Krishna's Personal Financial Plan - 30.1.2024
Krishna's Personal Financial Plan - 30.1.2024
Krishna's Personal Financial Plan - 30.1.2024
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SHAILENDRA KUMAR RAI
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KRISHNA’S PERSONAL FINANCIAL PLAN
As Krishna Chaitanya prepared to graduate from his postgraduate program in management at
the prestigious Management Development Institute in Gurgaon, India, he also finalized his
personal financial plan.
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He wanted his plan to meet his lifetime goals. He was concerned, however, because plans rarely
unfolded as expected. He questioned what combination of investment and loans would work
best for him. He wondered how to identify investments that underperformed in his portfolio
and whether a fund’s performance needed to be measured relative to its benchmark or
something else. Although his parents advised him to buy a home as soon as possible, he was
skeptical about this large expense, as he was not sure whether he could afford equated monthly
installments (EMI) without affecting his other financial goals.
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He was also concerned about taxes. At university, Krishna learned about tax strategies, but he
wondered which ones would have the optimal impact on his tax liability. And he was also
confused about the selection of the right life and health insurance policies he needed to cover
every eventuality. He decided the theories he learned at university would help him to find the
answers to these questions and could also help him to attain his future goals and dreams.
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Personal Goals
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Dr. Shailendra Kumar Rai, Management Development Institute, Gurgaon prepared this case for class discussion. This case is not
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intended to show effective or ineffective handling of decision or business processes. The authors might have disguised certain
information to protect confidentiality. Cases are written in the past tense, this is not meant to imply that all practices, organizations,
people, places or fact mentioned in the case no longer occur, exist or apply.
© 2019 by The Asia Case Research Centre, The University of Hong Kong. No part of this publication may be digitized, photocopied
or otherwise reproduced, posted or transmitted in any form or by any means without the permission of The University of Hong
Kong.
Ref. 19/637C
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19/637C Krishna’s Personal Financial Plan
The feasibility of Krishna’s goals along with how he would implement them were prioritized
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based on their importance, financial impact, need, and desire basis. [See Exhibit 1 for details
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of financial goals, monetary value, priority, and cut-off period.]
Krishna realized he needed to consider many assumptions and macro dynamics when he
evaluated and planned for his goals. These were based on various estimates such as income
growth, inflation, expenses, and other macro-economic factors. Going forward, he recognized
that he would need to review any plan he selected. For example, if he experienced a severe
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personal financial crisis or unforeseen event, he might have to defer some of his goals.
Personal Profile
Before he embarked on creating his personal financial plan, Krishna considered his own
circumstances. He expected to be single for another three or four years, and as a nonsmoker
who did not drink alcohol, he expected to have no major health issues in the future. However,
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health insurance was an important part of his financial plan.
He decided to buy at least one comprehensive medical insurance policy, as he believed medical
costs and insurance premiums would continue to increase as he aged. In addition, he planned
to buy a life insurance policy so that his future family would be protected, should anything
unforeseen happen to him. He intended to purchase a life insurance policy only after careful
analysis of available plans, as he remembered his professor had warned his students that too
much insurance could become a burden. Based on Indian life expectancy statistics, he
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calculated that he would live for at least 20 years after he retired.
Although his savings were negligible, he had a net debt of INR1,858,160, which resulted from
his education expenses. He assumed his net worth for the first two years after he graduated
would be zero because of this loan. However, with an investment plan in place, he aspired to
become debt free in eight years (the maximum period for which he was eligible for education
loan interest deductions for tax purposes). [Exhibit 2 provides details of Krishna’s current net
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worth.]
as he had no experience with either the stock market or mutual funds, or the risks associated
with them.
A risk profile was an evaluation of an individual’s willingness and ability to take risks, as well
as the threats to which an individual was exposed. A risk profile was needed to determine a
proper investment asset allocation in a portfolio.
It was important to consider an individual’s risk-taking ability, as well as the risk within
investments. Krishna knew that expected returns depended on the risks he was considering, so
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he based his risk profile on a questionnaire provided in his personal financial planning (PFP)
course. The questionnaire included a time line, asset allocation preferences, risk appetite, return
requirements, and investment skill levels. [See Figure 1 for a risk tolerance score.]
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19/637C Krishna’s Personal Financial Plan
After he analyzed his personal and risk profile, Krishna concluded that he preferred only
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moderate risk, so he planned to divide investments across various asset classes. In addition, he
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would not rely on levered investments or short-selling techniques.
He realized risk profiles changed over a lifetime, and he planned to lower his risk exposure as
he aged.
He wondered if it was a good idea to allocate a high percentage of investment to equity mutual
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funds and exchange traded funds with a portfolio allocation that kept liquidity, growth, and
volatility of investments in mind. He also considered fixed income securities, such as tax-free
government bonds, to offset volatility in the market.
He decided to include equity, debt, and money market mutual funds, fixed deposits, gold, and
savings account deposits as his investment instruments. In addition, he considered derivatives,
private equity, and hedge funds in his investment portfolio decisions.
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Setting Goals
Investing money was the process of allocating resources in a strategic way to achieve a definite
objective. Krishna’s investment decisions depended on his priorities and goals. The breakup of
the investment to achieve each goal depended on the time horizon, priority, and return needs.
His immediate goals were to buy insurance coverage for himself and his future dependents and
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to build an emergency fund. He decided the first financial decision was to buy insurance. He
used the online site policybazzar.com to compare different life and health insurance policies.
Another priority was to create an emergency fund, should he become unemployed or face a
similar crisis. His short-term objective was to create a buffer of two months’ pay and, over the
long term, to increase this to six months’ pay.
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He also wanted to buy a car in four years. Before he borrowed money for a car, he planned to
compare interest rates on car loans; he also needed to consider opportunity costs.
He planned to buy a house 10 years after he graduated. This involved saving for a down
payment of 20% of the total cost of property. He decided he had to rely on his portfolio to fund
this deposit.
He also wanted to be married by the time he turned 30, for which he budgeted INR500,000
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toward expenses. He realized he also needed to save more when and if he raised a family, as a
growing family required the purchase of a bigger car and higher monthly expenses. He decided
to tap into his portfolio to finance any future family requirements.
Despite India’s rising education costs, Krishna planned to pay for his children’s higher
education, e.g., an engineering degree plus an MBA, as he wished to give his children every
advantage. He wanted to provide them with opportunities to be able to undertake extracurricular
activities, e.g., music lessons, which incurred additional costs. Because he followed Indian
tradition, culture, and values, he also needed to bear all the marriage-related expenses of his
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children.
Krishna wanted to maintain a comfortable lifestyle when he retired at 60, so he decided to start
his retirement fund when he started his first job, and he planned to personally contribute to his
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19/637C Krishna’s Personal Financial Plan
Employees’ Provident Fund (EPF) in order to boost his pension fund as he aimed to live for 20
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years after he retired. [See Exhibit 1 for a summary financial goals, expected risks, and returns.]
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Planning for the Future
To diversify his portfolio and to reduce risks, Krishna decided to use the asset allocation model
(AAM). He wanted to focus on two factors—capital risk and the risk of inflation. He planned
to use equity and debt allocation to mutual funds because they had better access to markets than
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an individual investor did.
He decided to place a major part of his investments in mutual funds across a diverse basket of
mid-cap, balanced, diversified money market, and debt funds. However, his retirement fund
was to be met from provident funds and partly liquidated investments.
With so many available funds with varied risk and returns, he realized how difficult it was to
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select the best. So, the methodology he followed was to rank the funds that went into his
investment portfolio. He ranked funds based on qualitative and quantitative factors such as the
Sotino ratio, portfolio beta, expense and net asset ratio, and portfolio manager.
He assessed asset classes into three categories: equity funds, hybrid funds, and debt funds. The
debt fund allocation would be met through mutual funds and fixed deposits. Equity funds
included large-cap equity-oriented funds, diversified equity funds, small- and mid-cap equity
funds, thematic infrastructure funds, equity linked savings scheme (ELSS), ultra-short-term
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debt funds, and liquid funds. He also decided to include real estate, private equity, and other
alternate investment options to meet his goals.
Krishna used the Markowitz model to construct an optimum portfolio and used Solver from
Excel to construct the optimum portfolio, as it maximized the portfolio returns under given
objectives. Restriction on objectives resulted from the asset allocation derived from his risk
profile. [See Exhibit 3 for expected risk and returns.]
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He recalled that his PFP instructor said there was significant value in using debt to build
corporate and personal wealth. Although Krishna’s only debt was his education loan, he decided
not to pay it off before he reached his eighth year of employment, as it could be used to get
deductions on interest payments. In addition, if he borrowed to buy his first house, he was
eligible for a tax deduction on interest payments of up to INR250,000 per annum.
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Achieving Goals
A penny saved is a penny earned . . .
—Benjamin Franklin
In order to create wealth, Krishna used compounding so that he gained the maximum benefit
of an early start to the investment process. He understood that if he missed this opportunity in
his prime working years, it would not be made up, even if he doubled the amount he invested
later in life.
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He decided to evaluate his portfolio at regular intervals to keep it on track, and to evaluate
investments by safety, liquidity, and returns, in that order. He also considered tax-deductibility
and tax-free maturity. He would replace schemes that underperformed.
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19/637C Krishna’s Personal Financial Plan
Any change in investment strategy required that he rebalance his portfolio. However, he
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decided that if the market situation was volatile, he could rebalance it in later years. He also
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concluded that he needed to discuss his strategy with his experienced investment banker friends
in order to seek their professional advice.
He also decided to use financial technology in the form of a robo-advisory platform to check
whether his asset allocation was optimal or not. His primary objective was not to beat the market
or a particular rate of return, but he wanted to meet all his goals with the optimal amount of risk
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for a goal-seeking portfolio, rather than one based on modern portfolio theory.
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deposits, and stock dividends. However, when he started his plan, these forms of income did
not exist, and he made conservative projections. [See Exhibit 4 for detailed information about
income and expenses. Krishna’s expenses were considered for only one person.]
In the case of a downturn in his income, i.e., a salary reduction or liquidity crunch, Krishna
decided to reduce his discretionary expenses. [See Exhibit 5 for assumed increases in income
and expenses.]
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He also wanted to semi-retire at age 55 and to fully retire at age 60, but he wanted to maintain
the same lifestyle after he retired. Although he planned to save regularly for his retirement fund,
he knew he had to choose the right investments, as low returns from bank fixed deposits and
India’s Public Provident Fund (PPF) were likely to jeopardize his planned future. [See Exhibit
5.]
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Tax Advantages
Krishna aimed to optimize his tax savings. As such, he looked for investment opportunities that
helped boost after-tax returns, in order to help build his retirement fund and meet other goals.
For example, his EPF was a useful tool to make taxable savings. EPF contributions were tax
free and not taxed when withdrawn, and employer contributions were also nontaxable. He
decided to use his EPF for long-term savings toward his retirement. He realized he could also
withdraw his EPF, up to a certain limit, under specific circumstances, i.e., if he purchased a
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Krishna understood that if he wanted to maximize his tax-free savings, he could use a PPF
account with a public-sector bank. However, a PPF account was limited to deposits of
INR150,000 a year. This account matured at 15 years and was also not taxed when withdrawn.
He also decided to invest in an Equity Linked Savings Scheme (ELSS), a tax-saving mutual
fund scheme used to create retirement funds. In addition, he also considered the National
Pension Scheme (NPS) as another tax-friendly retirement planning tool, although his friends
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advised him not to opt for this scheme, as it was taxed on maturity, lacked flexibility, and had
restricted withdrawals. But the only time Krishna planned to withdraw funds from his EPF,
PPF, and ELSS accounts was if a liability occurred and needed to be met in the short term.
In addition to his planned tax-free income, certain expenses, i.e., interest on home loans and
educational loans, also provided opportunities for savings on taxes. A fixed amount of
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19/637C Krishna’s Personal Financial Plan
premiums for both life and health insurance schemes was also tax free. [See Exhibit 6 for
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various laws and sections on income tax.]
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Decision Making
Krishna’s decisions were based on his current situation and expectations, and he realized they
were bound to change over time. The unpredictability of life’s journey made it impossible to
prepare for every eventuality. However, he realized that if he considered as much information
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as possible, his strategy would help him to achieve his desired lifestyle and goals.
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19/637C Krishna’s Personal Financial Plan
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Immediate
Goals (0 - 1 Y) particulars Amount Time AGE
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A (Life & Health) Immediate 26
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Short term goals
( 1-5 Y) Particulars Details (INR)
Medium term
goals ( 5 - 20 Y) Particulars Details
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Gurgaon-2bedroom, INR25
D Buying a house million, 20% down payment 10 Years 36
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19/637C Krishna’s Personal Financial Plan
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Establishing Retirement Expenses (After 55) +
F fund Liabilities 34 Years 60
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Repayment of education After 8 Years of Max. Tax
G Loan rebate 8 Years 34
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Long term goals
( 20+ Years) Particulars Details
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19/637C Krishna’s Personal Financial Plan
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Age Particulars 26
Assets
Liquid assets
Cash and savings account 0
Saving accounts (emergency fund) 0
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Total (1-2) 0
Investment assets
Fixed deposits 0
Common stock 0
Mutual funds—stock 0
Employees Provident Fund 0
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Pension fund 0
Corporate/government bonds 0
Gold ETF 0
Total (1-7) 0
Personal assets
Residence 0
Cars 0
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Personal property (gold) 0
Total (1-3) 0
Total assets 0
Liabilities
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Short term
Current bills 0
Credit cards 0
Installment loans 0
Other 0
Total (1-4) 0
Long term
No
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19/637C Krishna’s Personal Financial Plan
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Source: Created by author.
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No
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19/637C Krishna’s Personal Financial Plan
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Expected
Age Risk Profile Risk Tolerance Allocation
Return
26-30 Advanced Krishna planned to take on additional risk to earn Equity—80%
investor long-term capital growth and was less concerned Fixed income— 15%
with short-term fluctuations. He believed he had 20%
sufficient time to recover any losses.
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30-50 Balanced In this period, Krishna supported his family, so he Balanced equity—
did not want additional risk, but he believed he 60%
would be able to bear some volatility. He looked Fixed ncome—
for long-term capital growth and a regular 40% 12%
income. He believed a moderate level of risk was Moderate
suitable during this period. equity—55%
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Fixed income—
45%
50-60 Conservative Krishna’s retirement neared. His priority was Equity—45%
preservation with some income, and he wished to Fixed income— 10%
limit the downside risk to less than 7%. 55%
60-80 Preservation At this stage, Krishna wanted to be sure that Equity—20% The
retirement savings were safe and available to be Fixed income— return
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withdrawn over the next 20 years. He believed 80% should
his goal was to preserve capital and to have a Very conservative be
predictable flow of income. Fixed income— higher
100% than
inflation
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19/637C Krishna’s Personal Financial Plan
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Gross Annual Salary INR1,150,000
Bonus INR690,000
Provident Fund INR72,321
Expenses: Fixed
Food INR96,000
Rent INR156,000
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Transport INR48,000
Mortgage Payment 0
Installment Loans INR282,567
Utilities INR12,000
Expenses: Variable
Vacation INR30,000
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Entertainment INR36,000
Self-Development INR50,000
Appliances INR20,000
Miscellaneous INR20,000
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19/637C Krishna’s Personal Financial Plan
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Assumptions Source
1 Receive only 60% of maximum bonus allowed Self-assessment
2 Professional tax @ 2,500 p.a. (Maharashtra tariff considered) Clear tax
3 EPF contribution @ 12% of basic pay EPFindia.com
4 HRA received pegged @ 15% of basic pay Self-assumption
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5 Bonus/ Incentives @ 10% of Basic pay Self-assumption
6 Inflation forecast @ 4.5 % long-term average OECD Forecast
7 Income growth @ 10% for 2 years followed by 4.5% (inflation Self-assumption
rate) for next 2 years; this cycle is repeated until age 55
Rent paid increases @ 4.5% (average long-term inflation) Self-assumption
9 Average dividend yield @ 3% ( BSE Sensex + mid-cap segment) BSE historical data
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10 Risk profiling—35% (large cap), 10% (small cap), 10% (gold), Charles SCHWAB
30% (fixed income), 10% (cash investments), 5% (international Risk Profiling
equity) Advisory
11 Long-term interest rate @ 7% (indicator – 10-year bond yields) Bloomberg
12 Average return – 5-year Y-O-Y average returns of entire Self-assumption
portfolio based on investment analysis (15%)
13 Growth rate in property prices > Growth rate of rent on 99Acres.com
properties
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14 Portfolio reshuffled every 5 years and equity:debt set to match Thumb rule
(100-X) principle, where X is age: 25% portfolio liquidated
15 Long-term capital gains tax @ 10% (no indexation used) Income tax act
16 25% mutual fund portfolio liquidated after every 5 years Self-assumption
17 Expense allocation – rent (15%), food (10%), and transport (5%) Self-assumption
– initial years
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29 Average sq. ft. area (2 bedrooms) – 1,000 sq. ft. & average sq. 99Acres.com
ft. area ( 3 bedrooms) – 1,400 sq. ft.
30 Down payment – house loan (20% of property value) Self-assumption
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List of Income Tax Exemptions for FY 2017-2018 and AY 2018-2019:
Section 80c
Under Section 80C, the maximum tax exemption limit is INR150,000 since this is not an
international standard per annum. The various investments that can be claimed as tax
deductions under section 80c are listed below;
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1. PPF (Public Provident Fund)
2. EPF (Employees’ Provident Fund)
3. Five year Bank or Post office Tax saving Deposits
4. National Savings Certificates (NSC)
5. ELSS Mutual Funds (Equity Linked Saving Schemes)
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6. Children’s Tuition Fees
7. Life Insurance Premium
8. SukanyaSamriddhi Account Deposit Scheme
9. SCSS (Post office Senior Citizen Savings Scheme)
10. Repayment of Home Loan (Principal only)
11. National Pension System
12. NABARD rural Bonds
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13. Stamp duty charges for purchase of a new house
Section 80CCC
Contributions made towards annuity plans available with any of the life insurance companies
for receiving a pension from the fund, can be considered for tax benefit. The maximum tax
deduction allowed under this section is INR150,000.
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Section 80CCD
Employees can contribute to the National Pension Scheme (NPS). The maximum contributions
can be up to 10% of the salary (Basic+DA) for salaried, or gross income in case of self
employed. From 2016-17 an additional tax deduction of up to INR50,000 u/s 80CCD (1b) is
allowed for excess employee contributions and this is over and above the limit of INR 150,000.
No
The definition of salary is ‘Basic + Dearness Allowance + any other bonus’. If the employer
also contributes to the pension scheme, the entire employer contribution (maximum 10% of the
salary) can be claimed as a tax deduction under Section 80CCD (2). This is over and above the
limit of INR150,000.
It is to be noted that the total deductions under sections 80C, 80CCD (1) and 80CCC put
together cannot exceed INR150,000 for the financial year 2017-18.
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Section 80DD
Up to INR75,000 can be claimed for spending on medical treatments of dependents (spouse,
parents, children or siblings) who have 40% disability. Up to INR150,000 can be deducted in
case of severe disability (80%).
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19/637C Krishna’s Personal Financial Plan
Section 80DDB
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Any individual below the age of 60 years can claim up to INR40,000 for the treatment of certain
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specified critical diseases. This can also be claimed for his/her dependents.
Senior citizens (above 60 years) can claim up to INR60,000 and very senior citizens (above 80
years) can claim INR80,000 under this section. It is mandatory for an individual to obtain a
medical certificate from a specialist doctor in a hospital, to claim tax deductions under Section
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80DDB
Section 80U
This section is similar to Section 80DD but here the tax deduction is permitted for an employee
who is physically or mentally challenged.
Section 80D
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Up to INR30,000 can be deducted towards the medical insurance premium for senior citizens
(above 60 years) and up to INR25,000 can be deducted towards medical insurance of self and
dependents (spouse & children).
In cases a home loan has been taken for the property which is not self-occupied, there is no
maximum limit prescribed and the entire interest paid is fully exempted.
If the taxpayer has availed a home loan for repair works or reconstruction, a maximum
deduction of up to INR30,000 per financial year is permitted.
No
Section 80EE
In India’s 2016-2017 Budget, a new proposal was made in which, first time home buyers
became eligible for an additional tax deduction of up to INR50,000 on home loan interest
payments under section 80EE. To claim tax deductions under this new section 80EE, the
following criteria has to be met:
The home loan should have been availed or sanctioned in FY 2016-2017
The loan amount should be less than INR3.5 million
The value of the home should not be more than INR5 million
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The buyer should not possess any other residential house under their name
Section 80 TTA
Under this section 80TTA, up to INR10,000 of total gross income can be claimed towards
income generated from interest on savings account deposits with a bank or post office or co-
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19/637C Krishna’s Personal Financial Plan
operative society. This deduction cannot be claimed on income generated from interest on fixed
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deposits.
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Section 80GG
As per India’s Budget 2016-2017, the permissible tax deduction under 80GG was raised from
INR24,000 p.a to INR60,000 p.a.
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Section 80GG is applicable only for those individuals who do not receive a House Rental
Allowance from their employer and do not possess a residential property. The maximum tax
deduction will be limited to the least of the following criteria:
Rent paid minus 10% of the total income.
INR5000 per month.
25% of the total income.
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Section 80G
Contributions made to charitable institutions and certain relief funds are claimed as a deduction
under Section 80G. This deduction can be claimed only when the contribution is made through
cheque or draft. In case of cash contribution, a maximum of INR10,000 is allowed as deduction.
Contributions such as clothes, food material, medicines, etc., are not eligible for deduction
under section 80G.
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Section 87A Rebate
From 2017-2018, if the taxable income of a taxpayer after various permissible income tax
deductions, is below INR350,000, they are eligible for up to INR2,500 on tax payable as tax
rebate under this section. If the tax payable is less than INR2,500 for FY 2017-18, the rebate
will be restricted to actual income tax payable only.
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Section 80E
Under Section 80E, interest paid towards an education loan can be claimed as a tax deduction.
This loan should have been ideally availed the taxpayer, the taxpayers spouse or children or by
a student for whom the taxpayers is the legal guardian, for higher education purposes. Only
interest paid can be claimed and not the principal.
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Under section 80E, there is no specific limit on the amount of interest claimed as deduction.
The deduction can be claimed for a maximum of eight years or until the interest is fully repaid,
whichever is earlier.
Section 80GGC
A taxpayer can claim deduction for the amount that they contribute to a political party or an
electoral trust formed to oversee the election process. Contributions made in cash are not
allowed for deductions (in this case a political party refers to any political party registered under
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This document is authorized for educator review use only by THIAGARAJAR SCHOOL OF MANAGEMENT (TSM), Thiagarajar School of Management (TSM) until Apr 2024. Copying or
posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860
19/637C Krishna’s Personal Financial Plan
Section 80RRB
t
Income received through patent royalty (registered on or after 01.04.2003), under the Patents
os
Act 1970 can be claimed up to INR300,000 or the income actually received, whichever is less.
The taxpayer who holds the patent must be a resident of India.
rP
yo
op
tC
No
Do
17
This document is authorized for educator review use only by THIAGARAJAR SCHOOL OF MANAGEMENT (TSM), Thiagarajar School of Management (TSM) until Apr 2024. Copying or
posting is an infringement of copyright. Permissions@hbsp.harvard.edu or 617.783.7860