personal finance for starters
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Personal Finance for Starters(For Newcomers)
By : Manish Chauhan http://www.jagoinvestor.com
Agenda
Section 80C HRA HRA Example LTA and Medical Exemptions Tax Calculations Tax Slab and example Power of Investing Early Understanding Equity and Debt Investments Options What is Insurance Insurance Options 4 most important things
Objective of the
session
To make you understand basic concept of Investments
and Taxation
Section 80C
.
Govt says that if you invest in any product covered under Sec 80C, you do not pay tax on that amount
subject to limit of Rs 1.0 Lac + 20,000 in investment bonds .
Under Sec 80CUnder Sec 80C
- Mutual Funds (ELSS) - PPF and EPF- 5 yrs Fixed Deposits- ULIPS / ULPP- NSC - Life Insurance Premiums- Home Loan Principle amount
HRA
HRA you can claim is minimum ofHRA you can claim is minimum of
- The actual amount of HRA received.
- 40% of salary (basic component + dearness allowance). This increases to 50% if you are renting out the house in Delhi, Mumbai, Chennai or Kolkata.
- Rent paid minus 10% of Salary (basic component + dearness allowance)
HRA Example
Basic salary of Rs 40,000 per monthBasic salary of Rs 40,000 per month
Rent : 20,000 pm : MumbaiRent : 20,000 pm : Mumbai
Actual HRA : Rs 25,000. Actual HRA : Rs 25,000.
These values are considered to find out his HRA tax exemption:These values are considered to find out his HRA tax exemption:
a) Actual HRA allowance from the employer, i.e. Rs 25,000,a) Actual HRA allowance from the employer, i.e. Rs 25,000,
b) 50% of the basic salary as he resides in a metro (else 40%), i.e. Rs 20,000b) 50% of the basic salary as he resides in a metro (else 40%), i.e. Rs 20,000
c) The actual rent he pays for the house from which 10% of his basic pay is c) The actual rent he pays for the house from which 10% of his basic pay is deducted, i.e. Rs 20,000 - Rs 4,000 = Rs 16,000deducted, i.e. Rs 20,000 - Rs 4,000 = Rs 16,000
Actual HRA exemption : Mimimum of a , b, c = 16,000 Actual HRA exemption : Mimimum of a , b, c = 16,000
LTA and Medical Reimbursment
LTALTA Limit of Rs 50,000 per year It can be claimed 2 times in 4 yrs block Block is decided by Govt , the current block is 2006-2009 . You must be on leave while travelling
Medical BillsMedical Bills
Limit of Rs 15,000 per year Doctors Visit fees and Medical Bills
Calculating Tax
Taxable Salary Taxable Salary ==
Gross Salary
– Exemptions
– Deductions
ExemptionsExemptions- HRA - HRA - Gratuity- Gratuity- LTA- LTA- Medical Bills- Medical Bills- Transport Exemption (800 pm) - Transport Exemption (800 pm) - Interest for Home Loan (sec 24)- Interest for Home Loan (sec 24)- Others- Others
DeductionsDeductions- Investments under Sec 80C- Investments under Sec 80C- Medical Insurance Premium (80D)- Medical Insurance Premium (80D)- Education Loan Interest (80E)- Education Loan Interest (80E)- Donations (80G)- Donations (80G)- Medical for Handicapped Dependent- Medical for Handicapped Dependent- Others- Others
Tax Slab and Example
Tax Slab (2010-2011)Tax Slab (2010-2011)
Upto 1.6 Lacs : No tax
1.6 lacs – 5 lacs : 10%
5.0 – 8 lacs : 20%
8 lacs + : 30%
Exemption LimitExemption LimitMen = 1.6 lacs
Women = 1.9 lacs
Senior Citizens = 2.4 lacs
Example Example
Taxable Salary = 5.4 Lacs Taxable Salary = 5.4 Lacs
Upto 1.6 lacs = 0
From 1.6 – 5.0 = 34,000 (10% of 3.4 Lacs)
From 5.0 – 5.4 = 8,000 (20% of 0.4 Lacs)
Total = 42,000
Note : Rs. 20,000 tax exemption will be provided for investments in certain investment bonds. This is in addition to the already allowed exemption (Rs. 1,00,000) in certain savings instruments.
Power of Early InvestingAjay starts investing 3,000 per month at 25 till 60
Investment : 12.6 lacs
Corpus : 1.95 crore
Robert is late and starts investing 6,000 when he is 35 till 60
Investment : 18 lacs
Corpus : 1.15 Crore
Power of Early Investing
Ajay invests 5,000 for 10 yrs and stops for next 25 yrs .
Investment : 6 lacs
Corpus : 1.97 crore
Robert is late and starts investing 5,000 when he is 35 till 60
Investment : 15 lacs
Corpus : 1.52 Crore
Understanding Equity and Debt
Debt Debt
- Loan- Loan
- Fixed Returns- Fixed Returns
- For Short Term- For Short Term
- Bank FD , Govt Bonds, - Bank FD , Govt Bonds,
Liquid FundsLiquid Funds
EquityEquity
- Ownership- Ownership
- Risky- Risky
- Excellent Return in long run- Excellent Return in long run
- Risk goes down in Long Run- Risk goes down in Long Run
- Shares and Mutual Funds- Shares and Mutual Funds- Equity gives Returns- Equity gives Returns
Investment OptionsEquity Diversified Mutual Funds:Equity Diversified Mutual Funds: Track Record High Returns over long term , Extremelly tax efficient .
Balanced Mutual Funds :Balanced Mutual Funds : For people who want to take less risk than Diversified Mutual Funds .
ULIPs :ULIPs : Only for Long Term investors and smart people who can use switching at right time with discipline and under the importance of Asset Allocation .
PPF :PPF : Very Important for long term , 100% secure debt portfolio . Can not be used in Legal proceeding too .
Pension Plans (ULPP's) :Pension Plans (ULPP's) : Can be used for Retirement . Same structure as ULIPS for Investments .
Fixed Deposits :Fixed Deposits : You know in advance the return you are going to get .
NSC/KVP/RBI Bonds/Endowment Plans :NSC/KVP/RBI Bonds/Endowment Plans : I am not excited with these
What is Insurance
Why - Cover Life and Health risk - Security to Family Why Not - For Investment - Only for Tax Savings (should not be the primary reason) . Misellings - No proper information given- For meeting sales targets - No proper products sold because of personal benefits like
commissions.
Insurance Options
Endowment or Money back PlansEndowment or Money back Plans - Safety - very less returns (5.5 - 6%) - No ability to fight Inflation
Term InsuranceTerm Insurance - Only Life Cover provided without Returns - very cheap premium - Recommended for everyone
ULIPSULIPS - Long term Products (10+ yrs) - Complex a bit and advised for someone who can utilize
the features like Switchings .
4 most Important things
Return : Good and Resonable Returns which can meet your financial goals
Risk : Should cover overall risk factors like Life, Health, any other
Liquidity : This means availibility of money anytime you need it . It should be atleast 3-4 months of Expenses
Simplicity : Your overall Financial Life needs to be simple enough for you to understand it . Simple is best
Your Your FinancialFinancial
Life Life
Demat and Trading Account
Additional Readings 5 Elements : http://www.jagoinvestor.com/2008/10/5-elements.html
Pillars of Success : http://www.jagoinvestor.com/2008/10/pillars-of-success.html Power of Compounding and Early Investing : http://www.jagoinvestor.com/2008/01/power-of-compounding-and-early.html Creating Long term Wealth : http://www.jagoinvestor.com/2008/08/creating-weatlh-we-are-going-to-discuss.html Diversification of Portfolio : http://www.jagoinvestor.com/2008/04/what-is-diversified-portfolio-and-how.html How to do your own Financial Planning : http://www.jagoinvestor.com/2008/05/factors-to-consider-while-doing.html Early Investor , Smart Investor : http://www.jagoinvestor.com/2009/02/early-investor-smart-investor.html How to choose a Mutual Fund :http://www.jagoinvestor.com/2009/01/what-to-look-for-while-choosing-mutual.html
Portfolio Rebalancing : http://www.jagoinvestor.com/2008/07/portfolio-rebalancing-today-i-am-going.html
Q&A's
Q&A
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