Tag: Business economics

a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier.

b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head.

Tax treatment in respect of contributions made to and payment from various provident funds are summarized in the table given below:

Specified Employee

The following employees are deemed as specified employees:

1) A director-employee

2) An employee who has substantial interest (i.e. beneficial owner of equity shares carrying 20% or more voting power) in the employer-company

3) An employee whose monetary income* under the salary exceeds Rs.50,000

Pension plans are a good way to secure your finances post-retirement. In India, there are several pensions plans available, and you can choose to invest in the one that you are most comfortable with.

Pension plans provide financial security and stability during old age when people don’t have a regular source of income. Retirement plan ensures that people live with pride and without compromising on their standard of living during advancing years. Pension scheme gives an opportunity to invest and accumulate savings and get lump sum amount as regular income through annuity plan on retirement.

According to United Nations Population Division World’s life expectancy is expected to reach 75 years by 2050 from present level of 65 years. The better health and sanitation conditions in India have increased the life span. As a result number of post-retirement years increases. Thus, rising cost of living, inflation and life expectancy make retirement planning essential part of today’s life. To provide social security to more citizens the Government of India has started the National Pension System.

There are different kinds of pension plans which you can check below:

• Plans that are sponsored by an insurer where the investment is solely in debt and are best suited for conservative investors.
• Plans that are unit-linked and invest in both equity and debt.
• The National Pension Scheme, which invests either 100% in government securities, 100% in debt securities (other than government securities), or a maximum of 75% in equity.

Schemes

Life Annuity

These schemes pay an amount called annuity to the retiree for their lifetime. If the annuitant dies and chooses the option ‘with spouse’, then the spouse receives the pension amount.

Annuity certain

In this scheme, the annuitant is paid the annuity for a certain number of years. The annuitant can pick this period, and in case of their death, the beneficiary receives the annuity.

Pension Plans with and without cover

Pension plans with cover include life cover, which means that if the policyholder dies, the family members are paid a lump sum. This amount may not be considerable. The without-cover plan, as the name suggests, does not have life cover. If the policyholder passes away, then the nominee gets the corpus. At present, the immediate annuity plans are without protection, while the deferred plans are with cover.

Guaranteed Period Annuity

Regardless of whether the holder survives the duration, this annuity option is given for periods such as five years, ten, fifteen, and twenty years.

Immediate Annuity

In this type of scheme, the pension begins right away. As soon as you deposit a lump sum amount, your pension starts. This is based on the amount the policyholder invests. You can choose from a range of annuity options. Under the Income Tax Act of 1961, the premiums of the immediate annuity plans are tax exempt. Post the death of the policyholder, it is the nominee who is entitled to the money.

National Pension Scheme

The Government of India introduced a pension scheme in 2004 for those who wanted to build up their pension amount. Your savings will be invested in the debt and equity markets, based on your preference. It allows you to withdraw 60% of the funds at the time of retirement, and the remaining 40% goes towards purchasing an annuity plan.

Pension Funds

The government body, Pension Fund Regulatory and Development Authority (PFRDA), has authorised six companies to operate as fund managers. These plans offer comparatively better returns at the time of maturity and remain in force for a substantial amount of time.

Deferred Annuity

With a deferred annuity plan, you can accumulate a corpus through a single premium or regular premiums over the policy term. The pension begins once the policy term gets over. This deferred annuity plan has tax benefits wherein no tax is charged on the money invested until you plan to withdraw it. This scheme can be bought by either making regular contributions or by a one-time payment. This way, it works for you whether you want to invest the entire amount at one time or want to invest systematically.

One of the reasons annuities have so many different features is that they are actually contracts between an annuity holder also known as an annuitant and an insurance company. Contracts have different provisions, different costs, different payouts, etc. The upside is an annuity can be personalized to fit your needs. The downside is the vast array of options can seem overwhelming to potential annuitants.

Annuities are contracts issued and distributed (or sold) by financial institutions where the funds are invested with the goal of paying out a fixed income stream later on. They are mainly used for retirement purposes and help individuals address the risk of outliving their savings. Upon annuitization, the holding institution will issue a stream of payments at a later point in time.

Fixed, variable and fixed indexed are the main types of annuities. Knowing what level of risk you’re comfortable with will help guide you through your annuity choices.

Interest-rate risk is a factor in determining the calculation of your payments. Low risk yields predictable payment amounts. Higher risk could boost your expectations.

Fixed Annuity

This is the option with the least risk and the most predictability. Fixed annuities come with a guaranteed, set interest rate that doesn’t vary beyond the terms of the contract. While other investments might soar or dive, the fixed annuity is steady. Sometimes, however, the interest rate will reset after a predetermined number of years.

Types of fixed annuities

An equity-indexed annuity is a type of fixed annuity, but looks like a hybrid. It credits a minimum rate of interest, just as a fixed annuity does, but its value is also based on the performance of a specified stock index usually computed as a fraction of that index’s total return.

A market-value-adjusted annuity is one that combines two desirable features the ability to select and fix the time period and interest rate over which your annuity will grow, and the flexibility to withdraw money from the annuity before the end of the time period selected. This withdrawal flexibility is achieved by adjusting the annuity’s value, up or down, to reflect the change in the interest rate “market” (that is, the general level of interest rates) from the start of the selected time period to the time of withdrawal.

Variable Annuity

A variable annuity comes with more risks and potentially higher rewards. The interest rate of variable annuities is tied to an investment portfolio. Payments from variable annuities can increase if the portfolio does well, but they can also decrease if the investments lose money.

With a variable annuity, the insurer invests in a portfolio of mutual funds chosen by the buyer. The performance of those funds will determine how the account grows and how large a payout the buyer will eventually receive. Variable annuity payouts can either be fixed or vary along with the account’s performance.

People who choose variable annuities are willing to take on some degree of risk in the hope of generating bigger profits. Variable annuities are generally best for experienced investors, who are familiar with the different types of mutual funds and the risks they involve.

Tax saving is a benefit you can avail for selective investment options and expenses. You anyways need to invest money to achieve your financial goals. Investments which save tax can help you in two ways:

• Invest more and have more disposable income
• Grow your investment faster

• Make an investment of Rs 1.5 lakh under Sec 80C to reduce your taxable income. Additional deduction of Rs 50,000 can be claimed by investing in NPS under 80CCD (1b)
• Buy Medical Insurance, maximum deduction allowed is Rs. 1,00,000 (Rs 50,000 for self and family if senior citizen and Rs 50,000 for senior citizen parents) under Section 80D.
• Claim deduction up to Rs 50,000 on Home Loan Interest under Section 80EE

The most popular tax-saving options available to individuals and HUFs in India are under Section 80C of the Income Tax Act, Section 80C includes various investments and expenses you can claim deductions on – up to the limit of Rs. 1.5 lakh in a financial year.

Retirement planning, in a financial context, refers to the allocation of savings or revenue for retirement. The goal of retirement planning is to achieve financial independence.

Without a judicious retirement plan in place, you run the risk of outliving your savings and not being able to maintain the desired lifestyle in your retirement years. You also run the risk of not being able to accumulate enough corpus for your dependant’s owing to unfortunate and uncertain events like death, disability etc.

Retirement planning helps you determine how much to save today for retirement; how to invest your savings to get the desired returns; how to protect your assets and provide for in case of unfortunate events and how to make judicious use of retirement income post retirement.

The process of retirement planning aims to:

• Assess readiness-to-retire given a desired retirement age and lifestyle, i.e., whether one has enough money to retire
• Identify actions to improve readiness-to-retire
• Acquire financial planning knowledge
• Encourage saving practices

Modeling and limitations

Retirement finances touch upon distinct subject areas or financial domains of client importance, including: investments (i.e., stocks, bonds, mutual funds); real estate; debt; taxes; cash flow (income and expense) analysis; insurance; defined benefits (e.g., social security, traditional pensions). From an analytic perspective, each domain can be formally characterized and modeled using a different class representation, as defined by a domain’s unique set of attributes and behaviors. Domain models require definition only at a level of abstraction necessary for decision analysis. Since planning is about the future, domains need to extend beyond current state description and address uncertainty, volatility, change dynamics (i.e., constancy or determinism is not assumed). Together, these factors raise significant challenges to any current producer claim of model predictability or certainty.

Monte Carlo method

The Monte Carlo method is the most common form of a mathematical model that is applied to predict long-term investment behavior for a client’s retirement planning. Its use helps to identify adequacy of client’s investment to attain retirement readiness and to clarify strategic choices and actions. Yet, the investment domain is only a financial domain and therefore is incomplete. Depending on client context, the investment domain may have very little importance in relation to a client’s other domains e.g., a client who is predisposed to the use of real estate as a primary source of retirement funding.

There are various kinds of needs and life-events, some of which are listed below:

• Retirement Corpus
• Buying a Home
• Post Retirement payout
• Job Transition
• Parenthood
• Children’s Education
• Children’s Marriage
• Insurance
• Tax planning

Retirement planning is the process of determining retirement income goals, and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, sizing up expenses, implementing a savings program, and managing assets and risk. Future cash flows are estimated to gauge whether the retirement income goal will be achieved. Some retirement plans change depending on whether you’re in, say, India, United States or Australia.

Retirement planning is the process of setting retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk.

Retirement planning is ideally a life-long process. You can start at any time, but it works best if you factor it into your financial planning from the beginning. That’s the best way to ensure a safe, secure and fun retirement. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.

Purpose

Money works for you

In the younger days, everyone runs after their 9-5 jobs. Everyone works to earn money and have a good living. However, retirement days are the days where one cannot work any longer. Therefore, it is the time when the money one earned should do all the work.

Stress-free life

This is the most significant outcome of retirement planning. Retirement planning helps to lead a peaceful and stress-free life. With having investments that earn regular income during retirement leads to a worry-free life. Retirement is the age where one has to relax and reap the benefits of all the hard work.

Inflation beating returns

Investing in retirement will help in earning inflation-beating returns. Holding money in a bank savings account will not generate high returns. In other words, the interest earned will not be enough to lead an uncompromised retirement. Therefore, proper investment planning will help one to generate significant returns in the long term. Also, it is important to start investing early. This helps in averaging out the impact of market volatility.

Cost-saving

Planning for retirement at a young age will help in reducing the cost. For example, in an insurance policy the premium amount to be paid will be lesser when the policyholder is younger. While getting insurance during retirement becomes costly.

Need

• Best time to fulfil life aspirations.
• One cannot work forever.
• Start planning early and diversify investments.
• The average life expectancy is increasing.
• Relying on one source of income is risky, e.g., pension.
• Do not depend on children.
• Higher complications, e.g., medical emergencies.
• Contribute to the family even during retirement.

Life cycle Planning

Stages of Retirement Planning:

1. Young Adulthood: Those who are entering an adult life may not have a lot of money to invest, but they can have enough time to let investments mature. It makes a critical and valuable piece of retirement saving. Such investments can make up a large piece of investments with regards to the principle of compound interest. Compound interest allows interest to be calculated on interest the more time you have, the more interest you will earn.
2. Early midlife: This age can bring in a lot of financial stress in terms of mortgages, student loans, and insurance premiums. Therefore, it may be difficult to save in this period.
3. Later midlife: When time is running out to make up for the difference in the actual savings and retirement plans, you will have the last opportunity to fill the gap. Since you will have higher wages and most of your debts would be fulfilled, you can have a larger sum available for investment.

The level of emphasis on retirement planning varies throughout different life stages. During the youth, retirement planning only means setting aside enough funds for retirement. During the middle of the career, it might change to setting specific income/asset targets and taking the necessary steps to realise them. Once you reach retirement, decades of savings will pay out.

The most important part of Retirement planning is ‘Investing’. Investing for retirement has to be very effective. There are several investment avenues that you can opt for retirement planning.

You have spent years accumulating your retirement fund. What is the best way to draw it down. Your retirement fund may consist of a collection of the following:

• Personal Pensions
• Company Pensions
• AVC
• Deferred pensions
• Paid up pensions
• Retirement Bonds

There is no right or wrong solution to retiring your fund. Only your solution. Everyone is different with a different set of needs, assets and objectives. We provide a bespoke solution to all of our clients to ensure that you receive the best solution for your specific situation, be it maximum tax-free lump sum or highest possible life time pension.

Pre

Exchange Traded Funds (ETFs): Exchange traded funds are considered to be one of the popular securities amongst investors. An Exchange Traded Fund (ETF) is a type of investment that is bought and sold on stock exchanges. It holds assets like commodities, bonds, or stocks. An exchange traded fund is like a mutual fund, but unlike a Mutual Fund, ETFs can be sold at any time during the trading period. Moreover, ETFs helps you to build a diverse portfolio.

Bonds: Bonds are one of the most popular retirement investment options. A bond is a debt security where the buyer/holder initially pays the principal amount for buying the bond from the issuer. The issuer of the bond then pays the holder an interest at regular intervals and also pays the principal amount at the maturity date. Some of the bonds provide good 10-20% p.a.-rate of interest. Also, there is no tax applicable on bonds at the time of investment.

Real Estate: It’s the most preferred retirement investment options amongst investors. It is an investment made in the real estate, i.e. house/shop/site, etc. It’s considered to give good stable returns. To make an investment in real estate, one should consider good location as the key point.

Equity Funds An equity fund is a type of Mutual Fund that invests mainly in stocks. Equity represents ownership in firms (publicly or privately traded) and the aim of the stock ownership is to participate in the growth of the business over a period of time. The wealth you invest in Equity Funds is regulated by SEBI and they frame policies & norms to ensure that the investor’s money is safe. As equities are ideal for long-term investments, it is one of the best retirement investment options.

New Pension Scheme (NPS) New Pension Scheme is gaining popularity in India as one of the best retirement investment options. NPS is open to all but, is mandatory for all government employees. An investor can deposit a minimum of INR 500 per month or INR 6000 yearly, making it as the most convenient for Indian citizens. Investors can consider NPS as a good idea for their retirement planning because there is no direct tax exemption during the time of withdrawal as the amount is tax-free as per Tax Act, 1961. This scheme is a risk-free investment as it’s backed by the Government of India.

Post

Bank Fixed Deposits: Most people consider the Fixed Deposit investment as a part of their retirement investment options because it enables money to be deposited with banks for a fixed maturity period, ranging from 15 days to five years (& above) and it allows to earn a higher rate of interest than other conventional Savings Account. During the time of maturity, the investor receives a return which is equal to the principal and also the interest earned over the duration of the fixed deposit.

Reverse Mortgage As a part of the post- retirement investment options, a reverse mortgage is a good option for senior citizens who need a steady flow of income. In a reverse mortgage, stable money is generated from the lender in lieu of the mortgage on their homes. Any house owner who is 60 years of age (and above) is eligible for this. Retired people can live in their property and receive regular payments, until the death. The money receivable from the Bank will depend on the valuation of property, its current price and well as the condition of the property.

Annuity An annuity is an agreement aimed at generating steady income during retirement. Where a lump sum payment is made by an investor to obtain a certain amount instantly or in future. The minimum age entry for any investor in this scheme is 40 years and the maximum is up to 100 years.

Senior Citizen Saving Schemes (SCSS): As part of the post- retirement investment options, an SCSS is designed for retired people who are above 60 years old. SCSS is available through certified banks as well as the network post offices spread across India. This scheme (or SCSS account) is up to five years, but, upon the maturity, it can be subsequently extended for an additional three years. With this investment, tax exemption is eligible under Section 80C.

Financial planning is a process of setting objectives vis-à-vis your current income. It involves assessing your currents savings and assets, estimating future financial needs, and making plans to achieve monetary goals. Retirement Planning goes beyond financial planning or providing investment advice and is aimed at achieving financial security for retirement. It is aholistic solution aimed at enabling people to achieve their financial dreams both before and after retirement.

Retirement planning is not an art but a definitive science which requires taking a 360-degree approach to studying one’s current financial health, long-term goals and risk appetite to design a plan that addresses the retirement and other long-term goals of an individual.

It involves a step-by-step approach:

Step 1: Identifying your financial and retirement goals

Step 2: Analysing your current financial situation

Step 3: Risk Profiling

Step 4: Asset Allocation

Step 5: Investment Allocation Strategy

Step 6: Periodic Monitoring and Rebalancing

Strategies

• Cut down expenses.
• Seek expert advice / professional help to create a roadmap for you to maximise your savings without compromising your standard of living.
• Choose investment options that give you higher returns.
• It is good to have a working spouse to generate an additional income stream.
• Look for additional income through another job / business simultaneously if possible.
• Start immediately.

Planning

Decide Your Retirement Age

The most common retirement age is 60 years, but it may vary from person to person.

Some may wish to work beyond 60 years of age, while a few even wish to retire at 50 basically it’s a matter of choice.

Estimating your retirement age is an important step, because after this age your regular income stream will stop or at least reduce considerably (in case you are eligible for pension). You will have to depend on your savings and investments to take care of your retirement needs.

Start Early to Retire Peacefully

Like any other goal, start planning your retirement as soon as possible. With several years in hand, you have time and the power of compounding in your favour.

Never delay retirement planning or else you might have to compromise your goal. Worst case you might have to be financially dependent on your children or family. Hence, start early, start now.

Most individuals who are in their 20s and having recently started earning might think that retirement is a distant reality. For them, planning for retirement at this early age may seem like being overly cautious.

Determine Your Retirement Corpus

Retirement corpus is the amount you require post retirement to meet your expenses and continue with the same lifestyle and maybe pursue your other personal goals.

For this, first ascertain your annual expenses at present.

For that you need to first write down monthly expenses on various categories such as household, medical, entertainment, travel, EMI, and children’s school/tuition fees, and so on.

So, it is important that you make an accurate estimate of how much amount you will require, to maintain your present lifestyle after you retire.

Wealth creation is the process of investing in different asset classes where the investments will help in fulfilling key needs. These investments should also be self-contained that can generate a stable source of income, helping one to fulfill their aspirations.

The wealth creation process will be most effective if started early. Starting investments during the early stages of life will give a head start for achieving goals. It also helps in generating higher growth in the long term. This is due to the power of compounding. Power of compounding is a concept that will help in building a considerable corpus in the future. The concept of compounding revolves around reinvesting the returns back into the fund to earn higher growth. Therefore, the longer one stays invested, the higher will be the gain in wealth.

Wealth creation is a process of investing in multiple asset classes that eventually help in meeting one’s livelihood needs. Therefore, wealth creation as an investment strategy plays a significant role.

No one really knows what the future holds for them. Hence, it is better to start planning for the future from the beginning. Starting investments early will help in creating wealth in the long term. Short term investments will not always create wealth.

Each one of us will reach a point where we are unable to work any longer or earn an income. Planning for a safe and secure livelihood in the future is what wealth creation is all about.

Factors

Goal based investing

Goal based investing is the best way to measure one’s financial success. All of us have goals and dreams about the future. Prioritizing and achieving one goal at a time will give the utmost satisfaction. To do so, one should list down all the goals along with timelines and start investing towards them. Starting small and early will help in wealth creation. Having a separate investment fund for each goal will help in achieving them sooner. Therefore, aligning investments to financial goals will help individuals to create wealth.

Retirement planning

The benefits of investments are realized to a greater extent during post retirement years. Having a separate retirement fund will help investors in leading a stress free and healthy retirement. Retirement is the time where one’s savings or investments do the work for them. To create one such fund, it is important to start early and invest regularly.

Regular income

Investments into good assets will help in generating alternate sources of income. For example, investments in equities, mutual funds or debt instruments will help in generating income through interest or dividends. Therefore, during retirement, these investments will be an additional source of income that will help one in retiring peacefully and have financial independence. Also, in times of emergencies or health crisis, these investments will help in addressing the contingencies.

Strategies

• Make money. Before you can begin to save or invest, you need to have a long-term source of income that’s sufficient to have some left after you’ve covered your necessities and debts.
• Save money. Once you have an income that’s enough to cover your basics, develop a proactive savings plan.
• Invest money. Once you’ve set aside a monthly savings goal, invest it prudently.

Principles

Fundamental Factors

The returns an investment generates will be based on its fundamental factors. Analysing fundamental factors only will lead to a long term success. There is a lot of difference between taking one right investment decision by fluke and taking right investment decisions regularly by analyzing the fundamental factors.

Risk Vs Safety

Whatever the long term savings you have got you can invest in risky assets like equity funds. You will be adequately rewarded for taking risk in the long run. Whatever the short term savings you have got you can park it in FDs or debt funds.

 Investing your long term money in safe avenues will be a destruction to create long term wealth. You will not be able to beat inflation. Similarly investing your short term money in risky investments is also dangerous.

Asset Allocation

Depending upon your financial goals, you need to arrive at the required rate of return from your investments. You need to decide what kind of allocation needs to be given to different kind of investment avenues like Fd, Debt funds, balanced fund or a high risk Equity Funds.