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