PROJECT REPORT ON FUNDAMENTALS OF FINANCIAL PLANNING UNIVERSITY OF MUMBAI BACHELOR OF COMMERCE (FINANCIAL MARKETS) SEMESTER V 2010-11 SUBMITTED BY PRATIK

BHANSALI PROJECT GUIDE MR.KIRTAN SHAH K.P.B HINDUJA COLLEGE OF COMMERCE 315, NEW CHARNI ROAD, MUMBAI-400 004

B.Com (Financial Markets) 5th SEMESTER

FUNDAMENTALS OF FINANCIAL PLANNING

SUBMITTED BY PRATIK BHANSALI ROLL.NO: 1

CERTIFICATE This is to certify that Mr. PRATIK BHANSALI of B.Com Financial Markets Semester 5th [2010-2011] has successfully completed the Project on FUNDAMENTALS OF FINANCIALPLANNING under the guidance of MR.KIRTAN SHAH
Project Guide Course Coordinator Internal Examiner External Examiner Principal ________________ ________________ ________________ ________________ _______________

DECLARATION I MR.PRATIK BHANSALI student of B.Com-Financial Markets, 5th semester (2010-2011), hereby declare that I have completed the project on FUNDAMENTALS OF FINANCIAL PLANNING The information submitted is true and original copy to the best of our knowledge.

PRATIK BHANSALI
(Signature)
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INDEX
SR.NO
1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

TOPIC
INTRODUCTION CASH MANAGEMENT & BUDGETING UNDERSTANDING THE USE OF CREDIT INCOME TAX PLANNING TAX CREDIT TAX PLANNING AND ITS ROLE IN THE FINANCIAL PLANNING PROCESS RISK MANAGEMENT CONCLUSION SUGGESTION BIBLIOGRAPHY

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EXECUTIVE SUMMARY
Financial planning is the process of assessing financial goals of individual, taking an inventory of the money and other assets which the person have, determine life goals and then take necessary steps to achieve goals in the stipulated period. It is a method of quantifying a persons requirement in terms of money.. Financial Planning is one such advisory service, which is yet to get recognition from investors. Although financial planning is not a new concept, it just needs to be conducted in organized manner. Today we avail this service from Insurance agent, Mutual fund agents, Tax consultant, Equity Brokers, Chartered Accountants, etc. Different agents provide different services and product oriented. Financial Planner on other hand is a service provider which enables an individual to select proper product mix for achieving their goals. The major things to be considered in financial planning are time horizon to achieve life goals, identify risk tolerance of client, their liquidity need, the inflation which would eat up living and decrease standard of living and the need for growth or income. Keeping all this in mind financial planning is done with six step processes. This are self assessment of client, identify personal goals and financial goals and objective, identify financial problems and opportunities, determining recommendations and alternative solutions, implementation of appropriate strategy to achieve goals and review and update plan periodically. A good financial plan includes Contingency planning, Risk Planning (insurance), Tax Planning, Retirement Planning and Investment and saving option. Contingency planning is the basic of financial planning and also the most
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ignored. Contingency planning is to be prepared for major unforeseen event if it occurs. These events can be illness, injury in family, loss of regular pay due to loss of job. Such events are not certain but may have financial hardship if they occur. Thus a person should have enough money in liquid form to cover this risk.

Chapter 1 INTRODUCTION

Financial planning is the process of solving financial problems and achieving financial goals by developing and implementing a personalized "game plan." In order to be effective this "plan" must take into consideration an individuals overall picture. It must be:

coordinated comprehensive continuous

Financial planning is like all other phases of life; it involves choices Spend now or save for later? Pay off existing bills or increase retirement savings? Focus savings rupees on short term or long term goals? A true financial plan does not focus one aspect or product, but instead seeks to take all areas of planning into consideration when making financial decisions.

1.1 What is Included?

Cash Flow Management

This aspect of planning deals with the day to day allocation of income; and its effective use in paying for current living expenses and in accumulating assets which will be used in meeting financial goals.

Tax Planning and Management

This area focuses on the understanding of and application of federal and state income tax law, estate and inheritance taxes; and, when possible, minimizing these taxes.

Risk Planning and Management

This area of planning deals with the risk of losing life, income, or property. It includes the use of insurance products and strategies.

Investment Planning and Management

Almost everyone has accumulation goals for which investments must be made and managed. These could include buying a home; planning for college; or providing for retirement.

Retirement Planning and Management

By far the most common accumulation goal is the ability to become financially independent. Retirement strategies encompass the understanding of the Social Security system; employer-sponsored retirement plans; and personal savings accumulation plans.

1.2 Why Plan?

Anyone who has financial challenges to solve or financial goals to achieve needs financial planning. Financial Planning can help to achieve both greater wealth and financial security. Inadequate or improper planning can be financially disastrous. An uninsured loss can wipe out accumulated wealth; insufficient savings for retirement can force a reduced lifestyle and/or
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postponement of retirement; and improper tax planning can result in higher than necessary taxes causing dollars to be lost to an accumulation plan or to ones heirs. 1.3 Why Do People Fail to Plan?

They may feel they do not have enough income or financial assets to consider planning. They may believe that they are too young/old to begin planning. They may be reluctant to consider some of the less pleasant aspects of planning such as thinking about death, disability, illness, etc. They may believe that financial planning is too expensive THEY MAY PROCRASTINATE! (The Number One Reason For Failure)

1.4 The Steps in Financial Planning Identify Goals and Objectives: Gather the necessary data Analyze present situation and consider alternatives Develop strategies to achieve goals. Implement the strategies

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Chapter 2- Cash Management and Budgeting

Cash Management involves how you handle your cash resources on an ongoing basis. There are a number of financial products and services, which can assist you in this.

2.1 Managing Cash & Savings 1) Financial Institutions

Traditional financial institutions include banks, savings and loan associations, savings banks and credit unions. Many different accounts are available from these institutions:
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Demand Deposit Accounts Withdrawals may be made whenever demanded by the accountholder (checking accounts) Time Deposit Accounts Deposits in these accounts are intended for longer accumulation. An Accountholder may be required to give a specific notice prior to withdrawal (Passbook or Regular Savings Accounts) MMDA Accounts Money Market Demand Accounts are similar to MMMF Accounts Money Market Mutual Funds pool funds from many investors and use these funds to purchase short term securities such as commercial paper, etc. They also offer a rate of return and easy access to funds through withdrawals or checking.
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Deposits in banks, savings and loan associations, or credit unions are insured against the failure of the institution up to Rs.100, 000 per account.

2) Developing Savings Habits

A portion of your financial assets should be kept liquid and readily accessible for day-to-day needs and emergencies. Most planners believe that you should maintain such an account in an amount equal to at least three to six months living expenses. Once this fund is established, you may then begin to consider the funding of more long-term savings goals. The most appropriate savings vehicle for these savings goals will vary, depending on time horizon of the savings goal; risk tolerance; etc. However, as a rule of thumb, a savings goal of 15% of gross income is a good target, although you may not be able to achieve this goal all at once. Some savings vehicles available through traditional financial institutions or through brokers are:

3) The Power of Compound Interest

How much you earn on your accumulated investment funds will be determined by several factors:

Your initial Investment and subsequent additional investments The amount of time the money is left on deposit
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The method The rate of interest being paid of interest calculation

The future value of your investment can be determined by the use of a simple calculation: Future Value is the amount to which todays investment will grow over a given period of time at a specific rate of interest. This process is referred to as "compounding."

Example
Assume that you were to make a Rs.2000 deposit into a Certificate of Deposit earning 5% interest per year. At the end of 20 years, total deposits would have been Rs.40,000 (20 years x Rs.2000 per year). However, the total account value would be Rs.66,132, due to the compounding of interest over that period of time. To apply this to a goal-setting problem, if you were to identify a savings goal of Rs.20,000 as down payment for a home in five years, (with Rs.5000 already saved), you could not simply divide the Rs.15,000 remaining accumulation goal by 5 to find out how much you would have to save per year to reach your goal. This process would ignore the interest factor, for which we will use 10%. FUTURE VALUE = AMOUNT INVESTED X FUTURE VALUE FACTOR This future value factor may be arrived at by using a financial calculator, or by using a Future Value Table. To use this Table, locate the factor (1.6105) which lies at the intersection of 5 on the vertical axis (for 5 years); and locate 10 on the horizontal axis (for 10% interest). The factor (1.6105) is then inserted into the formula: FV = Rs.5,000 x 1.6105 = Rs.8,052.50 13

Thus, your Rs.5,000 will be worth Rs.8,052.50 in 5 years. Subtracted from our total goal of Rs.20,000 there is still Rs.11,947.50 needed. The second step of our problem involves using the future value formula again to determine how much savings per year will be necessary (still at the 10%) for the 5 year period in order to reach the Rs.11,947.50 goal. A second time value formula involving a cash flow (sometimes called an annuity) can be used: YEARLY SAVINGS = AMOUNT DESIRED DIVIDED BY FUTURE VALUE ANNUITY FACTOR This computation uses a Future Value of an Annuity Table. You again locate the intersection of 5 years and 10 percent interest with a factor of 6.1051. Plugged into the formula, the computation becomes: YS = Rs.11,947.50 DIVIDED BY 6.1051 = Rs.1,956.97 So, you would have to save Rs.1,956.97 per year for five years, invested at 10% interest to reach your goal of Rs.11,947.50.

4) Present value calculation

Present Value is the value today of an amount to be received in the future; or the amount you would have to invest today at a given interest rate over the specified time period to accumulate the future amount. This process is known as "discounting", and is the inverse of compounding.

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Present Value calculations are frequently used in retirement projection calculations. For example, if you are 35 years old and wish to accumulate a Rs.300,000 retirement fund by age 60 (25 years from now), you would use a Present Value Table .

PRESENT VALUE = FUTURE VALUE X PRESENT VALUE FACTOR If we assume a 25-year investment at 7% the solution would look like this: PV = Rs.300,000 x .1842 = Rs.55,260 This is the lump sum you would have to deposit today to reach your goal with no further contributions. Another example involving present value deals with regular payments. Example

Suppose you this is in the fall of your son or daughter's senior year in high school and you want to know how much money you need to have today in order to make tuition and fee payments of Rs.18,000 at the beginning of each of the four years of your child's college education. You believe you can achieve a 12% yield on your funds during this time. To do this, use a Present Value of an Annuity Table. PRES. VALUE = ANNUITY VAL. X PRES. VAL. OF AN ANNUITY FACTOR
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Enter the Present Value of an Annuity Table at four years and 12% interest and obtain the factor of 3.0373.
Therefore, if you have Rs.54,671.40 invested today at 12% interest, you will be able to withdraw Rs.18,000 one year from today and for each of the following three years.

2.2-Preparation of Personal Financial Statements

The preparation of certain personal financial statements will clarify the current status of your financial situation and provide the"starting point" for any future action. These statements are very helpful in assisting you in evaluating your own situation or in gathering the information needed to work with a financial planner. The two forms we will be working with are the Personal Financial Statement; the Personal Budget.

2.2.1-THE PERSONAL BUDGET

Why Prepare a Personal Budget? A Budget can be used as a tool in identifying how and when money is being spent. It can help to identify cash flow problems and can also identify dollars which may be redirected toward achieving financial goals.

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Steps in Budgeting
1. The first step is to record historical information as to income. This information will come from pay stubs or statements or tax returns. 2. The next step is to record historical information concerning your personal expenses. This information will be found in your cancelled checks; checkbook registers; paid receipts (cash); credit card statements and/or tax returns. 3. You may wish to segregate your expenses by type. ("Fixed" expenses refer to payments which are equal and non-varying each payment period and "variable" expenses involve payments that vary in amount from one time period to the next.) 4. Once existing patterns are identified, you can identify those areas which you may wish to target for change. 5. The next step in the budgeting process involves preparing projected income and expenses for the next budgeting period (usually one year). You should include any targeted changes you have identified in Step 3. 6. Next, you will maintain Records of income and expenses as they occur. 7. Periodically compare actual results to desired target. Make changes as needed. 8. A budget will only help you achieve your goals if is honest; if it is used; and if adjustments are made, as needed. It also makes sense to get into the habit of "paying yourself first" by making the first check
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you write once you get paid to yourself to be deposited to you savings and investment program. If you wait to see what is left over, it is usually nothing! Personal Budgeting Worksheet (Period covering _______________to ________________) Item Household Expenses Food Clothing Transportation Personal Insurance Professional Debt Repayment Miscellaneous Savings and Investment Grand Total Historica l Target Actual Difference

2.2.2-THE PERSONAL FINANCIAL STATEMENT

Why Prepare a Personal Financial Statement? The Financial Statement is like a snapshot of your financial condition as of a certain date. The categories on a balance are assets, liabilities, and net worth. Financial statements should be prepared at least once per year. The Personal Financial Statement will include the following information:

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Assets Assets are the things that you own. They are often grouped into broad categories:

Liquid Assets - Cash or other financial assets, which can be easily and quickly converted into cash with little or no loss in value. (Checking Accounts, Money Market Accounts, Savings Accounts) Investment Assets Assets which are held for their financial return, rather than for personal use. Stocks, Bonds, Mutual Funds, etc.) These assets generally appreciate (increase) in value. Real Property Land and things attached to it (house, garage, etc.) Personal Property Movable property usually held for personal use (automobile, furniture, clothing, etc. These assets generally depreciate (decrease) in value.

Liabilities Liabilities are the things that you owe. They are also grouped into broad categories:

Current Liabilities Bills that are currently due and will be paid off within one year (Rent, Current Months unpaid utility bills; medical bills; credit card balances, etc.) Long Term Liabilities Liabilities on which the payment stream will continue for more than one year (long term loans for auto, home, education etc.)

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Net Worth Net Worth is the net amount of wealth or equity you own, based on your assets and liabilities. It is calculated by subtracting liabilities from assets. Net worth is increased when assets are added or debts are reduced or eliminated.

Utilizing and Analyzing the Information on your Personal Financial Statement Important areas to examine are:

Net Worth If your familys net worth is less than zero, than you are insolvent. A familys net worth should increase over time. Solvency Ratio This calculation shows how much of a financial cushion you have in relation to your financial obligations. Liquidity Ratio This calculation shows how long you could pay your current bills from your assets.

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3.1-Understanding the Use of Credit

Appropriate Use of Credit The use of credit (posting payments until a future time) can be a useful tool for individuals, businesses and governments. There are numerous valid reasons for the use of credit, such as

Safety/Convenience Consumer does not need to carry large amounts of cash, which could be lost or stolen . Also, recourse is provided for unsatisfactory purchases and returns can be re-credited to the account. Emergencies Consumer can deal with short term unexpected situations (auto repairs, medical expenses, etc.) when cash is not available. Record-Keeping Credit borrowing provides an itemized record of all transactions. Opportunity Consumer can make unanticipated purchases when cash resources are not available Facilitation of Transaction Consumer can make certain purchases indirectly by telephone or Internet or directly such as automobile rental; airplane tickets, etc. when other payment forms are not practical. Identification Credit cards are often used as a form of identification for other transactions such as cashing a check; applying for credit, etc.

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Inappropriate Use of Credit

There exists, however, the potential for abuse of credit which leads to overindebtedness and financial problems and may ultimately impede or prevent the achievement of financial goals..

The biggest problem with credit is the tendency to overspend. Credit should not be used for routine basic living expenses or impulse purchases Credit should also not be used for the purchase of short-lived goods and services. (Rule of thumb: an item purchased by credit should not be used up sooner than the bill is paid off!) Monthly debt repayment should not exceed 20% of monthly takehome pay. High interest costs on unpaid balances can accumulate rapidly.

3.2-Computation of Finance Charges on Credit Accounts

Various charges, fees and interest computations may all affect the cost of credit when using a credit card. Be sure to compare!

Calculation of Interest rate on Unpaid Balances May be fixed or variable. Issuers must disclose the "APR" (Annual Percentage Rate) and the "PIR" (Periodic Interest Rate) for each billing cycle. Computation of Unpaid Balance The method by which a card issuer calculates the unpaid balance on an account. This balance

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multiplied by the periodic interest rate determines the finance charge, so it is very important! 1. Average Daily Balance Method Each day the issuer subtracts any payments and adds new purchases to the account balance. These balances are they added together for the billing period and divided by the number of days in that cycle. 2. Previous Balance Method The issuer charges interest on the balance outstanding at the end of the previous billing cycle. This is the most expensive method for the consumer since interest is charged on the outstanding balance at the beginning of the billing period. 3. Adjusted Balance Method The issuer starts with the previous balance, subtracts any payments or credits, and charges interest on any remaining unpaid amount. 4. Past Due Balance Method With this method the issuer does not charge any interest for cardholders who pay the account in full before a specific period of time; otherwise, the finance charge is imposed under one of the three preceding methods.

Fees Some card issuers charge an annual fee, just to have access to the card. Separate fees may be charged for cash advances, late payments, exceeding the credit limit and other services, such as lost card replacement. Grace Period The amount of time during which no interest is charged, if the entire amount is paid .

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Other Benefits A card may provide other benefits such as cash advances, flight insurance, replacement of broken items, discounts on merchandise or purchasing clubs. Acceptance Some cards are more widely accepted than other cards

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Chapter4-Income Tax Planning

WHAT IS IT?? As the old saying goes Nothing is certain but death and taxes. Financial Planning cannot postpone or prevent the first inevitable (death),but, in some instances ,planning can postpone, reduce, or even eliminate the impact of the second (taxes). Income tax planning encompasses several areas to include: Understanding the structure and operation of our tax laws Calculation and filing of federal income tax returns Planning to minimize taxes Other forms of personal taxation

4.1-CALCULATION AND FILING OF INCOME TAX RETURNS There are several factors, which will determine the amount of income tax you will pay: Filing status Taxable Income (Gross) Allowable adjustments to income Allowable deductions to income Exemptions

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FILING STATUS The major categories are: An Individual A Hindu Undivided Family A Company A Firm An Association of Persons or a Body of Individuals, whether incorporated or not A Local Authority Every artificial Juridical Person not falling within any of the preceding categories

4.2-GROSS INCOME DEFINED The definition of income under the Income Tax Act is of an inclusive nature, i.e. Apart from the items listed in the definition, any receipt which satisfies the basic condition of being income is also to be treated as income and charged to income tax accordingly. Income includes: Profits or gains from business or profession including any benefit, allowance, amenity or perquisite obtained in the course of such business or profession. Salary Income including any benefit, allowance, amenity or perquisite obtained in addition to or in lieu of salary. Dividend income

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 Winnings from lotteries, crossword puzzles, races, games, gambling or betting. Capital gains on sale of capital assets. Amounts received under a KeyMan Insurance Policy i.e. a life insurance policy taken by a person on the life of another person who is or was the employee of the first mentioned person or is or was connected in any manner whatsoever with the business of the first mentioned person. Voluntary contributions received by a religious or charitable trust or scientific research association or a sports promotion association.

4.3-SOURCES OF INCOME EXCLUDABLE FROM TAXATION Section 10 of the Income Tax Act, 1961 specifies those incomes, which are exempt from income tax, i.e. incomes on which no income tax is payable. Let us understand such incomes:A. Agricultural Income Under the constitution of India , taxation of agricultural income eis the right of the state governments. The Central Government cannot levy tax on such income. Section 2(1A) gives a detailed definition of agricultural income. Income derived from agricultural operation from land, which is situated in India, will be exempt agricultural income. Income form agriculture up to and exclusive of the processing state will be agricultural income. Income from processing stage and onwards will be taxable income. Similarly,
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Income from a farmhouse used for agricultural purposes will be treated as agricultural income. Thus income form basic operations on land like cultivation, growing crops etc. and secondary operations like removal, digging, etc. can be classified as agricultural income and is exempt from tax. However, income from sale of trees, breeding livestock, fishing activities, poultry farming cannot be classified as agricultural income and is not exempt from income tax. B. Receipt by a member out of a HUF income Any sum received by a member of a Hindu Undivided Family from out of the income of the family as well as the income received by an individual member from out of the income of the impartial estate is exempt. Impartible estate means property which cannot be disposed off or divided by the holder of the property. An HUF is separately taxed on its income. The rate of tax levied on a Hindu Undivided Family is quite high. Therefore, in order to avoid the same income from being taxed twice, distribution of HUF income amongst members is exempt from Income Tax. C. Share of income of a partner from a firm Any sum received by a partner from a firm as his share in the total income of the firm is exempt from tax. The logic of such exemption is similar to that for granting exemption to income as share from HUF.

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D. Casual or non-recurring receipts Any receipts which are of casual or non- recurring nature are exempt up to a sum of rs.5000 (rs. 2500 in case of winnings from races) in each previous year. Casual income is income which is accidental, received without stipulation or a receipt which is of a fortuitous nature and which cannot be foreseen. For example Prize won for taking part in a competition, reward for finding a lost child, etc. However the following income will not be treated as casual or nonrecurring: Capital gains Receipts arising from business or from exercise of profession or occupation Receipts by way of addition to the remuneration of an employee E. Amount received under a life insurance policy- including the bonus allocated on such policy Any amount received under a life insurance policy including a bonus either on maturity of the policy, or otherwise, is exempt from tax. However, this exemption is not available to receipts under a Keyman Insurance Policy. F. Payments from Public Provident Fund Any payments received from The Public Provident Fund(PPF) are exempt from tax.
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G. Any scholarship granted to meet the cost of education is exempt H. Income of a minor upto rs.1500 Any income which arises to a minor child of an assessee is added or clubbed to the parents income under Section 64(IA) of the Act. Section 10(32) however gives exemption from such clubbing up to a maximum of rs.1500 annually per child. I. Dividend received by a shareholder Any income received by way of dividend from a domestic company, or from UTI or from a recognized mutual fund by a shareholder/unit holder is fully exempt from tax. J. Awards and Rewards Any award or reward, whether in cash or kind from Central or any state government or any other approved body in public interest is exempt from income tax. K. Pensions received form gallantry award winners. Family pension received by individual who has been in the service of the Central or State Government and has been awarded Param Vir Chakra or Maha Vir Chakra or Vir Chakra or other notified gallantry award or by members of his family is exempt from income tax. L. Interest incomes of certain types
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The following interest income is exempt from income tax: Interest on notified securities, bonds, certificates, deposits, etc. Interest on notified Capital Investment Bonds Interest on Relief Bonds Interest on notified Bonds in the hands of non-residents Interest on notified savings certificate Interest on Gold deposit bonds,1999

4.4-DEDUCTIONS FROM ADJUSTED GROSS INCOME A. An individual assessee can claim a deduction (u/s 80 CCC) for any amount paid or deposited by him in any annuity plan of the Life Insurance Companies for receiving pension from a fund set up by the said corporation. The deduction is restricted to a maximum of rs.10000. B. An assessee (u/s 80 D) is entitled to a deduction up to rs.10000 a year in respect of the premium paid by him/her by cheque for insurance: a) On his health or on the health of his spouse or dependent parents or children, and b) In case of a Hindu Undivided Family on the health of any member of such family Where any of the aforesaid persons is a senior citizen(i.e. one who has attained 65 years of age at any time during the previous year), the aforesaid limit has been increased upto rs.15000.
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C. Section 80DDB has been inserted to specifically provide a separate deduction for expenditure incurred for the medical treatment for the individual himself or to his dependent relative or any member of the Hindu undivided family in respect of diseases or ailments as maybe specified in the rules. The amount of deduction shall be limited to a maximum of rs.40000. Moreover assessee or any member is a senior citizen (i.e. , at least 65 years of age at any time during the previous year), then a fixed deduction of rs.60000 shall be available. The amount of deduction available shall be further reduced by any amount received from an insurer for medical treatment. D. Any taxpayer can claim a deduction (u/s 80 G & u/s 80 GGA) in respect of donations made to certain funds, charitable institutions. E. An assessee can claim a deduction for the interest received on the following Securities: Interest on any securities of the Central or any State Government; Interest on deposits under such National Deposit Scheme as may be framed by the Central Government and notified by it in this behalf in the official gazette; Interest on deposits under the Post Office( Monthly Income Account). F. An assessee shall be entitled to a deduction, from the amount of income tax (Section 88) on his total income with which he is chargeable for any assessment year, of an amount equal to 20 per cent of the aggregate of the sum. It includes contributions towards
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Life Insurance Premium, Post Office Savings Scheme, Public Provident Funds, etc.

Chapter-5 TAX CREDITS

Once the amount of taxes due has been determined, there may be tax credits available to offset payment due. A tax credit is a reduction in the actual tax bill, and as such, is of more value than a deduction for an equal amount, which simply reduces the amount of taxable income. Limitations and exclusion apply to all of these credits and their use should be coordinated through your tax advisor. So, now we complete our tax calculation as follows:

Less: Equals: Less Less Equals Times: Equals Less Equals

Gross Income Adjustments to Gross Income Adjusted Gross Income (AGI) Larger of Itemized or Standard Deductions Exemptions Taxable Income Applicable Tax Rate Tax Liability Tax Credits and Prepayments Tax or Refund Due

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Chapter-6 TAX PLANNING AND ITS ROLE IN THE FINANCIAL PLANNING PROCESS
Taxpayers are always seeking ways to eliminate or at least reduce their income tax burden. There are some strategies, when used in conjunction with the overall financial plan, which can accomplish these goals. Some popular tax-savings strategies are: 1) Taking Maximum Advantage of Tax Filing Options

This technique involves the maximization of available tax deductions, exemptions and credits (thereby reducing the amount of taxable income). These issues will vary by individual and should generally be discussed with a tax professional; however, some of the more important considerations are:
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Are you aware of all available exemptions, deductions and credits to which you are entitled? Is your present taxpayer status (joint return, separate return, Head of Household, etc.) best for you? Will your AMT calculation exceed your regular tax calculation; and if so, what planning steps should you consider? If self-employed, have you considered which form of business structure (Sole Proprietorship, Partnership, etc) is most advantageous from a tax perspective?
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2) Acceleration and Deferral Techniques Income tax liability can frequently be reduced though the techniques of deferral or acceleration.
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Acceleration: Income may be accelerated (taken early) so as to include it for a taxable period in which taxable income is less than in the next taxable period; thereby reducing taxes. Expenses may also be accelerated. One reason this strategy would be used would be to take maximum advantage of deductions and exemptions. For example, if a taxpayer has already had medical deductions of 7.5% of AGI, this would mean that any additional qualifying medical expenses incurred during that tax year, would be eligible for a deduction. Another instance in which this acceleration technique would work would be if current year taxable income was considerably less than anticipated income for the upcoming tax period; and thus, deductions would be of more value in the future to offset the higher income. Deferral: Deferring or postponing income may also result in tax savings. If taxable income is anticipated to be less in the next taxable period, deferring income into that period could result in lower taxes. Conversely, deferring expenses into the next taxable period would make sense if taxable income was anticipated to be higher than in the current income period.

3)

Utilization

of

Non-Taxable

Employee

Benefits

You may have access to certain employer-sponsored benefits through your job, which may provide great economic benefit to your family without
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creating any taxable income. These may be at no cost to you; or may require that you share in the cost. Some of the most popular benefits, which result in no taxable income, are
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Group medical and dental insurance (benefits received are not considered taxable income.) Group term life insurance (death benefits of up to Rs.50,000 in most cases, are exempt from taxation.) Group accidental death and dismemberment, travel accident and related plans

4) Income/Deduction shifting The taxpayer shifts a portion of his/her income (and therefore taxes) to a family member or entity, which is in a lower tax bracket. Some useful techniques are:
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Making a gift of incomeproducing property (such as stock, savings bonds, certain real estate, etc.) In this case, all future income will be taxed to the recipient, not the donor. It is important to note that this action may have Gift Tax implications, which should be discussed with your personal tax advisor. Also, the property itself must be given away; since gifts of only the income will not shift the income tax burden to the recipient. Also, the Tax Reform Act of 1986 limited the usefulness of this technique between parents and children by taxing unearned income over Rs.1,400 per year for children who are under age 14 at their parents top tax rate.
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The opposite of income shifting is deduction shifting. This is accomplished by shifting allowable tax deductions to a taxpayer who is in a higher bracket than the taxpayer who would otherwise be claiming this deduction.

5) Tax-Managing Your Investment Portfolio

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As an investor, you may be able to time investment sales in order to maximize your tax advantage. If you have capital gains on securities or other investment property, these gains may be offset by selling another security you own for a loss. This involves the planning in terms of the timing of the purchase and sale of these securities so that they fall within the same tax calculation period. "Tax exchanges" are available which will permit the sale of a security for a loss, and yet maintain a similar investment position. (For example, if you originally purchased a technology stock at Rs.10 per share, but the stock had now declined to Rs.5 per share, you could sell this stock, taking advantage of the loss for income tax purposes and immediately purchase a different technology stock; thereby keeping your position in a technology investment. (Note: tax laws concerning this type transaction are somewhat complicated, so you should consult with your tax professional for personal advice before undertaking this strategy.) Tax laws permit a taxpayer to select which stock/fund shares they want to sell if they are selling only a part of their holdings.

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Example Suppose, if over time, you had purchased shares of a particular stock as follows: 100 shares at Rs.20 per share in 1985 50 shares at Rs.70 per share in 1990 100 shares at Rs.80 per share in 1995 The value of the stock is now Rs.70 per share. If you wish to sell 50 shares, you may sell shares which would result in a gain (those purchased in 1985); no loss or gain (those purchased in 1990) or a loss (those purchased in 1995).
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Since capital gains laws favor investments held for periods of at least 12 months, (See Capital Gains Above), investment sales may be timed to take advantage of this lower tax rate.

6) Making Charitable Contributions Charitable contributions are considered itemized deductions, which reduce your taxable income. These charitable gifts may take various forms:
o o

Gifts of cash Gifts of appreciated property such as stock or real estate (These gifts would generally be deductible at fair market value on the date of the gift, with no capital gain consequences to the donor.) This may, however, trigger Alternative Minimum Tax consequences. The establishment of Charitable Remainder Trusts in which property is transferred to the trust, with the donor receiving and income stream from the investment, and the charity receiving the property. The taxpayer receives a current tax deduction for
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the value of the remainder interest that the charity is receiving. 7) Tax Shelters Some investments, such as certain types of real estate, oil and gas drilling, historical rehabilitation, etc. are structured to take advantage of certain tax write-offs, such as depreciation, amortization or depletion. It should be noted that the effectiveness and availability of these types of investments have been greatly diminished by the Tax Reform Act of 1986. This was intended to discourage taxpayers from investing in a particular activity strictly for tax purposes. 8) Tax-Free Investing Interest paid on some investments is free from federal income tax; and often from state and local taxes, as well. One such investment category is public purpose municipal bonds (that is, bonds issued by some governmental entities). However, you should be aware that the interest from certain taxexempt municipal securities might be subject to the Alternative Minimum Tax computation.) Note: this strategy is generally of interest only to the higher tax brackets, due to the fact that at lower brackets, these bonds would not have as high a return as the taxable bonds even after the payment of taxes. Another investment potentially excludable from taxation is Series EE Bonds, when used for higher education purposes (Certain limitations apply.) 9) Tax Deferred Investing Other investments do not eliminate tax, but simply postpone taxation until some future date. This may be advantageous if the taxpayer anticipates being
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in a lower tax bracket in the future. Another potential advantage of this technique is that investment return during the deferral period is enhanced, since the postponed amount of tax remains invested, earning interest, as well. Some of the most common vehicles for this deferral technique are:
o o o o

Qualified employer-sponsored retirement plans Employee Stock Options Plans Non-Qualified deferred compensation Plans Purchase of bonds (bonds issued by the state or central government on a discounted basis). Bond owners may elect when they want to be taxed on the increase in value of these funds; either yearly as interest accrues or upon maturity or when they are redeemed. Life Insurance Cash Values and the interest/investment return they receive are not subject to current income taxation. If values remain in the policy until the death of the insured, they pass as a portion of the death benefit to the beneficiary with no income tax consequences ever! If values are withdrawn during the life of the insured, any gain over and above the initial investment of premium is taxed as ordinary income. (For more information, see Insurance Module.) Deferred Annuity policies also feature the deferral of tax on investment growth until the policyholder withdraws these funds. (For more information, see Insurance and Retirement Modules.)

10) Tax Planning Wisdom

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Tax planning is very important; however, it should never be overemphasized at the expense overall financial goals and objectives. In some instances a strategy, which results in tax-savings also results in some loss of flexibility, control, or some other advantage. For example, tax-favored retirement plans offer deferral of taxes until retirement; however, they impose strict regulations and penalties which prevent the use of these funds prior to retirement age (59 in most cases). In general, if a strategy to save taxes does not make sense, other than for tax purposes, it should not be implemented. Also, a tax adviser should generally be consulted concerning the overall implications of any tax-savings strategies.

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Chapter-7 Risk Management

The Basics Risk Management is the cornerstone of any financial planning effort. It makes no difference how elaborate or effective the investment portfolio, the retirement plan, or the estate plan, if you have not taken the necessary steps to eliminate risk, all remaining planning efforts could be pointless. Risk management through the wise use of insurance removes the concern for the unknown from a financial plan.

How Does One Manage Risk? There are four basic techniques for managing risk:

Risk Avoidance - This technique involves the avoidance of exposure to loss; either by not owning specific property that could be exposed to loss; or by not engaging in a specific activity which could create liability. Example The ultimate avoidance of being killed in a plane crash is to refuse to fly. The ultimate avoidance of being sued by someone being injured on your trampoline is not to own one.

Risk Reduction/Loss Management and Control - This technique involves lowering the probability of a particular hazard occurring; and lessening the severity of the hazard by taking some positive action.

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Example A risk reduction strategy for a swimming pool is to install warning alarms on all doors leading to the pool; a risk reduction strategy to prevent home fires would be to refrain from leaving greasy or chemically saturated rags near a gas hot water heater.

Risk Assumption/Retention - This technique involves the acceptance of the risk. Generally, this technique should be used only when the potential exposure is very small or has a low probability of occurrence. In other words, you should only self-insure what you can afford to lose. Unfortunately, many people self-insure by default. They do not consciously decide to take-on the full risk; they merely fail to plan and provide for an adequate risk management program. Example Choosing not to insure a 15-year-old car with a value of less than Rs.1,000 for collision coverage is an example of Risk Assumption.

Sometimes partial risk retention is used, wherein the person at risk chooses to accept part of the potential liability for a certain hazard. Example The selection of an insurance policy (health, auto, or homeowners) with a large deductible would involve partial retention.

Risk Transfer - This technique almost always involves some form of insurance. The risk of a particular hazard is transferred to another entity (usually an insurance company) in exchange for a payment of
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premium. This progress also involves the determination by the insurer of whether or not the risk to be assumed is acceptable at the given premium. This process is known as the underwriting process.

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Chapter-8 CONCLUSION
The Saving behavior has been changed considerably over the last couple of years. The savings rate in India is comparatively higher than various other countries. Earlier the trend of saving was in terms of physical assets but it has started to shift now to financial instruments. This trend partially reflects the relentless expansion of the various branch networks of the financial institutions into the county's rural areas and partially holds the increasing trend of the easy accessibility of the alternative investment opportunities. Today corporate securities have become a part of household savings wherein retail individuals prefer to invest his saving in security market. The reason sited for this is the growth seen in the stock market and a low interest rate and return offered by traditional instruments. Also the growing income of working class has also contributed largely to the changing pattern of saving in India. The Household savings in India Can is broadly categorized into the following types: Savings in physical properties Savings following: Savings deposits with banks Life insurance policies Provident funds Pension funds Liquid cash of households
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in

financial

instruments

or

financial

household

savingsFinancial household savings in India usually include the

Deposits with non-banking financial institutions Unit Trust of India Investment Schemes The major portion of financial saving goes into pension funds and life insurance. It is also found that the response of saving for the interest rate changes in India was amongst the lowest in the developing countries. Over past 30 years, the prime two instruments for household long term saving like pension saving and life insurance have come to an idle state. On the other hand, the mutual funds started to become more successful in the early years of 1990s. Considering these two factors, we can conclude two weaknesses of the saving market in India. First, public sector dominates the markets. Second, the allocation of portfolio is under control that makes the low returns from the market developments.

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SUGGESTIONS
After all this it can be stated that the fundamental corner stones of successful investing are: Save regularly, Invest regularly Start Early Diversify Use tax shelter

Keep a regular check on investment and modify plans as and when needed People need to be educated and informed about Financial Planning and this provides greater opportunity to financial product distributer like Reliance Money to educate people. Companies can arrange for seminars and sessions through which they can provide information to people and in return can get prospective clients from the audience. In this way both the audience and the company can also be benefited. Financial planning is not a onetime activity; the initiative should be taken by financial planner to put this forward to their client. Regular meetings should be conducted between the financial planner and client to review the investment portfolio. Alteration should be made in portfolio as per need and requirement of the client. This will ensure that the investment objectives are achieved. It will create goodwill for the financial planner and his company. This is one area where many planners are lacking today. Follow-up, follow-up, follow-up is need of hour and it should be understood by financial service provider. Goal should be properly divided into short term, medium term and long term. Proper allocation should be done in various instruments according to the time period of goal. There are
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various instruments available which can site different time period needs. If investment are giving regular return or are going to get matured should be reinvested properly.. If an investor is seeking help from advisor then he should collect enough information of product from different sources. It will help to take proper investment decision and choose aright advisor. It is also necessary that advisor should have enough experience. Thus the ultimate responsibility is on the investor when it comes to taking investment decision. Always keep investment a simple affair. Diversification is must but not to a greater extend. Investor should know exactly what he is investing in. If they do not have adequate information, question should be asked to financial advisor. It is better to invest in instruments which we can understand rather than being dependent on someone else advice. All the documentations should be complete and need to be preserved. At time of maturity its necessary to produce the investment documents which act as a proof. But many times investors do not have proper documents which dishonors the claim at maturity. It is also recommended that all the disclosure documents also be preserved as it would help in case of any dispute in settlement. Investment through SIP should be encouraged. A little amount regularly invested for long period can create a greater wealth. SIP helps in Rupee cost averaging, develop habit of saving and it provides convenience of investment. Buy and hold. Investment should be done fairly for a longer period of time only then capital appreciations is possible.

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BIBLIOGRAPHY 1.Websites http://www.reliancecapital.co.in/ http://www.fpsbindia.org/ http://profit.ndtv.com/PersonalFinance/Insurance.aspx http://profit.ndtv.com/2008/01/16190747/Compare-DifferentInsurance-Pl.html http://business.rediff.com/report/2009/may/15/perfin-types-of-lifeinsurance.htm http://www.mywealthguide.com/persnl.htm http://www.kingswoodconsultants.com/LifetimeFinancialPlanning. html http://www.businessgyan.com http http://www.itrust.in/financial-planning/article.action/What-IsFinancial-Planning-India http://www.dnaindia.com/money/report_union-budget-2009-10highlights_1271503 http://finance.mapsofworld.com/savings/india/household.html

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