Personal Finance for StartersBy : Manish Chauhan http://www.jagoinvestor.com

Agenda

Basics Section 80C HRA 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 sessionTo make you understand basic concept of Investments and Taxation

Basics

You declare your Investments Your tax liabilities are calculated and TDS is cut and paid to Govt

Then you invest declared amount as declared and your actual tax is calculated at the end

Finally if your Tax = TDS , you do nothingif Tax > TDS , you pay to govtif Tax < TDS , govt (do not) pays to you

Section 80C .

Govt says that if you invest in any product covered under Sec 80C, you do not pay tax on that amountsubject to limit of Rs 1.1 Lac . Under Sec 80C

- Mutual Funds (ELSS) - PPF and EPF- 5 yrs Fixed Deposits- ULIPS / ULPP- NSC - Life Insurance Premiums- Home Loan Principle amount

HRAHRA 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)

LTA and Medical Reimbursment

LTA 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 Bills

Limit of Rs 15,000 per year Doctors Visit fees and Medical Bills

Calculating Tax

Taxable Salary =Gross Salary Exemptions DeductionsExemptions- HRA - Gratuity- LTA- Medical Bills- Transport Exemption (800 pm) - Interest for Home Loan (sec 24)- OthersDeductions- Investments under Sec 80C- Medical Insurance Premium (80D)- Education Loan Interest (80E)- Donations (80G)- Medical for Handicapped Dependent- Others

Tax Slab and ExampleTax Slab

Upto 1.6 Lacs : No tax1.6 lacs 3 lacs : 10%3.0 5 lacs : 20% 5 lacs + : 30%

Exemption LimitMen = 1.6 lacsWomen = 1.9 lacsSenior Citizens = 2.4 lacs

Example

Taxable Salary = 4.4 Lacs

Upto 1.6 lacs = 0From 1.6 3.0 = 14,000 (10% of 1.4 Lacs)From 3.0 4.4 = 28,000 (20% of 1.4 Lacs) Total = 42,000

Power of Early InvestingAjay starts investing 3,000 per month at 25 till 60

Investment : 12.6 lacsCorpus : 1.95 croreRobert is late and starts investing 6,000 when he is 35 till 60

Investment : 18 lacs Corpus : 1.15 Crore

Power of Early InvestingAjay invests 5,000 for 10 yrs and stops for next 25 yrs .

Investment : 6 lacsCorpus : 1.97 croreRobert is late and starts investing 5,000 when he is 35 till 60

Investment : 15 lacs Corpus : 1.52 Crore

Understanding Equity and DebtDebt

- Loan- Fixed Returns- For Short Term- Bank FD , Govt Bonds, Liquid Funds

Equity

- Ownership- Risky- Excellent Return in long run- Risk goes down in Long Run- Shares and Mutual Funds- Equity gives Returns

Investment OptionsEquity Diversified Mutual Funds: Track Record High Returns over long term , Extremelly tax efficient .Balanced Mutual Funds : For people who want to take less risk than Diversified Mutual Funds . 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 : Very Important for long term , 100% secure debt portfolio . Can not be used in Legal proceeding too .Pension Plans (ULPP's) : Can be used for Retirement . Same structure as ULIPS for Investments .Fixed Deposits : You know in advance the return you are going to get .NSC/KVP/RBI Bonds/Endowment Plans : I am not excited with these

What is InsuranceWhy - Cover Life and Health risk - Security to FamilyWhy 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 OptionsEndowment or Money back Plans- Safety- very less returns (5.5 - 6%)- No ability to fight Inflation

Term Insurance- Only Life Cover provided without Returns- very cheap premium- Recommended for everyone

ULIPS- Long term Products (10+ yrs)- Complex a bit and advised for someone who can utilize the features like Switchings .

4 most Important thingsReturn : Good and Resonable Returns which can meet your financial goalsRisk : 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 bestYour FinancialLife

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.htmlPower of Compounding and Early Investing : http://www.jagoinvestor.com/2008/01/power-of-compounding-and-early.htmlCreating 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.htmlHow to do your own Financial Planning : http://www.jagoinvestor.com/2008/05/factors-to-consider-while-doing.htmlEarly Investor , Smart Investor : http://www.jagoinvestor.com/2009/02/early-investor-smart-investor.htmlHow 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

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