Unit 1: Introduction to Financial Planning (Comprehensive Notes)

(Based on Textbook Chapters 1 & 2)

Chapter 1: Financial Planning, Goals and Budgeting (Sections 1.1 - 1.5)

Learning Outcomes (Chapter 1):

●​ Develop basic understanding of the concept of financial planning and financial goals.
●​ Learn about the steps involved in financial planning.
●​ Know about budgeting incomes and payments.
●​ Understand the concept of time value of money.

Introduction (Context from Page 1.1):

●​ Planning finances is critical for everyone (salaried employee, businessman, student,

retired citizen).
●​ It helps lay out a roadmap to achieve desired short-term and long-term financial
goals.
●​ Allows individuals to plan likely expenditures while keeping in mind their level of
income.
●​ Provides a sense of direction in managing money efficiently.
●​ Acts as a safety net against unexpected financial emergencies.
●​ Helps in budgeting income and expenses, identifying areas of overspending.
●​ Facilitates effective debt reduction and management, freeing up resources for
savings and investments.
●​ Essential for everyone to achieve financial well-being; builds a solid foundation.
●​ Helps make informed financial decisions while navigating life's financial challenges.
●​ Indian Context: Despite growth, many Indian consumers are yet to inculcate
financial planning. Surveys (e.g., All India Debt and Investment Survey 2019) show a
tendency to use financial assets for savings/investment needs, while a majority invest
in physical assets (land, building, transport equipment). Low financial literacy and
inadequate ecosystems hinder efficient financial management.

1.1 Financial Planning (Page 1.3)

●​ Definition: Financial planning involves assessing the current financial situation,

identifying financial goals, and creating an effective strategy (roadmap) to achieve
those goals.
●​ Scope: It's a comprehensive process analysing income, expenditures, assets,
liabilities, and investments.
●​ Dynamic Nature: It is not static; it's a dynamic process requiring continuous
monitoring, savings-adjustments, and investment planning based on changing
circumstances.
●​ Components: Involves savings planning, investment planning, income tax planning,
insurance planning, and estate planning.
●​ Need: Lack of proper planning leads people to count on friends, family, and
moneylenders in emergencies.
 ●​ RBI Initiatives: To create an essential "financial kit," RBI proposed solutions like:
○​ Pradhan Mantri Jan Dhan Yojana (PMJDY): Programme instead of opening
any frills bank account.
○​ Direct benefit transfer scheme.
○​ Investment in target-date funds (combination of bond and stock index funds)
for better retirement outcomes, sensible stock market participation, and
enhanced financial knowledge.
○​ Atal Pension Yojana (APY) and National Pension System (NPS) account in
the emergency kit (simplifies enrollment and provides an interface for
information on pension accounts).
●​
●​ Insurance as part of the kit: Term life insurance and health insurance. Basic
policies offered as part of PMJDY. Low-cost catastrophe insurance proposed (e.g.,
for events like Uttarakhand floods).
●​ Other RBI Recommendations: Promoting unsecured loans, small savings,
annuitized land/homes, tax-exempt saving schemes.
●​ Challenge: Large portion of household income is invested in illiquid assets like real
estate. Need to potentially annuitize or convert these to financial assets closer to
retirement for liquidity and welfare improvement.

Elements of Effective Financial Planning (Box on Page 1.4):

●​ Determining your short- and long-term goals.

●​ Monitor your spendings.
●​ Save to invest.
●​ Always remain debt-free.
●​ Build and emergency fund.
●​ Build a fund for unbridled expenses (discretionary/unexpected).
●​ Investing in a tax saving scheme.

(Note: Moneybox mentioned as a BSE-listed NBFC providing small-ticket business loans

and enabling invisible savings via payment apps.)

1.2 Financial Goals (Page 1.4 - 1.7)

●​ Definition: A financial goal is a milestone or specific objective which you aim to

achieve. Financial goals provide direction and motivation in life. Individual goals vary
based on preferences, circumstances, timelines, and finances.
●​ Classification (Timeframe):
○​ Short-Term Goals: Intended to accomplish in a span of up to 3 years.
(Example: Pursuing an MBA).
○​ Medium-Term / Intermediate Goals: May take up to 5 years. (Example:
Financing your marriage, gifting a vacation package, buying a house).
○​ Long-Term Goals: May take more than 5 years. (Example: Retirement
planning, children's education planning).
○​ Importance: Classifying goals helps in prioritizing and adds clarity to the
financial journey.
●​
●​ Common Types of Financial Goals (Page 1.5 - 1.7):
○​ Creation of Emergency Fund:
■​ Purpose: To handle unexpected events (illness, accidents, job loss,
property damage) without warning.
■​ Requirement: Sufficient cash in hand, invest in liquid assets or have
money in savings account that can be quickly withdrawn.
■​ Guideline: Keep an amount equivalent to six months' salary as a
contingency fund.
○​
○​ Retirement Planning:
■​ Purpose: Accumulating sufficient funds to achieve/maintain a
comfortable lifestyle, even after retirement.
■​ Sources: Employer funds (401(k)s), IRAs, or pension plans.
■​ Need: Funds for comfortable or financially secure life, pursue creative
passions.
■​ Timing: Must start as soon as one starts to earn. Requires disciplined
and sustainable saving.
○​
○​ Debt Management:
■​ Purpose: Fulfilling desires/aspirations (house, car, consumer durables)
often met through borrowing (home loan, vehicle loan, consumer
durable loan, personal loan). Also addresses extensive use of credit
cards for possessing/experiencing luxury goods/services.
■​ Impact: Borrowing means using a portion of tomorrow's income to
repay today's debt. Has significant impact on day-to-day expenses.
■​ Goal: Become debt-free by paying off loans, mortgages, or credit card
balances. May lead to reduced interest payments, improved credit
scores, and becoming financially free.
■​ Balance: Efforts should be made to keep an ideal balance of good
debt (home loan, small business loan, education loan) and bad debt
(car loan, electronic gadgets, consumables, credit cards).
■​ Guideline: Debt-to-income ratio lower than 30%.
○​
○​ Education Funding:
■​ Purpose: Individuals/parents seek advance education for themselves
or children (college or vocational training).
■​ Expenses: Tuition fee, books, other related costs.
■​ Method: Save religiously and invest to have enough funds when
required.
○​
○​ Estate Planning:
■​ Purpose: Engaging in future planning and making sure that assets
transfer smoothly in case of death or when the individual becomes
incapacitated.
■​ Actions: Creation of wills, establishing trusts, minimizing estate taxes.
■​ Goal: Preserving family's wealth, providing for dependents (spouse,
children), or leaving legacy behind for charity.
 ■​ Scope: Comprehensive plan to ensure an individual's wishes are
carried out, loved ones are cared for, and potential disputes are
avoided.
○​
○​ Wealth Creation via Investment:
■​ Purpose: One of the financial goals could be to grow assets and
accumulate wealth over time.
■​ Method: Must engage in investment planning (e.g., investing in equity
mutual funds) which includes regular contributions, diversification of
portfolios, and achieving target returns.
○​
○​ Purchasing a House:
■​ Considerations: Planning whether and how much home loan to be
availed, how to bear down payment and other incidental expenses
(registration fee, broker fee, etc.).
■​ Method: Keep aside a specific amount each month to meet the home
loan EMI, maintenance charges, and other household related
expenses.
○​
●​
●​ Individual Nature of Goals: Different individuals have different needs and
aspirations. Goals can range from saving for a down payment, starting a business,
going for a vacation, buying a car, etc. Requires identifying and clearly defining own
goals and creating a comprehensive plan. Crucial to review and update plans
regularly based on changing lifestyle and economic conditions.
●​ SMART Financial Objectives (As per SEBI, Page 1.5): The critical first step in
managing finances.
○​ Specific: Knowing exactly what you want and when.
○​ Measurable / Motivated: Knowing when you can achieve it.
○​ Attainable: Goals should be reasonable, within your reach.
○​ Realistic / Resource-based: Goals should be based on resources and tasks
that you can reasonably achieve.
○​ Time-bound (can be monitored): Timelines allow tracking progress and
encourage you to keep going until you reach your goal.
●​

1.3 Steps in Financial Planning (Page 1.7 - 1.8)

●​ A financial plan guides you through life's journey, helps gain control over income,
expenses, and investments to manage money and achieve goals. Provides direction
and helps make informed decisions.
●​ A Series of Steps:
1.​ Goal Setting: Clearly define short-term (up to 3 years), medium-term (3-5
years), and long-term (beyond 5 years) financial goals. Examples: purchasing
a car, professional course, financing marriage, international trip, buying a
house, paying off debts, starting a business, saving for retirement. Establish a
timeline and amount of funds for each.
 2.​ Collect Information and Assess Current Financial Position: Gather a
comprehensive overview of one's financial situation - income, expenses,
assets, liabilities, commitments, and related investment statements. Helps in
understanding net worth, cash flow, and debt-to-income ratio. Knowing your
liabilities is extremely important to avoid overspending or default on EMIs.
3.​ Develop a Budget: Helps monitor income and expenses. Differentiate
between essential and non-essential expenses. Make adjustments to meet
financial goals. Budgeting is about formulating a plan for various income
sources and how to spend this money more wisely. May help in managing
loan repayment, saving for emergencies, or contributing efficiently towards
retirement. Budget is often updated and revalued as per changing financial
scenarios.
4.​ Assess Risk Tolerance: Based on age, financial knowledge, and obligations.
Judge his/her risk tolerance level/attitude and capacity. Once you know your
acceptable risk level, you can devise suitable investment strategies and opt
for appropriate insurance cover.
5.​ Develop a Financial Plan: Create a comprehensive financial plan based on
goals, information, budget, and risk tolerance. May include investment plans,
retirement planning, debt management, tax planning, and estate planning.
6.​ Put Plan into Action (Implementation): Execute the plan with the help of
strategies and recommendations. Make appropriate adjustments to the
investment portfolio, improve spending habits, or seek professional help from
a financial advisor.
7.​ Monitor and/or Review: Analyze how close or far you are from your goals.
Evaluate investment performance and reassess financial situation over time.
With changing circumstances and economic scenarios, financial plans and
positions may also change. Therefore, you must adapt to these changes and
modify your goals/plans accordingly.
8.​ Seek Professional Advice: Based on your financial goals, a financial advisor
can provide personalized insights and guidance. Helps make informed
decisions. An advisor may serve as a coach and coordinate with accountants,
investment managers, etc.
●​
●​ Continuous Process: Financial planning is continuous, involving regular monitoring
and reviewing and updation of plans as per changing needs or lifestyle.
●​ SEBI's 5 Major Steps: Gathering financial data (inflow/outflow), identifying financial
goals, identifying financial issues, preparation of financial plan, implementation and
review. A properly defined and implemented plan follows a well-documented process
providing the greatest chance of success (though not guaranteeing financial
security/wealth).

1.4 Budgeting Incomes and Payments (Page 1.9)

●​ Definition: Formulating a financial plan as to how to spend money more wisely.

Essential for managing loan repayment, saving for medical emergencies, or
contributing efficiently towards retirement.
●​ Basis: Can be prepared based on income and expenditure data over a specified
period.
 ●​ Benefits: Facilitates sound financial planning via setting meaningful financial goals,
measuring outcomes, judicious use of funds, planning contingencies over short or
long-term horizon.
●​ Process: Identify sources of income and uses (expenditure) and put the most urgent
needs first. Hence, budgeting helps in effective allocation of resources to satisfy
maximum wants and needs.
●​ Dynamic: Budget is often updated and revalued as per changing financial scenarios
and personal lifestyle changes.
●​ Example (Birthday Party Budget): Illustrates budgeting by listing Income (self,
contributions) and Expenses (gift, snacks, return gifts) to determine the Balance.
Helps answer questions about affordability.

1.5 Time Value of Money (TVM) (Page 1.9 - 1.11)

●​ Core Principle: An amount of money received today is worth more than the same
amount of money received in the future. This is a core financial principle.
●​ Reason: Money's purchasing power diminishes over time. Money received today can
be invested to generate additional returns (compounding). Therefore, the value of
money today is more than it will be after a few years from now.
●​ Key Concepts:
○​ Future Value (FV): The value of an investment at a specific point in future for
a given level of rate of interest/return. It takes into account compounding
(returns earned in one period are reinvested to generate additional returns).
○​ Present Value (PV): The current value of an amount to be received in the
future, discounted back at a specific rate of interest. Discounting means using
a discount rate to value a future value of money to make it equivalent to the
current value.
●​
●​ Factors Affecting TVM: Interest rate, time period, cash flows, etc.
●​ Applications: Widely used in evaluating profitability of various investment projects
(capital budgeting), comparing alternative investment options (using Discounted
Cash Flow - DCF analysis), understanding opportunity cost, inflation, and uncertainty.
●​ Three Important Aspects:
○​ Opportunity Cost: Money you have today is invested, providing a return. If
sacrificed for some investment opportunity, future value will be sacrificed.
○​ Inflation: With rise in general price level of commodities, you may end up
buying less in future than what it does today.
○​ Uncertainty: The future is uncertain. Only the money you receive will be
counted.
●​
●​ Example: ₹100 invested at 10% interest will become ₹121 in 2 years if compounded
annually. Receiving ₹121 after 2 years is equal to receiving ₹100 today (PV). The
present value of ₹121 receivable after 2 years is ₹100 today.
●​ Formulas:
○​ Future Value (FV): FV = PV * [1 + (i / n)]^(n*t)
■​ PV = Present Value
■​ i = interest rate (when calculating FV) or discount rate (when
calculating PV)
 ■​ n = Number of compounding periods per year
■​ t = Number of years
○​
○​ Present Value (PV): PV = FV / [1 + (i / n)]^(n*t)
■​ FV = Future Value
■​ (Other variables as above)
○​
●​

Chapter 2: Introduction to Savings (Sections 2.1 - 2.7)

Learning Outcomes (Chapter 2):

●​ Develop understanding of savings and its benefits.

●​ Differentiate between various types of savings.
●​ Learn about various government saving schemes.
●​ Understand the concept of SMART goals.
●​ (Note: Text also covers Management of Spending/Financial Discipline and Managing
Fixed Commitments in this chapter)

2.1 Introduction to Saving (Page 2.1)

●​ Quote: "Money may not talk, but its absence screams!"

●​ Definition: Savings refer to the process of setting aside a portion of your income or
financial resources for future use or emergencies.
●​ Need: To use money wisely, you need to save wisely.
●​ Example: Earning ₹10,000/month, spending ₹8,000, leaves ₹2,000 as monthly
saving.
●​ Purpose: Allows individuals to accumulate funds over time for various purposes like
achieving financial goals, covering unexpected expenses, or planning for retirement.

Key Aspects to Consider When Saving (Page 2.2):

●​ Importance of Savings: Crucial for achieving financial stability and security.

Provides a safety net during emergencies or unexpected events. Helps individuals
avoid going into debt. Enables long-term financial planning and contributes to
achieving goals (buying a house, starting business, funding education).
●​ Types of Savings: Funds are set aside serving a specific purpose.
○​ Emergency Savings: Funds set aside to cover unexpected expenses like
medical bills, car repairs, or job loss.
○​ Short-Term Savings: Reserved for near-future expenses like vacations,
down payments, or major purchases.
○​ Long-Term Savings: Primarily focused on retirement planning or building
wealth over an extended period.
●​
●​ Creating a Savings Plan: Essential to make consistent progress. Start by setting
specific financial goals, such as saving a certain amount each month or reaching a
 target amount within a specified timeframe. Track expenses and identify areas where
you can cut back or save more. Automating savings (e.g., regular transfers to
savings/checking account) helps ensure consistency.
●​ Budgeting: Plays a crucial role. Involves tracking income and expenses to create a
plan for allocating funds effectively. Helps identify areas where you may be
overspending and redirect those funds towards savings. Helps prioritize financial
goals and make conscious spending decisions.
●​ Interest and Investment: Saving money in traditional savings accounts often
accrues interest over time, allowing savings to grow. Exploring higher-interest options
like Certificates of Deposit (CDs) or money market accounts can maximize returns.
Additionally, investing a portion of savings in stocks, bonds, or other financial
instruments may generate higher returns but involves higher risk.

Financial Discipline (Page 2.3):

●​ Requires discipline and commitment.

●​ May involve making sacrifices in the short term to achieve long-term goals.
●​ Practice self-control by resisting unnecessary purchases and impulse buying.
●​ Stick to your budget and consistently contribute to savings to foster healthy financial
habits.
●​ "Do You Know?": Ideally your saving should be 20% of your total income.

2.2 Benefits of Saving (Page 2.3 - 2.4)

Savings offer several benefits that significantly impact financial well-being:

1.​ Financial Security: Primary benefit. Allows handling unexpected expenses (medical
emergencies, car repairs, job loss) without relying on credit cards or loans. Provides
a safety net and helps prevent financial stress.
2.​ Emergency Preparedness: Life is unpredictable. Having savings helps prepare for
unexpected events or emergencies. A dedicated emergency fund provides quick
access to funds when needed, without disrupting long-term financial goals or
incurring debt.
3.​ Achieving Financial Goals: Enables working towards specific goals (buying a
house, starting a business, funding education, taking a dream vacation). Saving
consistently puts you on track to accumulate necessary funds over time.
4.​ Debt Reduction: Savings help avoid or reduce debt. Having funds available for
planned expenses or emergencies means you won't have to rely on credit cards,
personal loans, or borrowing from others. Reduces interest payments and financial
burden associated with debt.
5.​ Interest and Investment Opportunities: Savings money in interest-bearing
accounts (savings, CDs, money market) allows savings to grow over time. Earned
interest provides passive income stream and can increase overall wealth. Moreover,
savings also open up investment opportunities (stocks, bonds, real estate) where
potentially higher returns can be earned.
6.​ Financial Independence and Flexibility: Building savings provides financial
independence and flexibility. Gives freedom to make choices based on financial
situation and priorities (changing careers, starting a business, taking time off work).
 Savings provide a cushion and gives you the ability to make decisions solely
dependent on regular income.
7.​ Peace of Mind: Having savings brings peace of mind. Knowing you have funds
available for emergencies, future goals, or unexpected expenses reduces financial
stress and anxiety. Allows you to have a sense of control over your financial situation
and enhances overall well-being.

"Do You Know?" (Page 2.4): 94% of savings in India are in savings bank accounts and
fixed deposits, and the real return (post tax) to this large investor class, who is probably
unaware of inflation and taxes, is hardly 6-7%!

2.3 Management of Spending and Financial Discipline (Page 2.4 - 2.6)

●​ Crucial aspects of maintaining a healthy financial life.

●​ Strategies and Tips:
○​ Create a Budget: Start by creating a budget outlining income and expenses.
Track monthly income and categorize expenses into fixed (rent, utilities) and
variable (entertainment, dining out). Allocate specific amounts to each
category ensuring expenses don't exceed income. A budget serves as a
roadmap, helps prioritize financial goals. (Family budget example mentioned).
○​ Differentiate Needs and Wants: Distinguish between essential needs
(housing, utilities, groceries) and discretionary wants (entertainment, luxury
items). Focus on fulfilling needs first, then allocate funds to wants based on
importance and affordability. Prioritizing needs over wants helps avoid
unnecessary expenses and allocate more towards savings or debt
repayment. (Example: Need to go to college vs. Want to go by cab; difference
between college by bus vs. cab). Be very careful in fulfilling needs and wants.
○​ Practice Mindful Spending: Before making a purchase, take a moment to
evaluate if it aligns with your budget and financial goals. Ask if it's a
necessary expense or if there are alternative, more cost-effective options.
Avoid impulse buying; give yourself time to consider the long-term value and
impact of the purchase. (Example: Resist unnecessary shopping using mobile
phones).
○​ Track and Review Expenses: Regularly monitor expenses to identify areas
of overspending. Use budgeting apps or tools to track transactions and
categorize them. Reviewing helps identify unnecessary expenses or areas
where you can make adjustments to save money.
○​ Set Savings Goals: Establish specific savings goals and allocate a portion of
income towards them. Having clear objectives (emergency fund, down
payment, retirement) motivates you to limit unnecessary spending and
prioritize saving. Automate savings by setting up regular transfers to a
dedicated savings account to ensure consistency.
○​ Use Cash or Debit Cards: Paying with cash or debit card helps stay within
budget and avoid overspending. Leave credit cards at home or use them
sparingly and responsibly. With cash or debit, you're limited to available
funds, reducing temptation to accumulate debt. Using credit card means we
don't have to pay immediately.
 ○​ Practice Delayed Gratification: Instead of making impulsive purchases,
practice delayed gratification. If you come across something you want, give
yourself a waiting period (e.g., 24 hours or a week) before making the
purchase. Often, you may find the desire diminishes over time, saving you
money on unnecessary items.
○​ Seek Accountability: Share financial goals and intentions with a trusted
friend, partner, or family member. Having someone to hold you accountable
can help you stay on track with spending and financial habits.
○​ Discuss Financial Matters: Consider discussing financial matters with a
financial advisor or joining online communities focused on personal finance
for support and guidance.
○​ Celebrate Milestones: Acknowledge and celebrate milestones along your
financial journey. When you reach savings goals or pay off debts, reward
yourself (within reason) to maintain motivation and reinforce positive financial
habits. Choose rewards that don't compromise your long-term financial goals.
●​

2.4 Setting Alerts and Maintaining Sufficient Funds for Fixed Commitments (Page 2.6 -
2.7)

●​ Ensuring sufficient funds for fixed commitments is important practice to stay on top of
financial obligations.
●​ Strategies:
○​ Identify Fixed Commitments: Start by identifying all fixed commitments -
recurring expenses paid regularly (rent/mortgage, utility bills, insurance
premiums, loan repayments, subscription services, other monthly/quarterly
expenses). One can try to keep aside fixed amount and meet other expenses
out of remaining available cash.
○​ Set Up Alerts and Reminders: Take advantage of technology. Use calendar
apps, budgeting apps, or financial management tools that offer notification
features. Set reminders a few days before due dates to ensure enough time
to prepare and make payments.
○​ Sync Payment Due Dates: Whenever possible, try to sync due dates of fixed
commitments to match income schedule. This can help ensure funds are
available when payments are due. Contact service providers or lenders to
inquire about adjusting due dates if needed.
○​ Create a Bill Payment Schedule: Develop a schedule outlining due dates for
each fixed commitment. Helps visualize and organize financial obligations.
Can use a spreadsheet, digital calendar, or a dedicated bill payment app to
track due dates.
○​ Automate Payments: Whenever feasible, set up automatic payments for
fixed commitments. Most banks and financial institutions offer online bill
payment services. Ensure sufficient funds are in the account to avoid
overdrafts, late fees, or penalties; avoids risk of forgetting or overlooking a
payment.
○​ Maintain a Buffer in Your Account: To avoid issues with insufficient funds,
maintain a buffer. This buffer provides a cushion for unexpected expenses or
 minor fluctuations in income/expenses. Aim to maintain a buffer that covers at
least a month's worth of fixed commitments, plus an additional cushion.
○​ Review and Adjust Regularly: Periodically review fixed commitments and
assess if there are opportunities for adjustments or savings. Includes
checking for rate/plan changes from service providers, evaluating insurance
coverage, or refinancing loans to potentially lower payments. Regularly
reviewing helps identify areas where you can save money.
●​

2.5 Key Information about India's Gross Savings Rate (Page 2.7 - 2.8)

●​ March 2022: Measured at 30.2%, compared with 30.2% in the previous year.
●​ Historical Trend: Updated yearly, data available from Mar 1951 to Mar 2022, with an
average rate of 30.2%.
●​ Peak: Reached an all-time high of 30.2% in Mar 2008.
●​ Low: Recorded a low of 7.9% in Mar 1954.
●​ Calculation: CEIC calculates Gross Domestic Savings Rate from annual Gross
Domestic Savings and annual Nominal GDP. Ministry of Statistics and Programme
Implementation provides Gross Domestic Savings in local currency and Nominal
GDP based on SNA 2008, at 2011-2012 prices. Rate is annual frequency, ending in
March.
●​ Latest Reports (Dec 2022): India Nominal GDP reached 844,596.4 USD mn, YoY
growth 4.4%. GDP deflator increased 6.6%. India GDP Per Capita reached 2,301.4
USD in Mar 2022.

"Do You Know?" (Page 2.8): If your monthly expense is ₹10,000 today, you would need
₹21,580 pm 10 years from now and ₹100,600 pm 30 years from today to maintain the same
standard of living at an inflation of 8% p.a.

2.6 Government Schemes to Invest Savings (Page 2.8 - 2.9)

●​ Government of India promoted savings schemes by issuing "The Government

Savings Promotion Act" in 1973. Applicable to following schemes:
○​ Post Office Savings Account
○​ National Savings Monthly Income Account
○​ National Savings Recurring Deposit
○​ Sukanya Samriddhi Account
○​ National Savings Time Deposit (1 year, 2 years, 3 years and 5 years)
○​ Senior Citizens' Savings Scheme
○​ Savings Certificates:
■​ Kisan Vikas Patra (discontinued from 1st Dec 2011, restarted from
23rd Sep 2014).
■​ National Savings Certificates (VIII Issue).
○​
○​ Public Provident Fund Scheme
●​
 ●​ Regulations: Government revised regulations and came up with Government
Savings Promotion General Rules, 2018. Government issues interest rates on
various schemes from time to time.
●​ Table 2.1: Interest Rates (1.07.2023 to 30.09.2023): (Note: These rates are
indicative for the period mentioned and subject to change)
○​ Saving Deposit: 4%
○​ 1 Yr TD: 6.9%
○​ 2 Yr TD: 7%
○​ 3 Yr TD: 7%
○​ 5 Yr TD: 7.5%
○​ 5 Yr RD: 6.5%
○​ SCSS: 8.2%
○​ MIS: 7.4%
○​ NSC: 7.7%
○​ PPF: 7.1%
○​ KVP: 7.5% (Maturity in 115 months)
○​ SSA Scheme: 8%
●​

2.7 SMART Criteria of Saving Goals (Page 2.9 - 2.11)

●​ Applying SMART criteria transforms vague saving goals into well-defined targets that
are motivating, actionable, and within control. Allows regular progress review,
adjustments, and celebrating milestones.
●​ Breakdown:
○​ Specific: Make goals as specific as possible. Instead of "save money,"
specify purpose and amount. Example: "Save ₹5,000 for a down payment on
a house within two years." (Table 2.2 Example: Incorrect: "One should know
what he/she wants and when." Correct: "I will save ₹1,00,000 to finance my
foreign trip.")
○​ Measurable: Saving goal should be quantifiable so you can track progress.
Determine specific amount needed and break it down into smaller milestones
or increments. Example: "Save ₹500 per month to reach the ₹5,000 goal in
ten months." (Table 2.2 Example: Incorrect: "I will pay off my debts to banks."
Correct:"In the next six months, I will pay off ₹50,000 to bank.")
○​ Achievable: Set a goal that is realistically attainable based on income,
expenses, other financial obligations. Consider current financial situation,
lifestyle, and constraints. Should stretch but remain within reach with diligent
effort and discipline. (Table 2.2 Example: Incorrect: "I will save money."
Correct: "I will cut down on dine outs and partying to save ₹2000 every
month.")
○​ Relevant: Ensure saving goal aligns with overall financial objectives and
priorities. Should be relevant to long-term plans and aspirations. Example: If
priority is paying off high-interest debt, saving for a vacation might not be the
most relevant goal at the moment. (Table 2.2 Example: Incorrect: "If I save
money I will be rich." Correct: "Saving regularly will help me in paying off my
debts by the end of next year and I will not need to borrow more money.")
 ○​ Time-bound: Set a specific timeframe or deadline. Adds urgency and helps
stay focused. Establish a realistic timeline considering income, expenses, and
other financial commitments. Example: "Save ₹5,000 within two years." (Table
2.2 Example: Incorrect: "I will save money for my vehicle." Correct: "I will save
₹15,000 a year for next 3 years for my vehicle.")
●​

Okay, here are the very detailed, in-depth notes for Unit 2: Investment Planning, based
exclusively on the provided textbook images (Chapters 3 and 4).

Unit 2: Investment Planning (Comprehensive Notes)

(Based on Textbook Chapters 3 & 4)

(Total Hours Allotted in Syllabus: 9)

Chapter 3: Investment Planning: Risk, Return and Portfolio (Sections 3.1 - 3.8)

Learning Outcomes (Chapter 3):

●​ Develop basic understanding of the concept of Investment planning.

●​ Learn about the steps involved in Investment planning.
●​ Understand the concepts of risk and return.
●​ Develop understanding of diversification and portfolio formulation.

3.1 Introduction (Page 3.1)

●​ Definition: Investment planning is a crucial component of personal finance helping

individuals and families achieve financial goals and secure their future. It involves
strategic decisions about how to allocate financial resources to grow wealth,
generate income, and build a financial safety net.
●​ Scope: Goes beyond just picking stocks or bonds; encompasses a comprehensive
approach to managing finances to meet short-term and long-term objectives.
●​ Investment Defined: In finance, investments refer to assets or funds allocated to
various vehicles or instruments with the expectation of generating returns over time.
●​ Forms of Return: Can come as capital appreciation (increase in asset value) or
income (such as interest or dividends) - (Page 3.2).

3.2 Process of Investment (Page 3.2 - 3.3)

Investment planning is a dynamic and strategic approach involving several steps:

1.​ Setting Financial Goals: The first step. Identify specific objectives like building
wealth for retirement, buying a house, funding education, or any other specific goal.
Goals provide direction.
 2.​ Risk Tolerance Assessment: Understanding your tolerance for risk is crucial. Some
investments carry higher risks but may offer potential for higher returns, while others
are conservative with lower returns but also lower risk. Assessing risk tolerance helps
determine the appropriate investment strategy.
3.​ Asset Allocation: After understanding goals and risk tolerance, create an asset
allocation plan. Involves dividing the investment portfolio among different asset
classes (stocks, bonds, real estate, cash, alternative investments) based on risk
tolerance and needs. Categories of portfolios based on asset allocation:
○​ (a) Aggressive: Includes riskier assets with good return potential.
○​ (b) Defensive: Assets are less sensitive to market movements, comparatively
less risky.
○​ (c) Income: If regular profit/income is needed, invest in income portfolios.
○​ (d) Hybrid: Includes various categories of assets like equity, bonds, mutual
funds, real estate etc.
4.​
5.​ Research and Analysis: Conduct thorough research on investment options,
companies, sectors, and market trends to make informed decisions. Analyze various
aspects like company performance, industry outlook, economic factors etc.
6.​ Investment Selection: Based on research and analysis, choose specific
investments that fit your criteria. Could include individual stocks, mutual funds,
exchange-traded funds (ETFs), bonds, real estate properties, and more.
7.​ Investment Execution: Once investments are selected, execute the trades and
purchase the chosen assets. Can be done either with the help of a broker or on your
own through online platforms.
8.​ Monitoring and Review: Investments require ongoing monitoring to assess
performance and ensure they remain in line with financial goals and risk tolerance.
Regularly review your portfolio and make adjustments if necessary. Market
conditions, economic factors, and personal circumstances can change, so
modifications might be important for performance, risk, and volatility management.
This will ensure more returns and fewer losses.

3.3 Objectives of Investment (Page 3.3 - 3.4)

Individuals invest for various reasons, driven by different financial objectives:

1.​ Capital Appreciation: A common objective. Aims to achieve growth in the value of
the invested assets over time. Can result from an increase in the price of stocks, real
estate properties, or other investments.
2.​ Income Generation: Some investors seek a steady income stream from
investments. Achieved through dividends from stocks, interest from bonds, or rental
income from real estate.
3.​ Wealth Preservation: Investors may seek to preserve their wealth and protect it
from inflation. Certain investments, like precious metals, can act as a hedge against
inflation and currency devaluation.
4.​ Diversification: Spreading risk across different assets. Reduces the impact of
negative events in any single investment, aiming for a more stable and balanced
portfolio.
 5.​ Long-term Growth: Many investors focus on long-term growth, aiming to
accumulate wealth gradually over an extended period. Long-term investments often
involve a higher degree of risk but can also lead to potentially higher returns.
6.​ Speculation: Some investors engage in speculative investments, seeking significant
short-term gains. Speculative investments often carry high risks and are not suitable
for all investors.

Important Note: Each individual's investment process and objectives may differ based on
their financial situation, risk tolerance, and time horizon. Seeking professional financial
advice can be beneficial in tailoring an investment strategy.

"Do You Know?" (SEC Guidelines - Page 3.4):

1.​ Draw a Personal Financial Roadmap.

2.​ Evaluate your comfort zone while taking risk.
3.​ Choose an appropriate mix of investment.
4.​ Be careful when you invest in individual stock.
5.​ Create and maintain an emergency fund.
6.​ Pay off credit card debt with high interest rates.
7.​ Consider dollar cost averaging.
8.​ Take benefits of "free money" from employer.

3.4 Concepts of Risk and Return (Page 3.4 - 3.7)

Risk and return are fundamental principles in finance and investing, closely interconnected
and playing a crucial role in decisions.

●​ Risk-Return Profile (SEBI Guide for Young Investors): Every individual has a
different appetite for risk. Your level of risk tolerance decides your risk-return profile.
Three categories:
○​ 1. Conservative: Takes minimal risk to secure funds/his/her funds. Prefers
Post office deposit schemes, bank FDs, and government securities.
○​ 2. Moderate: Willing to take some risk. Invests in Mutual funds and secured
funds with moderate risk.
○​ 3. Aggressive: Takes high risks for high returns. Invests in equity,
commodities market and future and options market.
●​

3.4.1 Risk (Page 3.5)

●​ Definition: In finance, risk refers to the uncertainty or variability of returns associated

with an investment or an asset. It is the possibility that the actual outcome or return
will deviate from the expected outcome.
●​ Nature: All investments carry some level of risk. Understanding and managing risk is
essential. "Nothing is Free. Every benefit has a cost; you need to sacrifice something
to get something better."

3.4.2 Types of Risk (Page 3.5)

 ●​ (a) Market Risk (Systematic Risk):
○​ Risk that affects an entire market or economy.
○​ Factors: Economic conditions, political events, interest rates can impact
investment value.
○​ Tangible events (earthquake, war, political uncertainty) and intangible events
are related to market psychology.
○​ Generally push the market in a particular direction.
○​ Beyond the control of corporates.
●​
●​ (b) Specific Risk (Unsystematic Risk):
○​ Risk unique to a particular company or industry.
○​ Examples: Management changes, technological advancements, competitive
pressures.
○​ Within the control of corporates and thus different for different companies.
○​ Further Classified as:
■​ Business Risk: Caused by the operating environment of the
business. Arises when a firm is unable to maintain its competitive
edge over other firms and when earnings and growth of the firm are
unstable.
■​ Financial Risk: Related to the capital structure (mix of equity and
borrowed funds) of the firm. Affects distribution of income to equity
shareholders (residual income after debt/preference commitments).
Portion of debt/borrowed capital in capital structure results in
variability in return of equity shareholders.
○​
●​
●​ (c) Credit Risk: Risk that the issuer of a bond or debt instrument may default on
interest or principal payments.
●​ (d) Liquidity Risk: Refers to the difficulty of buying or selling an investment without
causing a significant impact on its price. Less liquid assets can be riskier to hold.
●​ (e) Currency Risk: Applies to investments denominated in foreign currencies, as
exchange rate fluctuations can affect their value in the investor's home currency.

3.4.3 Return (Page 3.6)

●​ Definition: In investing context, return is the gain or loss on an investment over a

specific period, typically expressed as a percentage. Represents the earnings or
profits generated.
●​ Two Ways Returns are Created:
○​ Investment creates income.
○​ Investment gains value.
●​
●​ Formula for Rate of Return (%):
○​ Rate of Return (%) = [Income + Gain] / Original value of investment
○​ Rate of Return (%) = [Income + {Ending value - Original value}] / Original
value of investment
●​
●​ Example: Ram buys shares for ₹1000. After one year, market value is ₹1050.
 ○​ If no dividend: Return = [0 + {1050-1000}] / 1000 = 50/1000 = 0.05 or 5%.
○​ If same share paid annual dividend of ₹20: Return = [20 + {1050-1000}] /
1000 = 70/1000 = 0.07 or 7%.
●​

3.4.4 Types of Return (Page 3.6)

●​ (a) Capital Gain: Increase in the value of an investment over its initial purchase
price. Also known as capital appreciation.
●​ (b) Dividend Income: Cash payments received by shareholders from a company's
earnings.
●​ (c) Interest Income: Income generated from interest-bearing investments like bonds,
CDs, or savings accounts.
●​ (d) Rental Income: Income received from real estate properties.

3.4.5 Risk-Return Trade-off (Page 3.7)

●​ Principle: An important investment principle stating that the level of return depends
on the level of risk you are ready to take.
●​ Relationship: Generally described as the risk-return trade-off. Investments with
higher potential returns also carry higher levels of risk. Conversely, investments with
lower risk tend to offer lower returns.
●​ Balance: Investors must strike a balance between risk and return based on their
financial goals, risk tolerance, and investment horizon.
●​ Example: Stocks are generally considered riskier than bonds because their prices
fluctuate significantly in the short term. However, historically, stocks have also
delivered higher average returns compared to bonds over the long term. (Illustrated
by Figure 3.1 showing a positive correlation between Risk and Return).

3.5 Measurement of Risk and Return (Page 3.8 - 3.10)

Measuring risk and return for various asset classes involves using specific financial metrics
and tools to assess historical performance and volatility.

3.5.1 Return Metrics (Page 3.9)

●​ (a) Total Return: Measures the overall gain or loss of an investment over a specific
period, taking into account both capital appreciation (and depreciation) and income
generated (dividends, interest, or rents).
●​ (b) Annualized Return: The average compound return per year over a specific
period, providing a standardized measure of an investment's performance.
●​ (c) Yield: The income generated by an investment expressed as a percentage of the
investment's current market price. E.g., bond's yield is the annual interest payment
as a percentage of the bond's current price. (Often received in terms of interest or
dividend).
●​ Example Calculation (Average Return):
○​ ROR for ABC Ltd. for 6 years: 12, 18, -6, 20, 22, 24 (%)
○​ Average Return (R̄) = ΣR / N = (12 + 18 - 6 + 20 + 22 + 24) / 6 = 15%
●​
3.5.2 Risk Metrics (Page 3.9 - 3.10)

●​ (a) Standard Deviation (σ):

○​ Measures the historical volatility of an asset's returns.
○​ Higher standard deviation indicates greater price fluctuations and higher risk.
○​ Formula: σ = √[ Σ(x - x̄)² / N ] OR σ = √[ (Σfx² / N) - (Σfx / N)² ]
■​ Where: x = variable under consideration, x̄ = mean of x, N = number of
observations, f = frequency distribution.
○​
○​ Variance (σ²) = Standard Deviation squared.
○​ Example Calculation: Using the ROR data for ABC Ltd. (Mean R = 15%):
■​ Year | ROR(%) | (R - R̄) | (R - R̄)²
■​ 1 | 12 | -3 | 9
■​ 2 | 18 | 3 | 9
■​ 3 | -6 | -21 | 441
■​ 4 | 20 | 5 | 25
■​ 5 | 22 | 7 | 49
■​ 6 | 24 | 9 | 81
■​ Σ(R - R̄)² = 614
■​ Variance (σ²) = 614 / 6 = 102.33
■​ Standard Deviation (σ) = √102.33 ≈ 10.1158%
○​
●​
●​ (b) Beta (β):
○​ Measures the sensitivity of an asset's returns to movements in the overall
market (usually represented by a market index like S&P 500).
○​ Beta > 1: Asset is more volatile than the market.
○​ Beta < 1: Asset is less volatile than the market.
●​
●​ (c) Value at Risk (VaR):
○​ Estimates the potential maximum loss an investment may experience over a
specific time horizon and confidence level.
○​ Helps investors understand the downside risk they could face.
●​
●​ (d) Sharpe Ratio:
○​ Evaluates an investment's risk-adjusted return.
○​ Calculated by dividing its excess return (return above a risk-free rate) by its
standard deviation.
○​ Higher Sharpe Ratio indicates better risk-adjusted performance.
●​

3.6 Asset Class-Specific Metrics (Page 3.10 - 3.11)

●​ (a) Equity (Stocks):

○​ Price-to-Earnings (P/E) Ratio: Measures stock price relative to its earnings
per share. Provides insights into valuation.
○​ Dividend Yield: Annual dividend payment as a percentage of the stock's
current price.
 ●​
●​ (b) Fixed-Income (Bonds):
○​ Yield to Maturity (YTM): Total return anticipated on a bond if held until it
matures.
○​ Credit Rating: Indicates the creditworthiness of a bond issuer, helping
assess credit risk.
●​
●​ (c) Real Estate:
○​ Capitalization Rate (Cap Rate): Ratio of net operating income to the
property's value, providing an estimate of potential return.
●​
●​ (d) Commodities:
○​ Commodity Price Index: Tracks the price movements of a basket of
commodities, indicating overall market performance.
●​

Important Note: Past performance may not predict future results. No single metric captures
all complexities. Investors should use multiple metrics, perform thorough research, consider
diversification, and seek advice.

3.7 Measurement of Portfolio Risk and Return (Page 3.11 - 3.12)

Assessing the performance and volatility of a collection of investments (portfolio) held by an

investor. Portfolio metrics are crucial for understanding how investments are performing as a
whole.

3.7.1 Portfolio Return Metrics

●​ (a) Weighted Average Return: Calculate the weighted average return of each
individual asset in the portfolio based on its allocation percentage. The overall
portfolio return is the sum of these weighted returns.
○​ Formula: Rp = Σ (Wi * Ri) for i=1 to n
■​ Rp = Expected Return of the Portfolio
■​ Wi = Proportion of funds invested in security i
■​ Ri = Expected Return in security i
■​ n = Number of securities in the portfolio
○​
○​ Example: Portfolio with 40% in ABC (15% return) and 60% in PQR (20%
return).
■​ Rp = (0.4 * 15) + (0.6 * 20) = 6 + 12 = 18%
○​
●​
●​ (b) Time-Weighted Return (TWR): Measures the compound rate of growth of a
portfolio over a specific time period, discounting the effect of any external cash flows
(deposits or withdrawals).
●​ (c) Dollar-Weighted Return (Internal Rate of Return, IRR): Takes into account the
timing and magnitude of cash flows into and out of the portfolio, providing a more
accurate measure of an investor's actual return.
3.7.2 Portfolio Risk Metrics

●​ (a) Standard Deviation: Compute the standard deviation of the portfolio's returns,
taking into account the individual asset weights. Measures volatility of the portfolio.
●​ (b) Beta: Calculate the beta of the portfolio, which measures its sensitivity to market
movements. A beta > 1 indicates higher volatility than the market, < 1 indicates lower
volatility.
●​ (c) Value at Risk (VaR): Estimate the potential maximum loss the portfolio may
experience over a specific time horizon and confidence level. Helps assess downside
risk.
●​ (d) Sharpe Ratio: Evaluate the risk-adjusted return of the portfolio by dividing the
excess return (portfolio return minus risk-free rate) by the portfolio's standard
deviation.

3.7.3 Performance Attribution (Page 3.13)

●​ Analysis breaking down the sources of portfolio returns to determine the contribution
of each asset or investment decision. Helps identify areas of strength and weakness
in the portfolio.
●​ Essential to use multiple metrics and tools for comprehensive evaluation. Regular
monitoring and periodic rebalancing help maintain the desired risk-return profile
aligned with goals and risk tolerance. Professional advisors can guide this process.

3.8 Diversification and Portfolio Formulation (Page 3.13 - 3.16)

Key concepts in investment management.

3.8.1 Diversification

●​ Definition: A risk management strategy involving spreading investments across

various market conditions. By holding a diversified portfolio, an investor seeks to
reduce the impact of poor performance from any single investment and enhance
overall stability. The goal is to achieve a balance between risk and return.
●​ Basis: Different assets react differently to various market conditions.
●​ Key Points about Diversification:
○​ Asset Classes: Involves investing in different asset classes (stocks, bonds,
real estate, cash, alternative investments like commodities or private equity).
○​ Sectors and Industries: Within asset classes (like stocks), diversify across
different sectors (technology, healthcare, finance) and industries.
○​ Geographic Regions: Entails investing in various countries and regions to
mitigate risks associated with a single economy's performance.
○​ Risk Correlation: Effectiveness depends on the correlation between returns
of different assets. Assets with low or negative correlation provide better
diversification benefits.
●​
●​ Levels of Diversification (Figure 3.3): Can occur at different levels - Capital
Allocation (riskless vs risky), Asset Allocation (markets and asset classes), Security
Allocation (investments within each asset class).
 ●​ Case in Point (Itiksha's Portfolio): Example showing allocation of ₹100,000 across
Stocks (60%), Bonds (30%), Real Estate (10%), Cash (5%). Spreads risk - stocks for
growth (higher volatility), bonds for stability/income (lower returns), real estate for
diversification/income, cash for safety/liquidity.
●​ Rationale (Page 3.15): When one asset class is performing poorly, another may be
performing well. Helps mitigate impact of poor performance. Aligns with risk tolerance
and objectives. Portfolio review and rebalancing help maintain desired allocation as
market conditions change. Diversification does not eliminate risk entirely, but
helps manage and reduce overall portfolio risk while potentially enhancing long-term
returns.

3.8.2 Portfolio Formulation (Page 3.15 - 3.16)

●​ Definition: The process of designing an investment portfolio that meets the specific
objectives and constraints of an investor. Involves a comprehensive analysis of the
investor's financial goals, risk tolerance, time horizon, and liquidity needs.
●​ Steps in Portfolio Formulation:
○​ (a) Investor Profiling: First step. Understand financial goals (wealth
accumulation, income generation, capital preservation), assess risk tolerance
to determine comfortable risk level.
○​ (b) Asset Allocation: Based on investor's profile, determine appropriate
asset allocation. Refers to the percentage of the portfolio allocated to different
asset classes (stocks, bonds, real estate, cash etc.). Critical factor driving
portfolio's risk and return characteristics.
○​ (c) Security Selection: Once asset allocation is decided, select specific
securities or investments within each asset class. Involves research, analysis,
considering various factors to identify suitable investments.
○​ (d) Risk Management: Diversification plays a central role. Goal is to combine
assets with varying risk profiles to create a well-balanced portfolio.
○​ (e) Monitoring and Rebalancing: Portfolio should be regularly monitored to
ensure it remains aligned with goals and risk tolerance. If market conditions or
asset performances cause the portfolio to deviate from the desired allocation,
rebalancing may be necessary. Also examine investments inside each asset
allocation category when rebalancing. Need to make adjustments if initial
allocation or specific investments are not in line with investing objectives.
●​
●​ Methods of Portfolio Rebalancing (Page 3.16):
○​ Sell investments in over-weighted asset categories and use proceeds to buy
investments in under-weighted categories.
○​ Buy fresh investments for under-weighted asset classes.
○​ Adjust contributions to allocate more funds to asset classes that are
under-weighted until the portfolio regains balance.
○​ Stick with Your Plan: "Buy Low, Sell High" - shifting away from poorly
performing assets to favour well-performing ones may seem logical but can
be difficult and unwise. Cutting back on "winners" and adding more to "losers"
(rebalancing) forces you to buy low and sell high.
●​
 ●​ Dynamic Process: Portfolio formulation requires periodic review and adjustments
based on changing circumstances and market conditions. Seeking professional
advice can be valuable.
●​ Case in Point (Suhanna's Video Games): Illustrates diversification concepts using
a non-financial example. Spending ₹1000 on one game vs. four different games
(₹250 each).
○​ Risk & Return: Each game has different characteristics (popularity,
enjoyment). Risk involved if she doesn't enjoy a game.
○​ Diversification: Buying four games spreads risk; if one is disliked, she still has
three others.
○​ Balancing Risk & Return: Didn't put all money into one high-risk game;
balanced by having a mix.
○​ Monitoring & Adjusting: Can monitor enjoyment, sell/trade less enjoyable
games for different ones, similar to portfolio adjustments.
●​

Chapter 4: Investment Planning: Types of Investment Avenues (Sections 4.1 - 4.9)

Learning Outcomes (Chapter 4):

●​ Know gold bonds and real estate investments.

●​ Differentiate between greenfield and brownfield investments.
●​ Understand fixed income securities.
●​ Appreciate the concepts of financial derivatives and digital currency in India.

Introduction (Page 4.1):

●​ Investment avenues encompass a broad spectrum of opportunities for individuals

and entities to deploy capital aiming for financial growth and security.
●​ Refer to various options available to allocate funds with the expectation of generating
a return.
●​ These avenues encompass assets, financial instruments, and opportunities, each
with its own risk and return profile.
●​ Understanding different avenues is crucial for making informed financial decisions
and building wealth over time. Essential to consider financial goals, risk tolerance,
and time horizon when choosing.
●​ Diversifying portfolio by spreading investments across different asset classes helps
manage risk and optimize returns.
●​ Staying informed about market conditions and seeking professional advice aids in
navigating the complex world of finance.

Benefits of Understanding Investment Avenues (Page 4.2):

●​ Empowers investors to make informed financial decisions, aligning them with specific
goals and risk tolerance.
●​ Awareness of diverse options allows tailoring portfolios to balance risk and return
effectively.
 ●​ Knowledge enables individuals to diversify investments, reducing overall risk by
spreading assets across various classes (long-term financial stability).
●​ Staying informed enables seizing opportunities for wealth creation (stock market, real
estate, cryptocurrencies, start-up ventures).
●​ Helps safeguard wealth during downturns by identifying conservative, low-risk
options for capital preservation.
●​ Understanding optimizes returns and financial security. Empowers investors to stay
ahead of changing market conditions, adjust strategies, and build a resilient financial
future. Encourages prudent financial planning.

"Food For Thought!" (CRISIL Report, Dec 2022 - Page 4.2):

●​ 45% of Indian Household savings go into fixed deposits and 25% into insurance.
●​ Only 8% of Indian households have invested in equities, as opposed to 42% in US
and 14% in China.

4.1 Gold Bond (Page 4.2 - 4.5)

●​ Context: Gold isn't just precious metal; used in electronics (approx. 7% of world's
gold supply for technological applications).
●​ Definition (Page 4.3): A type of debt security issued by the government or a
corporate entity, where the bondholder receives periodic interest payments and the
principal amount is repaid at maturity.
●​ Distinctive Feature: Value is directly linked to the price of gold. Bond provides an
opportunity to invest in gold without holding physical gold, offering interest and
potential price appreciation. Also have tax benefits compared to physical gold.
●​ Returns: Subject to gold price fluctuations, interest rate may vary.
●​ Risks: Like any investment, returns may fluctuate based on gold price, prevailing
interest rates, economic conditions, issuer's creditworthiness. Liquidity can be a
concern as bonds might have lock-in periods. Due diligence required.

4.1.1 Process of Gold Bond Investment (Page 4.3)

1.​ Issuance: Government or corporations issue gold bonds to raise funds from
investors. Usually offered in open market through auctions or other means.
2.​ Backing: Backed by a specific amount of physical gold reserves held by the issuer.
Issuer pledges quantity of gold to guarantee the bond's value.
3.​ Interest Payments: Like other bonds, pay periodic interest (coupon rate) to
bondholders, predetermined at time of issuance and remains fixed throughout tenure.
4.​ Maturity and Principal Repayment: At end of term (maturity date), issuer repays
face value to bondholders.
5.​ Redemption: Some bonds offer option for investors to redeem before maturity,
giving flexibility.
●​ Purpose for Investors: Offers exposure to gold as an asset class without needing to
physically hold/store precious metal. Way to diversify portfolio and serve as hedge
against inflation/economic uncertainties.

4.1.2 Key Benefits of Gold Bonds (Page 4.4)

 1.​ Diversification: Can help diversify portfolio by adding asset class with low
correlation to traditional investments (stocks, bonds).
2.​ Hedge against Inflation: Gold often considered hedge against inflation, value tends
to rise during periods of rising prices and economic uncertainties.
3.​ Preserved Value: Backed by physical gold reserves, perceived as relatively secure
investments with potential to preserve value over time.
4.​ Interest Income: Provide regular stream of interest income to bondholders.

Sovereign Gold Bonds (SGBs) (Page 4.4 - 4.5)

●​ Definition: Financial instruments issued periodically by the Reserve Bank of India

(RBI) on behalf of the Government of India. These bonds are an alternative to owning
physical gold.
●​ Features:
1.​ Purpose: Aim to reduce demand for physical gold and shift a part of savings
used for purchasing gold into financial savings.
2.​ Tenure: Typically eight years, with an exit option after the fifth year. Can be
traded on stock exchanges.
3.​ Interest and Returns: Offer a fixed interest rate (paid semi-annually) on
initial investment. Additionally, price of bond reflects price of gold; investors
benefit from capital appreciation if gold value rises.
4.​ Safety and Security: Issued by government, considered safe investment
avenue. Eliminate risk and cost of storage associated with physical gold.
5.​ Tax Benefits: Capital gains arising from transfer of SGBs are tax-free upon
maturity. However, if sold on secondary market, capital gains tax might apply.
6.​ Subscription and Issue: Available for subscription periodically. Can be
purchased from banks, Stock Holding Corporation of India (SHCIL),
designated post offices, or stock exchanges.
●​
●​ Overall: Investing in SGBs is an option for individuals looking to invest in gold
without holding physical gold. Provides opportunity to earn interest on gold
investments along with potential capital gains if gold price rises during tenure.

4.2 Real Estate (Page 4.5 - 4.6)

●​ Definition: Refers to property comprising land and any structures or improvements

built on it (residential homes, commercial buildings, industrial facilities, agricultural
land). Tangible asset class playing a significant role in economy and offering
investment opportunities.
●​ Characteristics: Can provide stable income through rentals and potential capital
appreciation over long term. Offer diversification and liquidity compared to direct
property ownership via Real Estate Investment Trusts (REITs).
●​ Considerations: Investments require substantial initial capital and ongoing
ownership costs. Market conditions and location significantly impact property values
and rental income. Can lack liquidity, making it challenging to sell quickly when
needed.

4.2.1 Types of Real Estate (Page 4.5)

 1.​ Residential Real Estate: Properties used for housing purposes (single-family
homes, apartments, townhouses, condominiums).
2.​ Commercial Real Estate: Properties used for business or income-generating
purposes (office buildings, retail spaces, hotels, warehouses, shopping centers).
3.​ Industrial Real Estate: Category includes properties used for manufacturing,
distribution, storage, and other industrial activities (factories, distribution centers,
industrial parks).
4.​ Agricultural Real Estate: Properties comprising farmland used for crop cultivation,
livestock farming, or other agricultural activities.

4.2.2 Key Features and Aspects of Real Estate (Page 4.6)

1.​ Tangible Asset: Physical asset; value influenced by location, condition, demand in
the market.
2.​ Income Potential: Can provide regular income source through rental payments,
offering steady cash flow.
3.​ Appreciation: Properties may increase in value over time due to factors like demand
growth, economic development, inflation, leading to potential capital appreciation.
4.​ Leverage: Investors can use borrowed funds (mortgages) to finance acquisitions,
allowing control of larger assets with smaller initial capital, potentially amplifying
returns.
5.​ Diversification: Can add diversification to portfolio, performance not always directly
correlated with stock market.
6.​ Risks and Challenges: Involves various risks (market fluctuations, economic
conditions, changes in interest rates, property management challenges).
7.​ Property Management: Owning often requires active management (maintenance,
tenant relations, property operations).
8.​ Real Estate Investment Trusts (REITs): For individuals who want exposure without
owning physical properties. REITs are companies that own, operate, or finance
income-generating real estate and distribute at least 90% of taxable income to
shareholders. Offer diversification and liquidity.
●​ Overall: Can be attractive and rewarding avenue, providing income, appreciation,
diversification. Requires thorough research, due diligence, understanding of local
market.

4.3 Greenfield and Brownfield Projects (Page 4.7 - 4.8)

●​ Refer to two different approaches to investing in new business ventures or expansion

projects. Common in context of infrastructure development, manufacturing facilities,
real estate.
●​ (Often discussed as types of Foreign Direct Investment - FDI)

4.3.1 Greenfield Investment (Page 4.7)

●​ Definition: Involves starting a new project or business from scratch on undeveloped

or vacant land. Investor builds entirely new facilities, structures, or operations.
●​ Key Characteristics:
1.​ New Development: Project begins on a clean slate, without existing
infrastructure.
 2.​ Higher Risk: Generally carry higher risks due to uncertainties (market
acceptance, regulatory approvals, construction challenges).
3.​ Full Control: Investors have complete control over design, construction,
management.
4.​ Long Lead Time: May have longer lead times before operational and start
generating returns.
5.​ Higher Growth Potential: Although riskier, potential for higher growth rates
since they start from ground up, not constrained by existing infrastructure.
●​
●​ Examples: Building new manufacturing plant, constructing new airport, developing
new residential community, establishing new retail store in previously untouched
location.

4.3.2 Brownfield Investment (Page 4.7 - 4.8)

●​ Definition: Refers to investing in existing projects, properties, or businesses that

may require refurbishment, redevelopment, or expansion. Investor repurposes or
upgrades already-developed assets. (Improvement)
●​ Key Characteristics:
1.​ Existing Infrastructure: Involve reusing or improving existing infrastructure
and facilities.
2.​ Lower Risk: Generally carry lower risks than Greenfield, leverage existing
assets and often have established customer base or market presence.
3.​ Faster Implementation: Can be implemented more quickly than Greenfield
since some infrastructure is already in place.
4.​ Regulatory Considerations: May require environmental assessments and
remediation due to potential prior contamination.
●​
●​ Examples: Renovating old industrial site for new manufacturing facility, converting
aging shopping mall into mixed-use development, upgrading existing energy
infrastructure for more efficient operations.
●​ Choice: Depends on investor's risk appetite, available resources, market factors.
Both offer unique opportunities. Thorough due diligence and feasibility studies
needed.

4.4 Fixed Income Instruments (Page 4.8 - 4.10)

●​ Definition: Investments involving purchasing securities that provide a predictable

stream of income at regular intervals and return the principal amount at maturity.
●​ Characteristics: Considered relatively lower risk compared to equities, making them
popular among investors seeking stable income and capital preservation. Typically
issued by governments, corporations, or other entities to borrow money.

4.4.1 Types of Fixed Income Instruments (Page 4.9)

1.​ Bonds: Debt securities issued by governments or corporations to raise capital.

Investor lends money to issuer in exchange for periodic interest payments (coupon)
and return of principal at maturity date.
 2.​ Treasury Bonds and Treasury Notes: Issued by governments (e.g., U.S. Treasury)
to finance government activities. Considered among safest investments as backed by
full faith and credit of the government.
3.​ Corporate Bonds: Issued by corporations to raise funds for various purposes
(expansion, acquisitions). Carry different risk levels depending on issuer's
creditworthiness.
4.​ Municipal Bonds: Issued by state and local governments, municipal bodies to
finance public infrastructure projects. Income from municipal bonds is often exempt
from federal income tax, and sometimes state/local taxes.
5.​ Certificates of Deposit (CDs): Time deposits offered by banks with fixed terms and
interest rates. Often FDIC-insured up to certain limits, making them relatively secure.
6.​ Treasury Inflation-Protected Securities (TIPS): Bonds issued by U.S. Treasury
offering protection against inflation. Principal value adjusts for inflation, and investors
receive fixed interest rate on the inflation-adjusted principal.
7.​ Fixed Annuities: Insurance contracts providing a guaranteed income stream for a
specific period or life. Offer fixed interest rate for term of annuity.

4.4.2 Benefits of Investing in Fixed Income Instruments (Page 4.9 - 4.10)

1.​ Steady Income: Provide predictable income stream.

2.​ Capital Preservation: Generally considered safer than equities, offering lower risk of
principal loss.
3.​ Diversification: Including fixed income in portfolio can help diversify risk, especially
when combined with other asset classes like stocks.
4.​ Liquidity: Many fixed income instruments (e.g., government bonds, CDs) offer
relatively high liquidity, allowing investors access to funds if needed.
●​ Considerations: While offering stability, essential to consider factors like interest
rate risk, credit risk, inflation risk when making decisions. Risk tolerance, time
horizon, and seeking advice are important.

4.5 Financial Derivatives and Commodity Markets (Page 4.10 - 4.11)

Play significant roles in India's financial landscape. Enable participants to manage risks,
hedge against price fluctuations, and speculate on future movements of underlying assets
(including commodities).

4.5.1 Financial Derivatives in India (Page 4.10)

●​ Definition: Contracts that derive their value from an underlying asset, such as
stocks, indices, currencies, or interest rates. Widely used by investors, traders,
businesses to hedge risks and enhance returns.
●​ Regulation: Regulated by Securities and Exchange Board of India (SEBI) and
traded on major stock exchanges (NSE, BSE).
●​ Key Financial Derivatives Traded:
1.​ Futures Contracts: Agreements to buy or sell an underlying asset at a
predetermined price on a specified future date. Facilitate price discovery and
provide means of hedging against price volatility.
2.​ Options Contracts: Give holder the right, but not obligation, to buy (call
option) or sell (put option) an underlying asset at a specified price (strike
 price) within a predetermined time frame. Used for hedging and speculative
purposes. (Note: Specifications like strike price, expiration date, lot size
specified by Exchange).
3.​ Index Futures and Options: Derivatives based on stock market indices like
Nifty 50 and Sensex. Allow investors to take positions on overall direction of
stock market.
4.​ Currency Futures and Options: Allow participants to hedge against foreign
exchange rate risks or speculate on currency movements.
●​

4.5.2 Commodity Market in India (Page 4.11)

●​ Definition: Platform where various commodities (agricultural products, metals,

energy resources) are bought and sold. Plays crucial role in ensuring price stability
and providing mechanism for farmers/producers to hedge against price fluctuations.
●​ Major Commodity Exchanges:
1.​ Multi Commodity Exchange (MCX): One of the largest. Offers platform for
trading wide range of commodities (gold, silver, crude oil, natural gas,
agricultural products, base metals).
2.​ National Commodity & Derivatives Exchange (NCDEX): Specializes in
agricultural commodities (wheat, soybean, cotton, pulses).
3.​ Indian Commodity Exchange (ICEX): Known for trading in precious metals
(particularly gold) and diamond futures.
●​
●​ (Historical Note: Ban on commodity trading lifted after 40 years in India in 2003. Price
fluctuations can be rather volatile depending on the category; returns are relatively
higher in the sector).

4.5.3 Regulation and Oversight (Page 4.11)

●​ Both financial derivatives and commodity markets in India are regulated by SEBI.
Regulator oversees market operations, introduces new products, ensures
compliance with regulations to protect investor interests and maintain market
integrity.
●​ Development: Have provided Indian investors and businesses with valuable tools to
manage risks and enhance investment strategies.
●​ Caution: Trading involves inherent risks and requires good understanding of the
products before participating. Advisable for investors and traders to seek expert
advice and conduct thorough research.

4.6 Mutual Funds (Page 4.12 - 4.13)

●​ Definition: Professionally managed investment vehicles pooling money from multiple

investors to invest in a diversified portfolio of securities (stocks, bonds, money market
instruments, other assets). Managed by professional fund managers making
investment decisions on behalf of investors.
●​ Regulation: Regulated by Securities and Exchange Board of India (SEBI) in India.
Offer a convenient and accessible way for investors to participate in financial
markets.
 ●​ (Historical Note: First modern mutual fund, Massachusetts Investors Trust,
established 1924. Mutual Fund Boom: Number of funds exploded over years; in
1970, ~361 funds in US. Today, thousands cater to various strategies and niches).

4.6.1 Types of Mutual Fund Schemes (Page 4.12)

1.​ Equity Mutual Funds: Primarily invest in stocks of companies. Aim for capital
appreciation over long term, suitable for investors seeking higher returns and willing
to bear higher risk levels.
2.​ Debt Mutual Funds: Invest primarily in fixed-income securities (government bonds,
corporate bonds, money market instruments). Aim to provide stable income and
suitable for investors looking for lower risk and regular income.
3.​ Hybrid or Balanced Mutual Funds: Invest in a mix of both equity and debt
securities. Aim to provide balance between growth and income while managing risk
through diversification.
4.​ Money Market Mutual Funds: Invest in short-term money market instruments
(Treasury bills, commercial paper, certificates of deposit). Considered low-risk with
relatively stable returns.
5.​ Index Mutual Funds: Aim to replicate performance of a specific market index (Nifty
50, Sensex) by investing in the same proportion as index constituents.
6.​ Sectoral and Thematic Mutual Funds: Invest in stocks of companies operating in
specific sectors (technology, banking, pharmaceuticals) or specific themes or trends
(infrastructure, consumption).
7.​ Tax-Saving (ELSS) Mutual Funds: Equity-linked savings schemes offering tax
benefits under Section 80C of Income Tax Act. Have lock-in period of three years,
primarily invest in equities.

4.6.2 Key Features of Mutual Fund Schemes (Page 4.13)

1.​ Diversification: Pool money from multiple investors, invest in diversified portfolio,
reducing individual investment risk.
2.​ Professional Management: Experienced fund managers make decisions based on
market research and analysis.
3.​ Liquidity: In open-ended funds, investors can buy/sell units at Net Asset Value
(NAV) on any business day, providing high liquidity.
4.​ Transparency: Provide regular updates on portfolio holdings and performance,
ensuring transparency for investors.
5.​ Systematic Investment Plan (SIP): Investors can invest fixed amount at regular
intervals, helps in rupee-cost averaging and disciplined investing.
6.​ Exit Load: Some funds may have an exit load (fee) charged to investors who
redeem units before a certain period.
●​ Considerations: Investors should carefully assess goals, risk tolerance, investment
horizon before choosing. Understanding expense ratio, historical performance,
investment philosophy of fund house is essential for informed decision making.
Aligning scheme choice with individual objectives is key (advisor help
recommended).

4.7 International Investment (Page 4.13 - 4.15)

 ●​ Definition: Refers to opportunities for investors to invest their money in assets and
financial instruments outside their home country.
●​ Benefits: Offers diversification benefits, access to different markets and industries,
potential for higher returns.

4.7.1 International Investment Avenues Available to Investors (Page 4.14)

1.​ Global Stocks: Investing in stocks of companies listed on international stock

exchanges. Allows participation in growth and performance of global companies
across industries/regions.
2.​ International Mutual Funds: Funds investing in a diversified portfolio of international
securities. Convenient way to access international markets, managed by
professionals well-versed in global markets.
3.​ Exchange-Traded Funds (ETFs): Offer exposure to international markets, sectors,
or regions and trade on stock exchanges like individual stocks. Provide flexibility and
liquidity.
4.​ Foreign Bonds: Investing in bonds issued by foreign governments or corporations.
Allows earning income from foreign debt instruments. Denominated in currencies
other than investor's home currency.
5.​ American Depositary Receipts (ADRs) and Global Depositary Receipts (GDRs):
Certificates representing ownership of shares in foreign companies. Trade on U.S. or
international stock exchanges, allowing investment in foreign companies indirectly.
6.​ International Real Estate: Investing in foreign real estate properties or REITs
operating in different countries. Provides exposure to global property market and
potential rental income.
7.​ Emerging Market Investments: Investing in emerging market economies offers
potentially higher returns due to rapid economic growth. Emerging market funds and
ETFs provide exposure (e.g., India, China, Brazil).
8.​ Foreign Currency: Investors can speculate on foreign currency movements through
currency trading in the foreign exchange (forex) market.

4.7.2 Benefits of International Investment (Page 4.14)

1.​ Diversification: Offers diversification benefits as performance of international assets

may not be closely correlated with domestic investments, reducing overall portfolio
risk.
2.​ Access to Growth Markets: Investing in rapidly growing economies provides
opportunities for potentially higher returns compared to developed markets.
3.​ Currency Diversification: Investing in foreign currencies can help hedge against
currency risk and protect against fluctuations in home currency's value.
4.​ Sector Exposure: International markets may offer exposure to sectors or industries
underrepresented or unavailable in investor's home country.

4.7.3 Risks and Considerations (Page 4.15)

1.​ Currency Risk: Fluctuations in foreign exchange rates can impact returns when
converted back to home currency.
2.​ Political and Economic Risks: Investing in some countries may expose investors to
geopolitical risks and uncertainties related to local economic conditions.
 3.​ Regulatory Differences: Countries have varying regulatory environments affecting
investment decisions and investor protections.
4.​ Foreign Taxation: Taxation rules differ across countries. Investors may need to
navigate tax implications when investing internationally. Thorough research, risk
tolerance assessment, and seeking professional advice needed. Understanding tax
implications and regulatory considerations is crucial.

4.8 Currency Derivatives (Page 4.15 - 4.16)

●​ Definition: Financial instruments that derive their value from underlying foreign
exchange rates. Used by investors, businesses, financial institutions to hedge
against currency risk, speculate on currency movements, and facilitate international
trade. Allow participants to manage exposure to foreign exchange rate fluctuations
without physically exchanging currencies.
●​ Regulation: Regulated by SEBI and traded on exchanges like NSE, BSE, MCX-SX.

4.8.1 Types of Currency Derivatives Include (Page 4.15 - 4.16):

1.​ Currency Futures: Standardized contracts obligating the parties to buy or sell a
specified amount of a foreign currency at a predetermined exchange rate on a future
date. Traded on regulated exchanges, have standardized contract sizes and maturity
dates.
2.​ Currency Options: Provide the holder the right, but not obligation, to buy (call
option) or sell (put option) a specified amount of foreign currency at a predetermined
exchange rate on or before a specified expiration date.
3.​ Currency Swaps: Involve the exchange of principal and interest payments in one
currency for those in another currency. These agreements can be used to hedge
foreign currency debt or obtain financing in a different currency.
●​ Purpose: Offer opportunities for investors and businesses to manage foreign
exchange risk effectively. Can also be used for speculative purposes to profit from
expected currency movements.
●​ Risks: Carry risks, including market volatility and potential for significant losses if the
exchange rate moves unfavourably.

4.9 Digital Currency (Cryptocurrency) (Page 4.16 - 4.17)

●​ Definition: Often referred to as cryptocurrency, is a form of digital or virtual currency

using cryptography for secure financial transactions and operates independently of
any central authority (government or financial institution). Crypto currencies are
decentralized and rely on blockchain technology to record and verify transactions.
●​ Examples: Well-known cryptocurrencies include Bitcoin (BTC), Ethereum (ETH),
Ripple (XRP), Litecoin (LTC).

4.9.1 Key Features of Digital Currencies (Page 4.16 - 4.17):

1.​ Decentralization: Not controlled by any central authority; transactions managed by

distributed network of computers.
2.​ Anonymity and Privacy: Transactions do not require personal information, providing
a certain level of anonymity.
 3.​ Volatility: Known for high price volatility, often experiencing significant fluctuations in
short periods.
4.​ Limited Supply: Most have capped supply, meaning only a certain number of
coins/tokens will ever be in circulation.
5.​ Utility and Use Cases: Some have specific use cases beyond serving as medium of
exchange, such as powering decentralized applications (smart contracts) on
blockchain networks.
6.​ Regulatory Environment: Subject to varying degrees of regulation in different
countries. Landscape evolving rapidly as authorities attempt to address challenges
posed by this relatively new asset class. (Note: RBI & SEBI are involved in regulating
crypto currency in India; Ministry of Finance has appointed committee to study its
use. In 2018, RBI banned all services related to crypto; In 2023, RBI expanded
definition of reporting entity to include virtual assets service providers).
●​ Growth & Concerns: Gained significant attention and popularity recently, viewed as
alternative to traditional fiat currencies and means to facilitate borderless
transactions. However, digital currencies also face criticisms related to price volatility,
security risks, potential use in illegal activities.
●​ Caution: As with any investment or financial transaction, crucial for individuals to
conduct thorough research, understand risks involved, and consider risk tolerance
before engaging. Additionally, seeking advice from professionals can help navigate
complexities.

Case in Point: Selecting the Right Investment (Avinash) (Page 4.18)

●​ Illustrates tailoring investment choices based on goals, risk tolerance, and

experience.
●​ Background: 35-year-old professional, substantial inheritance, diverse goals
(retirement, home, business).
●​ Challenges: Diverse goals (long-term retirement, medium-term business, short-term
home), Risk-averse for short-term goals but open to more risk for long-term, Limited
investment experience.
●​ Solution (Advisor's Recommendations):
○​ Short-Term (Buying a Home): Low-risk, easily accessible options like
high-yield savings account or CD for down payment (safety of principal,
liquidity).
○​ Medium-Term (Starting a Business): More flexible plan. Portfolio allocated
to diversified mix of stocks and bonds. Mix leans slightly more conservative,
but still growth-oriented. Mutual funds or ETFs excellent for diversification.
○​ Long-Term (Retirement): Longer time horizon allows taking more risk for
potentially higher returns. Combination of retirement accounts (401k, IRA),
diversified portfolio of stocks and bonds. May consider additional investments
(individual stocks, real estate). Extended time frame helps endure market
fluctuations.
●​
●​ Benefits (Page 4.19): Dividing investments according to goals/risk tolerance helps
Avinash prepare. Diversified portfolio mitigates risks. Retirement accounts offer tax
advantages. Advisor provides confidence and peace of mind.
Okay, here are the very detailed, in-depth notes for Unit 3: Personal Tax Planning,
meticulously compiled based only on the content within the provided textbook images
(Chapters 5 and 6).

Unit 3: Personal Tax Planning (Comprehensive Notes)

(Based on Textbook Chapters 5 & 6)

(Total Hours Allotted in Syllabus: 9)

Chapter 5: Personal Tax Planning: Regulation and Scope (Sections 5.1 - 5.3)

Learning Outcomes (Chapter 5):

●​ Develop fundamental knowledge about the personal income tax structure in India.
●​ Understand the scope of personal tax planning.
●​ Learn about exemptions and deductions available to individuals.

Introduction (Page 5.1 - 5.4)

●​ Taxation Definition: A mandatory recurring financial charge levied by the

government (central or state) on an individual or a corporate entity.
●​ Purpose of Taxes: Government's most crucial revenue source; used to carry out
various general welfare programmes (e.g., building public infrastructure, offering
welfare schemes like healthcare/education, scientific research, defence capabilities).
Taxation is a mechanism through which government achieves these objectives. Tax
payment should be considered a duty.
●​ Tax Classification: Broadly classified as Direct Taxes (taxpayer pays directly to
authority and cannot transfer burden, e.g., Income Tax) and Indirect Taxes (imposed
on suppliers/manufacturers, later passed on to end-consumer, e.g., Goods and
Services Tax - GST).
●​ Administrative Bodies:
○​ Central Board of Direct Taxes (CBDT): Collects and administers direct
taxes.
○​ Central Board of Indirect Taxes and Customs (CBIC): Collects and
administers indirect taxes.
●​
●​ Indian Context:
○​ India's gross personal income tax collection grew significantly (e.g., 24.23% in
FY ending March 2023). India is among the world's wealthiest economies.
○​ Steady rise in personal income tax as a percentage of GDP (e.g., 2.11% in
2014-15 to 2.94% in 2021-22).
○​ Widened taxpayer base. Direct tax collection (corporate + personal) grew
substantially (e.g., 40% increase in first four months of July 2022).
 ○​ Types of Direct Taxes in India: Income Tax (Personal Income Tax), Capital
Gains Tax, Wealth Tax (abolished), Gift Tax, Property Tax, Corporation Tax,
Expenditure Tax.
○​ Indirect Taxes: GST and Customs Duty are prominent. GST levied by GST
Council (as per tax slabs laid down). GST is a single, unified, comprehensive
indirect tax replacing many earlier taxes (VAT, Service Tax, Central Excise,
CST, etc.). Certain items like petroleum crude, high-speed diesel, motor spirit,
natural gas, aviation turbine fuel (ATF) are not yet subsumed under GST.
Customs duty levied on importing goods.
○​ Taxpayer Base: Despite being the world's most populous country (approx.
140 crores), only a tiny fraction (around 10%) filed ITRs in 2021-22 (total
collection ₹696,604 crores). Tax is an essential financial obligation.
●​
●​ Personal Income Tax Basis: An individual's income earned in a financial year is
taxed based on income tax slabs of the Income Tax (IT) department. Personal tax is
based on the individual's residential status in the relevant financial year and past
years.
●​ Tax Filing: Usually filed at the end of each financial year.
●​ Tax Regimes:
○​ Old Tax Regime: Governed primarily by the Income Tax Act, 1961.
○​ New Tax Regime: Introduced via Finance Act 2020 (effective AY 2021-22).
Revised/modified in Union Budget 2023 (effective AY 2024-25). Features
reduced number of slabs, reduced tax rates, increased basic exemption limit
(to ₹3,00,000). It is the default option for all taxpayers from 2024
onwards. Taxpayers wanting to use the old regime need to indicate their
preference specifically.
●​

Table 5.1: Changes in the Income Tax Regime (Slabs as per Forbes Advisor, Feb 2023)

Net Annual Income (INR) Old Tax New Tax Regime (%)
Regime (%) (From AY 2024-25)

Up to 2,50,000 0 0

2,50,000-3,00,000 5 0

3,00,000-5,00,000 5 5

5,00,000-6,00,000 20 5

6,00,000-7,50,000 20 10

7,50,000-9,00,000 20 10

9,00,000-10,00,000 20 15

10,00,000-12,00,000 30 15

12,00,000-15,00,000 30 20
 More than 15,00,000 30 30

(Note: Old regime slabs vary for senior/super

senior citizens, see Table 5.2)

5.1 Personal Income Tax Structure (Page 5.4 - 5.11)

●​ Governing Law: The Income Tax Act, 1961 governs income tax levy in India. It is
amended annually by the Annual Finance Act passed by Parliament (sometimes by
Taxation Laws (Amendment) Act). The Finance Bill introduced in Budget Session
becomes Finance Act after passage by houses and President's assent.
●​ Administration: CBDT frames rules (Income-Tax Rules, 1962) and administers the
Act, including sub-rules, provisos (conditions, limits, guidelines, explanations).
●​ Chargeability: Tax is chargeable as per rates prescribed for the year by the Annual
Finance Act or the Income Tax Act.
●​ Assessment Year (AY) vs. Previous Year (PY):
○​ Previous Year (PY): The financial year in which income is earned (e.g., April
1, 2023, to March 31, 2024, is PY 2023-24).
○​ Assessment Year (AY): The financial year immediately preceding the
previous year, in which income earned in the PY is taxable (e.g., For PY
2023-24, the AY is 2024-25).
●​
●​ Taxable Entities ("Person"): Income tax is levied on various entities: Individual,
Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals
(BOI), Firm, Company, etc. Tax rates differ (e.g., fixed rate for companies, slab rates
for individuals). Rate at which income is taxed rises in direct proportion to income
(progressive taxation).

5.1.1 Residential Status of Individuals (Page 5.5)

●​ Taxation is primarily based on residential status in the relevant tax year.

●​ Determined independently each year based on physical presence in India during
the relevant PY and past years.
●​ Income earned and received outside India may not be taxable in case of a
non-resident; however, it may become taxable for a resident and ordinarily resident.
●​ Categories:
○​ Resident: An individual is resident in the relevant PY if:
■​ Physically present in India for 182 days or more in the PY, OR
■​ Physically present for 60 days or more in the PY AND 365 days or
more during the 4 years preceding the relevant PY.
○​
○​ Non-Resident (NR): An individual who does not satisfy either of the above
conditions.
○​ Resident and Ordinarily Resident (ROR): A resident individual is ROR if
they satisfy both the following additional conditions:
■​ Resident in India in at least 2 out of 10 previous years preceding the
relevant PY.
 ■​ Physically present in India for 730 days or more during the 7 previous
years preceding the relevant PY.
○​
○​ Resident but Not Ordinarily Resident (RNOR): A resident individual who
does not satisfy one or both of the ROR conditions. Also, a resident individual
may be an RNOR if physically present for less than 730 days during the 7
preceding PYs. [Text seems slightly conflated here, focus on the two
conditions for ROR; failing either makes one RNOR if resident]. Also, an
individual who is resident (NR) in India in any 9 out of 10 PYs preceding the
relevant PY. [This seems contradictory, likely meant 'non-resident'].
○​ Deemed Resident: An Indian citizen having total income (other than from
foreign sources) exceeding ₹15 lakhs during the PY is deemed resident if
he/she is not liable to pay tax in any other country or territory due to domicile,
residence, or similar criteria.
●​
●​ Importance: Determination of residential status determines taxability of income.
Recognising different sources of income also contributes to computing total income
(e.g., Salary, interest, dividends, capital gains).

5.1.2 Income from Various Heads (Page 5.6 - 5.7)

The Income Tax Act, 1961 classifies all incomes of a taxpayer into five heads for
computation:

●​ (a) Income from Salary: Includes wages, annuity, pension, gratuity, fees,
commission, profits in lieu of or in addition to salary/wages, advance salary, leave
encashment, balance transferred from unrecognized provident fund (PF), annual
accretion to employee's pension account. Taxable on due basis or receipt basis,
whichever is earlier. Salary arrears are taxable under this head.
●​ (b) Income from House Property: Rental income from a property (land or building)
the taxpayer owns. Taxable under the head "House Property". Includes rental income
of a person other than the owner. Rental income of a tenant from sub-letting is
taxable under "Income from Other Sources", not "House Property".
●​ (c) Income from Profits and Gains of Business or Profession (PGBP): Income
taxable under this head as per Section 28(ii), such as for managing affairs of a
company (Indian or other), holding agency, income derived by
trade/professional/similar association from specific services to members, income
received/receivable by assessee carrying out export business, benefit/perquisite
arising from business/profession exercised, sum due or received by a firm partner
(interest, bonus, salary, commission), sum received for not carrying out activity or
sharing know-how (non-compete).
●​ (d) Income from Capital Gains: Any profits or gains from the transfer of capital
assets are taxable under this head. Capital asset includes any property held by
assessee, any securities held by a Foreign Institutional Investor (FII), and any Unit
Linked Insurance Policy (ULIP) issued on or after 1.2.2021 to which exemption u/s
10(10D) is not applicable. While capital assets held for more than 36 months
immediately preceding transfer are long-term capital assets, those held beyond a
 period [Text incomplete - should be 'less than or equal to 36 months'] are short-term
capital assets.
●​ (e) Income from Other Sources: Income not taxable under the above four heads is
taxed under the residuary head "Income from Other Sources". Includes dividend
income, casual incomes (lotteries, crosswords, puzzles, horse races, card games),
interest on securities, consideration received in excess of fair market value of shares
issued by a closely held company, employees' contribution towards staff welfare
scheme, and others.
●​ Clubbing Provisions: Since tax system is progressive, higher income bracket
taxpayers may direct some income to spouse, minor child, etc., to minimize tax. To
prevent tax avoidance, clubbing provisions are introduced under the Income Tax Act
(income of spouse, minor child, others included in taxpayer's total income).
●​ Set-off of Losses: Taxpayer may earn profit from one source and report loss from
another within the same head (intra-head adjustment). Loss from one source can be
offset against profit from other sources within the same head. Loss under one head
can be offset against income from another head (inter-head adjustment) with certain
restrictions (e.g., loss from PGBP can be set off against salary, but loss from
speculation business only against speculation profit). Similarly, loss under "House
Property" can be set off against other heads (subject to limits). Default tax regime
under Sec 115BAC puts more restrictions on set-off.
●​ Computation: An individual generates income from various sources. Classification
under various heads is necessary to compute total income. Income tax is levied on
total income computed according to the Income Tax Act (old regime and new tax
regime under Sec 115BAC).

5.1.3 Personal Income Tax Rates (Page 5.7 - 5.11)

●​ System: While some countries (like US, Middle East) follow flat-tax rate, India,
Canada, Japan practice progressive tax-rate slab system. Other countries levy
Eastern nations do not have a personal income tax system; other countries levy
income tax of 10 to 60 per cent. India has progressive tax system based on age,
income levels, income earned. Surcharge and health/education cess apply for tax
purposes.
●​ Categorization (Act 1961): Resident individuals below 60, individuals aged 60+ but
less than 80 (Senior Citizens), individuals aged 80+ (Super Senior Citizens).
●​ New Tax Regime (Sec 115BAC):
○​ Introduced by Finance Minister Nirmala Sitharaman in Union Budget 2020 (or
alternative tax regime).
○​ Default regime for taxpayers (individual or HUF) from AY 2024-25 onwards.
Optional for AY 2023-24.
○​ Taxpayers can opt out by exercising option under Sec 115BAC(6).
○​ Benefits extended to Association of Persons (AOP)/Body of Individuals (BOI)
and Artificial Juridical Person (AJP) from 2024 onwards.
●​
●​ Comparison (Old vs New):
○​ Old Regime: Generally higher tax rates, but allows various exemptions and
deductions (HRA, LTA, Sec 80C, 80D, interest on housing loan etc.).
 ○​ New Regime: Lower concessional tax rates, wider slabs, increased basic
exemption (₹3L), enhanced rebate (u/s 87A for income up to ₹7L), standard
deduction of ₹50,000 introduced. BUT, most exemptions and deductions are
disallowed.
○​ Choice: Taxpayers must analyze which regime benefits them considering
their income, potential deductions/exemptions. Professional advice
recommended.
●​

Table 5.2: Old Tax Regime: Income Tax Rates for Individuals (AY 2024-25) (For
reference if opting out of New Regime)

Category Net Income (INR) Rate

(%)

Individuals (<60 years) & HUF/AOP/BOI/AJP Up to 2,50,000 Nil

2,50,001 - 5%
5,00,000

5,00,001 - 20%
10,00,000

Above 10,00,000 30%

Resident Senior Citizen (60 to <80 years) Up to 3,00,000 Nil

3,00,001 - 5%
5,00,000

5,00,001 - 20%
10,00,000

Above 10,00,000 30%

Resident Super Senior Citizen (>=80 years) Up to 5,00,000 Nil

5,00,001 - 20%
10,00,000

Above 10,00,000 30%

Surcharge (on income tax, if total income exceeds

specific limits):

> 50 Lakhs to 1 10%

crore

> 1 crore to 2 15%

crores
 > 2 crores to 5 25%
crores

Above 5 crores 37%

Health and Education Cess: 4%

(On the amount of Income Tax plus Surcharge)

●​ ​
Surcharge: Additional tax levied as % of income tax, paid over and above income
tax.
●​ Health and Education Cess: Additional surcharge to support government efforts
(health services, primary, secondary, higher education). Levied on income tax plus
surcharge. Cess is nil if total income of a 'specified fund' u/s 10(4D) includes only
income in respect of securities given u/s 115AD(1)(a).
●​ Rebate u/s 87A (Old Regime): Resident individual with total income not exceeding
₹5,00,000 gets rebate = 100% of income tax or ₹12,500, whichever is less.

Table 5.3: New Tax Regime: Income Tax Rates for Individuals, HUFs, AOP/BOI, AJP
(AY 2024-25 onwards)

Net Income (INR) Rate (%)

Up to 3,00,000 Nil

3,00,001 to 6,00,000 5%

6,00,001 to 9,00,000 10%

9,00,001 to 12,00,000 15%

12,00,001 to 15,00,000 20%

Above 15,00,000 30%

Surcharge (on income tax):

> 50 lakhs to 1 crore 10%

> 1 crore to 2 crores 15%

> 2 crores to 5 crores 25%

Above 5 crores 37%

Health and Education Cess: 4%

(On Income Tax plus

Surcharge)
 ●​ ​
Rebate u/s 87A (New Regime): For resident individual with total income up to
₹7,00,000, rebate is available, resulting in nil tax liability. The maximum rebate
amount is ₹25,000. If total income exceeds ₹7,00,000, taxpayer can claim rebate to
the extent of the difference between tax payable on total income and the amount of
income by which it exceeds ₹7,00,000 (marginal relief). Example: Income ₹7,50,000,
tax payable ₹30,000. Rebate = ₹5,000 (Excess income ₹50,000 - Tax payable
₹30,000 = ₹20,000? [Text example seems inconsistent here, likely rebate ensures
tax doesn't exceed the income above 7L]). Actual calculation: Tax on 7.5L = 25k(on
6-9L slab) + 10k(on 3-6L slab)=35k? Needs clarification on exact rebate calculation.
Basic principle: Tax liability won't exceed income over ₹7L due to rebate/marginal
relief.
●​ AMT (Alternate Minimum Tax): Provisions of AMT are not applicable under Sec
115BAC (New Regime). AMT applies under old regime if certain deductions (Sec
10AA, Sec 35AD, Ch VI-A under heading 'C-Deductions in respect of certain
incomes') are claimed and adjusted total income exceeds ₹20,00,000. AMT is 18.5%
of adjusted total income.
●​ Surcharge (New Regime Clarification): Max surcharge on income chargeable
under sections 111A, 112, 112A and 115AD(1)(b) [dividend/certain capital gains] shall
be 15%. Surcharge is nil if total income of a 'specified fund' u/s 10(4D) includes only
income in respect of securities given u/s 115AD(1)(a).
●​ Other Entities: Income tax rates for AY 2024-25 prescribed for partnership firms
(including LLP), local authorities, domestic companies, foreign companies,
cooperative societies, along with surcharge/cess. Firms/LLPs taxed at 30%.
Domestic companies/cooperative societies taxed at specific rates.

Case in Point: Sunder Kumar (Page 5.11)

●​ Total income ₹18,00,000 in PY 2023-24. Includes salary, house property, interest.

●​ Tax calculation under New Regime (Default - Sec 115BAC) for AY 2024-25:
○​ First ₹3,00,000 = Nil
○​ Next ₹3,00,000 (3-6L) @ 5% = ₹15,000
○​ Next ₹3,00,000 (6-9L) @ 10% = ₹30,000
○​ Next ₹3,00,000 (9-12L) @ 15% = ₹45,000
○​ Next ₹3,00,000 (12-15L) @ 20% = ₹60,000
○​ Balance ₹3,00,000 (15-18L) @ 30% = ₹90,000
○​ Total Tax = ₹2,40,000
○​ Add: Health & Education Cess @ 4% on ₹2,40,000 = ₹9,600
○​ Total Tax Liability = ₹2,49,600
○​ (Rebate u/s 87A not applicable as income > ₹7,00,000).
●​

5.2 Scope of Personal Income Tax Planning (Page 5.12 - 5.14)

●​ Definition: Management of financial affairs such that tax obligations are met while
taking full benefit of all exemptions, deductions, rebates, allowances available under
the law to minimize the tax burden on the assessee.
 ●​ Requires: Comprehensive knowledge of tax laws, rules, regulations. Flexibility and
watchfulness for significant developments.
●​ Process: Careful application of direct tax laws to real-life situations to reduce tax
impact. An intellectual exercise involving thorough understanding of principles,
procedures, applying up-to-date knowledge, keeping abreast of circulars,
announcements, provisions by CBDT.
●​ Tax Planning vs. Tax Avoidance vs. Tax Evasion: These are extremes in the
spectrum of reducing tax liability (See Figure 5.3).
○​ Tax Planning: Aims for tax efficiency by reducing overall tax liability while
maximizing available tax benefits (exemptions, rebates etc.). Results in
reduced tax liability, minimized litigation, directed returns to investments.
○​ Tax Avoidance: Using legal means (adopting methods, satisfying
requirements) to circumvent or reduce tax burden, often exploiting loopholes.
○​ Tax Evasion: Illegal means (deceit, misrepresentation, falsification) to avoid
payment of tax.
●​
●​ Benefits of Tax Planning: Contributes to economic stability, increases cash flow
(lower tax liability) for reinvestment/expansion. Ensures compliance, avoids
penalties/fines/interest from non-compliance. Facilitates better investment decisions
by considering tax implications. Benefits individuals and businesses. Leads to sound
strategic financial decisions. Includes succession planning, wealth transfer,
management of potential tax risks. Flexible enough to incorporate changing norms,
laws, rules, compliance conditions.
●​ Time Horizon: Can be short-range or long-range.
○​ Short-range: Undertaken every year with a specific objective (e.g., investing
sale proceeds of house property in Rural Electrification Corp bonds u/s
54EC).
○​ Long-range: Takes time to pay off, generally done keeping in view long-term
benefits (e.g., spouse's income clubbing, transfer of shares, bonus shares,
residential status considerations, choosing entity type - Individual, HUF, Firm,
Co-operative Society).
●​
●​ Scope (Figure 5.4): Involves comprehensive understanding of tax laws/regulations
-> Availing suitable deductions/exemptions -> Considering tax implications of
business/investment decisions -> Ensuring proper documentation/compliance ->
Filing of Tax Returns. Essential for managing/preserving wealth in complex regulatory
environment. Requires adapting to changes (like Budget 2023 concession regime).

5.3 Exemptions and Deductions Under Various Heads of Income (Page 5.14 - 5.25)

●​ Exemption: Means exclusion. Income exempted from tax will not enter computation
of total taxable income. Certain incomes wholly exempt (e.g., agricultural income). In
case of income partially above exemption (e.g., commuted pension), balance is
included in Gross Total Income (GTI).
●​ Deduction: Refers to amount reduced from GTI to arrive at Total Taxable Income
(TTI). Certain incomes included in GTI are wholly or partially allowed as deductions
(e.g., municipal taxes, interest on housing loan allowed as deductions for computing
'Income from House Property').
Table 5.4: Difference between Exemption and Deduction

Feature Exemption Deduction

Meaning Incomes exempted are not Investments/contributions/payments allowed

included in GTI. for certain purposes.

Treatmen Not included in Gross Total Included first in GTI, then certain deductions
t Income. allowed from GTI.

Section Contained in Section 10, Contained in Sec 80C to 80U in Chapter IV-A
Income Tax Act. and Section 10AA, IT Act.

5.3.1 Exemptions (Page 5.16 - 5.21)

●​ Exemptions or allowances allow individuals to preserve a portion of income. Income

Tax Act, 1961 made exemptions mandatory to inculcate saving habit.
●​ Common Exemptions: House Rent Allowance (HRA), Leave Travel Allowance (LTA),
Children's Education Allowance, etc.

Table 5.5: Exemptions under Section 10 of Income Tax Act, 1961 (As amended by
Finance Act, 2003) (Selected Examples)

u/s Nature of Allowance Applicable Amount of Exemption

Under
head
"Salaries
"

10(7) Allowances to Individual Fully exempted.

employees posted
outside India (Judges
etc.)

16(ii) Entertainment Individual Least of ₹5,000, 1/5th of salary, or

allowance received by actual allowance.
government employees

10(13A) House Rent Allowance Individual Least of: Actual HRA received,
(HRA) 40% of Salary (50% if in metro),
Rent paid minus 10% of Salary.

10(14) Children Education Individual Up to ₹100 per month per child,

Allowance max 2 children.

10(14) Hostel Expenditure Individual Up to ₹300 per month per child,

Allowance max 2 children.
10(14) Transport Allowance Individual ₹3,200 per month to employee
with disabilities.

10(14) Allowance to employee Individual Least of 70% of such allowance

in any transport or ₹10,000 per month.
business

10(14) Conveyance Allowance Individual Fully exempted (for official

duties).

10(14) Daily Allowance, Individual Fully exempted (conditions

Helper/Assistant, apply).
Research, Uniform, etc.

10(14) Special Compensatory, Individual Specific limits (e.g., ₹200 to

Border Area, Tribal Area ₹1,300 per month for Border
Allowances etc. Area).

16(ia) Standard Deduction Individual Least of ₹50,000 or amount of

salary.

Under
head
"House
Property"

23(1) Municipal Tax All Assessee Amount actually paid.

23(5) No Notional income for All Assessee Any building/land appurtenant

house property held as thereto held as stock-in-trade (up
stock-in-trade to 2 years from end of FY of
completion cert.).

24(a) Standard Deduction All Assessee 30% of the Annual Value (Gross
Annual Value - Municipal Taxes).

24(b) Interest incurred on All Assessee Actual amount. Max ₹2,00,000 (if
borrowed capital loan after 1-4-99 for
acquisition/construction of
self-occupied property). Max
₹30,000 (if loan for repair/renewal
or before 1-4-99).
Pre-construction interest allowed
in 5 equal annual installments.

25(A) Standard Deduction All Assessee 30% of arrears of rent or

from arrears/unrealized unrealized rent received.
rent received
Under
head
"PGBP"(
Selected
Examples
)

32(1) Depreciation of Individual Depreciation at prescribed rate on

Tangible/Intangible engaged in actual cost.
assets power
gen/distributio
n or other
business

32(1)(iia) Additional Depreciation All taxpayers 20% of actual cost.

on new plant &
machinery

35(1)(i) Revenue expenditure All assessee Fully exempted (100%

on scientific research deduction).

35(2AA) Payment to National All assessee Fully exempted (100%

Laboratory/University/II deduction).
T

35(AD) Expenditure on All assessee Fully exempted (100% deduction

specified business (cold of capital expenditure).
chain, hospital etc.)

Under
head
"Capital
Gains"(S
elected
Examples
)

54 Capital gains from Indiv / HUF Least of investment in new assets

Residential House or capital gain.
Property

54B Capital gains from Indiv / HUF Least of investment in new

agricultural land used agricultural land or capital gain.
for agri purposes

54EC Capital gains from Any person Least of investment in specified

long-term capital asset bonds (NHAI/REC etc.) or capital
(land/building) gain (subj to ₹50L limit in FY).
54F Capital gains from any Indiv / HUF Investment in new residential
long-term asset (other house assets. X capital gain/net
than house) consideration (proportional
exemption).

Under
head
"Other
Sources"

56(2)(x) Any sum of money or Any person Fully exempted (if from relative,
immovable/movable on marriage, under will, etc., or
property received... aggregate value <= ₹50,000).

57(iia) Standard Deduction for Individual 33.33% of Family Pension subject

Family Pension to maximum of ₹15,000.

Case in Point: Yamini (HRA Calculation - Page 5.21)

●​ Salary ₹70,000/month (Delhi). HRA received ₹30,000/month. Rent paid

₹25,000/month.
●​ Salary for HRA = Basic + DA (forming part) + Commission (% of turnover). Assume
₹70,000 includes these. Annual Salary = ₹8,40,000.
●​ HRA Exemption is Least of:
1.​ Actual HRA received = ₹30,000 * 12 = ₹3,60,000
2.​ 50% of Salary (metro city) = 50% * ₹8,40,000 = ₹4,20,000
3.​ Rent paid - 10% of Salary = (₹25,000 * 12) - (10% * ₹8,40,000) = ₹3,00,000 -
₹84,000 = ₹2,16,000
●​
●​ Least amount = ₹2,16,000. This is the HRA amount exempted from taxable income.
●​ Total Rent Paid = ₹3,00,000. Out of which ₹2,16,000 is exempt. Remaining HRA
received (₹3,60,000 - ₹2,16,000 = ₹1,44,000? [Text calculation mistake: Taxable
HRA = Actual HRA - Exempt HRA = 3,60,000 - 2,16,000 = 1,44,000. Text states
remaining amount ₹84,000 is taxable - needs verification])

5.3.2 Deductions (Chapter VI-A and Section 10AA) (Page 5.21 - 5.25)

●​ IT Act 1961 prescribes various deductions to taxpayers for certain investments made,
expenditures incurred, or income earned during the relevant PY, subject to fulfilment
of specified conditions. Under Chapter VI-A, some popular deductions:

Table 5.6: Deductions under Chapter IV-A and Section 10AA, Income Tax Act, 1961
(Selected Examples)

u/s Nature of deduction Applicable Amount of deduction

80C Sum contributed to PPF, Individual or Up to a maximum of ₹1,50,000
Payment of LIC premium, HUF (aggregate limit with 80CCC,
repayment of housing loan, 80CCD(1)).
tuition fees, term deposit >
5 years, 5-year post office
time deposit, etc.

80CCC Sum contributed to certain Individual Up to ₹1,50,000 (within the

pension fund of LIC or other aggregate limit of 80C).
insurer

80CCD(1) Sum contributed to pension Individual 10% of salary (salaried) or 20%

scheme of central of gross total income (other
government (NPS - case), within aggregate ₹1.5L
Employee/Self contribution) limit of 80C.

80CCD(1B Additional deduction for Individual Additional deduction up to

) contribution to NPS ₹50,000 (over and above 80C
limit).

80CCD(2) Employer's contribution to Individual Employer's contribution up to

pension scheme (NPS) 14% of salary (Central/State
Govt employee) or 10% of
salary (other employee). [This
deduction is available under
New Regime too].

80CCH Sum contributed to Individual Individual's whole contribution.

Agniveer Corpus Fund Central Government's entire
contribution. [This deduction is
available under New Regime
too].

80D Medical insurance premium Individual Max ₹25,000 (self/family) +

for self, spouse, dependent and HUF Max ₹25,000 (parents). Limit
children, parents; ₹50,000 if person is senior
Preventive health checkup citizen. Preventive health
checkup max ₹5,000 within
overall limits.

80DD Medical treatment, training, Resident Flat deduction of ₹75,000

rehabilitation of a Ind/HUF (disability >= 40%). Flat
dependent disabled deduction of ₹1,25,000 (severe
disability >= 80%).
80DDB Medical treatment of Resident Actual sum paid or ₹40,000
specified diseases or Ind/HUF (₹1,00,000 in case of senior
ailments for self, spouse, citizen), whichever is less.
dependent children, Minus amount received from
parents, siblings insurance/employer.

80E Interest on loan taken for Individual Interest payment (no limit on
higher education (self, amount, max 8 years).
spouse, children, or student
legally guardianed)

80EE Interest on loan for Individual Up to ₹50,000 (conditions

acquisition of residential apply).
property (sanctioned
2016-17)

80EEA Interest on loan for Individual Up to ₹1,50,000 (conditions

acquisition of residential apply, e.g., not eligible for
property (sanctioned 80EE).
1.04.19 to 31.03.22)

80EEB Interest on loan for Individual Up to ₹1,50,000.

purchase of electric vehicle
(sanctioned 1.04.19 to
31.03.23)

80G Donations to charitable All 100% or 50% deduction, with

institutions, certain funds, or without qualifying limit,
etc. depending on donee institution
(e.g., 100% for PM National
Relief Fund, 50% for PM
Drought Relief Fund, 50% for
temple etc.).

80GGA Donations for scientific Indiv not Actual donation (no cash
research and rural having donation > ₹2,000).
development PGBP
income

80GGB Contribution to political Indian Actual contribution (no cash).

parties company

80GGC Contribution to political Any Actual contribution (no cash).

parties assessee
other than
local
authority/AJ
P
80GG Rent paid for residential Individual Least of: ₹5,000 per month,
accommodation (if not not received 25% of total income, Rent paid
received HRA) HRA - 10% of total income.

80JJA Employment of new Assessee 30% of additional employee

employees whom Sec cost incurred (for 3 AYs).
44AB
applies

80QQB Royalty income, etc., of Resident Income derived in exercising

authors of certain specified individual profession or ₹3,00,000,
category of books (not being an whichever is less.
textbooks) author

80RRB Royalty on patents Resident Whole of such income or

individual ₹3,00,000, whichever is less.
being a
patentee

80TTA Interest on deposits in Individual or Actual interest or ₹10,000,

savings account HUF other whichever is less.
than resident
senior
citizen

80TTB Interest on deposits Resident Actual interest or ₹50,000,

(savings account and fixed senior whichever is less.
deposits) citizen

80U Deduction in case of person Resident Flat deduction of ₹75,000

with disability Individual (disability >= 40%). Flat
deduction of ₹1,25,000 (severe
disability >= 80%).

10AA Profits derived from exports Assessee 100% deduction in first 5 years,
of articles/things/services from 50% deduction in 6-10 years,
undertaking 50% deduction in 11-15 years
established (subject to conditions).
in SEZ

Figure 5.5: Deductions from Gross Total Income (Under Chapter IV-A, IT Act, 1961)

●​ Visually groups deductions:

○​ Respect of certain payments (Life insurance, PF, Medical, Loan Interest,
Donation etc.)
○​ Respect of certain incomes (Employment of new employees, royalty etc.)
○​ Respect of other income (Interest on deposits, etc.)
○​ Other deductions (Person with disability)
●​
New Regime vs Deductions (Page 5.25):

●​ Individuals filing returns can opt for old or new regime. New (concessional) regime
u/s 115BAC(1) does not allow claiming deductions under Chapter VI-A (except
80CCD(2), 80CCH(2)).
●​ Most deductions under Ch VI-A would be restricted to taxable income calculation.
Excess deductions cannot be carried forward.
●​ Deductions under heading "C-deductions in respect of certain incomes" cannot be
claimed.
●​ Must weigh options carefully.

Case in Point: Mr. Shyam Sunder (Page 5.26)

●​ Gross Total Income (GTI) for AY 2024-25 is ₹8,00,000.

●​ Investments/payments during PY 2023-24:
○​ PPF Contribution: ₹1,15,000
○​ Tuition fees (son, Class XI): ₹50,000
○​ Housing loan repayment (principal): ₹30,000
○​ Contribution to approved LIC pension fund: ₹1,10,000
●​
●​ Eligibility for Deductions under Chapter VI-A if he shifts out of the default tax
regime (i.e., chooses OLD REGIME):
○​ Deduction under section 80C:
■​ PPF: ₹1,15,000
■​ Tuition Fees: ₹50,000
■​ Housing Loan Repayment: ₹30,000
■​ Total eligible for 80C = ₹1,95,000
■​ Note: Restricted to ₹1,50,000 (being the maximum permissible
deduction u/s 80C).
○​
○​ Deduction under section 80CCC:
■​ Contribution to approved pension fund of LIC: ₹1,10,000
○​
○​ Aggregate Deduction under Chapter VI-A:
■​ As per 80CCE, aggregate deduction u/s 80C, 80CCC, and 80CCD(1)
restricted to ₹1,50,000.
■​ Therefore, total deduction allowed under Chapter VI-A for AY
2024-25 = ₹1,50,000.​
(Note: Under the New Regime, none of these deductions (80C,
80CCC) would be available).
○​
●​

Chapter 6: Personal Tax Planning: Comparison of Benefits under vis-à-vis Provisions

(Sections 6.1 - 6.2)

Learning Outcomes (Chapter 6):

 ●​ Recognise and compare the special provisions under Section 115BAC and the
general Income Tax Act, 1961 provisions.
●​ Learn about the concepts of tax avoidance and tax evasion.

Introduction (Page 6.1)

●​ Recap: IT Act 1961 governs income tax. Finance Bill amends annually. Optional
concessional tax regime (New Regime - Sec 115BAC) introduced 2020, offering
lower rates with fewer deductions (approx. 70 removed). Aimed to simplify/streamline
tax structure. Revised in Budget 2023: Standard deduction added, basic exemption
increased (₹3L), slab widened, surcharge reduced for income > ₹5 crore, rebate
threshold increased (₹7L u/s 87A). Made default regime from AY 2024-25.
●​ Choice: Taxpayers must assess pros/cons of continuing with old regime or shifting to
new one. Critical factors: Annual income, potential deductions/exemptions available.
●​ Example: Salary ₹10L, PPF ₹84k, Medical Insurance ₹24.3k.
○​ Old Regime Tax Liability: (Assuming Std Ded ₹50k, 80C ₹84k, 80D ₹24.3k
claimed). Taxable Income = 10L - 50k - 84k - 24.3k = ₹8,41,700. Tax (using
old slabs) = ₹80,852. Add Cess@4% = ₹3,234. Total Tax = ₹84,086 (approx.
₹84,905 in text example - minor calculation difference possible).
○​ New Regime Tax Liability: (Assuming only Std Ded ₹50k claimed). Taxable
Income = 10L - 50k = ₹9,50,000. Tax (using new slabs) = ₹52,500. Add
Cess@4% = ₹2,100. Total Tax = ₹54,600.
○​ Conclusion: In this case, New Regime is beneficial as tax liability is lower.
●​

Figure 6.1: Old vs New regime: What to choose? (Page 6.2)

●​ Shows breakeven deduction limits for Salaried individuals (Source: M2K Advisors &
SW India).
●​ If total deductions < breakeven limit for your income level => New Regime better.
●​ If total deductions > breakeven limit => Old Regime scores well.
●​ Examples: Income ₹10L, Breakeven ₹2,62,500. Income ₹15L, Breakeven ₹4,08,333.
Beyond ₹15.5L up to ₹5 crore, breakeven ₹4,25,000. Beyond ₹5 crore, New regime
is better (due to surcharge reduction).
●​ Do You Know?: As per changes in Union Budget 2023 session, no tax is levied on
individuals with annual income up to ₹7 lakh under the new tax regime, along with a
standard deduction of ₹50,000.

6.1 New Tax Regime under Section 115 BAC vis-à-vis Old Tax Regime (Page 6.3 - 6.5)

●​ Adoption: While announced in 2020, adoption remained low. Revised provisions

(Budget 2023-24) aim to boost adoption by making it the default regime from current
financial year onwards.
●​ Decision Factors: Choosing a tax regime is essential, depending upon several
factors. Significant changes in tax structure impact tax liability. Requires thorough
awareness of tax slabs, financial goals (short/long-term), sufficient knowledge of
relevant deductions/exemptions. Adopting New Regime requires careful analysis.
●​ Old Regime Provisions: Offered several deductions/allowances (discussed in
Chapter 5). Common ones: Standard Deduction, Leave Travel Concession, House
 Rent Allowance, Official/personal allowances, Professional Tax, Interest on housing
loans, Deductions u/s 80C to 80U (Chapter VI-A), Set-off of losses. Encouraged
savings & investments (e.g., tax-saving instruments like ULIPs) among taxpayers,
thereby inculcating habit of planning for essential life events (marriage, child's
education, emergency).
●​ New Regime Provisions: Rules out many deductions/exemptions. Allows: Standard
Deduction (₹50k), employer NPS contribution (80CCD(2)), Agniveer fund
(80CCH(2)). Forgoes: HRA, LTA, most Ch VI-A deductions (80C, 80D etc.), interest
on housing loan (Sec 24b), professional tax, allowances like children
education/hostel, etc. Promotes consumption by increasing disposable income.
Reduces compliance burden (fewer claims/proofs). Simplified/streamlined landscape.
May make it easier for salaried individuals to file taxes.
●​ Table 6.1: Comparison of Exemptions/Deductions under Old vs New Tax
Regime of Section 115BAC (Page 6.4) (Crucial comparison)

Deduction/Exemption Section Old Regime New Regime

Standard Deduction 16(ia) Available Available

Entertainment Allowance 16(ii) Available Not Available

Leave Travel Concession 10(5) Available Not Available

House Rent Allowance 10(13A) Available Not Available

Official & Personal Allowances (other) 10(14) Available Not Available

Allowances to MPs/MLAs 10(17) Available Not Available

Professional Tax 16(iii) Available Not Available

Interest on housing loan (self-occupied) 24(b) Available Not Available

Deductions under Sec 80C to 80U (most) 80C to 80U Available Not Available

Set-off of any loss under "house property" - Available Not Available

Exemptions/perquisites under any law - Available Not Available

(Source: incometaxindia.gov.in/Tutorials)

●​ ​
Do You Know? (Page 6.4): Individual with NO deductions under old tax regime,
opting for it would NOT be beneficial (?). If avails deductions u/s 80C, 80D, Sec 24,
opting for old regime WOULD be beneficial. If deductions under Sec
80C+80D+Sec24 total up to ₹8,82,500 (breakeven?), opting for new regime is more
beneficial if income > ₹8,82,500 (?). (This breakeven point seems extremely high and
likely depends heavily on income level and specific deduction amounts; treat with
caution).
Table 6.2: Which regime is beneficial to opt for? Old Tax Regime or New Tax Regime
of Section 115BAC (Page 6.5)

Deduction claimed under old tax regime Breakeven Is it

(Total tax under beneficial
old = Total tax to opt for
under new) old tax
regime?

No deduction allowed - Not

beneficial

Deduction under Section 80C - Not

beneficial
(?)

Deduction under Section 80C and Section 80D ₹8,25,000 Beneficial,

if income <
breakeven

Deduction allowed under Section 80C, 80D & Sec 24 - Beneficial

(Source: incometaxindia.gov.in/Tutorials) (Note: This

table's conclusions seem overly generalized and
potentially inaccurate without income context. The
breakeven point varies significantly with income).

●​ ​
New Regime Impact: Simplifies matters for employers/taxpayers (less need for
collecting evidence of rent paid, travel expenses, investments). Filing returns may
become more transparent, reducing tax disputes. Young taxpayers may forego
certain deductions/pay extra taxes under new regime. Taxpayers often invest in
insurance, pension plans etc., which might not be preferred choice under new
regime. Individuals may invest more in market instruments (equity, start-ups) or
spend it as they prefer. Imperative for individuals to make wise choice between
regimes based on personal/financial goals. Rationalised regime with greater ease of
compliance might attract more taxpayers, lead to better tax administration/collection,
more agile tax policy.

6.2 Tax Avoidance vs Tax Evasion (Page 6.6 - 6.7)

●​ Tax planning, tax avoidance, tax evasion are methods of saving taxes / reducing tax
liability.
●​ Tax Avoidance: Aims to minimize tax liability while complying with the law. Legal
method leveraging loopholes or ambiguities in tax system. It benefits from the way
loopholes are used; however, tax avoidance employs illegitimate means and is
always subject to penalties/punishments. Imperative to acquire knowledge to clearly
understand legal/illegal aspects. Often involves making certain deductions leveraging
 provisions under Income Tax Act; crucial that such deductions are part of tax
avoidance and not tax evasion. Expert guidance recommended.
○​ Purpose: Minimizing tax.
○​ Legality: Legal (but potentially against spirit of law).
○​ Nature: Avail loopholes in law (bend/interpret law provisions).
○​ Exercise: Done before the tax liability arises.
○​ Impact: Penalty or Imprisonment if violates the rules.
○​ Examples (Table 6.3): Investing in financial instruments to save taxes;
Claiming deductions for interest payments on home loans, medical insurance
premiums, education loans; Claiming deductions by donating to charitable
institution/political party; Using professional financial planning services to
invest and claim deductions.
●​
●​ Tax Evasion: Conversely, is a method of escape from tax payment through deceit,
misrepresentation of facts, falsification of accounting calculations or fraud. Lies
between two extremes: tax planning and tax evasion (Text seems slightly off here,
evasion is one extreme). Evasion is an attempt to use illegal means to circumvent tax
payment (suppression of facts, failure to record investments/books, claim of
expenditure without significant evidence, recording false entry, failure to record
receipts, failure to report transactions like international/specified domestic). All such
incidences constitute misreporting of income and attract penalty of 200% under
Section 270A.
○​ Purpose: Not paying tax.
○​ Legality: Illegal.
○​ Nature: Employ illegitimate means.
○​ Exercise: Done after the tax liability arises.
○​ Impact: Penalty or Imprisonment.
○​ Examples (Table 6.3): Failure to report foreign income/rental property income
outside India; Not reporting income generated from cryptocurrencies; Not
reporting income generated through all-cash transactions; Creating fake
reports or false financial statements; Offering/paying bribe to tax official.
●​
●​ Tax Planning: Careful application of tax laws to reduce tax burden efficiently.
○​ Purpose: Tax efficiency.
○​ Legality: Legal.
○​ Nature: Use the law to reduce tax liability.
○​ Exercise: Done before the tax liability arises.
○​ Impact: Tax efficiency (Legal).
●​
●​ Figure 6.2: Tax Evasion, Tax Avoidance, and Tax Planning: Summarizes the
differences across Purpose, Legality, Nature, Exercise, Impact.

Case in Point: Ganesh and Arti (Page 6.7)

●​ Couple paid more taxes previously, received refund.

●​ Next year, decided to claim deduction for interest paid on home loan and childcare
expenses to avoid overpayment.
 ●​ This is an instance of Tax Avoidance (using legally available deductions to reduce
tax liability) and Tax Planning, NOT Tax Evasion.

Okay, here are the very detailed, in-depth notes for Unit 4: Insurance Planning, based
exclusively on the content within the provided textbook images (Chapter 7: Pages 7.1 -
7.17).

Unit 4: Insurance Planning (Comprehensive Notes)

(Based on Textbook Chapter 7)

(Total Hours Allotted in Syllabus: 9)

Chapter 7: Insurance Planning: Need and Types of Insurance

Learning Outcomes (Page 7.1):​

After studying this unit, you should be able to:

●​ Understand the meaning of insurance and related terms.

●​ Recognise the need for and importance of insurance planning.
●​ Learn about different types of insurance policies and their features.

Introduction & Market Context (Page 7.1 - 7.3):

●​ Growth Drivers: Over the last few decades, the Indian insurance industry has
experienced impressive growth driven by:
○​ Remarkable transformations in technology.
○​ Continuous rise in personal disposable income.
○​ Significant government initiatives like income tax exemptions on insurance
policies, 'Ayushman Bharat PMJAY SEHAT' scheme, Pradhan Mantri Fasal
Bima Yojana (PMFBY), PM Suraksha Bima and PM Jeevan Jyoti Yojana.
○​ Growing financial awareness across income groups.
○​ Strong regulatory support and other factors.
●​
●​ Market Size: The Indian insurance market is the ninth-largest market globally,
expected to reach $200 billion by 2025-26, thereby becoming the sixth-largest
insurance market globally.
●​ Pandemic Impact: The recent pandemic significantly transformed the insurance
sector, accelerating fundamental change in the perspectives of insurers, regulators,
consumers, and the entire healthcare ecosystem.
○​ Insurance companies received a significant number of claims associated with
COVID-19 hospitalisations and treatments.
○​ The Insurance Regulatory and Development Authority of India (IRDAI)
introduced many COVID-19-focused health insurance products, leading to
substantial changes in policy terms and conditions.
 ○​ Resulted in the pandemic becoming the driver of digital transformations in
India within the insurance industry, leading to increased awareness among
individuals and businesses.
●​
●​ Insurance Definition (General - Page 7.2): Insurance is an arrangement wherein
one plans for a continuous flow of income in the event of disaster, illness, accident,
death, or old age, which affects one's ability to earn a livelihood (RBI).
●​ Classification (Page 7.2): Classified into Life insurance and General insurance.
○​ Life insurance policies are the benefit policies protecting the family of an
earning member from unforeseen circumstances.
○​ General insurance policies cover families, businesses, and industries from
unexpected losses to their assets and property.
●​
●​ Industry Premium Trends (Figure 7.1 - Page 7.2): Shows Total Premium Life (Rs.
In Crores) trend from 2015-16 to 2021-22 for Private insurers, LIC, and the overall
Industry, indicating significant growth. (e.g., Industry premium grew from approx.
415476 Cr in 2015-16 to 958711 Cr in 2021-22).
●​ Insurance Penetration (Page 7.2): While nearly 70% of India's population is
covered by some form of health insurance scheme, 30% is not covered by any form
of financial protection for health (Niti Aayog, 2021). Over 40 crore individuals in the
country lack financial awareness. They are not poor enough to be covered by
government-subsidized insurance schemes and often find challenges in purchasing
appropriate insurance policies for themselves.
●​ Regulatory Initiatives (IRDAI - Page 7.2, 7.3, 7.6):
○​ To develop and promote awareness, IRDAI launched an insurance
awareness campaign - 'BimaBemisaal'. Aims at educating consumers about
rights, duties, obligations, nomination needs, claim settlement, surrender
value, terms/conditions, and complaints resolution methods.
○​ IRDAI also launched an exclusive consumer education portal,
www.policyholder.gov.in, to provide information related to insurance
products.
○​ IRDAI launched 'Insurance for All by 2047' to ensure appropriate life, health,
and property insurance coverage for every individual and appropriate
insurance coverage for every business. Aligned with government's vision of
financial inclusion and accelerating reforms. IRDAI is making efforts to create
a progressive and supportive regulatory culture, committed to strengthening
the Indian insurance ecosystem via policyholders, insurers, and
intermediaries.
○​ IRDAI plays a crucial role in the growth and development of the industry.
Regulated under Section 114A of the Insurance Act 1938. Functions and
duties include registering/regulating insurance companies,
licensing/establishing norms for intermediaries, regulating/monitoring
premium rates and terms of non-life policies, laying down financial reporting
norms, providing insurance coverage in rural areas and other vulnerable
sections.
●​
●​ Role of Insurance Companies (Page 7.3): While buying and selling financial
instruments, insurance companies play an active role in capital formation, influence
 stock/market valuations, ensure diversification, invest in corporate bonds, and
maintain an active and liquid capital market. Since insurance companies channelise
more than 50% of their investment in capital markets, the industry plays a crucial role
in restoring financial stability in times of uncertainty.
●​ Fundamental Purpose (Page 7.3): Insurance is fundamental to financial planning
for individuals, families, businesses, markets, and the economy, as it helps provide
peace of mind. At the same time, one manages the financial risks associated with
unexpected events.

7.1 Insurance (Formal Definition - Page 7.3)

●​ In general, insurance, as a risk management tool, helps an individual plan effectively

and become secure against unexpected contingencies like accidents, illnesses,
death, property damage and other such events.
●​ Individuals and businesses select and purchase different insurance policies to
mitigate risks and achieve financial protection as part of their financial planning.
●​ Individuals may buy life, health, motor, home, travel, and personal property
insurance.
●​ Businesses may need commercial general liability, professional liability, commercial
property, product liability, commercial vehicle, and employee insurance.

7.1.1 Terminologies Associated with an Insurance Policy (Page 7.4 - 7.5)

To fully understand insurance, one must be familiar with various essential terms:

●​ Premium: Insurance is purchased by paying a lumpsum amount or periodic

payments over a specified tenure. This amount paid is called the premium.
●​ Sum Assured: The total amount paid by the insurance company in case of a claim,
i.e., the occurrence of an event covered under the policy. For example, car accidents
in motor/auto insurance, hospitalisation in case of health insurance, and death in
case of term life insurance. However, some policies also pay the sum assured post
maturity irrespective of the occurrence of the event covered.
●​ Tenure: The tenure of the insurance policy is the duration for which it remains
effective and provides coverage to the policyholder. Tenure can be five years, ten
years, 15 years, or any period, depending upon the circumstances, age, and
requirements of the policyholder.
●​ Insurance Deductible: The amount required to be paid out of one's pocket before
the insurance claim kicks in. This amount is subtracted from the claim payment when
the claim is made. A deductible is a standard feature in health, auto, home, and other
insurance policies.
○​ Example: House insurance policy with a ₹10,000 deductible. If house suffers
₹50,000 worth of damage, you will be responsible for paying the first ₹10,000
out of your own pockets. The insurance company will pay the remaining
₹40,000 per the policy's terms.
●​
●​ Insurance Limit (Coverage Limit): The ceiling or cap on the amount of financial
protection the insurance company offers. It is the maximum amount the insurance
 company pays for a claim to cover the loss under the policy. Many insurance policies
(like home and auto) have different coverage limits.
●​ Policyholder (Insured) / Customer: An insurance policy is a legal agreement
between the insurance customer (policyholder) and the insurance provider
(insurer). The policyholder pays the insurer and, in exchange, receives financial
protection or reimbursement of losses from a covered event. An insurance policy is
evidence of insurance that highlights the coverage's terms and conditions, risks
covered, sum assured, premium payments, insurer, etc.
●​ Insurer: An entity or a company that provides insurance coverage based on the risks
assumed and fixes premiums based on these risks. It pays policyholders for losses
covered within the policy in exchange for regularly paid premiums. An insurer lays
down the conditions for the coverage in the insurance contract. An insurer may be an
insurance company like HDFC Life Insurance Company Ltd., Life Insurance
Corporation of India (LIC), Bajaj Allianz Life Insurance Company Limited, ICICI
Prudential Life Insurance Company Ltd., etc.
○​ Do You Know?: The Life Insurance Corporation (LIC) of India launched its
IPO-Initial Public Offer in 2022. It was the largest IPO ever in India and the
sixth biggest IPO globally.
●​
●​ Reinsurance / Reinsurer: An insurer may be a reinsurance company like General
Insurance Corporation of India (GIC Re), ITI Reinsurance Limited, or Agriculture
Insurance Company of India Limited (AIC). Reinsurance companies or reinsurers are
the entities that provide insurance to the primary insurance companies while
managing their risks. The primary insurance companies transfer a portion of their
insurance policies, often termed insurance policies, to the reinsurance company. Just
like individuals pay premiums to the primary insurers, the primary insurers pay
premiums to reinsure for the transfer of insurance liabilities.
●​ Policyholder (Role - Page 7.5): A policyholder buys an insurance policy from an
insurance company, either as an individual or a business. Usually, the policyholder is
an individual insured under the policy. However, an individual may also buy a policy
to protect their immediate family members from unexpected events in life insurance.
As a result, if the insured person dies, the claim will be paid to the nominee. But if the
policyholder is not insured dies, no claim is paid. The policyholder is responsible for
determining the coverage, making adjustments, appointing/changing the nominee,
selecting the sum assured, and other rights and obligations related to the insurance
policy.
●​ Nominee: If the policyholder dies, the nominee will receive the sum insurance with
the policy benefits. A nominee can be a spouse, children, or parents selected by the
policyholder.
●​ Risk Management (Insurance Context - Page 7.5): Refers to recognizing,
assessing, and controlling potential risks associated with health and assets/property.
●​ Figure 7.2 (Page 7.5): Diagram showing the interaction of Policyholder, Insurer,
Reinsurer, and key policy components (Premium, Sum Insured, Deductible, Tenure &
Nominee, Coverage/Insurance limit, Risk Management).

Insurance Planning (Page 7.6)

 ●​ Mechanism: Insurance facilitates risk reduction by transferring it to the insurance
company in exchange for regular premium payments.
●​ Dynamic Nature: However, with changing circumstances, necessary adjustments
must be made within the insurance policy to suit evolving needs and risk exposures.
●​ Definition: Insurance planning is an essential step in managing one's finances.
Insurance planning encompasses risk mitigation, creating financial security, selecting
from various insurance coverages, enjoying tax benefits, and achieving financial
independence.
●​ Process: Effective insurance planning involves risk identification, assessing
insurance needs per one's age, income, health, and dependents in the family,
selecting and buying the most appropriate insurance policy, understanding its terms
and conditions. Lastly and most importantly, revising the insurance coverage to
accommodate changing circumstances, needs, and risks.
●​ Professional Advice: Seeking professional advice from an expert helps develop
comprehensive insurance plan. Insurance planning involves careful selection of
appropriate insurance policies.

7.2 Need for Insurance (Page 7.8)

●​ No matter how healthy one is, how well one is doing financially in a job or business,
how good is the construction of a house, or how good driving skills one has, one still
needs insurance.
●​ Sometimes, the future may fail to meet one's expectations about it. Sometimes,
occasional medical emergencies can vanish years of savings.
●​ Insurance is an indispensable tool for risk mitigation and protection against
uncertain/unexpected financial burdens and loss/damages.
●​ Legal Requirement: It is a legal requirement to invest in specific insurance policies,
like auto insurance by an individual, to cover liability in accidents and employee
insurance policies by a business as part of regulatory compliance.

Benefits of Insurance (Figure 7.4 & Text, Page 7.8 - 7.9):

Insurance is essential in providing coverage not just to the policyholder but also to the entire
family, compensating one for property and vehicle damage/loss and medical expenses, and
offering protection for every precious possession, including jewellery, appliances, and
electronic devices. As a critical aspect of financial planning, insurance renders benefits of:

●​ Risk Mitigation and Peace of Mind: Mitigating uncertainties and sharing the
financial burden during a crisis. Providing peace of mind with a secure future and
allowing focus on other critical day-to-day activities without constant worry about
potential setbacks.
●​ Financial Stability: Extends financial security to the dependents in the event of the
policyholder's death, thereby bringing financial stability into the family.
●​ Family Welfare & Security: Protects the family from financial hardship.
●​ Long term financial planning and savings: Disciplined savings wherein policy
promotes wealth accumulation in exchange for nominal premium payments,
facilitating long-term planning.
 ●​ Tax benefits: Offering tax benefits to the policyholders on premium payments and
maturity benefits as per the type of policy.
●​ Legal compliance: Fulfilling mandatory insurance requirements.
●​ Business Continuity: Ensures continuity in business operations as insurance
covers losses related to property damage, liability claims, and other unforeseen
circumstances.
●​ Protection from unforeseen events: Insurance coverage is a saviour in case of any
unfortunate event and provides financial confidence in times of unstable
circumstances.
●​ Availing of loan facilities: Against endowment and money-back policies.
●​ Overall: Offers various benefits while supporting long-term financial planning for
individuals and business entities.

7.3 Types of Insurance (Page 7.9)

In India, there are two types of insurance coverage: life insurance coverage and general
(non-life) insurance coverage.

●​ Life Insurance Coverage:

○​ A legal agreement between the individual and the insurance company where
the sum assured amount is coverage is paid to the beneficiary/nominee in the
event of the insured's death.
○​ Life insurance policies are of various types: term life insurance, whole life
insurance, endowment policies, unit-linked insurance plans (ULIPs),
money-back policies, retirement policies and child life insurance
policies.
●​
●​ General (Non-life) Insurance Coverage:
○​ Provides coverage for risks other than those covered under life insurance,
like health, travel, home, and vehicle.
○​ General insurance also covers disasters like floods, fire, theft, accidents, and
other environmental events.
○​ The various types of general insurance policies are health insurance, motor
insurance, home insurance, travel insurance and commercial insurance
policies.
●​

7.3.1 Life Insurance Policies (Page 7.10 - 7.11)

●​ Term Life Insurance Policy:

○​ Offers financial coverage for a specific term/period.
○​ The insurer pays the sum assured to the nominee in the event of the insured's
death during the policy term.
○​ If the insured survives the term, there is no payout during the policy term or
accumulated savings.
○​ At expiry, the insured may renew the policy terms; however, the premium
payments shall be recalculated based on the insured's age at renewal.
 ○​ Premium payments are directly proportional to the age of the
policyholder/insured.
○​ The tenure may range from 5 to 30 or more, depending on individual's age,
health, life expectancy, preferences, and insurer.
○​ Term life insurance policy is the least costly as it only offers death benefits
and has no component of cash accumulation.
○​ Nowadays, term plans offer various options like spouse cover, protection
against critical illness, and disability by accident, among others.
○​ May be suitable for growing families and older surviving spouses.
○​ A Case in Point (Deepak): 32-year-old buys 10-year, ₹5,00,000 term life
policy. Pays monthly premium of ₹50. If Deepak dies within 10 years, his
nominee receives ₹5,00,000. If he lives, after 10 years term expiration,
beneficiary will not receive any benefit. If policy expires before death and he
renews it after expiry (e.g., 10 years), premium shall be higher based on his
current age (42 rather than 32).
●​
●​ Whole Life Insurance:
○​ Permanent life insurance offering financial coverage for the insured's entire
life if the premiums are paid as specified in the policy.
○​ Types include universal life, indexed universal life, and variable universal life.
○​ Also has a saving component of cash accumulation called the cash value.
The policy's cash value is built by contributing a portion of the premiums.
○​ Policyholder can grow cash value by purchasing extra coverage by remitting
greater premium payments than scheduled.
○​ Policyholder may access the cash value, the living benefit of the policy, via
withdrawals or loans.
○​ Provides financial security to individuals and immediate families. It is like an
investment wherein the build-up cash value provides money for large
purchases (buying a house), supplementing income in retirement and others.
○​ In comparison to term life insurance, whole life insurance tends to have
higher premiums for the same death coverage amount.
●​
●​ Endowment Policy:
○​ Offers both death benefits and savings. Upon the insured's death, the
beneficiary receives the sum assured. However, if the insured survives the
policy term, the insured receives the lump sum on maturity.
○​ Insurer invests a part of the premium paid by the policyholder in various
financial instruments (stocks, bonds, or other assets). Over time, this
investment grows and accumulates a cash value.
○​ The sum assured received can be used for retirement planning, education
funding, or to meet any other financial need.
●​
●​ Unit-linked Insurance Plans (ULIPs):
○​ Provide benefits of insurance and investment under a single policy.
○​ In ULIP, a part of the premium is contributed to provide the life cover, whereas
another part is invested in different market instruments (debt and equity)
based on one's risk appetite and financial requirements.
 ○​ ULIPs have a lock-in period ranging from 5 to 10 years, during which the
policyholder cannot withdraw funds without certain penalties.
○​ While premiums paid under ULIPs are eligible for tax deductions under
Section 80C, the death benefit is tax-exempt under Section 10(10D) of the
Income Tax Act, subject to conditions specified in the law.
●​
●​ Money-back Policies:
○​ Provide periodic payments to the insured during the policy term as a
percentage of the sum assured. The insurer also makes a lump sum payment
in the event of maturity or the insured's death.
○​ Such policies come with certain terms and conditions that outline the specific
circumstances in which a refund will be issued. In some businesses, the
money-back guarantee is 30 days, while in others it may be 60 or 90 days.
(This reference to business guarantees seems misplaced in the context of
insurance policies).
○​ Money-back policies are often used in retail, e-commerce, software, and
service-based businesses (Again, seems misattributed to insurance).
●​
●​ Retirement Policies:
○​ Designed to accumulate one's savings over a specified period. It helps one
deal with financial uncertainties post-retirement by providing a steady flow of
income even after one stops working. Such policies are a smooth transition
from working to retirement.
●​
●​ Child Life Insurance Policies:
○​ Aim at financially securing a child's future goals of education and marriage.
On maturity, the sum assured received is used to fulfil the financial
requirements of the child.
○​ Various other life insurance policies like universal insurance, group insurance,
microinsurance, funeral insurance, survivorship insurance, mortgage life
insurance, etc.
●​
●​ Bond Insurance (Do You Know? - Page 7.11): An insurance wherein the insurance
company guarantees the payment of interest and principal on a bond (or other
security) in case of payment default by the bond (or security) issuer.

7.3.2 General Insurance Policies (Page 7.11 - 7.14)

●​ Health Insurance:
○​ Covers medical and hospitalisation expenses due to illness, accidents, etc., in
return for monthly premium payments.
○​ One can buy a health insurance policy to cover critical illnesses like cancer,
cardiac conditions, and other ailments, protecting one from exorbitant
healthcare costs.
○​ Provides coverage for individuals, families, and senior citizens. Offers benefits
like cashless treatment and coverage for pre-existing diseases. Generally,
health insurance comes with a deductible, which requires policyholders to
bear certain healthcare expenses out of their own pockets.
 ○​ A Case in Point (Abhishek): 30-year-old buys health insurance, max
coverage ₹5,00,000. Pays annual premium ₹10,000, deductible ₹5,000 per
policy year. Policy tenure one year from date of purchase. Coverage includes
medical expenses upon hospitalisation, doctor's consultation/visits,
prescription drugs, laboratory tests and X-rays with specific terms/conditions.
Ambulance charges, emergency room visits, and preventive care are
covered. Policy may not cover cosmetic procedures, dental and vision, and
certain pre-existing conditions.
●​
●​ Motor Insurance:
○​ Necessary for every vehicle as a legal and regulatory compliance under the
Motor Vehicles Act.
○​ Includes coverage for loss/damages caused by accidents, natural calamities,
theft, violence, third-party liabilities, and personal accidents.
○​ Third-party and comprehensive insurance are two types of motor insurance
coverage. Third-party compensates for third-party loss and loss/damage to
the vehicle and the individual, respectively.
●​
●​ Home Insurance:
○​ Protects loss/damage to one's home and its valuables from natural disasters
like fire, theft, natural calamities or liability from third-party injury or property
damage on the insured's premises.
●​
●​ Travel Insurance:
○​ Covers uncertainty/unforeseen events, especially during domestic or
international travel, such as medical emergencies, delayed or lost baggage,
theft or loss of passports, emergency evacuations, flight delays and
cancellations, etc.
●​
●​ Commercial Insurance:
○​ Includes property insurance, liability insurance, marine insurance, and more
for businesses to protect against risks associated with operating activities.
●​
●​ Credit Card Insurance (A Case in Point - Sunil - Page 7.12):
○​ Sunil, a student, uses credit card for study materials, workshops, educational
expenses. Credit card insurance offers "Purchase Protection" wherein if
Sunil's laptop is stolen within a specific time (usually 90 days) from purchase
date, he can file claim with credit card company's insurer. Needs supporting
document like receipt/complaint. Coverage might reimburse Sunil for stolen
laptop's value up to limit mentioned in policy.
●​
●​ Property Insurance (Page 7.13):
○​ Provides financial protection to individuals or businesses against loss/damage
to their physical properties like buildings, furniture, machinery, equipment, and
other tangible assets.
○​ Insurance coverage helps mitigate financial adversities caused by fire, theft,
natural disasters, vandalism, and other such events.
 ○​ Property insurance covers policies like homeowners' insurance, renters'
insurance, fire insurance, burglary and theft insurance, flood insurance,
and others.
○​ Property insurance also provides liability coverage, which offers protection
against claims made for injuries and damage to other people and property.
●​
●​ Liability Insurance (Page 7.13):
○​ Insurance would cover the legal cost and payouts for which the insured is
found legally liable.
○​ Coverage under property insurance is of three types: replacement cost,
actual cash value and extended replacement cost.
■​ Replacement cost coverage covers the cost of repairing or replacing
the property at the same equal value.
■​ Actual cost coverage is coverage for the replacement cost
post-depreciation.
■​ Extended replacement cost coverage is coverage for the replacement
cost even if the cost of construction has gone up; the coverage will be
up to the increased value vs. the ceiling.
○​
●​
●​ Credit Card Insurance (Page 7.13):
○​ Provides financial protection and coverage to credit cardholders against
fraudulent activities, accidental death, travel-related loss/damage, and more.
○​ Credit card insurance may come as an added feature with certain premium
credit cards or may be activated by the cardholder. On the other hand, some
cardholders might have to make additional payments to avail of credit card
insurance benefits. To file a claim with an insurer, the credit card holder must
present supporting evidence of the event.
●​
●​ Professional Liability Insurance (Page 7.14):
○​ Protects professionals such as lawyers, accountants, architects, doctors, and
other professionals against claims arising from negligence, malpractice,
mistakes, or misrepresentation initiated by their clients.
○​ Claims covered vary from one profession to another. They range from
misdiagnosis, medication mistakes or surgical errors in medical, negligence
and incorrect advice in legal, and so on.
○​ Coverage limits and deductibles are important parts of this insurance as well.
●​

Table 7.1: Life Insurance vs. General Insurance (Page 7.13)

Feature Life Insurance General Insurance

Cover Individual's life and fixed health benefits. Non-life assets like house,
vehicles, travel, health,
property, and others.
 Compensatio Sum assured is paid to the beneficiary Sum assured is paid on the
n when the insured dies or when the occurrence of the event.
insured outlives the maturity.

Premium Fixed premium depending upon the Depends upon various factors
coverage amount. associated with the assets
insured in the policy.

Beneficiary Can be anyone including the Usually, policyholder is the

policyholder. beneficiary.

Tenure Long-term coverage. Typically, annual coverage

renewed as and when
required.

Okay, here are the very detailed, in-depth notes for Unit 5: Retirement Benefits Planning,
based exclusively on the content within the provided textbook images (Chapter 8: Pages 8.1
- 8.15).

Unit 5: Retirement Benefits Planning (Comprehensive Notes)

8.1 Retirement Planning Goals (Page 8.1 - 8.4)

●​ Importance: Retirement is one of the most important stages in one's life. From
personal and financial aspects, realising a comfortable retirement is an extensive
process which needs careful planning and years of persistence. Retirement planning
simply means allocation of finances for the purpose of retirement to achieve financial
independence.
●​ Context: India's Ageing Population:
1.​ The "India Ageing Report 2023" (UNFPA India & IIPS) provides analysis of
wellbeing and living circumstances of senior citizens.
2.​ India's senior population (age 60+) would account for 20.8% of all people by
the year 2050, up from 10.5% in 2022. (Page 8.1)
3.​ Figure 8.1 (Page 8.1): Shows the trend of population percentage by age
group (0-14, 15-59, 60+ years) indicating a rising proportion of the 60+ group
over time.
4.​ Table 8.1 (Page 8.2): Key Population Indicators of India, 2023
■​ Population age 60+ (thousands): 153,135
■​ Population aged 60+ (% of total population): 10.7
■​ Percentage of women out of the population aged 60+: 51.6
■​ Percentage of women out of the population aged 80+: 57.5
■​ Life expectancy at birth (years): 72.0
■​ Median age (years): 27.3
■​ Total fertility rate (2023): 2.0
5.​
 6.​ Figure 8.2 (Page 8.2): Size and Share of Population by age group
(1950-2100), showing projected increases in the 60+ share.
7.​ Trend: India has been described as a young nation, but the elderly population
(60+ years) grew 27 million between 2001 and 2011. Pace of growth was
slower in 2001 but sharply increasing in recent years. It's a matter of concern
for the Government of India. (Page 8.2, 8.3)
●​
●​ Government Mandate & Initiatives (Page 8.3):
1.​ The Indian Constitution mandates the well-being of senior citizens in India
under Article 41.
2.​ Government provides various social security schemes like Indira Gandhi
National Old Age Pension Scheme (2007), Jeevan Pramaan (2014), Senior
Citizens Savings Scheme (2020), etc.
3.​ Government also provides various concessions and rebates to senior citizens
of the country.
4.​ The National Policy on Older Persons (NPOP), 1999 was recognised as
the first policy addressing population ageing and laid out a plan.
5.​ A Senior Citizens' Welfare Fund (SCWF) was established to provide
funding for initiatives supporting senior citizens' access to healthcare,
nutrition, financial security as well as the welfare of elderly widows and other
creative senior citizen welfare initiatives.
●​
●​ Social Security Context (Page 8.3): Social Security is a government program
providing income to retirees, but it's often not sufficient to cover all retirement
expenses. Elderly population i.e. people with age of more than sixty five years in
India is rising at unprecedented rate and might surpass the children's age by 2050.
(Page 8.2)
●​ Goal Definition: Retirement planning goals are financial objectives set by individuals
to ensure a secure and comfortable retirement. Proper retirement planning is
essential to maintain financial independence, cover living expenses, and achieve
personal aspirations during the post-working years.
●​ Common Retirement Planning Goals (Page 8.3 - 8.4):
1.​ Retirement Savings Target: Determine the desired amount of savings
needed to maintain the desired lifestyle during retirement. Includes estimating
living expenses, healthcare costs, travel, and other activities.
2.​ Early Retirement: Some individuals aspire to retire early, before the
traditional retirement age, and may set a specific target date for early
retirement.
3.​ Debt-Free Retirement: Aim to pay off debts, such as mortgages, loans, or
credit card balances, before retiring to reduce financial obligations during
retirement.
4.​ Diversified Investment Portfolio: Create a well-diversified investment
portfolio that balances risk and return to generate sufficient income during
retirement.
5.​ Emergency Fund: Set aside an emergency fund to cover unexpected
expenses and provide a financial safety net during retirement.
6.​ Maximize Retirement Contributions: Contribute the maximum allowed
amount to retirement accounts.
 7.​ Social Security Optimization: Understand the best time to start receiving
Social Security benefits to maximize monthly payments during retirement.
8.​ Long-Term Care Planning: Plan for long-term care expenses, such as
nursing home care or in-home assistance, in case it becomes necessary later
in life.
9.​ Estate Planning: Develop an estate plan to ensure that assets are
distributed according to one's wishes and to minimize estate taxes and legal
complexities for beneficiaries.
10.​Legacy Goals: Consider leaving a legacy by supporting charitable causes or
passing on wealth to future generations.
11.​Health and Wellness: Maintain good health through a healthy lifestyle and
appropriate insurance coverage to reduce healthcare costs during retirement.
12.​Post-Retirement Activities: Identify hobbies, travel plans, volunteering, or
part-time work options to stay engaged and fulfilled during retirement.
●​

8.2 Process of Retirement Planning (Page 8.4 - 8.7)

●​ Dynamic Nature: Retirement planning is a dynamic process that requires periodic

reviews and adjustments as life circumstances change.
●​ Starting Point: To achieve retirement goals, individuals should start saving and
investing early, seek professional financial advice, and regularly monitor their
progress towards meeting their retirement objectives.
●​ Early Start: The earlier one begins planning and saving for retirement, the more time
and potential for growth in investments to build a solid financial foundation for the
retirement years.
●​ Impact of Life Expectancy (Page 8.5):
○​ Figure 8.2: Life Expectancy for India chart (Source: UN World Population
Prospects). Current life expectancy in 2023 is 70.42 years (0.33% increase
from 2022).
○​ Implications: Life expectancy plays a significant role due to its direct
correlation with the duration of retirement and the sustainability of one's
savings.
○​ As life expectancy increases, individuals can expect longer retirements.
Retirement planning needs to accommodate a more extended period without
earned income.
○​ Longer life expectancy means more years of financial needs in retirement
(healthcare costs, lifestyle choices). Individuals need to estimate their
expenses, healthcare costs, and lifestyle choices for an extended period.
○​ A longer life expectancy may necessitate more significant savings or
investment returns to ensure financial security throughout retirement. Starting
retirement planning early and contributing regularly become crucial.
○​ With increased life expectancy, there's a higher likelihood of facing
health-related expenses, including potential long-term care costs. Planning for
these expenses is crucial to avoid financial strain.
○​ Overall, longer life expectancy directly impacts retirement planning by
necessitating more robust financial preparation, including increased savings,
 careful investment strategies, and considering potential longer periods of
expenses.
●​

Step-by-Step Guide to the Retirement Planning Process (Page 8.6 - 8.7):

1.​ Set Retirement Goals: Determine your retirement goals and aspirations. Consider
factors such as the desired retirement age, the lifestyle you wish to maintain, and any
specific activities or travel plans you want to pursue during retirement.
2.​ Assess Current Financial Situation: Evaluate your current financial status,
including income, expenses, savings, investments, and debts. Understanding your
current financial position will help set a baseline for retirement planning.
3.​ Estimate Retirement Expenses: Estimate your future retirement expenses,
including living costs, healthcare, travel, hobbies, and any other planned activities.
Account for inflation and potential changes in spending patterns during retirement.
4.​ Calculate Retirement Savings Target: Based on your estimated retirement
expenses and the desired retirement age, calculate the total savings required to
support your lifestyle throughout retirement. Online retirement calculators or
consulting with a financial advisor can help with this calculation.
5.​ Create a Retirement Budget: Develop a budget for your retirement years that aligns
with your estimated expenses and available resources. This budget will guide your
savings and investment strategies.
6.​ Maximize Retirement Contributions: Contribute the maximum allowed amount to
retirement accounts, such as employer-sponsored retirement plans or individual
retirement accounts. Take advantage of any employer matching contributions.
7.​ Diversify Investment Portfolio: Build a well-diversified investment portfolio that
aligns with your risk tolerance and retirement timeline. Consider a mix of stocks,
bonds, mutual funds, and other investment options to balance risk and return.
8.​ Review and Rebalance: Regularly review your investment portfolio and make
adjustments as needed to ensure it remains aligned with your retirement goals and
risk tolerance. Rebalance the portfolio periodically to maintain the desired asset
allocation.
9.​ Plan for Social Security: Understand how Social Security benefits work and
consider the optimal time to start receiving benefits based on your financial needs
and life expectancy.
10.​Consider Long-Term Care and Insurance: Assess the need for long-term care
insurance and other insurance coverages to protect against unexpected healthcare
expenses during retirement.
11.​Estate Planning: Develop an estate plan that includes a will, living will, healthcare
directive, and powers of attorney. Ensure that your assets are distributed according
to your wishes and to minimize estate taxes.
12.​Review and Adjust: Periodically review and adjust your retirement plan as life
circumstances change. Monitor progress towards your retirement goals and make
necessary adjustments to stay on track.
13.​Seek Professional Advice: Consider consulting with a financial advisor or
retirement planning expert who can provide personalized guidance based on your
individual financial situation and retirement goals.
8.3 Pension Plans Available in India (Page 8.7 - 8.8)

●​ Context: Retirement planning is a lifelong process requiring discipline, ongoing

monitoring, and being proactive. Starting early significantly increases the likelihood of
achieving retirement goals.
●​ Definition of Pension Funds: Investment vehicles designed to provide individuals
with a regular income after retirement. These funds pool contributions from
employees, employers, or both, and invest them in a diversified portfolio of assets to
generate returns and build a corpus for retirement. The accumulated corpus is then
utilized to provide pension or annuity payments to the beneficiaries during their
retirement years.
●​ Regulation: Pension funds in India are regulated and overseen by the Pension
Fund Regulatory and Development Authority (PFRDA).
●​ Key Aspects and Types of Pension Funds in India:
1.​ National Pension System (NPS):
■​ A voluntary, contributory retirement savings scheme launched by the
Indian government in 2004.
■​ Open to employees from the public, private, and unorganized sectors,
as well as self-employed individuals.
■​ NPS offers two types of accounts - Tier-I and Tier-II.
■​ Tier-I is a mandatory pension account with certain withdrawal
restrictions.
■​ Tier-II is a voluntary investment account with no restrictions on
withdrawals.
■​
2.​
3.​ Pension Fund Managers (PFMs):
■​ In NPS, individuals have the option to choose their Pension Fund
Manager (PFM) from among several PFRDA-regulated fund
management companies.
■​ These PFMs manage the investments of NPS subscribers based on
their chosen investment preferences - active choice or auto choice.
4.​
5.​ Investment Options:
■​ NPS offers multiple investment options, including equity funds (E),
corporate bonds (C), government securities (G), and a
lifecycle-based auto choice.
■​ Subscribers can choose their asset allocation based on their risk
appetite and investment horizon.
6.​
7.​ Tax Benefits:
■​ NPS offers tax benefits to both employees and employers.
■​ Contributions made by employees up to 10% of their salary (Basic +
DA) are eligible for a tax deduction under Section 80CCD(1) of the
Income Tax Act.
■​ An additional deduction of up to Rs. 50,000 is available under Section
80CCD(1B) for contributions to the NPS.
■​ Employer contributions are also eligible for tax benefits.
 8.​
9.​ Annuity Options:
■​ At retirement, a portion of the accumulated corpus can be withdrawn
as a lump sum, and the remaining amount must be utilized to
purchase an annuity from a PFRDA-approved life insurance company.
The annuity provides a regular income stream during retirement.
10.​
11.​Atal Pension Yojana (APY):
■​ A government-backed social security scheme aimed at providing a
guaranteed minimum pension to unorganized sector workers.
■​ It is primarily targeted at those working in the lower-income strata.
12.​
13.​Corporate Pension Plans:
■​ Some private companies offer their employees pension plans as part
of their employee benefits package.
■​ These corporate pension plans may be managed by insurance
companies or other financial institutions.
14.​
●​
●​ Overall Strategy: Pension funds in India offer individuals a structured and regulated
way to save for retirement and secure a steady income stream in their
post-retirement years. NPS, in particular, has gained popularity due to its tax
benefits, flexibility, and choice of investment options. Individuals planning for
retirement should carefully consider their financial goals, risk tolerance, and
investment horizon before choosing the appropriate pension fund option. Consulting
with a financial advisor can help tailor a retirement strategy that aligns with individual
needs and objectives.

8.4 Reverse Mortgage (Page 8.9)

●​ Definition: A financial product that allows senior citizens to convert a portion of the
equity in their homes into cash, without the need to sell the property or make regular
mortgage payments.
●​ Purpose: Designed to provide additional income to retired individuals who own their
homes and have limited financial resources.
●​ Eligibility: Typically available to homeowners above a certain age (usually 60 years
or older) and have a clear and marketable title to their property.
●​ Key Features:
1.​ Homeownership Retained: The homeowner retains ownership of the
property throughout the reverse mortgage period and can continue to live in
the house.
2.​ Loan Repayment: Unlike a traditional mortgage, the borrower does not make
regular loan repayments. Instead, the loan is repaid, with interest, when the
homeowner sells the property, permanently moves out, or passes away.
3.​ Cash Disbursement: The homeowner can receive the loan proceeds in the
form of a lump sum, regular monthly payments, a line of credit, or a
combination of these options.
 4.​ Non-Recourse Loan: A reverse mortgage is a non-recourse loan, which
means that the lender can only claim repayment from the sale of the home.
The borrower or their heirs are not personally liable for any deficit if the loan
balance exceeds the home's value at the time of repayment.
5.​ Loan Limits: The maximum amount that can be borrowed through a reverse
mortgage is typically based on factors such as the borrower's age, the home's
appraised value, and prevailing interest rates.
6.​ Occupancy Requirements: Most reverse mortgages require the borrower to
use the home as their primary residence. If the borrower moves out of the
home for an extended period, the loan may become due.
7.​ Counseling Requirement: Before obtaining a reverse mortgage, potential
borrowers are required to undergo counseling from a government-approved
housing counseling agency. This counseling ensures that borrowers
understand the terms and implications of the reverse mortgage.
●​
●​ Usefulness: Can be a helpful financial tool for seniors who need additional income
to support their retirement lifestyle or cover medical expenses.
●​ Considerations: Essential for potential borrowers to carefully consider the
implications and costs associated with a reverse mortgage. Interest accumulates on
the loan balance over time, which means the loan balance will increase over time,
potentially reducing the equity in the home.
●​ Alternatives: Before deciding on a reverse mortgage, individuals should explore
other alternatives, such as downsizing to a smaller home, exploring government
assistance programs, or tapping into other retirement savings. Consulting with a
financial advisor or a housing counselor can help seniors make informed decisions
based on their unique financial situations and goals.

8.5 Estate Planning (Page 8.10 - 8.12)

●​ Definition: The process of arranging and preparing for the management and
distribution of a person's assets and properties after their death or in the event of
incapacitation.
●​ Scope: Involves making important legal and financial decisions to ensure that one's
assets are distributed according to their wishes and that their loved ones are taken
care of. Estate planning is not just for the wealthy; it is essential for individuals of all
financial backgrounds to protect their assets and provide for their families.
●​ Key Elements and Steps:
1.​ Will: A legal document that outlines how a person's assets will be distributed
after their death. It also designates an executor to handle the estate
administration. Without a will, the distribution of assets will be determined by
state laws (intestacy laws), which may not align with the person's wishes. (Do
You Know?: Generally, the grantor is free to choose any person as a trustee,
including himself. One trustee could be the grantor, or a family member,
whose role is to be sure that the grantor's personal objectives are met. A bank
or other financial entity that would make the investment decision on behalf of
trust beneficiaries can be other trustee.)
2.​ Trusts: Legal arrangements that allow a person (the grantor) to transfer their
assets to a trustee, who holds and manages the assets for the benefit of
 designated beneficiaries. Trusts can provide greater control over asset
distribution and may offer potential tax advantages.
3.​ Beneficiary Designations: Review and update beneficiary designations on
retirement accounts, life insurance policies, and other assets to ensure they
align with the desired distribution of assets.
4.​ Durable Power of Attorney: A legal document that designates someone to
make financial and legal decisions on the person's behalf in the event of
incapacitation. (Caution!: If you authorize someone to act as a power of
attorney on your behalf it must be signed and notarized by a certified notary
advocate, who is able to declare that you are competent at the time of signing
the document to issue the said power of attorney. You will need to show your
ID to the notary advocate before he/she is able to certify and issue the
document.)
5.​ Healthcare Directives: Healthcare directives, including a living will and a
medical power of attorney, outline a person's healthcare wishes and
designate a healthcare proxy to make medical decisions on their behalf if they
are unable to do so.
6.​ Guardianship Designations: Parents with minor children should designate
guardians in their will to ensure their children's care and well-being in case of
the parents' untimely death.
7.​ Minimizing Estate Taxes: Estate planning can include strategies to minimize
estate taxes and transfer wealth efficiently to beneficiaries.
8.​ Organizing Financial and Legal Documents: Gather and organize
important financial and legal documents, including property deeds, insurance
policies, investment account statements, and tax records.
9.​ Regular Review and Updates: Estate plans should be reviewed regularly
and updated when significant life events occur, such as marriage, divorce,
birth of children, or changes in financial circumstances.
10.​Seek Professional Advice: Estate planning is complex, and it is advisable to
consult with an experienced estate planning attorney and a financial advisor
to tailor a plan that aligns with individual goals and objectives.
●​
●​ Important Considerations (Box on Page 8.11):
1.​ First, there may be worse than good effects from a plan that leaves an
excessive amount of money to kids or young adults. Ease of access to money
may reduce or eliminate children's motivation to work; also, they may no
longer experience the satisfaction and sense of accomplishment that comes
with personal success.
2.​ Secondly, there are parents who doubt their kids' capacity to handle large
quantities of money sensibly. They can be concerned that their inheritance will
be lost in the absence of adequate oversight. You have to choose how much
property to give to charity, your family, or other people after taking these
things into account.
3.​ Third, determine the amount of property control that each of your successors
should receive, as well as the appropriate dates and ages at which to grant
them each such power.
●​
●​ Ernst & Young's Personal Financial Planning guide - Ten Big Mistakes in Estate
Planning (Page 8.12):
1.​ Omitting your foreign owned funds from the estate plan.
2.​ Holding all the assets jointly.
3.​ Constructing an estate plan that uses the marital deduction