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

Paper/Subject Code: 46009/Finance: Wealth Management 

TYBMS SEM :5 

Finance :

Wealth Management

(Q.P. November 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) Match the following: (Any 8):                    (08)

Column "A"	Column "B"
1. Interest on Higher Educational loan	a. Upward Sloping
2. Housing Loan Installment	b. Downward Sloping
3. Normal Yield Curve	c. Deduction u/s 80D
4. Inverted Yield Curve	d. Deduction u/s 80E
5. Medical Insurance Premium	e. Deduction u/s 80C
6. Earning Capacity of an Individual	f. Human Life Value
7. Objectivity and Competence	g. Principle of Wealth Creation
8. Pay Yourself First	h. Principle of Insurance
9. Principle of Indemnity	i. Total Assets - Total Liabilities
10. Net Worth	j. Code of Ethics For Wealth Managers

Ans:

Column "A"	Column "B"
1. Interest on Higher Educational loan	d. Deduction u/s 80E
2. Housing Loan Installment	e. Deduction u/s 80C
3. Normal Yield Curve	a. Upward Sloping
4. Inverted Yield Curve	b. Downward Sloping
5. Medical Insurance Premium	c. Deduction u/s 80D
6. Earning Capacity of an Individual	f. Human Life Value
7. Objectivity and Competence	j. Code of Ethics For Wealth Managers
8. Pay Yourself First	g. Principle of Wealth Creation
9. Principle of Indemnity	h. Principle of Insurance
10. Net Worth	i. Total Assets - Total Liabilities

Q.1 (B) State whether the following statements are True or False (any 7):            (07)

1) Business loss cannot be set off against salary income.

Ans : True

2) Yield refers to the annual return on an Investment.

Ans : True

3) Human Life Value concept deals with human capital.

Ans : True

4) CAGR return is same as Holding Period Return.

Ans : False

5) Insurer is the one who undertakes the responsibility of risks.

Ans : True

6) Health insurance policies are not issued for less than one year period.

Ans : False

7) Inflation rate has direct impact on wealth creation.

Ans : True

8) MIS provides regular income to the investors.

Ans : True

9) Long term capital loss cannot be set-off against short term capital gain.

Ans : True

10) Deduction for donation to a charitable trust can be claimed u/s 80G.

Ans : True

Q.2. (A) What is Wealth Management? Explain its scope in brief.            (08)

Wealth management is a comprehensive financial service that goes beyond traditional financial planning and investment advice. It's a holistic approach to managing an individual's or family's entire financial life to help them create, preserve, and grow their wealth over time, ultimately achieving their financial goals and building a legacy.

Scope of Wealth Management in Brief:

Wealth management encompasses a wide range of services and considerations, tailored to the unique needs of the client, particularly high-net-worth individuals (HNIs) and families. The key areas include:

• Financial Planning: This is the foundation, involving a thorough assessment of income, expenses, assets, liabilities, and financial goals (short-term and long-term). It creates a roadmap for achieving objectives like buying a house, funding education, or comfortable retirement.
• Investment Management/Portfolio Management: This involves designing, implementing, and continually overseeing an investment portfolio. Wealth managers analyze risk tolerance, time horizon, and market conditions to allocate investments across various asset classes (stocks, bonds, real estate, alternative investments) and make decisions on buying, selling, and rebalancing to optimize returns and manage risk.
• Tax Planning and Optimization: A crucial aspect is minimizing tax liabilities and maximizing after-tax returns. Wealth managers devise strategies such as tax-efficient investing, utilizing tax-advantaged accounts, optimizing deductions, and managing capital gains and losses.
• Estate Planning: This focuses on the organized and tax-efficient transfer of assets to heirs. It includes drafting wills, establishing trusts, designating power of attorneys, and structuring assets to ensure a smooth transition of wealth and minimize potential conflicts or taxes for beneficiaries.
• Risk Management and Insurance Planning: Wealth managers identify and mitigate potential financial risks that could impact wealth. This involves evaluating insurance needs (life, disability, long-term care, specialized asset coverage) and recommending suitable policies to protect against unforeseen events.
• Retirement Planning: A core component, it involves developing a strategy for a secure retirement, considering lifestyle goals, expected expenses, and investment strategies to ensure financial stability in later years.
• Cash Flow Management and Budgeting: Even for wealthy individuals, managing income and expenses efficiently is important. Wealth managers provide guidance on budgeting and maintaining financial equilibrium.
• Philanthropic Planning: For clients interested in charitable giving, wealth managers assist in structuring donations in a tax-efficient manner to maximize their impact and align with legacy goals.
• Integrated Corporate and Personal Finance Management: For business owners, wealth managers often bridge the gap between personal and business finances, optimizing both realms for synergy and growth.

(B) What are the reasons for changes in interest rates?                (07)

Interest rates are the cost of borrowing money or the return on lending money. They are dynamic and influenced by a complex interplay of various economic, monetary, and market factors. Here are the primary reasons for changes in interest rates.

1. Monetary Policy (Central Bank Actions):

   • Repo Rate/Federal Funds Rate: The most significant driver of interest rate changes is the monetary policy set by a country's central bank (e.g., the Reserve Bank of India (RBI), the Federal Reserve in the US). Central banks manipulate a key interest rate (like the repo rate in India or the federal funds rate in the US) to influence overall economic activity.
     • Raising Rates: When inflation is high or the economy is "overheating" (growing too quickly), the central bank may increase this policy rate. This makes it more expensive for commercial banks to borrow money, which in turn leads banks to charge higher interest rates on loans to consumers and businesses, discouraging borrowing and spending, and thus aiming to cool down inflation.
     • Lowering Rates: Conversely, during periods of economic slowdown or recession, the central bank may decrease this policy rate. This makes borrowing cheaper for banks, encouraging them to lend more at lower rates to consumers and businesses, stimulating investment and spending to boost economic growth.
   • Quantitative Easing/Tightening: Central banks can also influence interest rates by buying or selling government bonds. Buying bonds (quantitative easing) increases the money supply and tends to lower long-term interest rates. Selling bonds (quantitative tightening) reduces the money supply and tends to raise long-term interest rates.

2. Inflation and Inflation Expectations:

   • Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
   • Impact: Lenders demand higher interest rates to compensate for the erosion of their money's purchasing power due to inflation. If they lend money today, and inflation is high, the money they get back in the future will be worth less. Therefore, they demand a higher return to maintain the real value of their investment. High inflation often prompts central banks to raise rates.
   • Expectations: Even the expectation of future inflation can lead to higher interest rates, as lenders price this anticipated loss of purchasing power into their rates.

3. Supply and Demand for Credit:

   • Demand for Credit: When businesses and consumers are confident about the economy, they tend to borrow more for investments (e.g., expanding factories, buying homes, making large purchases). High demand for loans puts upward pressure on interest rates.
   • Supply of Credit: The amount of money available for lending. If there's an abundance of money in the banking system (high liquidity), banks may lower rates to attract borrowers. Conversely, if there's a shortage of funds, banks will raise rates.

4. Economic Conditions/Growth:

   • Strong Economy: A robust economy with high GDP growth and low unemployment often leads to higher interest rates. Businesses are expanding, consumers are spending, and there's a greater demand for capital, which drives up borrowing costs.
   • Weak Economy: During recessions or periods of slow growth, demand for loans decreases, and central banks typically lower interest rates to stimulate economic activity.

5. Government Policy (Fiscal Policy):

   • Government Borrowing: When governments run large budget deficits and need to borrow heavily (by issuing bonds), they increase the overall demand for credit in the market. This can push up interest rates, especially for longer-term bonds, as they compete with other borrowers for available funds.

6. Global Economic Conditions:

   • Interest rates are not determined in isolation. Global events, such as economic slowdowns or booms in major economies, geopolitical events, and currency exchange rate fluctuations, can influence domestic interest rates as capital flows across borders in search of the best returns.

7. Credit Risk:

   • Borrower Creditworthiness: Lenders assess the risk of a borrower defaulting on a loan. Borrowers with a higher credit risk (lower credit score, unstable income) will typically be charged higher interest rates to compensate the lender for the increased risk of non-repayment.
   • Loan Type/Maturity: Longer-term loans generally carry higher interest rates than short-term loans, reflecting the increased risk of unforeseen events or inflation over a longer period.

OR

(P) Mr. Mohanji furnishes the following details for the year ended 31 March, 2019:   (15)

Particulars	Amount (Rs.)
Short Term Capital Gain	2,40,000
Income from business of Electronics	4,00,000
Loss from Speculative business	(-) 2,40,000
Long Term capital Gain on Sale of Land	1,20,000
Long term Capital Loss on Sale of Shares	(-)2,00,000
Income from Salary	8,00,000
Loss from House Property A	(-) 2,60,000
Income from owning and maintaining of Race horses	1,00,000
Income From House Property B	2,40,000
Income from House Property C	1,80,000

Following are the carry forward losses  

(1) Carry forward loss from business of electronics: Rs. 1,40,000, pertaining to the year 2017-18.

(2) Losses from the activity of owning and maintaining race horses pertaining to assessment year 2016-17: Rs. 3,00,000 

Compute Gross Total Income of Mr. Mohanji for the Assessment Year 2019-20. Also state the eligible carry forward losses for the Assessment Year 2019-20. 

Q.3.

(A) Explain the Primary and Secondary functions of Insurance in brief.        (08)

Insurance plays a vital role in managing risks and providing financial security. Its functions can be broadly categorized into primary and secondary functions.

Primary Functions of Insurance

The primary functions of insurance are the core reasons for its existence and operation:

1. Providing Protection: The fundamental purpose of insurance is to provide financial protection against unexpected losses. While insurance cannot prevent an event from happening (e.g., a fire, an accident, or a death), it provides a financial cushion to cover the losses that arise from such events. This protects individuals and businesses from severe financial hardship.

2. Risk Sharing/Pooling of Risk: Insurance operates on the principle of risk sharing. A large number of people exposed to similar risks contribute a small amount (premium) into a common fund. When a loss occurs to one or a few of these contributors, they are compensated from this pooled fund. This effectively distributes the financial burden of a few among many, making individual losses manageable.

3. Providing Certainty: Insurance helps to convert uncertainty into certainty regarding the financial impact of a loss. While the timing and amount of a potential loss might be uncertain, insurance guarantees a payment in case a covered event occurs. This provides peace of mind and allows individuals and businesses to plan their finances with greater confidence.

4. Risk Assessment and Evaluation: Insurance companies thoroughly assess and evaluate risks before providing coverage. This involves collecting data, analyzing probabilities, and determining appropriate premium rates. This function helps in understanding and quantifying various risks, which is crucial for effective risk management.

Secondary Functions of Insurance

Beyond its core protective role, insurance also serves several secondary functions that contribute to economic stability and societal well-being:

1. Prevention of Losses: Insurers often promote loss prevention measures. They may offer lower premiums for policyholders who implement safety standards (e.g., installing fire alarms, security systems). Additionally, insurance companies and industry associations invest in research and public awareness campaigns to educate people about risk mitigation, ultimately leading to a reduction in losses.

2. Facilitating Capital Formation: The large sums collected by insurance companies as premiums are not immediately paid out as claims. A significant portion of these funds is invested in various productive sectors of the economy, such as infrastructure, industries, and government securities. This contributes to capital formation, stimulates economic growth, and creates employment opportunities.

3. Enhancing Efficiency: By providing financial security and reducing worries about potential losses, insurance allows individuals and businesses to focus on their core activities and pursue opportunities with greater confidence. This reduction in anxiety and uncertainty can lead to increased efficiency and productivity.

4. Supporting Economic Progress and Trade: Insurance is crucial for modern economic development. It enables businesses, especially large enterprises, to undertake risky ventures by providing a safety net against potential losses. This encourages innovation, investment, and expansion. It also facilitates international trade by covering risks associated with transportation, such as marine insurance.

5. Providing Social Security: Beyond commercial insurance, many governments and organizations use insurance principles to provide social security benefits, such as health insurance, unemployment benefits, and pension schemes. This helps to protect vulnerable segments of society and maintain a certain standard of living.

(B) "Goal based Wealth Management is better" Justify the statement.        (07)

"Goal-based wealth management is better" is a statement that is widely justified by financial professionals and investors alike due to its client-centric and purpose-driven approach. Here's why it often outperforms traditional wealth management:

What is Goal-Based Wealth Management?

Goal-based wealth management is a financial planning philosophy that centers on identifying and achieving specific, measurable financial goals throughout an individual's life. Instead of solely focusing on maximizing portfolio returns or outperforming market benchmarks, it ties investment strategies directly to personal aspirations such as:

• Buying a home
• Funding a child's education
• Retirement planning
• Starting a business
• Wealth transfer/legacy planning
• Taking a dream vacation

Why Goal-Based Wealth Management is Better:

1. Clarity and Purpose:

   • Traditional: Often focuses on abstract metrics like beating the S&P 500 or achieving a certain percentage return, which can feel detached from real-life objectives.
   • Goal-Based: Provides a clear "why" for every investment. When you know you're saving for your child's college education or your comfortable retirement, it makes the financial journey more meaningful and motivating. This clarity helps maintain discipline, especially during market volatility.

2. Tailored Risk Management:

   • Traditional: Typically assigns a single risk tolerance profile to the entire portfolio based on a questionnaire, which might not be appropriate for all financial needs.
   • Goal-Based: Recognizes that different goals have different time horizons and require varying levels of risk. For instance, a short-term goal like a down payment on a house (3-5 years away) might be invested conservatively, while a long-term retirement goal (20+ years away) could tolerate more aggressive, growth-oriented investments. This multi-portfolio approach optimizes risk for each specific objective.

3. Enhanced Discipline and Reduced Emotional Investing:

   • Traditional: Without specific goals, investors are more susceptible to impulsive decisions based on market fluctuations or news headlines. They might panic and sell during downturns or chase hot stocks.
   • Goal-Based: By linking investments to tangible goals, it fosters greater financial discipline. Investors are more likely to stick to their plan because they understand the impact of deviating from it on their aspirations. This reduces the "behavioral gap" – the difference between market returns and what investors actually earn due to poor timing decisions.

4. Realistic Expectations and Progress Tracking:

   • Traditional: Success is often measured against market benchmarks, which can be disheartening if the market is underperforming, even if your personal financial situation is on track.
   • Goal-Based: Success is measured by progress towards your personal goals. This provides a more relevant and satisfying measure of success. It allows for clearer tracking of whether you're on track to achieve each specific objective, and if not, what adjustments need to be made.

5. Holistic Financial Planning:

   • Traditional: Can sometimes be limited to investment management, overlooking other crucial aspects of financial well-being.
   • Goal-Based: Integrates various financial elements such as budgeting, savings, debt management, insurance, and estate planning, all under the umbrella of achieving specific life goals. It provides a comprehensive roadmap rather than just an investment strategy.

6. Improved Communication with Advisors:

   • Traditional: Discussions might revolve around asset allocation models and market performance.
   • Goal-Based: Facilitates more meaningful conversations between clients and advisors. The focus shifts to understanding the client's life aspirations, helping them articulate their goals, and building a financial plan that truly reflects their unique circumstances and values.

OR

(P) Following is the Balance Sheet of Kabir Singh and Sons as on 31 March, 2019.     (08)

Liabilities	Rs.	Assets	Rs.
Equity Share Capital	25,00,000	Plant & Machinery	20,00,000
General Reserve	5,00,000	Building	10,00,000
Share Premium	2,50,000	Stock	8,50,000
9% Debentures	10,00,000	Sundry Debtors	10,29,000
11% Preference share capital	8,00,000	Cash & Bank balance	3,25,000
Sundry Creditors	2,50,000	Short Term Investments	2,78,000
Bank Overdraft	2,05,000	Profit and Loss Account	1,84,000
Provision for Taxation	50,000	Shares Issue Expenses	8,000
Proposed dividend	1,45,000	Preliminary Expenses	26,000
	57,00,000		57,00,000

You are required to calculate;

i) Current Ratio

ii) Acid Test Ratio

iii) Debt Equity Ratio.

iv) Capital Gearing Ratio

(Q) Mr. Shahrukh purchased a house property for Rs. 20,00,000 on 1 September, 1995. He incurred expenses of Rs. 7,00,000 in financial year 1997-98 and Rs. 2,50,000 in the financial year 2006-07 on the same.                                                        (07)

The fair market value of the property on 01-04-2001 was Rs. 25,50,000. He sold the property on 1 December, 2018 for Rs. 95,00,000. Brokerage of Rs. 85,000 was incurred on sale transaction. He purchased a new Residential house on 1 February, 2019 for Rs. 30,00,000.

The Cost inflation index for various years is given: 2001-02-100, 2006-07 = 122, 2018-19-272 and 2018-19-280.

Compute the net capital gains of Mr. Shahrukh.

Q.4.

(A) What is Estate Planning? Explain its Objective.            (08)

Estate planning is the comprehensive process of anticipating and arranging for the management and disposal of a person's assets (their "estate") during their lifetime, in preparation for future incapacity or after their death. It involves a set of legal and financial strategies designed to ensure that your wishes regarding your property, finances, and even personal care are carried out, while also aiming to maximize the value of your estate for your beneficiaries.

Your "estate" isn't just for the wealthy; it includes everything you own – from your home, bank accounts, investments, and life insurance policies to your personal belongings like jewelry, cars, and even digital assets.

Key components of estate planning typically include:

• Will (Last Will and Testament): A legal document outlining how your assets should be distributed after your death, who will be the guardian of minor children, and who will serve as your executor.
• Trusts: Legal arrangements where a trustee holds and manages assets for the benefit of beneficiaries. Trusts can offer advantages like avoiding probate, minimizing estate taxes, and providing specific conditions for asset distribution.
• Power of Attorney (POA): A legal document that grants authority to another person (your "agent" or "attorney-in-fact") to make financial or legal decisions on your behalf if you become incapacitated.
• Healthcare Directives (Living Will, Healthcare Proxy): Documents that express your wishes regarding medical treatment and end-of-life care, and designate someone to make healthcare decisions for you if you cannot.
• Beneficiary Designations: Ensuring that direct beneficiaries are named on accounts like life insurance policies, retirement accounts (e.g., EPF, NPS), and bank accounts, as these designations often override a will.
• Letters of Instruction: Non-legal documents providing practical guidance to your executor or loved ones, such as location of important documents, contact information for advisors, and funeral wishes.

Objectives of Estate Planning:

The primary objectives of estate planning revolve around control, protection, and efficiency:

1. Ensure Your Wishes Are Honored (Control):

   • Asset Distribution: The most fundamental objective is to ensure your assets are distributed exactly as you intend, to the people or organizations you want, and at the time you specify. Without a plan, state laws will dictate asset distribution, which may not align with your desires.
   • Guardianship for Minors: If you have minor children or dependents, estate planning allows you to designate guardians, ensuring their care and financial well-being.
   • Incapacity Planning: It provides for the management of your affairs (financial and medical) if you become unable to make decisions for yourself, preventing family disputes and potentially costly legal proceedings.

2. Minimize Taxes and Costs (Efficiency):

   • Reduce Estate/Inheritance Taxes: Strategic estate planning can significantly reduce the amount of taxes (like estate duty or inheritance tax, where applicable) levied on your estate, allowing more of your wealth to pass to your beneficiaries.
   • Avoid Probate: Probate is the legal process of validating a will and administering an estate, which can be time-consuming, expensive, and public. Effective estate planning (e.g., using trusts) can help bypass or streamline the probate process.
   • Reduce Legal Fees and Administrative Costs: A clear, well-structured estate plan minimizes the need for court intervention, legal disputes among heirs, and prolonged administrative processes, thereby saving time and money.

3. Protect Your Loved Ones and Assets (Protection):

   • Provide for Dependents: Ensures that your family, especially minor children, elderly parents, or individuals with special needs, are financially secure and cared for after your passing.
   • Prevent Family Disputes: By clearly outlining your wishes and distributing assets, estate planning helps prevent disagreements, conflicts, and costly litigation among family members, preserving family harmony.
   • Asset Protection: Certain estate planning tools, like trusts, can protect assets from creditors, lawsuits, or even reckless spending by beneficiaries.
   • Business Succession: For business owners, it ensures a smooth transition of ownership and management, safeguarding the continuity and value of the business.

4. Provide Peace of Mind:

   • Knowing that your affairs are in order, your loved ones are provided for, and your legacy will be handled according to your wishes offers immense peace of mind. It alleviates the burden on your family during a difficult time.

(B) What are different types of Will?                (07)

In India, as in many other jurisdictions, wills are crucial legal documents for estate planning. While the fundamental purpose of a will remains the same (to dictate asset distribution after death), there are several types, each suited to different circumstances and having specific legal requirements.

Different types of wills:

1. Unprivileged Will:

   • This is the most common type of will, made by any person who is not a soldier engaged in actual warfare, an airman, or a mariner at sea.
   • Key Requirements (as per Section 63 of the Indian Succession Act, 1925):
     • It must be in writing.
     • The testator (person making the will) must sign or affix their mark to the will, or some other person must sign it in their presence and by their direction.
     • The signature must be placed in a way that it appears intended to give effect to the writing as a will.
     • It must be attested by two or more witnesses, each of whom must have seen the testator sign or affix their mark, or have seen some other person sign in the testator's presence and by their direction. Each witness must sign the will in the presence of the testator, though not necessarily in the presence of other witnesses.

2. Privileged Will:

   • This type of will is made by individuals in active service, specifically soldiers, airmen, or mariners at sea. The legal formalities are relaxed due to the urgent and potentially dangerous circumstances they face.
   • Features:
     • Can be in writing or made orally (by word of mouth).
     • If written wholly by the testator's own hand, it does not need to be signed or attested.
     • If written wholly or partly by another person and signed by the testator, it doesn't require attestation.
     • An oral privileged will must be declared in the presence of two witnesses.
     • Special rules apply regarding their validity period after the individual is no longer in active service.

3. Holographic Will (Handwritten Will):

   • A will entirely written and signed by the testator in their own handwriting.
   • Validity: In many jurisdictions, including India, a holographic will (if entirely in the testator's hand) does not always require witnesses to be valid, but it still needs to meet other legal requirements and the handwriting must be verifiable. In some places, these are recognized primarily in emergency situations.

4. Conditional or Contingent Will:

   • A will whose validity or effectiveness depends on the happening (or non-happening) of a specific event or condition. If the condition is not met, the will (or specific parts of it) may not take effect.
   • Example: "If I die during my trip to the Amazon, then I leave all my assets to my sister." If the person returns safely from the trip and dies later, the will might be considered invalid. The intention (whether it's a condition for the will's validity or just a motive for making it) is crucial.

5. Joint Will:

   • A single document executed by two or more persons, typically spouses, agreeing on a conjoint disposition of their property.
   • Feature: Often intended to take effect after the death of both persons. It can be revoked by any party during their joint lives or by the survivor after one's death (unless there's a binding agreement not to).
   • Consideration: While convenient, these can become complicated if one party's wishes change after the death of the other, as they may become irrevocable.

6. Mutual Wills:

   • These are separate wills made by two or more persons (usually spouses) who confer reciprocal benefits on each other, often with an underlying agreement that the survivor will not alter their will after the first one's death.
   • The "mutual" aspect comes from the agreement to not revoke or alter the wills after the first death, which can create a binding obligation on the survivor. This agreement must be clearly proven.

7. Living Will (Advance Healthcare Directive):

   • Unlike traditional wills that deal with asset distribution after death, a living will expresses a person's wishes regarding medical treatment and end-of-life care in case they become incapacitated and unable to communicate their decisions. It's not about property but about personal medical choices.
   • Validity in India: While historically not widely recognized, the Supreme Court of India in 2018 recognized the right to die with dignity, paving the way for living wills under strict guidelines.

8. Testamentary Trust Will (Will Trust):

   • A type of will that creates a trust, which comes into effect only upon the testator's death. Assets are transferred to this trust, and a trustee manages them for the benefit of beneficiaries according to the terms specified in the will.
   • Use Case: Often used to provide for minors, individuals with special needs, or to control how assets are distributed over time (e.g., distributing funds at certain ages).

9. Pour-Over Will:

   • This type of will is used in conjunction with a living trust. It acts as a "safety net" to "pour over" any assets that were not formally transferred into a living trust during the testator's lifetime into that trust after their death.
   • Benefit: Ensures that all remaining assets are administered according to the terms of the existing trust, consolidating the estate.

10. Duplicate Wills:

    • The testator may create identical copies of a will for safety or safekeeping (e.g., one with the testator, one with the executor/bank).
    • Important Note: If the testator destroys the original will in their custody with the intent to revoke it, the duplicate is also considered revoked.

11. Sham Wills:

    • A will that appears to be validly executed but was not intended by the testator to be a genuine expression of their wishes. Such wills are generally held to be invalid if proven that there was no true testamentary intent.

OR

(P) Compute the taxable income and tax liability of Mr. Naseem who is a handicap assessee for the Assessment Year 2019-20.                                        (08)

Particulars	Amount (Rs.)
Income from Business	3,60,000
Interest on Post Office Savings Bank A/c	5,500
Income from house Property	48.000
Income from salary	2,40,000
Winning from Lotteries	30,000
Interest on FD with Banks	10,000
Interest on National Savings Certificate	5,000
Contribution to Pension Fund	54,000

(Q) Mr. Nitin is an assessee whose income is estimated at Rs. 22,00,000 during the Previous Year. Calculate the advance tax payable on the respective due dates.          (07)

To calculate the advance tax payable by Mr. Nitin, we need to consider the income tax slabs for the Assessment Year (AY) 2025-26 (which corresponds to the Previous Year 2024-25), surcharge, and Health and Education Cess. We will assume Mr. Nitin is a resident individual below 60 years of age and has not opted for the new tax regime under Section 115BAC, hence the old tax regime will be applied.

1. Calculate Income Tax Liability (Old Tax Regime for AY 2025-26):

Mr. Nitin's estimated income is Rs. 22,00,000.

• Up to Rs. 2,50,000: Nil
• Rs. 2,50,001 to Rs. 5,00,000: 5% on (5,00,000 - 2,50,000) = 5% of 2,50,000 = Rs. 12,500
• Rs. 5,00,001 to Rs. 10,00,000: 20% on (10,00,000 - 5,00,000) = 20% of 5,00,000 = Rs. 1,00,000
• Above Rs. 10,00,000: 30% on (22,00,000 - 10,00,000) = 30% of 12,00,000 = Rs. 3,60,000

Total Income Tax = 12,500 + 1,00,000 + 3,60,000 = Rs. 4,72,500

2. Surcharge:

Since Mr. Nitin's income is Rs. 22,00,000, which is less than Rs. 50,00,000, no surcharge is applicable.

3. Health and Education Cess:

Health and Education Cess is levied at 4% on the income tax.

Cess = 4% of Rs. 4,72,500 = Rs. 18,900

4. Total Tax Liability:

Total Tax Liability = Income Tax + Cess = 4,72,500 + 18,900 = Rs. 4,91,400

5. Advance Tax Due Dates and Instalments for FY 2024-25 (AY 2025-26):

Taxpayers with an estimated tax liability of Rs. 10,000 or more in a financial year are liable to pay advance tax in instalments.

Due Date	Percentage of Total Tax Liability to be paid	Amount Payable (Cumulative)	Amount Payable (Current Instalment)
On or before June 15, 2024	15%	15% of Rs. 4,91,400 = Rs. 73,710	Rs. 73,710
On or before Sep 15, 2024	45%	45% of Rs. 4,91,400 = Rs. 2,21,130	Rs. 2,21,130 - Rs. 73,710 = Rs. 1,47,420
On or before Dec 15, 2024	75%	75% of Rs. 4,91,400 = Rs. 3,68,550	Rs. 3,68,550 - Rs. 2,21,130 = Rs. 1,47,420
On or before Mar 15, 2025	100%	Rs. 4,91,400 - Rs. 3,68,550 = Rs. 1,22,850	Rs. 4,91,400 - Rs. 3,68,550 = Rs. 1,22,850

Therefore, the advance tax payable by Mr. Nitin on the respective due dates is as follows:

• June 15, 2024: Rs. 73,710
• September 15, 2024: Rs. 1,47,420
• December 15, 2024: Rs. 1,47,420
• March 15, 2025: Rs. 1,22,850

Q.5

(A) What are the steps in Retirement Evaluation and Planning? 

Retirement evaluation and planning is a crucial process for ensuring financial security and a desired lifestyle in your later years. It involves a systematic approach to assess your current financial situation, define your future goals, and create a strategy to achieve them.

The steps involved in retirement evaluation and planning:

1. Define Your Retirement Goals and Vision:

   • Set a target retirement age: When do you want to stop working? Consider your health, desired lifestyle, and financial readiness.
   • Envision your retirement lifestyle: What do you want to do in retirement? Will you travel, pursue hobbies, volunteer, start a new venture, or simply relax? Be specific about your aspirations.
   • Determine post-retirement expenses: Estimate your anticipated monthly and annual costs for housing, utilities, food, transportation, healthcare, entertainment, and any specific goals (e.g., travel). Remember to account for potential changes like reduced commuting costs and increased medical needs.

2. Assess Your Current Financial Situation:

   • Calculate your net worth: List all your assets (savings, investments, property, retirement accounts like EPF, NPS, etc.) and subtract your liabilities (loans, debts). This gives you a snapshot of your current financial standing.
   • Track income and expenses: Understand your current cash flow by meticulously tracking your monthly income and expenditures. This helps identify areas where you can save more.
   • Evaluate existing savings and investments: Review your current retirement accounts and other investments. Determine how much you've already accumulated and whether it's on track with your goals.

3. Estimate Your Retirement Corpus (How Much You Need):

   • Factor in inflation: Money loses its purchasing power over time. Use a realistic inflation rate (e.g., 6-8%) to adjust your future expense estimates and ensure your savings will be sufficient.
   • Consider life expectancy: Plan for a long retirement. Consider actuarial life tables or your family's history to estimate how many years your savings will need to last.
   • Calculate the total amount needed: Based on your estimated expenses, desired lifestyle, and the impact of inflation, determine the total lump sum you'll need to accumulate by retirement.

4. Identify Potential Retirement Income Sources:

   • Employer-sponsored plans: Understand the benefits and withdrawal rules of your provident fund (PF), pension plans, or other workplace retirement schemes.
   • Government schemes: Explore options like the National Pension System (NPS) and Senior Citizen Savings Scheme (SCSS) for steady post-retirement income.
   • Personal savings and investments: Consider income from fixed deposits, real estate, mutual funds, stocks, and other assets.
   • Social Security/Government Pensions (if applicable): Understand how much you can expect from these sources and when you can start claiming benefits.
   • Part-time work: Decide if you plan to work part-time in retirement to supplement your income.

5. Create a Retirement Savings Plan:

   • Set a savings target: Based on the estimated retirement corpus, determine how much you need to save monthly or annually.
   • Develop a savings strategy: Automate your savings by setting up regular contributions to your retirement accounts.
   • Choose appropriate investment options: Select investments that align with your risk tolerance, time horizon, and financial goals. Diversify your portfolio across different asset classes (e.g., equity, debt, real estate) to balance risk and growth. Younger investors typically have a higher risk tolerance, while those closer to retirement should consider safer options.
   • Leverage tax benefits: Utilize tax-saving instruments like EPF, PPF, and NPS to maximize your savings and reduce your tax liability.

6. Plan for Healthcare Needs and Emergencies:

   • Health insurance: Ensure you have adequate health insurance coverage to handle increasing medical expenses during retirement.
   • Emergency fund: Maintain a separate fund specifically for unforeseen medical costs, home repairs, or other unexpected events. This prevents you from dipping into your retirement savings.

7. Address Risk Management and Estate Planning:

   • Diversify investments: Spread your investments across different asset classes to mitigate market volatility.
   • Insurance: Consider other insurance policies like long-term care insurance to protect your assets from unforeseen events.
   • Estate planning: Prepare a will and other necessary legal documents to ensure your assets are distributed according to your wishes and to avoid complications for your family. Update nominee details in your accounts and policies.

8. Regularly Review and Adjust Your Plan:

• Annual reviews: Assess your retirement plan yearly to ensure you're on track with your savings goals and that your investments are performing as expected.
• Adjust for life changes: Major life events (marriage, childbirth, job changes, health issues) can impact your financial situation and retirement goals. Be prepared to adjust your plan accordingly.
• Rebalance your portfolio: As you get closer to retirement, shift your investment allocation from growth-oriented (higher risk) to more conservative (lower risk) options to preserve your accumulated wealth.

(B) Explain the principles of Wealth Creation in brief.

Wealth creation is about accumulating assets that generate income and appreciate in value over time, leading to financial independence and security. It's not just about earning a high salary, but more about how you manage and grow your money. Here are the core principles of wealth creation:

1. Earn More Than You Spend (Live Below Your Means): This is the fundamental starting point. You cannot build wealth if you spend everything you earn, or worse, spend more than you earn (leading to debt). The gap between your income and expenses is what you can save and invest. This requires budgeting, tracking expenses, and being mindful of your spending habits.

2. Save Consistently and Systematically: Once you're earning more than you spend, the next step is to consistently put a portion of that surplus aside. Automation is key here – setting up automatic transfers to savings or investment accounts ensures you "pay yourself first" before other expenses. The earlier you start, the more time your money has to grow.

3. Invest Wisely (Make Your Money Work for You): Simply saving money isn't enough to build substantial wealth due to inflation. You need to invest your savings so that your money grows and generates returns. This involves:

   • Understanding Risk and Return: Different investments carry different levels of risk and potential return. You need to align your investments with your risk tolerance and financial goals.
   • Diversification: "Don't put all your eggs in one basket." Spreading your investments across various asset classes (stocks, bonds, real estate, mutual funds, etc.) helps mitigate risk.
   • Long-Term Perspective: Wealth creation is rarely an overnight process. It requires patience and a long-term outlook. Market fluctuations are normal, and reacting impulsively to short-term movements can derail your progress.

4. Harness the Power of Compounding: This is often called the "eighth wonder of the world." Compounding is the process where your investments earn returns, and those returns then earn further returns. The longer your money is invested, the more powerful compounding becomes, leading to exponential growth. Starting early is crucial to maximize this effect.

5. Control and Manage Debt: Not all debt is bad (e.g., a mortgage can be "good debt" if it helps you acquire an appreciating asset), but high-interest consumer debt (credit card debt, personal loans) can severely hinder wealth creation. Prioritize paying off high-interest debt to free up more money for saving and investing.

6. Increase Your Income (Continually): While managing expenses and investing are vital, increasing your earning potential can significantly accelerate wealth creation. This can be achieved through:

   • Skill development and continuous learning.
   • Career advancement and salary negotiations.
   • Starting a side hustle or business.
   • Developing passive income streams (e.g., rental properties, dividends from investments).

7. Protect Your Assets and Plan for the Future:

   • Risk Management: Have adequate insurance (health, life, property) to protect your wealth from unforeseen events.
   • Emergency Fund: Maintain a readily accessible fund for unexpected expenses, so you don't have to dip into your long-term investments.
   • Tax Efficiency: Utilize tax-advantaged investment vehicles and strategies to minimize your tax liability and maximize your returns.
   • Estate Planning: Plan for the transfer of your wealth to your heirs through wills and other legal documents.

8. Financial Literacy and Continuous Learning: Understanding financial concepts, investment products, and market dynamics is crucial for making informed decisions. The more you learn, the better equipped you'll be to navigate the financial world and optimize your wealth-building strategy.

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

i) Post Office Monthly Investment Scheme (MIS)

The Post Office Monthly Investment Scheme (MIS), officially known as the Post Office Monthly Income Scheme, is a popular small savings scheme in India, backed by the Government of India. It's designed for individuals seeking a regular, fixed monthly income from their lump sum investment.

• Objective: To provide a steady stream of income to investors, particularly retirees, senior citizens, and those looking for a low-risk, predictable monthly payout.
• Investment: You make a one-time lump sum deposit into the scheme.
• Maturity Period: The scheme has a fixed tenure of 5 years.
• Interest Rate: The interest rate is fixed by the Ministry of Finance and is reviewed quarterly. As of the latest updates (April-June 2025 quarter), the interest rate is 7.40% per annum, paid out monthly.
• Monthly Payouts: As the name suggests, the interest earned on your deposit is paid out to you every month. This can be directly credited to a Post Office Savings Account or a bank account via ECS.
• Investment Limits:
  • Single Account: Maximum investment of ₹9 lakh.
  • Joint Account (up to 3 adults): Maximum investment of ₹15 lakh.
  • Minimum investment is ₹1,000.
• Safety: Being a government-backed scheme, it offers high capital protection, making it a very safe investment option.

• Taxation: The interest earned from MIS is taxable as per the investor's income tax slab. However, there is no Tax Deducted at Source (TDS) on the interest. The principal invested does not qualify for tax benefits under Section 80C.
• Premature Withdrawal: Allowed after 1 year, but with penalties. If withdrawn between 1 and 3 years, a 2% penalty on the principal is deducted. If withdrawn between 3 and 5 years, a 1% penalty applies.

• Eligibility: Any resident Indian adult can open an account individually or jointly. A guardian can open an account on behalf of a minor (a minor above 10 years can also open an account in their own name). NRIs are not eligible.

ii) Importance Of Yield Curve

The yield curve is a powerful and closely watched economic indicator that graphically plots the yields (interest rates) of bonds with equal credit quality but varying maturity dates. Typically, it refers to government bonds (like U.S. Treasuries or Indian Government Securities) because they are considered risk-free.

Important:

1. Economic Barometer and Recession Predictor:

   • Normal Yield Curve (Upward Sloping): This is the most common shape, where longer-term bonds offer higher yields than shorter-term bonds. It signals a healthy, growing economy where investors expect future interest rates to rise due to economic expansion and inflation.
   • Inverted Yield Curve (Downward Sloping): This occurs when short-term yields are higher than long-term yields. It's a rare and historically reliable predictor of a forthcoming economic recession. Investors, anticipating a slowdown or recession, flock to the safety of long-term bonds, driving their prices up and yields down, while central banks may be keeping short-term rates high to combat inflation.
   • Flat Yield Curve: This indicates uncertainty about future economic conditions, often occurring as the economy transitions between expansion and contraction, or vice-versa.

2. Forecasting Interest Rates and Inflation:

   • The shape of the yield curve reflects the collective expectations of bond market participants regarding future interest rates and inflation. An upward slope suggests expectations of rising rates and inflation, while an inverted curve implies expectations of future rate cuts (due to an economic slowdown) and potentially lower inflation.

3. Monetary Policy Guidance:

   • Central banks (like the RBI in India or the Fed in the US) closely monitor the yield curve. It provides insights into how the market perceives their current and future monetary policy actions. For example, a steepening curve might indicate that the market expects central banks to tighten policy, while a flattening or inverting curve might signal expectations of future easing. It's also central to the transmission of monetary policy, as changes in policy rates influence the entire curve, affecting borrowing costs for businesses and consumers.

4. Pricing of Financial Products:

   • The yield curve serves as a benchmark for pricing a wide array of financial products, including loans, mortgages, corporate bonds, and derivatives. Banks, for instance, often borrow short-term (at lower rates) and lend long-term (at higher rates), making their profitability sensitive to the spread between short and long-term yields.

iii) Responsibilities of the insured

The "insured" refers to the person or entity who is covered by an insurance policy. While the insurer has obligations to pay claims, the insured also has crucial responsibilities that are vital for the policy's validity and the smooth processing of claims. Failing to meet these responsibilities can lead to claim rejection or policy cancellation.

key responsibilities of the insured:

1. Provide Accurate and Complete Information:

   • At Proposal Stage: The insured must disclose all material facts honestly and completely when applying for the policy. "Material facts" are any facts that could influence the insurer's decision to accept the risk, set the premium, or determine the terms of the policy (e.g., pre-existing medical conditions in health insurance, previous accidents in motor insurance, or specific business operations in commercial insurance). This is based on the principle of "utmost good faith" (uberrima fides).
   • During Policy Term: Any significant changes to the disclosed information or risk profile (e.g., change of address, significant lifestyle changes, modifications to property, or increased business risk) must be communicated to the insurer promptly.

2. Pay Premiums on Time:

   • The insured is responsible for ensuring that premiums are paid by the due date. Timely payment is fundamental for the policy to remain active and for coverage to continue. Non-payment can lead to lapse of the policy, meaning no coverage will be available for future incidents.

3. Take Reasonable Care to Prevent Loss/Damage:

   • The insured must act prudently and take reasonable steps to prevent or minimize loss or damage to the insured property or person. This means not being reckless or negligent. For example, a homeowner should lock their doors, and a driver should adhere to traffic laws. Insurance is meant to cover unforeseen events, not losses resulting from deliberate neglect.

4. Notify the Insurer Promptly of a Claim/Loss:

   • In the event of an incident that could lead to a claim, the insured must inform the insurer as soon as reasonably possible, typically within a specified timeframe (e.g., 24-48 hours for motor accidents, immediately for fire). Delays in notification can prejudice the insurer's ability to investigate the claim and may lead to rejection.

5. Cooperate with the Insurer During Claim Investigation:

   • The insured must provide all necessary documents, evidence, and information requested by the insurer or their appointed surveyors/investigators to assess the claim. This includes submitting police reports, medical records, repair estimates, photographs, and any other relevant proof. Lack of cooperation can hinder the claim process.

6. Mitigate Further Loss (Post-Incident):

   • After an incident, the insured has a responsibility to take reasonable steps to prevent further loss or damage to the insured subject matter. For example, after a burst pipe, the homeowner should try to stop the water flow to prevent more damage to the property.

7. Do Not Exaggerate or Fabricate Claims:

   • The insured must not inflate the value of a loss or make fraudulent claims. Such actions constitute fraud and can lead to immediate claim rejection, policy cancellation, and even legal consequences.

iv) ULIP Pension Scheme

A ULIP Pension Scheme (Unit Linked Insurance Plan Pension Scheme) is a popular financial product in India that uniquely blends life insurance coverage with market-linked investment opportunities, specifically designed to build a corpus for retirement.

• Dual Benefit: A portion of your premium secures life insurance, while the larger part is invested in funds (equity, debt, or balanced) of your choosing, similar to mutual funds.

• Market-Linked Growth: Your returns depend on the performance of these chosen funds, offering the potential for higher returns compared to traditional plans, but also carrying market risk.

• Retirement Focus: It's structured with a long-term perspective and typically has a mandatory 5-year lock-in period to encourage disciplined savings for your post-retirement needs.

• Tax Benefits: Premiums paid are eligible for deduction under Section 80C, and the maturity/death benefits are generally tax-exempt under Section 10(10D) of the Income Tax Act, 1961 (subject to conditions, particularly the Rs. 2.5 lakh annual premium limit for policies issued after Feb 1, 2021).

• Flexibility: Most ULIPs allow you to switch between fund options to adapt to market conditions or your changing risk profile.

• Charges: Be aware that ULIPs come with various charges (premium allocation, mortality, fund management, etc.) which can impact your net returns, especially in the initial years.

v) Limitation of Ratio analysis

Ratio analysis is a valuable tool for evaluating a company's financial health and performance, but it has several significant limitations that analysts and decision-makers must consider:

• Reliance on Historical Data: Ratios are calculated using past financial statements, which may not accurately reflect current or future financial conditions. A company's situation can change rapidly due to new investments, market shifts, or economic downturns, making historical ratios less relevant for predicting future performance.

• Ignores Qualitative Factors: Ratio analysis focuses solely on quantitative, financial data. It overlooks crucial qualitative aspects of a business, such as management quality, employee morale, customer satisfaction, brand reputation, innovation, and market trends. These non-financial factors can significantly impact a company's success but are not captured by ratios.

• Differences in Accounting Policies and Methods: Companies may use different accounting methods (e.g., inventory valuation methods like FIFO vs. LIFO, depreciation methods), which can lead to variations in financial figures and, consequently, in ratios. This makes it difficult to compare ratios across different companies, even within the same industry, without adjusting for these differences.

• "Window Dressing" and Manipulation: Financial statements can be manipulated or "window-dressed" by management to present a more favorable financial picture. This can involve practices like accelerating revenue recognition, delaying expense payments, or making last-minute adjustments to make certain ratios appear better. Such manipulation can distort the true financial health of a company.

• Lack of Standardized Definitions: There's no universal standard for calculating all ratios. Different firms or analysts might use slightly different formulas for the same ratio, which can lead to inconsistencies and make comparisons challenging.

• Industry-Specific Differences: Ratios that are considered good in one industry might be poor in another. For example, a high debt-to-equity ratio might be normal for a capital-intensive manufacturing company but a red flag for a tech company. Comparing companies across different industries without considering their unique business models and capital structures can lead to misleading conclusions.

• Seasonal Effects: For businesses with seasonal operations (e.g., retail, tourism), annual ratios might mask significant fluctuations in performance throughout the year. A single annual ratio might not capture the full picture of the company's financial performance during peak and off-peak seasons.

• Inflationary Effects: Financial statements are often based on historical costs, and ratios derived from them may not account for changes in price levels due to inflation. This can distort comparisons of performance over different periods, especially during times of high inflation.

• Limited Scope: Ratios provide a snapshot of specific relationships but don't explain the underlying causes of those relationships. A seemingly good ratio might hide operational inefficiencies or strategic missteps, and a poor ratio might be due to temporary factors that don't indicate long-term problems.

• No Absolute Standards: There are no universally accepted ideal ratios. What constitutes a "good" or "bad" ratio depends on the industry, company size, economic conditions, and specific goals. Ratios are most useful when compared against industry benchmarks, historical trends for the same company, or direct competitors.