TYBMS SEM :5 Finance : Wealth Management (Q.P. April 2019 with Solution)

Paper/Subject Code: 46009/Finance: Wealth Management 

TYBMS SEM :5 

Finance :

Wealth Management

(Q.P. April 2019 with Solution)

Note:

1) All questions are compulsory subject to internal choice.

2) Figures to the right indicate full marks.

3) Use of simple calculator is allowed

Q.1. (a) Multiple Choice Questions: (any 8)                    (08)

1) The goal of wealth management is to sustain & grow ________ term wealth. 

(a) Long term

(b) Short term

(c) Medium term

(d) None of the above

2) Yield curve refers to ________.

(a) Demand Curve

(b) Upward sloping curve

(c) Downward sloping curve

(d) A line that plots interest rates

3) Medical Insurance is offered by _______. 

(a) Banks

(b) Life Insurers

(c) Non life insurers.

(d) All of the above

4) ________ applies to debt investments such as bonds.

(a) Credit risk

(b) Debit risk

(c) Planned risk

(d) Unplanned risk

5) TDS means _______

(a) Tax demanded statutorily

(b) Tax demanded subsequently

(c) Tax deducted at source

(d) Tax deducted at statute

6) Deduction for interest on higher education can be claimed under ________.

(a) Sec 80C

(b) Sec 80D

(c) Sec 80E

(d) Sec 80G

7) When 2 or more persons join hands for common actions with common objectives are called as _______.

(a) Body of Individuals

(b) Firms

(c) Company

(d) Association of Persons

8) _______ involves an analysis of various choices you can make today to help provide for your financial future.

(a) Cash budget

(b) Cash flow

(c) Retirement planning

d) Financial Priorities

9) _______ is one of the most preferred tax planning instrument in India as it's a Government scheme.

(a) PF

(b) PPF

(c) FD

(d) Life Insurance plan

10) Wills which are written entirely by hand of the testator are called as  _______ Wills.

(a) Sham

(b) Concurrent

(c) Holograph

(d) Calligraph

(b) State whether the following statements are true or false: (any 7)                   (07)

1) A code of ethics issued by a business is a particular kind of policy statement.

Ans: True

2) The yield curve is flat when yields of all maturities are close to each other.

Ans: True

3) Life insurers are also known as health insurers.

Ans: False

4) Liquidity risk is being able to sell your investment at a fair price.

Ans: False

5) Longetivity risk is the risk of outliving your savings.

Ans: True

6) Net worth is Assets + Liabilities.

Ans: False

7) Total Income is derived after making various deductions from GTI u/s 80C&801

Ans: True

8) Retirement planning takes into account all emergencies.

Ans: False

9) Lifetime annuity pays an income for a specified period of time say 10 years.

Ans: False

10) ULIP are policies that combine risk coverage with investing in stock/debt market.

Ans: True

Q.2. (a) What are code of ethics for a Wealth manager?

A wealth manager's code of ethics is a set of principles and guidelines that dictate their professional conduct, ensuring they act in the best interests of their clients. These codes are often established by professional bodies (like the CFA Institute, CFP Board, or Investments & Wealth Institute) and by regulatory requirements (like the SEC in the US).

While specific wording may vary, the core ethical principles for a wealth manager typically include:

I. Core Principles (Often Rooted in Fiduciary Duty):

• Fiduciary Duty / Client's Best Interest: This is paramount. A wealth manager must always place the client's interests above their own or their firm's interests. This means avoiding conflicts of interest or fully disclosing and managing them with the client's informed consent.
• Loyalty, Prudence, and Care: Acting with the care, skill, prudence, and diligence that a prudent professional would exercise in light of the client's goals, risk tolerance, objectives, and financial and personal circumstances.
• Integrity: Performing all professional services with honesty, candor, and transparency. This means avoiding deceit, fraud, or misrepresentation in all dealings.
• Objectivity and Independence: Providing advice free from bias or undue influence, ensuring that recommendations are based solely on the client's needs.

II. Professional Competence and Diligence:

• Competence: Possessing and maintaining the necessary knowledge, skills, and expertise to provide sound financial advice and make informed decisions. This often involves ongoing continuing education.
• Diligence: Providing services in a timely and thorough manner, including responding to client inquiries promptly and accurately.
• Suitability: Ensuring that any recommendations for financial products or services are suitable for the client based on their specific financial situation, investment objectives, and risk profile.

III. Transparency and Communication:

• Disclosure of Services and Compensation: Clearly communicating the services offered, how the wealth manager is compensated, and any potential fees or charges.
• Informed Consent: Ensuring clients understand the advice they receive and provide clear agreement to the services and fees.
• Accurate and Timely Communication: Communicating with clients in a clear, accurate, and timely manner, avoiding jargon, and being available to answer questions.
• Performance Presentation: Presenting performance information fairly and accurately, avoiding misleading statements.

IV. Confidentiality and Privacy:

• Confidentiality: Protecting the privacy of sensitive and non-public client information, both during and after the client relationship. This includes controlling access to such information.
• Protection of Material Non-Public Information: Refraining from trading on or disclosing insider information.

V. Compliance and Professional Conduct:

• Compliance with Laws and Regulations: Adhering to all applicable laws, regulations, codes, and guidelines governing the financial industry in the relevant jurisdiction.
• Professionalism: Maintaining a high standard of conduct that reflects positively on the financial planning profession. This includes treating clients, colleagues, and the public with respect.
• Avoiding Prohibited Practices: This includes, but is not limited to:
  • Churning (excessively trading client accounts to generate commissions).
  • Borrowing or lending money or securities to/from clients.
  • Exercising discretionary authority without express written authorization.
  • Engaging in market manipulation or insider trading.
  • Accepting improper gifts or benefits that could create a conflict of interest.
  • Discrimination or harassment.

(b) What is a yield curve? What are its types?

A yield curve is a graphical representation that plots the interest rates (or "yields") of bonds with equal credit quality but different maturity dates. In simpler terms, it shows how much you can expect to earn by lending money for different periods of time.

The most commonly referred to yield curve is the U.S. Treasury yield curve, as U.S. Treasury bonds are considered to have virtually no credit risk and offer a wide range of maturities, making them a benchmark for other fixed-income securities.

Key elements of a yield curve:

• X-axis (horizontal): Represents the time to maturity (e.g., 3 months, 1 year, 5 years, 10 years, 30 years).
• Y-axis (vertical): Represents the annualized yield (interest rate) for that maturity.

The shape of the yield curve is a significant economic indicator because it reflects market expectations about future interest rates, inflation, and economic growth.

Types of Yield Curves:

There are three primary types of yield curves, each signaling different economic outlooks:

1. Normal (Upward-Sloping) Yield Curve:

   • Shape: Short-term yields are lower than long-term yields, causing the curve to slope upward from left to right.
   • Meaning: This is the most common and "normal" shape for the yield curve. It indicates that investors expect stronger economic growth, potentially leading to higher inflation and interest rates in the future. Investors demand higher compensation (yield) for locking up their money for longer periods due to the increased risk of inflation eroding their returns over time. This curve is typically seen during periods of economic expansion.

2. Inverted (Downward-Sloping) Yield Curve:

   • Shape: Short-term yields are higher than long-term yields, causing the curve to slope downward from left to right.
   • Meaning: This is an unusual and often concerning shape. An inverted yield curve suggests that investors expect interest rates to fall in the future, usually in response to an anticipated economic slowdown or recession. They might be willing to accept lower yields on long-term bonds because they believe short-term rates will decline even further. Historically, an inverted yield curve has been a reliable predictor of economic recessions in several countries, including the United States, often preceding them by 12 to 18 months.

3. Flat Yield Curve:

   • Shape: Short-term and long-term yields are very similar, resulting in a relatively flat line.
   • Meaning: A flat yield curve often indicates a transition period in the economy, either from a normal curve to an inverted one, or vice versa. It suggests uncertainty about the future direction of economic growth and interest rates. It can appear when the central bank is raising short-term rates (making them closer to long-term rates) or when long-term rates are falling due to concerns about the economic outlook.

Other variations you might hear about:

• Steep Yield Curve: This is a more pronounced version of a normal yield curve, where the difference between short-term and long-term yields is particularly wide. It often signals strong expectations of future economic growth and inflation.
• Humped Yield Curve: In this rare scenario, medium-term yields are higher than both short-term and long-term yields, creating a "hump" in the middle of the curve. It can sometimes indicate a slowing of economic growth.

OR

(p) Ms. Durga an individual submits the flowing information relevant for AY 2018-19.

Find out the net taxable income of Ms. Durga for AY 2018-19 applying the provisions of set off and carry forward of losses.

Particulars	Rs.
Income from Salary computed Income from House Property House I House II Income from Business Business I (non-speculative) Business II (non speculative) Income from Long Term Capital Gains Income from Other sources Interest on debentures Lottery winnings	90,000   40,000 (60,000)   60,000 (20,000) 50,000   2,000 10,000

You are also informed that:

1. She spent Rs.1500 as collection towards interest on debentures allowed to be deducted u/s 57 as expenditure.

2. She has the following carry forward losses:

i) Business losses-Rs. 10,000 (AY 2014-15)

ii) Long term Capital losses -Rs.35,000(AY 2015-16)

Q.3. (a) What is General Insurance? What are its types?                (08)

General Insurance refers to any insurance policy that is not "life insurance." It provides financial protection against losses and damages to assets, liabilities, and health from various unforeseen events like accidents, natural disasters, theft, and specific medical emergencies.

Unlike life insurance, which typically covers the financial risk associated with a person's death or survival over a long term, general insurance policies are usually short-term contracts, often renewed annually. They focus on compensating the insured for actual financial losses incurred due to a specific event within the policy period.

Characteristics of General Insurance:

• Covers Non-Life Assets: It protects tangible assets like vehicles, homes, businesses, and personal belongings.
• Short-Term Contract: Most policies are for a year, requiring annual renewal.
• No Savings/Investment Component: Generally, it does not have a savings or investment element, unlike some life insurance products.
• Reimbursement/Cashless Claims: It typically works on a reimbursement basis (you pay first, then claim) or a cashless basis (the insurer directly settles with the service provider) for covered events.
• Focus on Indemnity: The goal is to indemnify the insured, meaning to restore them to the financial position they were in before the loss, up to the sum insured.

Types of General Insurance:

The broad categories of general insurance include:

1. Motor Insurance:

   • Purpose: Covers damages and liabilities arising from the use of a motor vehicle (car, bike, commercial vehicle).
   • Types:
     • Third-Party Liability Insurance: Mandatory in many countries (like India, as per the Motor Vehicles Act, 1988). It covers legal liability for injury or death to a third party, or damage to third-party property caused by your vehicle. It does not cover damages to your own vehicle.
     • Own Damage (OD) Insurance: Covers damages to your own vehicle due to accidents, fire, theft, natural calamities (earthquake, flood, etc.), or man-made disasters.
     • Comprehensive Insurance: A combination of Third-Party Liability and Own Damage cover, offering broader protection.
   • Examples: Car insurance, Two-wheeler insurance, Commercial vehicle insurance.

2. Health Insurance:

   • Purpose: Provides financial coverage for medical expenses incurred due to illness, injury, or medical emergencies.
   • Types:
     • Individual Health Insurance: Covers a single person.
     • Family Floater Health Insurance: Covers multiple family members under a single policy with a shared sum insured.
     • Critical Illness Insurance: Provides a lump-sum payout upon diagnosis of specific critical illnesses (e.g., cancer, heart attack).
     • Personal Accident Insurance: Offers financial protection against disability or death resulting from an accident.
     • Senior Citizen Health Insurance: Tailored plans for individuals above a certain age.
     • Group Health Insurance: Often provided by employers to their employees.

3. Home Insurance / Property Insurance:

   • Purpose: Protects your home structure and/or its contents against various perils.
   • Coverage: Typically includes damages from fire, natural disasters (earthquake, flood, storm), theft, burglary, explosions, and sometimes even terrorism.
   • Examples: Fire insurance, Burglary insurance, Householder's policy.

4. Travel Insurance:

   • Purpose: Offers financial protection against unforeseen events and emergencies while traveling, both domestically and internationally.
   • Coverage: May include medical emergencies abroad, trip cancellation or interruption, baggage loss or delay, passport loss, flight delays, personal accident cover, and sometimes even adventure sports cover.
   • Types: Single-trip, multi-trip, student travel insurance, senior citizen travel insurance.

5. Commercial / Business Insurance:

   • Purpose: Covers a wide range of risks faced by businesses and organizations.
   • Examples:
     • Marine Insurance: Covers loss or damage to goods, cargo, and vessels during transit by sea, air, rail, or road.
     • Fire Insurance: Specifically covers damages to commercial property and stock due to fire.
     • Liability Insurance: Protects businesses from legal liabilities arising from claims of injury or damage caused to third parties by their operations, products, or employees (e.g., Public Liability, Product Liability, Professional Indemnity).
     • Shopkeeper's Insurance: A comprehensive policy for small and medium-sized businesses, covering various risks like fire, burglary, and liability.
     • Employee Benefits Insurance: Such as group health insurance or workmen's compensation insurance.
     • Cyber Insurance: Protects against financial losses due to cyberattacks and data breaches.
     • Crop Insurance: For farmers, covering crop loss due to weather or natural calamities.

(b) What is Active asset management? What are its advantages?                 (07)

Active asset management is an investment approach where a portfolio manager or a team of managers actively makes decisions about which securities to buy, hold, or sell, with the primary goal of outperforming a specific market benchmark (like the S&P 500 or Nifty 50) or generating returns that exceed what a passive strategy would achieve.

Unlike passive investing, which aims to simply mirror the performance of an index by holding all or a representative sample of its components, active management involves extensive research, analysis, and strategic judgment. Active managers believe that markets are not perfectly efficient and that by skillfully identifying undervalued assets or overvalued assets, they can generate "alpha" (excess returns above the benchmark).

Characteristics of active asset management:

• Hands-on approach: Managers are constantly monitoring market trends, economic data, company news, and geopolitical events.
• Research-intensive: Involves fundamental analysis (evaluating a company's financial health, management, industry, etc.), technical analysis (studying price charts and trading patterns), and quantitative analysis (using mathematical and statistical models).
• Security selection: Actively choosing individual stocks, bonds, or other investments based on their potential to outperform.
• Market timing: Attempting to buy or sell assets at optimal times to capitalize on short-term price fluctuations.
• Portfolio adjustments: Frequently rebalancing or reallocating the portfolio in response to changing market conditions or new opportunities.

Advantages of Active Asset Management:

Despite the higher fees often associated with active management and the challenge of consistently beating the market, it offers several potential advantages:

1. Potential for Outperformance (Alpha Generation): This is the primary draw. Skilled active managers aim to identify mispriced securities or capitalize on market inefficiencies to generate returns higher than a passive index fund. If successful, this can lead to significant wealth creation for investors.

2. Risk Management and Downside Protection:

   • Flexibility to exit positions: Unlike passive funds that must hold all index components regardless of their performance, active managers can sell underperforming or risky assets to protect capital during market downturns.
   • Lower volatility: They can adjust the portfolio to reduce overall risk during volatile periods, potentially leading to smoother returns.
   • Hedging strategies: Active managers can employ various hedging techniques (like derivatives) to mitigate specific risks within the portfolio.

3. Adaptability and Flexibility:

   • Responding to market changes: Active managers can swiftly react to economic shifts, geopolitical events, or changes in company fundamentals. This agility allows them to seize emerging opportunities or exit problematic investments quickly.
   • Tactical asset allocation: They can dynamically adjust the allocation of assets across different asset classes (e.g., reduce exposure to stocks and increase bonds during a recessionary outlook) to optimize returns or reduce risk.

4. Exploiting Market Inefficiencies / Niche Markets:

   • Undervalued/Overvalued assets: Active managers believe that emotional biases, information asymmetry, or temporary market conditions can lead to mispricings. They actively seek to buy undervalued assets and sell overvalued ones.
   • Niche and less efficient markets: Active management can be particularly effective in less efficient markets (e.g., small-cap stocks, emerging markets, private equity, or certain fixed-income segments) where information is less readily available, and there are fewer analysts, making it easier for skilled managers to find overlooked opportunities.

5. Customization and Tailored Strategies:

   • Meeting specific client needs: Active managers can construct portfolios that align with an individual investor's unique risk tolerance, income goals, liquidity needs, time horizon, and ethical preferences (e.g., ESG investing).
   • Tax management: They can implement tax-efficient strategies, such as tax-loss harvesting (selling losing investments to offset capital gains) to minimize the tax impact on returns.

6. Stewardship and Engagement:

   • Influencing companies: Active managers, especially those with significant stakes, can engage with company management on issues like strategy, corporate governance, and environmental/social practices. This can lead to positive change within companies and benefit shareholders.

OR

(p) Mr. Dinesh Kamble purchased house property for Rs. 1,25,000 on 16th August 1991. He made the following addition to the house property. Cost of construction of 1" floor in financial year 2005-06 Rs. 12,25,000.                                                                    (08) 

The fair market value of the property 1-4-2001 was Rs. 13,50,000. He sold the property on 15th September 2017 for Rs. 85,00,000. He paid brokerage of Rs. 25,000 for the sale transaction.

The cost inflation index for financial year 2001-02 is 100, for financial 2005-06 is 117 & 2017-18 is 272.

Compute the capital gain of Mr. Dinesh Kamble for the Assessment Year 2018-19.

(q) Following is the Balance Sheet of Aarna Ltd. Find out Current Ratio, Debt Equity Ratio, Quick Ratio.

Balance Sheet

Liabilities	Amount	Assets	Amount
Equity share capital	10,00,000	Plant and Machinery	7,50,000
8% Preference share capital.	7,00,000	Goodwill	6,50,000
9% Debentures.	40,400	Stock	1,15,000
Sundry Creditors	40,000	Sundry debtors	1,26,000
Bills Payable	50,000	Bills receivables	1,46,000
Bank OD	10,600	Prepaid expenses	54,000
	18,41,000		18,41,000

 

Q.4. (a) What is Ratio Analysis? What are its advantages?

Ratio analysis is a quantitative method used to assess a company's financial performance, health, and efficiency by comparing two or more line items from its financial statements (such as the balance sheet, income statement, and cash flow statement). It involves calculating various financial ratios and then interpreting them, often by comparing them over time (trend analysis) or against industry benchmarks and competitors (cross-sectional analysis).

Essentially, ratio analysis simplifies complex financial data into easily digestible figures, allowing stakeholders to gain insights into different aspects of a company's operations.

Common categories of financial ratios include:

• Liquidity Ratios: Measure a company's ability to meet its short-term financial obligations (e.g., Current Ratio, Quick Ratio).
• Solvency/Leverage Ratios: Assess a company's ability to meet its long-term financial obligations and its reliance on debt financing (e.g., Debt-to-Equity Ratio, Interest Coverage Ratio).
• Profitability Ratios: Indicate how well a company generates profits from its sales, assets, or equity (e.g., Net Profit Margin, Return on Assets (ROA), Return on Equity (ROE)).
• Activity/Efficiency Ratios: Evaluate how effectively a company is utilizing its assets to generate sales or manage its operations (e.g., Inventory Turnover, Accounts Receivable Turnover, Asset Turnover).
• Market Value Ratios: Relate a company's stock price to its earnings or book value, often used by investors to assess investment attractiveness (e.g., Price-to-Earnings (P/E) Ratio, Earnings Per Share (EPS)).

Advantages of Ratio Analysis:

Ratio analysis offers numerous benefits to various stakeholders, including management, investors, creditors, and analysts:

1. Simplifies Complex Financial Data: Financial statements can be overwhelming. Ratios condense vast amounts of data into easily understandable figures, highlighting key relationships and trends that might otherwise be hidden.

2. Facilitates Comparative Analysis:

   • Time-Series Analysis (Intra-firm Comparison): By calculating ratios over several accounting periods, companies can identify trends in their financial performance (improving, stagnating, or declining). This helps in understanding the company's progress and forecasting future performance.
   • Cross-Sectional Analysis (Inter-firm/Industry Comparison): Ratios allow for a standardized comparison of a company's performance against its competitors or industry averages, even if companies are of different sizes. This helps identify strengths, weaknesses, and areas where a company might be lagging or excelling.

3. Aids in Performance Evaluation:

   • Profitability: Ratios directly indicate a company's ability to generate profit from its operations, sales, or investments.
   • Operational Efficiency: Efficiency ratios reveal how effectively a company is utilizing its assets and managing its resources to generate revenue.
   • Financial Health (Liquidity and Solvency): They provide insights into a company's ability to meet both short-term and long-term financial obligations, indicating its financial stability and risk level.

4. Helps in Identifying Strengths and Weaknesses: By analyzing various ratios, management can pinpoint specific areas where the company is performing well (strengths) and areas that require attention and improvement (weaknesses). This enables targeted corrective actions.

5. Supports Decision-Making:

   • Investment Decisions: Investors use ratios to assess a company's attractiveness, growth potential, and risk profile before investing.
   • Lending Decisions: Creditors and banks use ratios to evaluate a company's creditworthiness and its ability to repay loans.
   • Management Decisions: Managers use ratios for strategic planning, budgeting, controlling costs, setting performance targets, and making operational adjustments.

6. Early Warning System: Significant or consistent deviations in certain ratios can serve as an early warning signal of potential financial problems (e.g., declining liquidity, increasing debt burden, shrinking profit margins), allowing for timely intervention.

7. Benchmarking: Ratios provide clear benchmarks against which a company's performance can be measured, whether against industry best practices or its own historical performance.

8. Communication Tool: Ratios provide a concise way to communicate the financial standing and performance of a business to various stakeholders, making complex financial information more accessible.

(b) What is a Will? What are its types?

A Will, also known as a Last Will and Testament, is a legal document that expresses a person's (the "testator's") wishes regarding how their property (assets, estate) is to be distributed after their death. It also designates who will manage the estate until its final distribution (the "executor") and can appoint guardians for minor children or dependents.

The primary purpose of a Will is to ensure that your assets are distributed according to your wishes, rather than by the default laws of intestacy (which apply when someone dies without a valid Will). Having a Will can prevent family disputes, simplify the probate process, and ensure that your loved ones are taken care of as you intend.

Key Elements of a Valid Will (generally):

• Testamentary Capacity: The testator must be of sound mind, of legal age (usually 18 or older), and understand the nature and consequences of making a Will.
• Voluntary Act: The Will must be made freely, without coercion, fraud, or undue influence.
• In Writing: Generally, Wills must be in writing (typed or handwritten).
• Signed by Testator: The testator must sign the Will.
• Witnessed: Most jurisdictions require the Will to be signed in the presence of two or more disinterested witnesses (who are not beneficiaries in the Will).
• Clear Intent: The Will must clearly state the testator's intentions regarding asset distribution.

Types of Wills:

While the specific classifications can vary by jurisdiction, here are some common types of Wills:

1. Unprivileged Will (or Simple Will / Standard Will):

   • This is the most common type of Will, made by ordinary civilians. It must adhere to strict legal formalities, typically requiring it to be in writing, signed by the testator, and attested by two or more witnesses.
   • Purpose: To clearly outline the distribution of assets, appoint an executor, and designate guardians for minor children.
   • Prevalence (India): This is the standard Will for most individuals in India, governed by the Indian Succession Act, 1925.

2. Privileged Will:

   • These are special Wills made by individuals in active military service (soldiers, airmen) or mariners at sea. Due to the urgent and perilous circumstances they might face, the legal formalities for these Wills are relaxed. They can be made orally or in writing, and sometimes don't require attestation or even a signature, provided certain conditions are met (e.g., made before witnesses if oral).
   • Purpose: To allow individuals in hazardous situations to quickly and simply declare their wishes regarding their property.
   • Prevalence (India): Recognized under the Indian Succession Act, 1925, for specific personnel.

3. Holographic Will:

   • A Will that is entirely handwritten and signed by the testator.
   • Distinguishing Feature: In some jurisdictions, holographic Wills may be valid even without witnesses, given that the handwriting itself serves as evidence of the testator's intent and authenticity. However, recognition of holographic Wills varies significantly by state/country.
   • Prevalence (India): While not explicitly defined in the Indian Succession Act, they can be recognized if they meet the general requirements of a valid Will (like being attested). The fact that it's handwritten by the testator can lend more weight to its authenticity in case of a dispute.

4. Joint Will:

   • A single document created by two or more persons (usually spouses) to dispose of their joint or individual property. It's often intended to take effect after the death of both testators.
   • Joint Wills can be complex and sometimes lead to inflexibility. They may become irrevocable after the death of one testator, meaning the surviving testator cannot change their portion of the Will, which can be problematic if circumstances change.

5. Mutual Will:

   • These are separate Wills made by two or more individuals (again, typically spouses) who agree on a reciprocal arrangement for the distribution of their property. For instance, husband and wife each make a Will leaving everything to the other, with a further agreement on how the remaining assets will be distributed after the second death.
   • The "mutual" aspect usually implies a binding agreement not to revoke or alter the Wills after the death of one party. This binding nature can also create issues if the surviving spouse wishes to change the disposition.

6. Conditional or Contingent Will:

   • A Will that only takes effect or specific provisions within it become valid upon the occurrence or non-occurrence of a particular event or condition.
   • Example: "This Will shall be valid only if I die during my trip to Everest," or "My son shall receive this property only if he completes his education." If the condition is not met, the Will or the specific clause may become invalid.

7. Concurrent Will:

   • When a testator creates two or more Wills that deal with different parts of their property, often for convenience or due to assets being in different geographical locations (e.g., one Will for movable property and another for immovable property, or Wills for assets in different countries). Each Will is valid and addresses a specific segment of the estate.

8. Living Will (Advance Directive/Medical Directive):

• Although often referred to as a "Will," a Living Will is not a Will in the sense of distributing assets after death. Instead, it's a legal document that expresses a person's wishes regarding their medical treatment and end-of-life care, should they become incapacitated and unable to communicate their decisions.
• Purpose: To give instructions on refusing or consenting to specific medical treatments (e.g., life support, artificial nutrition) and often appoints a healthcare proxy to make decisions on their behalf.

OR

(p) Following are the details of Mr. Thakur for Assessment Year 2018-19.

a) Income from Salary Rs.5,00,000

b) Income from House Property Income Rs. 1,50,000

c) Won Lottery of Rs.50,000

He has made the following payments:

a) Mediclaim premium of Rs.5,000 paid in cash for preventive health check-up of self.

b)Contribution to NSC Rs. 10,000 and received interest on NSC Rs.4,000 for AY 2018-19. Compute the taxable income of Mr. Thakur after allowing deductions under chapter VI-A.

(q) Assuming the total tax liability of Sumit Ltd. is 50,000 and TDS Rs.2,000. Calculate the advance tax payable on the respective due dates.                                (07)

Advance Tax is required to be paid by individuals if their estimated tax liability for the financial year, after accounting for TDS, exceeds ₹10,000.

1. Calculate Net Tax Liability for Advance Tax:

• Total Tax Liability = ₹50,000
• Less: TDS (Tax Deducted at Source) = ₹2,000
• Net Tax Payable (Advance Tax Liability) = ₹50,000 - ₹2,000 = ₹48,000

Since Sumit Ltd net tax payable (₹48,000) is more than ₹10,000, he is liable to pay advance tax.

2. Advance Tax Due Dates and Installment Percentages for Individuals (Other than those opting for Presumptive Taxation):

Advance tax is paid in four installments throughout the financial year:

• 1st Installment: On or before June 15th
• Minimum payment: 15% of the total advance tax liability.

• 2nd Installment: On or before September 15th
• Minimum payment: 45% of the total advance tax liability (less tax already paid).

• 3rd Installment: On or before December 15th
• Minimum payment: 75% of the total advance tax liability (less tax already paid).

• 4th Installment: On or before March 15th
• Minimum payment: 100% of the total advance tax liability (less tax already paid).

3. Calculation of Advance Tax Payable by Sumit Ltd on Respective Due Dates:

Due Date	Percentage of Net Tax Payable	Calculation	Advance Tax Payable for Installment	Cumulative Advance Tax Paid
June 15	15%	15% of 48000	7200	7200
September 15	45%	(45% of  48000) - 7200	21600 -7200 = 14400	21,600
December 15	75%	(75% of 48000) - 21600	36000 – 21600 = 14400	36000
March 15	100%	(100% of 48000) – 36000	48000 – 36000 = 12000	48000

Q.5. (a) What is Retirement Planning? What is its need and purpose?            (08)

Retirement planning is the process of setting financial goals for your post-working life and developing a strategy to accumulate, manage, and ultimately draw upon the necessary funds to achieve those goals. It involves a forward-looking assessment of your current financial situation, a projection of your future expenses and desired lifestyle in retirement, and the creation of an investment and savings plan to build a sufficient financial corpus.

It's not just about accumulating a lump sum; it's about creating a sustainable income stream that can support your chosen lifestyle for the duration of your retirement, which could span several decades.

Need and Purpose of Retirement Planning:

Retirement planning is not a luxury but a crucial necessity in today's world due to several evolving factors:

1. Increased Life Expectancy: People are living longer than ever before. This means your retirement period could easily stretch for 20, 30, or even more years. Without adequate planning, there's a significant risk of outliving your savings. The purpose here is to ensure your funds last as long as you do.

2. Rising Healthcare Costs: As we age, healthcare expenses tend to increase significantly. Medical treatments, prescription drugs, long-term care, and health insurance premiums can be substantial burdens. Retirement planning helps you factor in these escalating costs and build a dedicated fund or insurance coverage to address them, ensuring you don't become a financial burden on your family due to health issues.

3. Inflation: The purchasing power of money erodes over time due to inflation. What seems like a comfortable sum today will be worth less in 20 or 30 years. Retirement planning necessitates accounting for inflation to ensure your retirement corpus maintains its real value and allows you to afford the same quality of life in the future. The purpose is to protect your future purchasing power.

4. Decline of Traditional Pensions: In many parts of the world, defined-benefit pension plans (where employers guarantee a specific retirement income) are becoming rare, replaced by defined-contribution plans (like 401(k)s or EPF/NPS in India) that place the responsibility of saving and investing squarely on the individual. This shift makes personal retirement planning indispensable. The purpose is to create your own "pension."

5. Desire for Financial Independence and a Desired Lifestyle: Most people envision a retirement where they are free from financial worries, can pursue hobbies, travel, spend time with family, or even start a passion project. Without a solid plan, these aspirations might remain just dreams. The purpose is to enable financial freedom and a comfortable, fulfilling post-work life.

6. Uncertainty of Social Security/Government Benefits: While government social security or pension schemes provide a basic safety net, they may not be sufficient to maintain your pre-retirement lifestyle, especially with rising costs and demographic shifts potentially straining these systems. Relying solely on these benefits can lead to a significant drop in living standards. The purpose is to supplement or provide an alternative to insufficient government support.

7. Avoiding Dependence on Family: No one wants to be a financial burden on their children or other family members in their golden years. A well-executed retirement plan ensures financial self-sufficiency and preserves dignity. The purpose is to maintain independence and minimize family stress.

8. Power of Compounding: Starting early allows your investments more time to grow through the power of compounding. Even small, consistent contributions made over many years can accumulate into a substantial corpus. Delaying planning means you'll need to save significantly more later to catch up. The purpose is to leverage time and compounding for wealth creation.

(b) What are Annuities? Explain its types.                        (07)

Annuities are financial contracts, primarily offered by insurance companies, designed to provide a steady stream of income payments, typically during retirement. In essence, you make a payment (either a lump sum or a series of payments) to an insurance company, and in return, the company promises to make regular payments back to you, either immediately or at a future date, for a specified period or for the rest of your life.

Annuities are primarily used for retirement planning to ensure a reliable income stream and protect against the risk of outliving your savings (longevity risk).

Annuities usually have two phases:

1. Accumulation Phase (if applicable): This is the period when you contribute money to the annuity. Your investment grows, often on a tax-deferred basis, meaning you don't pay taxes on the earnings until you start receiving payments. This phase is characteristic of "deferred" annuities.
2. Annuitization/Payout Phase: This is when the annuity begins making regular payments to you. The frequency and duration of these payments are determined by the terms of your contract.

Types of Annuities:

Annuities can be categorized in several ways based on:

A. Timing of Payouts:

1. Immediate Annuity (Immediate Annuitization):

   • Description: You pay a lump sum premium, and the income payments begin almost immediately, usually within one year (often within a month, quarter, or year).
   • Suitability: Ideal for individuals who are nearing retirement or already retired and have a lump sum (e.g., from a provident fund, superannuation, or gratuity) that they want to convert into a regular income stream immediately.
   • Indian Context: Often referred to as "single premium immediate annuity plans" in India.

2. Deferred Annuity:

   • Description: You make contributions (either a lump sum or a series of regular payments) over a period, allowing the money to grow during an accumulation phase. The income payments are "deferred" to a future date, typically when you retire.
   • Suitability: Suitable for younger individuals or those still working who want to build a retirement corpus over time and start receiving income later.
   • Indian Context: These are commonly known as "pension plans" that have both an accumulation (premium payment) and vesting (payout) phase.

B. Investment Growth and Payout Structure:

1. Fixed Annuity:

   • The insurance company guarantees a fixed rate of interest on your contributions during the accumulation phase and/or a fixed, predetermined payout amount during the annuitization phase. Your payouts are stable and not linked to market performance.
   • Suitability: Ideal for conservative investors who prioritize safety, predictability, and a guaranteed income stream, even if the growth potential is lower.
   • Indian Context: Offers guaranteed and fixed returns, often by investing in low-risk instruments like government securities or corporate bonds.

2. Variable Annuity:

   • Your premiums are invested in sub-accounts, which are typically mutual funds or other market-linked investment options. The value of your annuity and subsequent payout amounts will fluctuate based on the performance of these underlying investments.
   • Suitability: For investors willing to take on market risk for the potential of higher returns. They offer growth potential but also the risk of capital loss.
   • Indian Context: Payouts are linked to the performance of the chosen investment funds.

3. Indexed Annuity (or Fixed Indexed Annuity - FIA):

   • This type blends features of fixed and variable annuities. The returns are linked to a specific market index (like the Nifty 50 or S&P 500), but with a built-in "floor" (guaranteed minimum return) to protect against market downturns and often a "cap" (maximum return) or "participation rate" (a percentage of the index's gains) that limits upside.
   • Suitability: For investors who want some market participation without the full downside risk of a variable annuity.
   • Indian Context: Less common as a distinct product compared to fixed and variable, but elements might be present in some market-linked plans.

C. Payout Options/Survivorship Benefits (Common in India):

Beyond the accumulation and investment types, annuities also differ in how the income is paid out and what happens upon the annuitant's death:

1. Life Annuity (Single Life Annuity):

   • Payments are made for the entire lifetime of the primary annuitant. Payments cease upon their death.
   • Suitability: Simplest form, often provides the highest regular income because there are no provisions for future beneficiaries.

2. Joint Life Annuity (Joint and Survivor Annuity):

   • Payments are made for the lifetime of two individuals (usually spouses). If one annuitant dies, the surviving annuitant continues to receive payments, often at a reduced percentage (e.g., 50% or 75% of the original amount).
   • Suitability: Ideal for couples to ensure financial security for the surviving partner.

3. Life Annuity with Return of Purchase Price (ROP):

   • Payments are made for the lifetime of the annuitant. Upon the annuitant's death, the original purchase price (premium paid) is returned to the nominee/beneficiary.
   • Suitability: Provides lifelong income while also ensuring that the capital invested is preserved for heirs. The regular payout will be lower than a pure life annuity.

4. Annuity for a Guaranteed Period (Annuity Certain):

   • Payments are guaranteed for a specific number of years (e.g., 5, 10, 15 years), regardless of whether the annuitant lives or dies. If the annuitant dies within the guaranteed period, the remaining payments are made to their nominee. If they live beyond the guaranteed period, payments continue for their lifetime.
   • Suitability: Good for those who want a guaranteed income for a minimum period, ensuring beneficiaries receive some benefit if death occurs early.

5. Inflation-Indexed Annuity:

• The annuity payments increase annually by a certain percentage (e.g., 3% or linked to inflation), helping to preserve the purchasing power of the income over time.
• Suitability: Protects against the erosion of income due to inflation, which is crucial for long retirements. The initial payout will be lower than a non-indexed annuity.

OR

Q.5. Write Short Notes on (any three):                            (15)

1) Components of Wealth Management

Wealth management is a comprehensive and personalized financial advisory service designed to help individuals, particularly high-net-worth individuals (HNWIs) and their families, manage, grow, and preserve their financial assets over the long term. It goes beyond traditional financial planning by integrating various aspects of a client's financial life into a cohesive strategy.

The key components of wealth management typically include:

1. Financial Planning: This forms the cornerstone, involving a thorough assessment of a client's current financial situation (income, expenses, assets, liabilities), setting clear financial goals (e.g., retirement, education, major purchases), and creating a roadmap to achieve them.

2. Investment Management: A core element, this involves developing and managing a diversified investment portfolio aligned with the client's risk tolerance, time horizon, and financial goals. This includes asset allocation across various asset classes (stocks, bonds, real estate, alternative investments) and ongoing monitoring and rebalancing of the portfolio.

3. Tax Planning and Optimization: Wealth managers devise strategies to minimize tax liabilities on income, investments, and wealth transfer. This involves utilizing tax-efficient investment vehicles, maximizing deductions, and planning for capital gains and estate taxes.

4. Estate Planning: This component focuses on the efficient and tax-effective transfer of wealth to heirs or beneficiaries according to the client's wishes. It involves drafting wills, setting up trusts, and considering charitable giving strategies to preserve legacy and minimize estate taxes.

5. Risk Management and Insurance: Identifying and mitigating financial risks is crucial. This includes assessing and addressing potential threats to wealth through appropriate insurance coverage (life, health, disability, property, liability) and other risk mitigation strategies.

6. Retirement Planning: A specialized aspect of financial planning, it focuses on building a sufficient corpus for a secure and comfortable retirement, including selecting suitable retirement accounts, contribution strategies, and withdrawal plans.

7. Cash Flow Management and Debt Management: Effective management of income and expenses, along with strategic debt reduction, is essential for optimizing financial resources and freeing up capital for investment.

8. Other Specialized Services: Depending on the client's needs, wealth management may also encompass business succession planning, philanthropic advisory, and even concierge services.

2) Principle of Utmost good faith

The Principle of Utmost Good Faith (Latin: Uberrima Fides) is a fundamental common law principle that applies particularly strongly to contracts of insurance. It mandates that all parties to an insurance contract must act with absolute honesty and disclose all material facts relevant to the contract, whether or not specifically asked.

key aspects:

• Mutual Obligation: It's a two-way street. Both the insured (policyholder) and the insurer have a duty to act in utmost good faith.
• Disclosure of Material Facts: This is the core of the principle. A "material fact" is any information that would influence the judgment of a prudent insurer in deciding whether to accept the risk, and if so, at what premium and on what terms. Examples include:
  • For the insured: Previous medical conditions, dangerous hobbies, prior insurance claims, criminal convictions, or any other factor that increases the risk.
  • For the insurer: Terms and conditions of the policy, exclusions, duties of the insured, and the nature of the coverage.
• Proactive Disclosure: The duty of disclosure is not limited to answering questions posed by the other party. Each party must voluntarily disclose all material facts known to them, even if not explicitly asked.
• Consequences of Breach: If either party breaches the principle of utmost good faith (e.g., by misrepresentation or non-disclosure of a material fact), the contract can be voided or rescinded by the innocent party. For the insurer, this means they may refuse to pay a claim, and in some cases, even retain the premium paid. For the insured, if the insurer concealed a material fact, the insured might be able to cancel the policy and demand a return of premiums.
• Distinction from Ordinary Contracts: Unlike typical commercial contracts where "buyer beware" (caveat emptor) often applies and parties are generally expected to look out for their own interests, insurance contracts demand a higher standard of disclosure due to the inherent information asymmetry. The insured typically knows more about the risk than the insurer, and vice-versa regarding policy terms.

3) New Pension Scheme

The New Pension Scheme (NPS), also known as the National Pension System, is a voluntary, defined contribution retirement savings scheme launched by the Government of India. Initially introduced for central government employees in 2004, it was later extended to all Indian citizens, including those in the private and unorganized sectors. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA).

Features of NPS:

• Voluntary and Flexible: Individuals can choose to contribute regularly or periodically, and there's flexibility in contribution amounts (within minimum limits).
• Defined Contribution: Unlike older "defined benefit" pension schemes, the final pension amount in NPS depends on the contributions made and the market-linked returns generated on those investments.
• Market-Linked Returns: Funds contributed are invested by professional fund managers in a diversified portfolio comprising equities, corporate bonds, and government securities. Subscribers can choose their investment mix (Active Choice) or opt for an automatic allocation based on age (Auto Choice).
• Low Cost: NPS is known for its very low administrative and fund management charges, making it a cost-effective retirement savings option.
• Portable: The NPS account (identified by a unique Permanent Retirement Account Number or PRAN) is portable across jobs and locations, ensuring continuity of savings even with career changes.
• Two Account Types:
  • Tier I Account: This is the primary pension account, with withdrawal restrictions and associated tax benefits. A portion of the corpus is mandated for annuity purchase upon retirement.
  • Tier II Account: This is an optional savings account offering greater flexibility in terms of withdrawals, but it generally does not provide the same tax benefits as Tier I.
• Tax Benefits: NPS offers attractive tax benefits on contributions under various sections of the Income Tax Act, including Section 80CCD(1), 80CCD(1B), and 80CCD(2) for employer contributions.
• Retirement Planning: The core objective of NPS is to encourage systematic savings for retirement, helping individuals build a substantial corpus to ensure financial security in their post-retirement years. Upon retirement, a portion of the accumulated corpus can be withdrawn as a lump sum, while the remaining is used to purchase an annuity, providing a regular pension income for life

4) Tax Deducted at source

Tax Deducted at Source (TDS) is a mechanism implemented by tax authorities (like the Income Tax Department in India) to collect taxes at the very source of income. Under this system, a person or entity (the "deductor") who is liable to make certain specified payments to another person (the "deductee") is required to deduct a prescribed percentage of tax from that payment before making the final disbursement. This deducted amount is then remitted to the government on behalf of the deductee.

TDS applies to a wide range of income types, including:

• Salaries
• Interest on fixed deposits
• Rent payments
• Professional fees (e.g., for doctors, lawyers, consultants)
• Commission payments
• Contractor payments
• Certain winnings (e.g., from lotteries)

Key aspects of TDS:

• Payer's Responsibility: The deductor (payer) is responsible for deducting the correct amount of TDS at the specified rates and depositing it with the government within prescribed timelines.
• Recipient's Credit: The deductee (recipient) receives the net amount after TDS. This deducted amount is then reflected in their tax credit statement (like Form 26AS in India) and can be claimed as a credit against their final tax liability when they file their income tax return.
• Advance Tax Collection: TDS acts as a form of advance tax payment, helping the government collect revenue consistently throughout the year.
• Preventing Evasion: It also helps in preventing tax evasion by ensuring that tax is collected at the point of income generation.
• Forms and Certificates: Deductors are required to file periodic TDS returns and issue TDS certificates (e.g., Form 16 for salaries, Form 16A for non-salary payments) to the deductees, detailing the tax deducted.

5) Health Insurance

Health insurance is a type of financial coverage that pays for medical and surgical expenses incurred by the insured. It is designed to protect individuals and families from high healthcare costs by covering expenses such as doctor visits, hospital stays, surgeries, medications, and preventive care.

There are different types of health insurance plans, including individual, family, group (usually employer-sponsored), and government-funded schemes like Medicaid or Medicare (in the U.S.) or Ayushman Bharat (in India).

Having health insurance provides not only financial protection but also access to timely and quality healthcare. It encourages regular check-ups and early detection of illnesses, which can lead to better health outcomes.