniversary

a. 5,00,000
b. 5,90,000
c. 5,25,000
d. 6,00,000

3. A Life Insurance Agent has approached Sahanubuti with two types of Term Insurance Plans:
(i) Plan I, without return of premium, term 30 years, Sum Assured of Rs. 1 cr, yearly premium payable
Rs. 2.42 per thousand of SA
(ii) Plan II, with return of total premiums paid, on maturity, term 30 years, Sum Assured of Rs. 1 Cr,
yearly premium payable Rs. 4.22 per thousand of SA.

She is not clear which plan to opt for and she seeks your advice on which policy is beneficial for her, if
discounted by the risk-free rate. (Assuming She lives till maturity of the Insurance Policy)

a) Plan I is better as the net present value is higher

b) Plan I is better as the net present value is lower
c) Plan II is better as the net present value is higher
d) Plan II is better as the net present value is lower

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 CFPCM Certification Exam preparation material

4. Sahanubuti want to Calculate taxable HRA for FY2019 -20?

a. 3,00,000
b. 4,20,000
c. 3,60,000

5. Sahanubuti want to Calculate Income tax liability for AY 2020-21 after considering deductions ? Assume
She has earned Interest on saving bank A/c Rs. 20,000 and Interest on Fixed deposit & other bonds is Rs. 3
Lakh in this FY 2019-20 & no capital gain liability.
a. 960340
b. 923400
c. 944340

6. Sahanubuti purchased 3,000 Units of Equity Mutual Funds @Rs. 62 per unit on 8th May 2019. The Equity
Mutual Fund declares a dividend of Rs. 10 per unit. The record date for the dividend was 13th Aug 2019.
She sold 3,000 units on 15th September 2019 at Rs. 50 per unit. He wants to know the amount of short
term capital loss he can claim in AY 2020-21?
a) He gets short Term Capital Gains of Rs. 6,000
b) He gets Short Term Capital loss of Rs. 36,000
c) He can claim Short Term Capital Loss of Rs. 30,000
d) He cannot claim any Short Term Loss for Tax computation

7. Sahanubuti’s had invested Rs. 5 lakh to buy 2000 shares of a listed company, Ramco Systems, in the year
2013-14. The Company had issued Bonus shares in the ratio 1:2 on 1st August 2016. She come to know the
bad news about this company & She wants to sell the entire shares of Ramco Systems on 5th June 2019 at
the prevailing market price of Rs. 600 per share through a recognized Stock exchange.
What is the amount of taxable Capital Gains for her on sale of these shares if provisions of AY 2020-21 are
applicable today if there is no other equity sale transaction in that FY? ( Market value of stock as on 31-01-
2018 is Rs.400)

a) LTCG 6,00,000
b) LTCG 11,00,000
c) LTCG 5,00,000
d) LTCG 12,00,000

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 CFPCM Certification Exam preparation material

8. Sahanubuti’s advisor guide her to accumulate corpus for vacation fund goal by allocating existing balance
fund MF Investments. Also asked her to immediately increase existing monthly SIP to Rs. 25000 pm in the
same fund till her age of 38 years, thereafter double the SIP amount, till her age of 41 and stop further SIP.

You further advice, her to switch 25% of the outstanding balance fund every year to debt mf scheme, start
from the age of 42 to full redemption at age 44. She want to start her first withdrawal from this vacation fund
at the age of 44 and thereafter as per the vacation goal and continue invested in the debt fund till last
withdrawal of vacation goal. How much Surplus/shortfall in achievement of this goal by following this
Investment Strategy at her age of 44?

a) 28 Lakh
b) 24 Lakh
c) 32 Lakh
d) 21 Lakh

9. The cash flows required for the boarding school expenses, higher education expenses and wedding
expenses of her daughter are managed from existing Equity mutual fund schemes and debt mutual fund
portfolio. You advise to switch today suitable lump sum from equity mutual fund scheme portfolio to Debt
scheme portfolio, so that withdrawal from Debt MF portfolio on yearly basis is enough to meet boarding
school education requirements.

Equity mutual fund scheme portfolio utilized for her daughter’s higher education requirements. After 12
years you switch suitable lump sum from equity mutual fund scheme portfolio to Debt scheme portfolio to
meet her wedding expenses. What incremental SIP in Equity MF (Index fund) schemes needs to be started
immediately for 12 years to ensure this strategy works?

a. 83,806
b. 68,806
c. 66,800
d. 69,560

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Case – D:

(Reference Date: 1st April 2019)

Mahesh and Neelam approached you, a CFPCM practitioner for preparing a Financial Plan to achieve their
financial goals. Mahesh, aged 45 years, is working in Bengaluru for a multi national corporation in a
managerial capacity. His wife Neelam, aged 42 years, is working in a private company and has gross
annual income of Rs. 5 lakh. The gross salary of both Mahesh and Neelam is likely to grow annually at
7%. They are married for 20 years now. They have two children, daughter Sapna, 18, pursuing her
Graduation in Economics, and son Varun, 16, studying in 12th standard. Sapna intends to pursue a
doctorate in economics from a foreign university. Varun wants to become a Doctor.

The family spends Rs. 60,000 per month on household expenses, which exclude EMI on loans and
Insurance premiums. The education expenses are annually Rs. 2.5 lakh. They stay in a house valued at
Rs. 75 lakh, the house being in the name of his father who passed away recently in December 2018.
Mother stays with the family in the same house.

Mahesh has a term insurance of Rs. 50 lakh (term20 years, annual premium Rs. 13,985), the term
expires 15 years from now. Mahesh and Neelam are covered under Group Medical Insurance by their
respective employers. They additionally have a Rs. 10 Lakh family floater policy (Mahesh pays annual
premium Rs. 20,386).

Salary Breakup of Mahesh for Financial Year 2019-20

Components Annually (Rs)

Basic 7,16,000
House Rent Allowance 1,80,000
Dearness Allowance 2,50,000
Transport Allowance 96,000
Medical Reimbursement 15,000
Entertainment Allowance 60,000
Total 13,17,000

Assets as on 31st March 2019:

1. Cash in Hand Rs. 50,000
2. Bank balance Rs. 2,50,000
3. Diversified Equity Mutual Fund units at market value Rs. 12.78 lakh.
4. Equity Shares at market value Rs. 25.83 lakh.
5. Debt Mutual Fund units at market value Rs. 12.17 lakh, scheme nature is of short term debt.
6. PPF A/c balance Rs. 8.25 lakh (Mahesh), Rs. 3.15 lakh (Neelam), both maturing on 1st April 2023.
7. Equity Linked Saving Scheme (ELSS Mutual Fund, growth option), Rs. 75,000 invested on March
20, 2017 at NAV Rs. 14.81 and Rs. 75,000 invested on February 3, 2019 at NAV of Rs. 16.95. NAV
on 31st January 2018 was Rs. 15.56. The current NAV is Rs. 16.26 per unit.

1
8. A separate house in joint ownership of Mahesh and Neelam with respective shares of 75% and
25%. This house has two floors and is let out each floor separately for a monthly rent of Rs.
12,000. Rent increases annually at real estate appreciation rate. Present Market Value of this
House is Rs. 1 crore1
9. Gold Ornaments at market value Rs. 8.35 lakh.
10. Car at market value Rs. 2.60 lakh.
11. 100 units of Sovereign Gold Bonds (SGB) of duration around 8 years subscribed on issue on 28th
September 2016 at Rs. 2,987 per unit; market price quoted on 31st March 2019 is Rs. 2861;
interest @ 2.50% p.a. payable on 31st March and 30th September. First coupon on 31st March
2017. Maturity on 30th September, 2024.
12. Government Securities (Gilt) MF Scheme; open ended scheme; Invested Rs. 4 lakh in New Fund
Offering on 23rd January 2017; NAV on 31st March 2019 is Rs. 11.642.
13. Money back insurance plan of 20 year term on the life of Mahesh with sum assured of Rs. 5 Lakh2
14. Unit linked insurance plan (ULIP aggressive allocation; 70% to equity) of 10 years in the name of
Mahesh with sum assured of Rs. 5 lakh3

Liabilities as on 31st March 2019:

Housing loan outstanding: Rs. 20.89 Lakh

Goals & Aspirations:

1) Plan for medical education of Varun for a term of 6 years, beginning a year from now, estimated
to be annually Rs. 10 lakh (current costs) with cost escalation at 8% p.a.
2) Plan for post graduation and doctorate of Sapna from abroad, estimated to cost Rs. 1 crore over
the next 4 years.
3) Create a separate fund to provide holiday expenses annually in the retirement years, amounting
to Rs. 1.25 lakh in current terms and escalating at 7% p.a.
4) To accumulate funds for marriage of Sapna and Varun when they individually reach 28 years of
age. At current costs, they will require Rs. 15 lakh and Rs. 10 lakh respectively at current cost
escalating annually at 7%.
5) Build retirement corpus to be available when Mahesh completes 60 years, to provide for
equivalent household expenses today and required until Neelam survives.

Life Expectancy:
Mahesh : 80 years
Neelam : 82 years

1
Mahesh and Neelam had jointly taken a housing loan of Rs. 30 Lakh in the ratio of their ownership of the house
st
which cost them Rs. 47.50 Lakh on 1 April 2012. The loan is for 15 years at a fixed rate of interest of 9.25% p.a.
They pay EMI proportionate to their ownership on the last day of every month.
2
Annual premium Rs. 28,875, due in March every year, paid 16 premiums. The policy provides 25% of basic sum
assured each on 5th, 10th, 15th years, and on maturity of the policy. (Reversionary Bonus accrued up to 15 years
is Rs. 2,43,100)
3
Annual premium of Rs. 35,000 p.a. due in end of April every year; six installments paid till date, this year
premium due. (current unit balance 15,554.221 units, NAV: Rs. 16.56 per unit)

2
Assumptions regarding gross returns in various asset classes:
1) Equity & Equity MF schemes/ Index ETFs : 11.00% p.a.
2) Balanced MF schemes : 9.50% p.a.
3) Bonds/Govt. Securities/ Debt MF schemes : 7.50% p.a.
4) Liquid MF schemes : 6.00% p.a.
5) Gold and linked investments : 6.00% p.a.
6) Real Estate appreciation : 6.50% p.a.
7) Bank/Post Office Term Deposits : 6.50% p.a. (for tenure exceeding 1 year)
8) Public Provident Fund/EPFO : 7.75% p.a.

Assumptions regarding economic factors:

1. Inflation : 4.50% p.a.
2. Expected return in Risk free instruments : 5.00% p.a.

Cost Inflation Index:

FY CII FY CII FY CII FY CII FY CII

2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272
2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280

2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289

2004-05 113 2008-09 137 2012-13 200 2016-17 264

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 CFPCM Certification Exam preparation material

Mahesh case study – Questions

1) Mahesh has received an attractive offer from Tours and Travel company for 7 days Europe trip with a
family in which he has to pay only 20% upfront Rs.50,000/- while remaining amount may be repaid in 60 EMIs
of Rs.5750/- each. Mahesh wants to know annualized effective rate of return charged to him in this offer?

a) 23.96%
b) 25%
c) 26.79%
d) 28.07%

2) Mahesh has identified two stock A and B and out of two stocks wants to invest in one stock immediately
Rs.1 lac for one to three years horizon. He wants your advice before investment.
You have gathered past data to calculate Standard deviation on the basis of Sample and which one stock
will recommend based on standard deviation.

Stock A (One year Return) Stock B (One year Return)

2019 -40% -25%
2018 +50% +30%
2017 +60% + 60%
2016 -50% - 30%
2015 +40% +82%

a) 50.02 and B security

b) 52.6 and A Security
c) 52.6 and B Security
d) 44.2 and A Security

3) Mahesh wants to build a portfolio of two securities (X and Y) in 60%:40%. Standard deviation of security X
is 28 and security Y is 19 and correlation coefficient 0.4. Expected return of security X is 15% and Security Y
is 20%.Mahesh wants to know the standard deviation and expected return of the portfolio.

a) 21.96% and 17%

b) 20.96% and 18%
c) 21.02% and 17%
d) 20.07% and 17.20%

4. You suggest Mr. Mahesh to achieve the goal for accumulation of funds for marriage expenses of Varun &
Seema by immediately starting a systematic regular quarterly investment in existing diversified equity MF
portfolio for 9 year. You also guide him to switch required amount in debt fund 3 years prior to respective
marriage of Varun & Seema. What is the approximate quarterly investment amount required?

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 CFPCM Certification Exam preparation material
a) 15780
b) 17890
c) 16940
d) 24300

5. Mahesh’s ideal life cover has to be estimated which in case of any exigency will first repay the outstanding
loans and the remaining would be invested along with the couple’s existing financial assets. Such combined
corpus would be invested in a debt fund instrument to sustain the family’s living expenses and the specific
financial goals of higher education of their children.

The living expenses need to be taken to the extent of 70% of their present household expenses up to
Neelam’s age of 58 years and further 70% of then expenses for the remaining period of her expected life.
What should be this ideal cover (ignore existing Insurance policies)?

a) 217.90L
b) 225.30L
c) 211.68 L
d) 218.28L

6. Mahesh wants to know the taxable Income from house property for AY 2020-21. Both floors vacant for
two months during the financial year 2019-20 and for 1 floor tenant has not paid rent for three months start
from June 2019 to Aug 2019.
Mahesh has followed necessary steps for recovery of rent, however he has not able to realize the rent and
Municipal taxes paid in previous year Rs. 8000. Interest liability for this rent out house is 1,35,090 for FY 2019-
20.
Calculate taxable value of Income from House property for Mahesh’s Income tax assessment for FY 2019-20?
a) 18910
b) 84910
c) 1582
d) 2110

7. Today, Mahesh wants to redeem his Gilt MF Schemes & With the full redemption amount he buy further
units in same series of SGB which he has already bought. Mahesh wishes to hold all these SGBs till maturity.
Calculate the impact of taxation in the AY 2020-21 for these transactions (including existing SGB)? Also
evaluate capital gains on maturity in the 8-year tenure of these SGBs, if on maturity Gold price in its purest
form is expected at Rs. 4,600 per gram. (CII expected in the year of maturity may be considered as 348).

a Give your answer for 3 type of tax impact for these transactions

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 CFPCM Certification Exam preparation material
8. Mahesh and Neelam wants to create a separate fund for annual holiday vacation goal till
Mahesh’s expected life span. If from the age of 60 accumulated corpus invested in a debt fund. You
suggest an investment strategy by investing certain equal amount in Debt & equity fund and double
the monthly Investment every five years till his Age of 60. He wants to know what monthly amount he
would invest in the last block of five years?
a) 39594
b) 9071
c) 36286
d) 40506

9. Mahesh & Neelam wants the 75% of the pre-retirement expenses during post retirement period and
50%of pre-retirement expenses post Mahesh’s death. In retirement corpus calculation, you further
advised to account for an additional 5 years life expectancy based on improved medical facilities in our
country. They also want to celebrate their golden Jubilee of marriage and cost would be Rs.10 lakh in
present terms and also would like to go for the world tour in the same year which cost another Rs.75 Lakh
at that point of time.
He allocated his existing equity share portfolio and existing PPF A/c’s for retirement and Invest
maximum permissible amount in a FY on quarterly basis and extend PPF’s A/c’s with contribution till one
year prior to retirement and shift entire maturity value of PPF A/c’s and sale value of equity share
portfolio to debt fund at that point of time. Post retirement corpus will be invested in debt fund
throughout the period. He wants to know how much Surplus/Shortfall in desired retirement corpus on
Mahesh’s retirement Age?
a) Shortfall of 19.08 lakh
b) Surplus of 8.76 Lakh
c) Shortfall of 6.58 lakh
d) Shortfall of 12.03 lakh

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Case-E:

(Reference Date 1st April 2019)

Sanjay aged 31 years is working in a managerial capacity with a private sector bank in Mumbai. He is
married for over two years now to Sherlyn, who is 28 years old. Sherlyn is a homemaker. They have a
son Ajinkya who has just completed one year. They stay in a rented flat. Sanjay expects to work till 62
years of age. His salary details for the year beginning on date and current expenses are as follows:

Particulars Amount (Rs. per annum)

Basic 6,60,000
H.R.A. 1,98,000
Executive Allowance 9,60,000
Medical Allowance 15,000
EPF: Employee contribution 79,200
EPF: Employer contribution 79,200

Monthly Expenses:

House Rent Rs. 25,000

Household Expenses Rs. 60,000

Following are the details of his assets as on 31st March 2019:

Equity Mutual Fund Schemes Rs.8.25 lakh (Five schemes; one is sector fund, two are midcap
funds, two are diversified funds with large cap focus; monthly
SIP of Rs. 5,000 started 3 years ago and continuing in each
scheme 1st day of month).
Balanced Mutual Fund Scheme Rs. 3.2 lakh (Invested Rs. 1.5 lakh in NFO on 8th March, 2016;
continued monthly SIP of Rs. 5,000 for a year from 1st April,
2017; Scheme Asset Allocation in equity/debt is 50:50; dividend
reinvestment option, net dividends of Rs. 1.5 per unit
reinvested at NAV Rs. 10.323 on 4th March, 2018 and Rs. 2.5
per unit reinvested at NAV Rs. 11.269 on 5th March 2019.
Equity Linked saving scheme (ELSS) Invested in 5,000.000 units at price of Rs. 11.62 per unit on 2nd
Feb, 2013; further invested Rs. 1,50,000 at price of Rs. 13.47 per
unit on 18th January, 2015; open ended scheme; growth option.
Current NAV: Rs. 22.893 per unit.
Gold Jewelry and coins 380 grams; received as gift on the occasion of marriage on 21st
January 2017; Current Price of Standard Gold (22K) Rs. 3,150
per gram.
Car Rs. 3,00,000 (depreciated value)
PPF Account Rs. 3,77,440; the account was opened on 8th July, 2014
Balance in Savings Bank Account Rs. 1,50,000
Balance in Bank Fixed Deposit Rs. 3,00,000 invested on 1st August 2017 for 24 months;
cumulative option, interest is compounded quarterly @ 9% p.a.
Employees Provident Fund Rs. 8,27,325 (Cumulative balance)

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House Property Situated at Aurangabad, inherited on 1st December 2018 when
the market value was Rs. 50 lakh, since transferred in the name
of Sanjay.
Term Insurance Plan Sum assured Rs.50 lakh; Rs. 11,500 p.a. premium.
He has following Financial Goals:
1. A new flat in 18 months from now at Mumbai; Cost negotiated Rs. 1.20 crore; availed a loan at
70% loan to value; interest payable up to possession 9% p.a.; 32 year loan tenure after
possession of flat with interest 2% above RBI repo rate periodically. Goal is to be debt free well
before retirement at 62.
2. Retirement at the age 62; retirement corpus to yield inflation adjusted expenses till the lifetime
of Sherlyn.
3. Buying a car costing lump sum of Rs. 10 lakh in October 2019 after disposing of the existing car.
4. Admission of Ajinkya to an international school at age 4; Admission fee Rs. 4 lakh; Rs. 2 lakh p.a.
in first 6 years, Rs. 3 lakh p.a. in the next 9 years (current costs, escalation expected 6% p.a.).
5. Higher education of Ajinkya when he attains 19 years of age; Rs. 75 lakh would be required (at
current prices, Higher Education expenses escalating at 6% p.a.).
6. Create a corpus till age 50 for annual vacation costing currently Rs. 1 lakh, such expenses
escalate at 5.5% p.a., annual withdrawals begin at age 50 and continue till Sanjay survives.
7. Marriage expenses of Ajinkya after he is 27, Rs. 15 lakh current costs, escalating at 6% p.a.
8. A lump sum for his venture 10 years prior to his proposed retirement.

Life Parameters
Life expectancy: Sanjay : 80 years
Life expectancy: Sherlyn : 80 years

Assumptions regarding gross returns in various asset classes:

1) Equity & Equity MF schemes/ Index ETFs : 11.00% p.a.
2) Balanced MF schemes : 9.50% p.a.
3) Bonds/Govt. Securities/ Debt MF schemes : 7.50% p.a.
4) Liquid MF schemes : 6.00% p.a.
5) Gold and linked investments : 6.00% p.a.
6) Real Estate appreciation : 6.50% p.a.
7) Bank/Post Office Term Deposits : 6.50% p.a. (for tenure exceeding 1 year)
8) Public Provident Fund/EPFO : 7.75% p.a.
Assumptions regarding economic factors:
1) Inflation : 4.50% p.a.
2) Expected return in Risk free instruments : 5.00% p.a.
Cost Inflation Index:

FY CII FY CII FY CII FY CII FY CII

2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272
2002-03 105 2006-07 122 2010-11 167 2014-15 240 2018-19 280

2003-04 109 2007-08 129 2011-12 184 2015-16 254 2019-20 289

2004-05 113 2008-09 137 2012-13 200 2016-17 264

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 CFPCM Certification Exam preparation material

Sanjay cases study – Questions

1. Towards Sanjay annual excursion, you advise him to build corpus through start in monthly SIP in a new
balance fund scheme and continue this SIP till first withdrawal, beginning from today to meet the cost of
Holiday trip. Calculate what is the monthly amount of investment required to achieve this goal if Sanjay
step up his SIP by 0.5% every month?
a. 5360
b. 5470
c. 5258
d. 5875

2. As a moderate risk strategy to meet entire education expenses, existing Equity Mutual Fund portfolio
allocated for entire education expenses and SIP is also started immediately in Equity Fund till last switch.

The Debt Fund is used to meet the yearly expenses of basic education and higher education from lump sum
amounts switched at certain intervals from the Equity Fund in the following manner: First; at age 4 to meet
basic education expenses from age 4 to 8; Second, at age 6 to meet the education expenses from age 9 to
14; Third, at age 12 to meet the education expenses from age 15 to 19. What should be the amounts of
monthly SIPs Equity Fund today?

a. 87615 b. 83,820 c. 81409 d. 85315

3. Today is 1st December 2019, Sanjay needs funds to expand his business; he sold his Inherited house, for Rs.
42 lakhs. The brokerage charges to be incurred on sale transaction are 1% of sale amount.
Sanjay’s father purchased this house in June 2007 for Rs. 12 lakhs for investment purposes and further spent
Rs. 2.60 lakh in August, 2013 on its renovation. He entered into an agreement for sale of this house for Rs.
38 lakhs in March 2016 and received Rs. 1 lakh towards advance. However, the buyer could not meet his
commitment and the advance was forfeited by Sanjay.
Sanjay wants to know from you the amount of capital gains on this sale transaction as per AY2020-21?

a. 1348313 b. 1306313 C. 1128080 d. 1228083

4. Sanjay redeems all the units of ELSS MF Schemes on 1st April 2019. He wants to know the annual rate of
return he earned on this investment? (Ignore taxes)

a. 16.6% b. 12.96% c. 13.81% d. 12.71%

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5. Today as on 1st April 2019, as per low valuations in small cap companies, Sanjay wants to switch 50% of
his balance MF Scheme to Small cap fund. Assume he bought 6910 units through Rs. 5000 SIP started from
1st April 2017 for one year. Assume NAV as on 1st April 2019 is 10.45. He wants to know what is the Units
balance as on date in this balance mf scheme (before switch) and CAGR in this investment?

a. 31806 & 16.67%

b. 33810 & 18.59%
c. 32263 & 19.68%
d. 30660 & 17.16%

6. Sanjay and his wife wish their retirement corpus to sustain 70% of their Pre-retirement total monthly
household expenses (including rent) till Sanjay Life time and 70% of then expenses till Sherlyn expected life.
They also want to gift Rs. 60 Lakh to his child and an additional Rs. 5 Lakh towards charity to an Old Age
home at Sanjay age of 70 years.

The sums are at absolute values then. They also wish to provide in the corpus an additional Rs. 10,000 pm
(Current costs) towards Healthcare after Sanjay age of 70 years till Sherlyn expected life. You estimate the
required corpus, if post retirement corpus will be invested in debt fund.

a. 4.85 cr
b. 5.05 cr.
c. 5.09 cr
d. 4.98 cr

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RETIREMENT

Q. 1 Your client aged 34 now requires at his retirement age of 60 years a corpus to sustain an annuity of Rs.
55,000 p.m. (current cost) inflation linked for a post-retirement life of 25 years up to which he expects to live.
You estimate that his goal would be achieved by investing corpus at a return of 8%.
Your client apprises you that he would additionally like to start a Trust with a donation of Rs. 1 crore (value
then) on his reaching age 70 years and would bequeath posthumously a further amount of Rs. 1 crore (value
then) for his son. He asks you whether this arrangement would be feasible by taking a little more risk while
investing the retirement corpus. You estimate by taking 1% additional return than envisaged and opine
that____________ shortfall expected in bequeathing to son. (Consider inflation at 5.5%).

a. 5,30,316
b. 45,72,959
c. 54,27,042
d. 42,24,108

2. Your client aged 34 now requires at his retirement age of 60 years a corpus to sustain an annuity of Rs.
55,000 p.m. (current cost) inflation linked for a post-retirement life of 25 years up to which he expects to live.
You estimate that his goal would be achieved by investing corpus at a return of 8%.
Your client apprises you that he would additionally like to start a Trust with a donation of Rs. 1 crore (value
then) on his reaching age 70 years and would bequeath posthumously a further amount of Rs. 1 crore (value
then) for his son. He asks you whether this arrangement would be feasible by taking a little more risk while
investing the retirement corpus. What rate of return should be aimed to achieve that goal? (Consider inflation
at 5.5%).

a. 8.5%
b. 9%
c. 9.1%
d. 9.28%

3. Your client aged 34 now requires at his retirement age of 60 years a corpus to sustain an annuity of Rs.
55,000 p.m. (current cost) inflation linked for a post-retirement life of 25 years up to which he expects to live.
You estimate that his goal would be achieved by investing corpus at a return of 8%.
Your client apprises you that he would additionally like to start a Trust with a donation of Rs. 1 crore (value
then) on his reaching age 70 years and would bequeath posthumously a further amount of Rs. 1 crore (value
then) for his son. He asks you whether this arrangement would be feasible by taking a little more risk while
investing the retirement corpus. You estimate by how much the additional goals should be moderated in
order to achieve them by taking risk of just 1% extra return? (Consider inflation at 5.5%).

a. 905025
b. 9014975
c. 9214800
d. 928500

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Education Goal

4. Rajeev require Rs. 50 Lakh(then value) for his son's higher education after 15 years, and a further Rs. 30
lakh (then value) for his son's business establishment 3 years later. You devise an investment strategy
whereby equivalent funds are available in liquid scheme after 15 years. Current age of child is 5 years.

This involves starting a SIP in equity schemes immediately, increasing such investment by 20% after every
three-year period and thus continuing for a total 12 years. At the end of 12 years, 30% of the outstanding
equity fund corpus every year is redeemed and invested in liquid funds until entire equity fund is redeemed
after 15 years. What Equity SIP amount is required immediately?
If a stress test is applied for 2% reduction in equity returns and 1% reduction in liquid returns, by what
percentage equity SIP amount should be stepped up in every three-year span? (Assume returns from equity
funds and liquid funds in the first analysis to be 12% and 6%, respectively).

a. 29%
b. 32%
c. 35%
d. 37%

5. Rajeev require Rs. 50 Lakh(then value) for his son's higher education after 15 years, and a further Rs. 30
lakh (then value) for his son's business establishment 3 years later. You devise an investment strategy
whereby equivalent funds are available in liquid scheme after 15 years. Current age of child is 5 years.

This involves starting a SIP in equity schemes immediately, increasing such investment by 20% after every
three-year period and thus continuing for a total 12 years. At the end of 12 years, 30% of the outstanding
equity fund corpus every year is redeemed and invested in liquid funds until entire equity fund is redeemed
after 15 years. What Equity SIP amount is required immediately? (Assume returns from equity funds and
liquid funds to be 12% and 6%, respectively).

If a stress test is applied, if Client can afford to invest SIP amount Rs. 12,000/- initially followed by step up as
given in question. how much impact there would be on son's business establishment goal.

a. Shortfall of 18,43,134
b. Shortfall of 11,56,866
c. Shortfall of 17,63,134
d. Shortfall of 19,60,200

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