Lmr - Advanced Financial Planning
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OVERVIEW – ADVANCED FINANCIAL PLANNING
SIX STEP PROCESS 1. Establishing the relationship
6. Review & revision of plan
2. Data gathering & goal setting 6 step process of Financial Planning
5. Implementation of recommendations
3. Identification of financial problems 4. Written alternatives & recommendations
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPONENTS OF FINANCIAL PLAN
Covering letter
Cover page
Summary of the plan
Client profile
Goals of the client
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPONENTS OF FINANCIAL PLAN
Financial statements
Assumptions
Risk Management & Insurance needs
Goal Funding
Retirement Planning
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPONENTS OF FINANCIAL PLAN
Tax Planning
Asset Allocation – Portfolio Rebalancing
Disclosures
Disclaimers
Risks
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPONENTS OF FINANCIAL PLAN
Cash Flow Projections
Recommendations
Action Plan
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW INVESTMENTS
INVESTMENTS
OVERALL PRODUCT KNOWLEDGE
PRODUCT’s STAR FEATURES
ASPECTS AFFECTING CASH FLOWS
TAXATION ASPECTS
25 June 2007
ADVANCED FINANCIAL PLANNING
RELIEF BONDS (TAX-FREE)
Issued in March 2003
Tenure – 5 years (2008)
Interest @ 6.5% (Half yearly)
Interest payments – 1st July & 1st January
Compounding – Half yearly
Maturity Value – Rs. 1000 becomes Rs. 1377
25 June 2007
ADVANCED FINANCIAL PLANNING
RELIEF BONDS (TAX-FREE)
Individuals & HUF (No NRIs)
Min – Rs. 1,000
I.T & W.T – Exempt
Premature encashment at the end of 3 years: timing at the interest payment dates – penalty @ half of the interest due for the last 6 months
Discontinued by F.A 2004
25 June 2007
ADVANCED FINANCIAL PLANNING
RELIEF BONDS (TAXABLE)
April 2003
8% Interest (Taxable)
6 years
Interest payments – Half yearly (1st February & 1st August)
Compounding – Half yearly
Maturity Value – Rs. 1000 becomes Rs. 1601
25 June 2007
ADVANCED FINANCIAL PLANNING
RELIEF BONDS (TAXABLE)
Individuals & HUF (No NRIs)
Min – Rs. 1,000
I.T & W.T – Taxable
No Premature encashment at the end of 3 years
25 June 2007
ADVANCED FINANCIAL PLANNING
NATIONAL SAVING CERTIFICATES
Minimum – Rs. 100
Interest compounded half yearly
100 becomes 160.10
Six years – no premature encashment
Premature allowed in case of death
25 June 2007
ADVANCED FINANCIAL PLANNING
NATIONAL SAVING CERTIFICATES
Encashment Features:
Within a year – only face value
One year to three years – face value + simple interest
More than 3 years – as per schedule
25 June 2007
ADVANCED FINANCIAL PLANNING
PUBLIC PROVIDENT FUND
15 years
Min – 500, max – 70,000
Account closure – 15 years
Total deposits – 12 in a year
In a month may be more than 1
Loans: after completion of one year from the end of the financial year of opening of the account and before completion of the 5th year.
25 June 2007
ADVANCED FINANCIAL PLANNING
PUBLIC PROVIDENT FUND
Amount cannot exceed 40% of the amount that stood to credit at the end of fourth year preceding the year of withdrawal or at the end of preceding year whichever is lower
Premature withdrawal is permissible every year after completion of 5 years from the end of the year of opening the account.
25 June 2007
ADVANCED FINANCIAL PLANNING
POST OFFICE SCHEMES
Kisan Vikas Patra
Post Office Monthly Income Scheme
Post Office Saving Account
RD – Rs. 10 becomes Rs. 728.9 (5 years)
25 June 2007
ADVANCED FINANCIAL PLANNING
INVESTMENT CONCEPTS
Return (HPR) & CAGR
Expected Return on Security/ Portfolio
Standard Deviation on Security/ Portfolio
Co-efficient of correlation
Co-variance
25 June 2007
ADVANCED FINANCIAL PLANNING
INVESTMENT CONCEPTS
Share Valuation
Constant Growth Model
Above normal growth rate & constant growth
25 June 2007
ADVANCED FINANCIAL PLANNING
OPTIONS
Call & Put Strategies
Protective Put
Covered Call
Straddle
Spread
Collar
Break even of put or call
25 June 2007
ADVANCED FINANCIAL PLANNING
TIME VALUE OF MONEY
Present Value
Future Value
Present value of Annuity
Future Value of Annuity
Growing Annuity – Present Value
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW RETIREMENT
RETIREMENT CONCEPTS
GRATUITY Gratuity as per POGA (calculation) 3 types of workers: Month rated, piece rated and seasonal Month – 15 days salary Piece rated – 3 month avg salary Seasonal employees – 7 days wages for each season Gratuity after 5 years of service.
25 June 2007
ADVANCED FINANCIAL PLANNING
RETIREMENT CONCEPTS
Provident Funds (not taxable after 5 years of service)
Leave Salary
VRS/ Retrenchment Compensation
Super Annuation
25 June 2007
ADVANCED FINANCIAL PLANNING
RETIREMENT INCOME STREAMS
Senior Citizens Saving Scheme
Age – 60 years (55 years, for those who have retired)
9% p.a.
Qtrly interest – March, June, Sept & Dec
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW INCOME-TAX
INCOME TAX CONCEPTS
Heads of Income Salaries
Business/ Profession
Capital Gains
House Property
Other Sources
25 June 2007
ADVANCED FINANCIAL PLANNING
INCOME TAX CONCEPTS
Other Important Topics Clubbing of Income
Set off & Carry Forward
Agricultural Income
Taxability of Gifts
STT
25 June 2007
ADVANCED FINANCIAL PLANNING
SECURITIES TRANSACTION TAX
Tax on purchase or sale of shares or derivatives or Units Of Equity Oriented Mutual Fund In Recognized Stock Exchange Or Sale Of Units To Mutual Fund. Taxable Service Is Price Of Securities Traded Or Futures Traded Or In Case Of Option, Total Of Strike Price & Option Premium. Rate Of Tax: Between From 1/06/05 To 31/05/06: Delivery Based Sale Or Purchase Of Securities From Stock Exchange 0.1% Non Delivery Based 0.02% Derivatives 0.0133% Sale Of Units To Mutual Funds 0.2% No Surcharge Or Education Cess.
25 June 2007
ADVANCED FINANCIAL PLANNING
SECURITIES TRANSACTION TAX
Rate Of Tax: Between From 1/10/04 To 31/05/05: Delivery Based Sale Or Purchase Of Securities From Stock Exchange Non Delivery Based Derivatives Sale Of Units To Mutual Funds No Surcharge Or Education Cess. Rate Of Tax: FROM 1/06/06 (Till Date): Delivery Based Sale Or Purchase Of Securities From Stock Exchange Non Delivery Based Derivatives Sale Of Units To Mutual Funds No Surcharge Or Education Cess.
25 June 2007
0.075% 0.015% 0.01% 0.15%
0.125% 0.025% 0.17% 0.25%
ADVANCED FINANCIAL PLANNING
DIVIDEND DISTRIBUTION TAX UPTO A.Y. 2006 – 07: TAX ON DIVIDEND BY DOMESTIC COMPANY OR MUTUAL FUNDS AFTER 01/04/2003. TAX @ 12.5% + SURCHARGE + EDUCATION CESS. FOR DIVIDEND BY MUTUAL FUND FROM 09/07/2005 TO PERSONS EXCEPT INDIVIDUALS & HUF TAX @ 20%. FOR DIVIDEND FROM EQUITY ORIENTED MUTUAL FUNDS, DDT IS EXEMPT.
A.Y. 2007 – 08:
Companies – 15%, MMMF & Liquid Fund – 25%, Other Funds – 12.5% (Individuals), 20% (Corporates) Equity Funds - Exempt
25 June 2007
ADVANCED FINANCIAL PLANNING
SALARIES
Incl. Pension also Taxable on due or receipt basis (bonus taxable only on receipt basis) Conveyance Reimbursement Fully Exempt. Conveyance Allowance. (EXEMPT UPTO Rs. 800/-P.M.) No Proof Of Spending Needed. Medical Reimbursement. (EXEMPT UPTO Rs. 15,000/- P.A. IF IN INDIA AND UPTO Rs.2,00,000/- If Abroad) Bills To Be Attached. Medical Allowance Fully Taxable. Mediclaim Of Employees & Their Family Paid By Employer Fully Exempt. Children Education Allowance. (EXEMPT UPTO Rs. 100/- P.M.P.C. Max. 2 Children) No Bills To Be Attached. Hostel Expenditure Allowance. (EXEMPT UPTO Rs. 300/- P.M.P.C. Max. 2 Children) No Bills To Be Attached.
25 June 2007
ADVANCED FINANCIAL PLANNING
SALARIES
HRA : LOWEST OF: 1. ACTUAL HRA PAID. 2. RENT PAID OVER 10% OF SALARY. 3. 50% OF SALARY. (40% IN CASE OF NON METROS)
25 June 2007
ADVANCED FINANCIAL PLANNING
HOUSE PROPERTY
Income derived from property (land and buildings appurtenant)
Received by the owner
Not used for business or profession
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPUTATION OF INCOME
Gross Annual Value (as per specifications)
Deduct Municipal Taxes (only paid by the owner during the year)
Derive Net Annual Value
Deduct Standard Deduction @ 30%
Deduct interest on housing loan
Net income/ loss offered to tax
25 June 2007
ADVANCED FINANCIAL PLANNING
BUSINESS/ PROFESSION
Income from business, vocation and profession
Speculative income
Interest, commission of partners
Deductions – expenses incurred wholly and exclusively for business purposes
25 June 2007
ADVANCED FINANCIAL PLANNING
SPECIFIC EXPENSES
Depreciation
Repairs, rent, rates and taxes
Bad debts
Interest
Bonus/ Commission to employees
Insurance premium (health)
25 June 2007
ADVANCED FINANCIAL PLANNING
CAPITAL GAINS
Capital asset means any property whether for business or otherwise except stock in trade, personal effects (except jewellery & house) & agricultural land in India.
Long term capital asset is which is held for more than 12 months for shares & mutual funds and more than 36 months for others. others are called short term capital assets.
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPUTATION OF CAPITAL GAINS
Full value of Sale Consideration (sale of property)
Deduct: Expenses on transfer
Net Sale consideration
Deduct: Cost (Indexed) of acquisition
Deduct: Cost (Indexed) of improvement
Check for exemption of CG
25 June 2007
ADVANCED FINANCIAL PLANNING
CAPITAL GAIN ON SHARES
No long term capital gain on shares and mutual funds if securities transaction tax is paid. Short term capital gain on shares and mutual funds if STT is paid is taxed @ 10%. If STT is not paid, STCG = added in total income. LTCG = 20% with indexation or 10% without indexation. In case capital gain is taxed at concessional rate tax, no 80C to 80U benefit. but, minimum exemption limit available in case of other income lower than exemption limit.
25 June 2007
ADVANCED FINANCIAL PLANNING
OTHER SOURCES
Dividends
Income from vacant land
Winnings from lotteries
Maintaining race horses
Family Pension (1/3rd or 15,000)
25 June 2007
ADVANCED FINANCIAL PLANNING
GIFTS
Gifts received by individual or HUF only are treated as income.
Firm, company , trust, etc. Are exempt.
Gifts received after 01/09/2004 and if above Rs. 5O,000/- from a single person are taxable. (w.e.f 1 April 2006)
If gift received from more then 1 person together above Rs. 50,000/- not taxable.
25 June 2007
ADVANCED FINANCIAL PLANNING
EXEMPT GIFTS
Gifts received on marriage are exempt.
Gift for some consideration exempt.
Gift under will or inheritance or death of payer exempt. Relatives include: Spouse Brother or sister of self/ spouse Lineal ascendant or descendant Brother or sister of parents Spouse of each of the above
25 June 2007
ADVANCED FINANCIAL PLANNING
CLUBBING
Transfer of income without transfer of asset is clubbed in the hands of owner of asset.
Income from revocable transfer except irrevocable during the lifetime of the transferee is clubbed in the hands of transferor.
Income from asset transferred without adequate consideration or unreasonable remuneration to spouse is clubbed except if there is technical or professional qualification.
Income from asset transferred to son’s wife is also clubbed.
Income of minor child is clubbed with higher income earning parent except if the child is physically or mentally handicapped or the child is using his own skill.
25 June 2007
ADVANCED FINANCIAL PLANNING
SET OFF & CARRY FORWARD
Business loss is not allowed to adjusted with salary income. Loss from speculation can be setoff only with income from speculation. Loss from owning & maintaining horses will be setoff only against horse racing income. Short term capital loss can be setoff with long term as well as short term capital gain. Long term capital loss cannot be setoff with short term capital gain but only with long term capital gain. Loss from exempted income cannot be setoff against taxable income. Loss from any head cannot be adjusted with winning from lotteries, betting, etc. All unadjusted losses can be carried forward for 8 years except horse racing loss which can be carried forward for 4 years. Such carried forward loss can be setoff in subsequent years only against same heads. For all losses to be carried forward except loss
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW RISK MANAGEMENT & INSURANCE PLANNING
REQUIREMENTS OF INSURABLE RISKS
Existence of sufficiently large number of homogenous exposure units
Loss must be definite and measurable
Loss must be fortuitous and accidental
Loss must not be catastrophic
25 June 2007
ADVANCED FINANCIAL PLANNING
STEPS OF RISK MANAGEMENT
Identify Risks
Analyze & Evaluate Risks
Develop alternatives for handling risks: Risk control & Risk financing
Choose & implement appropriate strategy
Monitor the strategy
25 June 2007
ADVANCED FINANCIAL PLANNING
CATEGORIES OF RISK
Personal Risk: Death Disability Medicals
Property Risk: Asset protection
Liability Risk: Protection of liabilities towards people
25 June 2007
ADVANCED FINANCIAL PLANNING
TYPES OF POLICIES
Term Plans: Level Benefit Increasing Benefit Decreasing Benefit
Endowment Plans
Money Back Plans
Whole Life Plans
Unit linked Plans
25 June 2007
ADVANCED FINANCIAL PLANNING
APPROACHES TO QUANTIFY RISKS
Human Life Value Approach:
Multiple Approach:
Needs Based Approach: Total of all needs
Capital Retention Approach:
25 June 2007
Economic Value
Apply a multiple to salary
Living only on income
ADVANCED FINANCIAL PLANNING
CONCEPTS – GENERAL INSURANCE
Average Clause - Coinsurance clause
Indemnity Clause
Valued Policy/ Indemnity with reinstatement
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW FINANCIAL RATIOS
FINANCIAL RATIOS
Liquidity
Solvency
Risk Coverage
Tax Burden
Net Worth
25 June 2007
ADVANCED FINANCIAL PLANNING
LIQUIDITY RATIOS
Basic Liquidity Ratio = Liquid Assets/ Monthly expenses
Expanded Liquidity Ratio = (Liquid Assets + Other Financial Assets)/ Other Expenses
25 June 2007
ADVANCED FINANCIAL PLANNING
SOLVENCY RATIOS
Liquid Asset Coverage Ratio = Liquid Assets/ Total Debt
Solvency Ratio = Liquid + Other Financial Assets/ Total Debt
Current Ratio = Liquid Assets/ Current Liabilities
25 June 2007
ADVANCED FINANCIAL PLANNING
RISK RATIOS
Life Insurance Coverage Ratio = Net Worth + Death Benefits/ Salary
25 June 2007
ADVANCED FINANCIAL PLANNING
TAX RATIOS
Effective Income tax ratio = Income tax/ total realised increases in net worth
INFLATION PROTECTION RATIOS Inflation Hedge Ratio = Equity, persona and tangible assets/ Net Worth
25 June 2007
ADVANCED FINANCIAL PLANNING
NET WORTH RATIOS
Net Worth Growth Ratio = Net Increase in Net worth/ Net worth at the beginning of the year
Net worth entities ratio
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW CODE OF ETHICS
CODE OF ETHICS
INTEGRITY: No misleading advertising: size, scope or areas of competence
Promotional activities: no material false or misleading communications
Representation: no misrepresentation of FPSB, India. Identify personal opinions
Custody of clients documents – extra care to be exercised
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
OBJECTIVITY: Act in the interest of the client
Limitation in the capacity to advise = disclose upfront
Statement of compensation
Conflict of interests to be disclosed
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
COMPETENCE: Be informed of the developments in FP
Offer advice only in areas of competence
Representatives to be reasonably appointed
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
FAIRNESS: Compensation should be fair
Identity of the company and representative should be distinctly known
Provide clients or employers about outside affiliations
Inform about revenue arrangements other than remuneration
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
CONFIDENTIALITY: Do not reveal for own benefit – clients data, without his consent, except when allowed
Member, exposed to information about FPSB not to reveal the same
To maintain same standards with employers too
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
PROFESSIONALISM: Show respect to other professionals
Maintain professional indemnity insurance
Not to misrepresent status of their membership
Not to practice any other profession, unless qualified to do so
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
DILIGENCE: Sufficient information to be collected
Have access to research for clients needs
Develop a proper strategy for the client
Recommendations to be made in writing
Implementation in a timely manner
Changes in investments to be explained
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
COMPLIANCE: Comply with rules of FPSB, Govt.
Co-operate with FPSB for any inquiries
Comply with all post certification requirements
Maintain effective system of supervision of representatives activities, performance.
25 June 2007
ADVANCED FINANCIAL PLANNING
THANK YOU
SIX STEP PROCESS 1. Establishing the relationship
6. Review & revision of plan
2. Data gathering & goal setting 6 step process of Financial Planning
5. Implementation of recommendations
3. Identification of financial problems 4. Written alternatives & recommendations
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPONENTS OF FINANCIAL PLAN
Covering letter
Cover page
Summary of the plan
Client profile
Goals of the client
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPONENTS OF FINANCIAL PLAN
Financial statements
Assumptions
Risk Management & Insurance needs
Goal Funding
Retirement Planning
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPONENTS OF FINANCIAL PLAN
Tax Planning
Asset Allocation – Portfolio Rebalancing
Disclosures
Disclaimers
Risks
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPONENTS OF FINANCIAL PLAN
Cash Flow Projections
Recommendations
Action Plan
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW INVESTMENTS
INVESTMENTS
OVERALL PRODUCT KNOWLEDGE
PRODUCT’s STAR FEATURES
ASPECTS AFFECTING CASH FLOWS
TAXATION ASPECTS
25 June 2007
ADVANCED FINANCIAL PLANNING
RELIEF BONDS (TAX-FREE)
Issued in March 2003
Tenure – 5 years (2008)
Interest @ 6.5% (Half yearly)
Interest payments – 1st July & 1st January
Compounding – Half yearly
Maturity Value – Rs. 1000 becomes Rs. 1377
25 June 2007
ADVANCED FINANCIAL PLANNING
RELIEF BONDS (TAX-FREE)
Individuals & HUF (No NRIs)
Min – Rs. 1,000
I.T & W.T – Exempt
Premature encashment at the end of 3 years: timing at the interest payment dates – penalty @ half of the interest due for the last 6 months
Discontinued by F.A 2004
25 June 2007
ADVANCED FINANCIAL PLANNING
RELIEF BONDS (TAXABLE)
April 2003
8% Interest (Taxable)
6 years
Interest payments – Half yearly (1st February & 1st August)
Compounding – Half yearly
Maturity Value – Rs. 1000 becomes Rs. 1601
25 June 2007
ADVANCED FINANCIAL PLANNING
RELIEF BONDS (TAXABLE)
Individuals & HUF (No NRIs)
Min – Rs. 1,000
I.T & W.T – Taxable
No Premature encashment at the end of 3 years
25 June 2007
ADVANCED FINANCIAL PLANNING
NATIONAL SAVING CERTIFICATES
Minimum – Rs. 100
Interest compounded half yearly
100 becomes 160.10
Six years – no premature encashment
Premature allowed in case of death
25 June 2007
ADVANCED FINANCIAL PLANNING
NATIONAL SAVING CERTIFICATES
Encashment Features:
Within a year – only face value
One year to three years – face value + simple interest
More than 3 years – as per schedule
25 June 2007
ADVANCED FINANCIAL PLANNING
PUBLIC PROVIDENT FUND
15 years
Min – 500, max – 70,000
Account closure – 15 years
Total deposits – 12 in a year
In a month may be more than 1
Loans: after completion of one year from the end of the financial year of opening of the account and before completion of the 5th year.
25 June 2007
ADVANCED FINANCIAL PLANNING
PUBLIC PROVIDENT FUND
Amount cannot exceed 40% of the amount that stood to credit at the end of fourth year preceding the year of withdrawal or at the end of preceding year whichever is lower
Premature withdrawal is permissible every year after completion of 5 years from the end of the year of opening the account.
25 June 2007
ADVANCED FINANCIAL PLANNING
POST OFFICE SCHEMES
Kisan Vikas Patra
Post Office Monthly Income Scheme
Post Office Saving Account
RD – Rs. 10 becomes Rs. 728.9 (5 years)
25 June 2007
ADVANCED FINANCIAL PLANNING
INVESTMENT CONCEPTS
Return (HPR) & CAGR
Expected Return on Security/ Portfolio
Standard Deviation on Security/ Portfolio
Co-efficient of correlation
Co-variance
25 June 2007
ADVANCED FINANCIAL PLANNING
INVESTMENT CONCEPTS
Share Valuation
Constant Growth Model
Above normal growth rate & constant growth
25 June 2007
ADVANCED FINANCIAL PLANNING
OPTIONS
Call & Put Strategies
Protective Put
Covered Call
Straddle
Spread
Collar
Break even of put or call
25 June 2007
ADVANCED FINANCIAL PLANNING
TIME VALUE OF MONEY
Present Value
Future Value
Present value of Annuity
Future Value of Annuity
Growing Annuity – Present Value
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW RETIREMENT
RETIREMENT CONCEPTS
GRATUITY Gratuity as per POGA (calculation) 3 types of workers: Month rated, piece rated and seasonal Month – 15 days salary Piece rated – 3 month avg salary Seasonal employees – 7 days wages for each season Gratuity after 5 years of service.
25 June 2007
ADVANCED FINANCIAL PLANNING
RETIREMENT CONCEPTS
Provident Funds (not taxable after 5 years of service)
Leave Salary
VRS/ Retrenchment Compensation
Super Annuation
25 June 2007
ADVANCED FINANCIAL PLANNING
RETIREMENT INCOME STREAMS
Senior Citizens Saving Scheme
Age – 60 years (55 years, for those who have retired)
9% p.a.
Qtrly interest – March, June, Sept & Dec
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW INCOME-TAX
INCOME TAX CONCEPTS
Heads of Income Salaries
Business/ Profession
Capital Gains
House Property
Other Sources
25 June 2007
ADVANCED FINANCIAL PLANNING
INCOME TAX CONCEPTS
Other Important Topics Clubbing of Income
Set off & Carry Forward
Agricultural Income
Taxability of Gifts
STT
25 June 2007
ADVANCED FINANCIAL PLANNING
SECURITIES TRANSACTION TAX
Tax on purchase or sale of shares or derivatives or Units Of Equity Oriented Mutual Fund In Recognized Stock Exchange Or Sale Of Units To Mutual Fund. Taxable Service Is Price Of Securities Traded Or Futures Traded Or In Case Of Option, Total Of Strike Price & Option Premium. Rate Of Tax: Between From 1/06/05 To 31/05/06: Delivery Based Sale Or Purchase Of Securities From Stock Exchange 0.1% Non Delivery Based 0.02% Derivatives 0.0133% Sale Of Units To Mutual Funds 0.2% No Surcharge Or Education Cess.
25 June 2007
ADVANCED FINANCIAL PLANNING
SECURITIES TRANSACTION TAX
Rate Of Tax: Between From 1/10/04 To 31/05/05: Delivery Based Sale Or Purchase Of Securities From Stock Exchange Non Delivery Based Derivatives Sale Of Units To Mutual Funds No Surcharge Or Education Cess. Rate Of Tax: FROM 1/06/06 (Till Date): Delivery Based Sale Or Purchase Of Securities From Stock Exchange Non Delivery Based Derivatives Sale Of Units To Mutual Funds No Surcharge Or Education Cess.
25 June 2007
0.075% 0.015% 0.01% 0.15%
0.125% 0.025% 0.17% 0.25%
ADVANCED FINANCIAL PLANNING
DIVIDEND DISTRIBUTION TAX UPTO A.Y. 2006 – 07: TAX ON DIVIDEND BY DOMESTIC COMPANY OR MUTUAL FUNDS AFTER 01/04/2003. TAX @ 12.5% + SURCHARGE + EDUCATION CESS. FOR DIVIDEND BY MUTUAL FUND FROM 09/07/2005 TO PERSONS EXCEPT INDIVIDUALS & HUF TAX @ 20%. FOR DIVIDEND FROM EQUITY ORIENTED MUTUAL FUNDS, DDT IS EXEMPT.
A.Y. 2007 – 08:
Companies – 15%, MMMF & Liquid Fund – 25%, Other Funds – 12.5% (Individuals), 20% (Corporates) Equity Funds - Exempt
25 June 2007
ADVANCED FINANCIAL PLANNING
SALARIES
Incl. Pension also Taxable on due or receipt basis (bonus taxable only on receipt basis) Conveyance Reimbursement Fully Exempt. Conveyance Allowance. (EXEMPT UPTO Rs. 800/-P.M.) No Proof Of Spending Needed. Medical Reimbursement. (EXEMPT UPTO Rs. 15,000/- P.A. IF IN INDIA AND UPTO Rs.2,00,000/- If Abroad) Bills To Be Attached. Medical Allowance Fully Taxable. Mediclaim Of Employees & Their Family Paid By Employer Fully Exempt. Children Education Allowance. (EXEMPT UPTO Rs. 100/- P.M.P.C. Max. 2 Children) No Bills To Be Attached. Hostel Expenditure Allowance. (EXEMPT UPTO Rs. 300/- P.M.P.C. Max. 2 Children) No Bills To Be Attached.
25 June 2007
ADVANCED FINANCIAL PLANNING
SALARIES
HRA : LOWEST OF: 1. ACTUAL HRA PAID. 2. RENT PAID OVER 10% OF SALARY. 3. 50% OF SALARY. (40% IN CASE OF NON METROS)
25 June 2007
ADVANCED FINANCIAL PLANNING
HOUSE PROPERTY
Income derived from property (land and buildings appurtenant)
Received by the owner
Not used for business or profession
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPUTATION OF INCOME
Gross Annual Value (as per specifications)
Deduct Municipal Taxes (only paid by the owner during the year)
Derive Net Annual Value
Deduct Standard Deduction @ 30%
Deduct interest on housing loan
Net income/ loss offered to tax
25 June 2007
ADVANCED FINANCIAL PLANNING
BUSINESS/ PROFESSION
Income from business, vocation and profession
Speculative income
Interest, commission of partners
Deductions – expenses incurred wholly and exclusively for business purposes
25 June 2007
ADVANCED FINANCIAL PLANNING
SPECIFIC EXPENSES
Depreciation
Repairs, rent, rates and taxes
Bad debts
Interest
Bonus/ Commission to employees
Insurance premium (health)
25 June 2007
ADVANCED FINANCIAL PLANNING
CAPITAL GAINS
Capital asset means any property whether for business or otherwise except stock in trade, personal effects (except jewellery & house) & agricultural land in India.
Long term capital asset is which is held for more than 12 months for shares & mutual funds and more than 36 months for others. others are called short term capital assets.
25 June 2007
ADVANCED FINANCIAL PLANNING
COMPUTATION OF CAPITAL GAINS
Full value of Sale Consideration (sale of property)
Deduct: Expenses on transfer
Net Sale consideration
Deduct: Cost (Indexed) of acquisition
Deduct: Cost (Indexed) of improvement
Check for exemption of CG
25 June 2007
ADVANCED FINANCIAL PLANNING
CAPITAL GAIN ON SHARES
No long term capital gain on shares and mutual funds if securities transaction tax is paid. Short term capital gain on shares and mutual funds if STT is paid is taxed @ 10%. If STT is not paid, STCG = added in total income. LTCG = 20% with indexation or 10% without indexation. In case capital gain is taxed at concessional rate tax, no 80C to 80U benefit. but, minimum exemption limit available in case of other income lower than exemption limit.
25 June 2007
ADVANCED FINANCIAL PLANNING
OTHER SOURCES
Dividends
Income from vacant land
Winnings from lotteries
Maintaining race horses
Family Pension (1/3rd or 15,000)
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ADVANCED FINANCIAL PLANNING
GIFTS
Gifts received by individual or HUF only are treated as income.
Firm, company , trust, etc. Are exempt.
Gifts received after 01/09/2004 and if above Rs. 5O,000/- from a single person are taxable. (w.e.f 1 April 2006)
If gift received from more then 1 person together above Rs. 50,000/- not taxable.
25 June 2007
ADVANCED FINANCIAL PLANNING
EXEMPT GIFTS
Gifts received on marriage are exempt.
Gift for some consideration exempt.
Gift under will or inheritance or death of payer exempt. Relatives include: Spouse Brother or sister of self/ spouse Lineal ascendant or descendant Brother or sister of parents Spouse of each of the above
25 June 2007
ADVANCED FINANCIAL PLANNING
CLUBBING
Transfer of income without transfer of asset is clubbed in the hands of owner of asset.
Income from revocable transfer except irrevocable during the lifetime of the transferee is clubbed in the hands of transferor.
Income from asset transferred without adequate consideration or unreasonable remuneration to spouse is clubbed except if there is technical or professional qualification.
Income from asset transferred to son’s wife is also clubbed.
Income of minor child is clubbed with higher income earning parent except if the child is physically or mentally handicapped or the child is using his own skill.
25 June 2007
ADVANCED FINANCIAL PLANNING
SET OFF & CARRY FORWARD
Business loss is not allowed to adjusted with salary income. Loss from speculation can be setoff only with income from speculation. Loss from owning & maintaining horses will be setoff only against horse racing income. Short term capital loss can be setoff with long term as well as short term capital gain. Long term capital loss cannot be setoff with short term capital gain but only with long term capital gain. Loss from exempted income cannot be setoff against taxable income. Loss from any head cannot be adjusted with winning from lotteries, betting, etc. All unadjusted losses can be carried forward for 8 years except horse racing loss which can be carried forward for 4 years. Such carried forward loss can be setoff in subsequent years only against same heads. For all losses to be carried forward except loss
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW RISK MANAGEMENT & INSURANCE PLANNING
REQUIREMENTS OF INSURABLE RISKS
Existence of sufficiently large number of homogenous exposure units
Loss must be definite and measurable
Loss must be fortuitous and accidental
Loss must not be catastrophic
25 June 2007
ADVANCED FINANCIAL PLANNING
STEPS OF RISK MANAGEMENT
Identify Risks
Analyze & Evaluate Risks
Develop alternatives for handling risks: Risk control & Risk financing
Choose & implement appropriate strategy
Monitor the strategy
25 June 2007
ADVANCED FINANCIAL PLANNING
CATEGORIES OF RISK
Personal Risk: Death Disability Medicals
Property Risk: Asset protection
Liability Risk: Protection of liabilities towards people
25 June 2007
ADVANCED FINANCIAL PLANNING
TYPES OF POLICIES
Term Plans: Level Benefit Increasing Benefit Decreasing Benefit
Endowment Plans
Money Back Plans
Whole Life Plans
Unit linked Plans
25 June 2007
ADVANCED FINANCIAL PLANNING
APPROACHES TO QUANTIFY RISKS
Human Life Value Approach:
Multiple Approach:
Needs Based Approach: Total of all needs
Capital Retention Approach:
25 June 2007
Economic Value
Apply a multiple to salary
Living only on income
ADVANCED FINANCIAL PLANNING
CONCEPTS – GENERAL INSURANCE
Average Clause - Coinsurance clause
Indemnity Clause
Valued Policy/ Indemnity with reinstatement
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW FINANCIAL RATIOS
FINANCIAL RATIOS
Liquidity
Solvency
Risk Coverage
Tax Burden
Net Worth
25 June 2007
ADVANCED FINANCIAL PLANNING
LIQUIDITY RATIOS
Basic Liquidity Ratio = Liquid Assets/ Monthly expenses
Expanded Liquidity Ratio = (Liquid Assets + Other Financial Assets)/ Other Expenses
25 June 2007
ADVANCED FINANCIAL PLANNING
SOLVENCY RATIOS
Liquid Asset Coverage Ratio = Liquid Assets/ Total Debt
Solvency Ratio = Liquid + Other Financial Assets/ Total Debt
Current Ratio = Liquid Assets/ Current Liabilities
25 June 2007
ADVANCED FINANCIAL PLANNING
RISK RATIOS
Life Insurance Coverage Ratio = Net Worth + Death Benefits/ Salary
25 June 2007
ADVANCED FINANCIAL PLANNING
TAX RATIOS
Effective Income tax ratio = Income tax/ total realised increases in net worth
INFLATION PROTECTION RATIOS Inflation Hedge Ratio = Equity, persona and tangible assets/ Net Worth
25 June 2007
ADVANCED FINANCIAL PLANNING
NET WORTH RATIOS
Net Worth Growth Ratio = Net Increase in Net worth/ Net worth at the beginning of the year
Net worth entities ratio
25 June 2007
ADVANCED FINANCIAL PLANNING
SECTORAL VIEW CODE OF ETHICS
CODE OF ETHICS
INTEGRITY: No misleading advertising: size, scope or areas of competence
Promotional activities: no material false or misleading communications
Representation: no misrepresentation of FPSB, India. Identify personal opinions
Custody of clients documents – extra care to be exercised
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
OBJECTIVITY: Act in the interest of the client
Limitation in the capacity to advise = disclose upfront
Statement of compensation
Conflict of interests to be disclosed
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
COMPETENCE: Be informed of the developments in FP
Offer advice only in areas of competence
Representatives to be reasonably appointed
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
FAIRNESS: Compensation should be fair
Identity of the company and representative should be distinctly known
Provide clients or employers about outside affiliations
Inform about revenue arrangements other than remuneration
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
CONFIDENTIALITY: Do not reveal for own benefit – clients data, without his consent, except when allowed
Member, exposed to information about FPSB not to reveal the same
To maintain same standards with employers too
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
PROFESSIONALISM: Show respect to other professionals
Maintain professional indemnity insurance
Not to misrepresent status of their membership
Not to practice any other profession, unless qualified to do so
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
DILIGENCE: Sufficient information to be collected
Have access to research for clients needs
Develop a proper strategy for the client
Recommendations to be made in writing
Implementation in a timely manner
Changes in investments to be explained
25 June 2007
ADVANCED FINANCIAL PLANNING
CODE OF ETHICS
COMPLIANCE: Comply with rules of FPSB, Govt.
Co-operate with FPSB for any inquiries
Comply with all post certification requirements
Maintain effective system of supervision of representatives activities, performance.
25 June 2007
ADVANCED FINANCIAL PLANNING
THANK YOU
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