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 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 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 month

Rent : 20,000 pm : Mumbai
Actual HRA : Rs 25,000.
These values are considered to find out his HRA tax exemption:
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 20,000
c) The actual rent he pays for the house from which 10% of his basic pay is

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
Exemptions
Taxable Salary
=
Gross Salary

Exemptions

Deductions

- HRA
- Gratuity
- LTA
- Medical Bills
- Transport Exemption (800 pm)
- Interest for Home Loan (sec 24)
- Others

Deductions
- Investments under Sec 80C
- Medical Insurance Premium (80D)
- Education Loan Interest (80E)
- Donations (80G)
- Medical for Handicapped Dependent
- Others

Tax Slab and Example

Example

Tax Slab (2010-2011)

Taxable Salary = 5.4 Lacs

Upto 1.6 Lacs : No tax

1.6 lacs 5 lacs : 10%

Upto 1.6 lacs = 0

5.0 8 lacs : 20%

8 lacs + : 30%

From 1.6 5.0 = 34,000 (10% of 3.4 Lacs)

Exemption Limit
Men = 1.6 lacs
Women = 1.9 lacs
Senior Citizens = 2.4 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 Investing

Ajay 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

Equity

Debt

- Ownership
- Risky

- Loan
- Fixed Returns

- Excellent Return in long run

- Risk goes down in Long Run

- For Short Term

- Bank FD , Govt Bonds,

- Shares and Mutual Funds

- Equity gives Returns

Liquid Funds

Investment Options
Equity 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 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 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 things

Return : Good
and Resonable
Returns which
can meet your
financial goals

Risk : Should

Your
Financial
Life

cover overall risk

factors like Life,
Health, any other

Liquidity : This

Simplicity : Your

means availibility of
money anytime you
need it . It
should
be atleast 3-4 months
of Expenses

overall Financial Life

needs to be simple
enough for you to
understand it . Simple
is best

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-ofcompounding-and-early.html
Creating Long term Wealth : http://www.jagoinvestor.com/2008/08/creating-weatlh-we-are-going-todiscuss.html
Diversification of Portfolio : http://www.jagoinvestor.com/2008/04/what-is-diversified-portfolio-andhow.html
How to do your own Financial Planning : http://www.jagoinvestor.com/2008/05/factors-to-considerwhile-doing.html
Early Investor , Smart Investor : http://www.jagoinvestor.com/2009/02/early-investor-smartinvestor.html
How to choose a Mutual Fund :http://www.jagoinvestor.com/2009/01/what-to-look-for-whilechoosing-mutual.html
Portfolio Rebalancing : http://www.jagoinvestor.com/2008/07/portfolio-rebalancing-today-i-amgoing.html

Q&A's

Q&A