smart goals, time value of money

1. SRI KRISHNA COLLEGE OF TECHNOLOGY
SCHOOL OF MANAGEMENT
20PNE009-PERSONAL FINANCE
Dr.M.Padmavathi
Professor

2. Module– 1
Financial Planning – Importance – Steps in Financial Planning –
Personal Budget – SMART GOAL – Ways to achieve SMART Goal –
Risk and Return - Present Value and Future Value – Annuity –
Power of Compounding – Capital Gains on Personal Investment

3. Are you accountable for your future financial well being?

4. Financial Planning
• Meet our future financial goals
• Every individual has manage his or her financial needs.

5. Why Financial Planning
• Planning of finance is essential for everyone.
• One must restrain from overspending
• Planning help us to plan save and achieve our financial
goals.
• If people start planning from student days, they have
longer time to plan.
• Power of compounding

6. Poll
• Buy Happiness with Money

7. Activity -1 Personal Budget
Particulars Amount
Income
Pocket Money
Part time Assignment
Stipends
Cash gifts(if any)
Expenses
College fees
Party
Gifting others
Lunch/ Eating outside
Travelling
Others
Balance (A-B)
https://www.youtube.co
m/watch?v=SdvJMrsKd2E

8. Activity-2 Family Budget
Sit with your family members and prepare your family
budget and see the Balance

9. Steps in Financial Planning Process
Gather
financial
data
Identify your
goals
Gap
identification
Prepare
financial
Plan
Implement
your
financial plan
Review

10. Gathering Financial Data
• Source of income
• How much are your monthly expenses
• Knowing salary & expenses

11. Identify financial goals
• Define financial goals
• Short term goal (upto 3 years), medium term (3-5) years
Long term goal (above 5 years)
Each goal must have target date and target amount.

12. Identify gaps
• Are there any expenses which have to be met on a
priority, due to which plan may have to be changed.
• Are there any liabilities which are already existing or
worse still, may crop up suddenly?

13. Prepare the plan
• Understand the risk taking ability
• Income & Expenditure and Assets & Liabilities play a
very important role in an individual’s risk taking ability.
• High income does not necessarily mean high risk
appetite if the person also has large amount of liabilities.
• Low income used judiciously to build assets, can
increase risk appetite

14. Implement the plan
• Preparing plan is relatively simple, implementing it
regularly is the real challenge.
• Where is the money invested – in which asset class –
determines the potential returns the investor can expect.
• Avoiding risky investments may lead to compromising of
goals.

15. SMART GOALS
SPECIFIC
MEASURABLE
ATTAINABLE
TIME BOUND
TIMEBOUND

16. SPECIFIC
• You need to know exactly what you want and when.
Case study
I need to money to buy car
I need to save 5000 per month to buy a car worth
6Lakhs. √

17. Measurable
• Your goal should be measurable so that you know when
you can achieve it.
Case study
I will pay off my debts
I will return 10000 to my friends, from whom I borrowed √

18. Attainable
• Your goals should be reasonable i.e. within your reach
Examples
I will save money
I will save Rs. 2,000 each month by cutting down on eating
out and partying. √

19. Realistic
• Your goals need to be based on resources and tasks that
you can reasonably accomplish.
• Example
If I save money I will be rich.
If I save regularly, need not borrow more money, I can pay
off my debts by next year and will have enough savings
till I begin to earn. √

20. Time-bound
• Goals with timelines allow you to track your progress and
encourage you to keep going until you reach your goal.
Case study
I will save money for my vehicle
I will save Rs.10000 a year for the next 2 years for my
vehicle. √

21. Activity 3
• Talk to your parents and write the financial goals.

22. Savings and Investment
• Savings – Not spent on current consumption
• Investment –Assets purchased with the goal of providing
additional income from the asset itself.

23. Savings
Standard of living : Material well-being and peace of mind
that individuals or groups earnestly desire and seek to
attain, to maintain if attained, to preserve if threatened,
and to regain if lost

24. Financial Happiness
• Paying bills on time.
• Spending less than you earn.
• Knowing where your money goes.
• Investing some money for future.

25. Building Blocks

26. Time value of Money
• A method by which one can compare cash flows across
time, either as what a future cash flow is worth today
(present value) or what an investment made today will be
worth in the future

27. Components of TVM
• Future Value
• Present Value

28. Common Questions
• What will an investment (or a series of investments) be
worth after a period of time? This question asks for a
future value.
• How much has to be put away today (or as a series of
investments) to provide some dollar amount in the
future? This question asks for a present value

29. Simple Interest
• Interest = PNR
• P=Principal (Original amount invested)
• N=no of years
• R= rate of interest
Example 1000@ 8% for 4 years

30. Compounding
• When interest on an investment itself earns interest
• A =P(1+r/n)˄n*t
Where P=Principal
r=interest
N=no of times
t=number of years

31. Example
• Assume you put 10,000 into a bank. How much will your
investment be worth after 15 years at an annual interest
rate of 4% compounded quarterly
Principal =10000
T=15
N=4 (no of times compounded, quarterly =4)
R=4%

32. • Assume you put $10,000 into a bank. How much will your
investment be worth after 10 years at an annual interest
rate of 5% compounded monthly

33. Power of Compounding
• https://www.youtube.com/watch?v=BQKgW0aQzSg

34. Find the amount
• 100000
• 10% interest annually
• T=25

35. Calculate future value
• Future value -The valuation of an asset projected to the
end of a particular time period in the future.

36. Future value of single cash flow
FV = PV (1+r)n
FV = future value
PV = present value (given)
r= rate of interest
n= period
• See the compound value for one rupee table for
calculations
• PV =Rs.100, Interest rate =10%, period=1 year

37. Future value of a series of cash
flows or Annuity of cash flows
FVAn=A[(1+r)n – 1)]
r
A= constant cash flow
r= interest rate
n= period
Mr.X wants to Deposit Rs.15,000 every
year for 10 years at the rate of 8%.
How much it would grow at the end of
10th year?
( 15000*14.487=217305)
Suppose firm deposits Rs.5000 at the
end of each year for four years at 6%
rate of interest. How much would this
accumulate at the end of fourth year?

38. Problem
FVAn=A[(1+r)n – 1)]
r
A= 15000
R=0.08
N=10
FVAn=A[(1+r)n – 1)]
r
FVAn= 15000[(1+0.08)10 – 1)]
0.08
=15000 *14.480 = 217305

39. Practice problems
• XYZ bank pays 12% interest. If you deposit Rs.1000
initially how much shall it grow at the end of 5 years?
• A person plans to contribute Rs. 2,000 every year to a
retirement account which is paying 8% interest. If the
person retires in 30 years, what is the future value of this
amount?

40. Finding Interest rate
• Suppose you receive a lump sum of Rs. 94,000 at the
end of 8 years after paying annuity Rs. 8,000 for 8 years
FVAn=A[(1+r)n – 1)]
r
96000 =8000*X
96000/8000 = X
X=12%

41. Finding Annual Annuity
• You are required to find the amount of annual annuity.
How much you should deposit in a bank annually so that
you get Rs. 1,50,000 at the end of I0 years at 10% rate of
interest
FVAn=A[(1+r)n – 1)]
r
150000 = A*15.93
A= 150000/15.93 =9412

42. Practice problems
• How much should a person accumulate Rs. 1,00,000 for
his daughters marriage at the end of 10 years, at the
interest rate of 8%

43. Multiple compounding periods
Semi-annual or bi-annual compounding,
m=2
Quarterly compounding, m=4
Monthly compounding m=12

44. • Nominal interest rate –Interest rate specified on an
annual basis (loan agreement)
• Effective interest rate – Compounding done more than
once a year, the actual rate would be higher than the
nominal interest rate.
Effective rate of interest = (1+(i/m)^(n*m))-1
Company pays 15% interest, compounded quarterly on a
3 year public deposit of Rs 1000
Calculate FV = PV(1+r/m)^n*m = 1000(1+(0.15/4)^3*4
=1555

45. Semi-annual compounding
Period will be multiplied by 2 and Interest rate will
be divided by 2
n*2 and r/2
Interest rate 10%, number of years 6
N=12, i=5%,PV=1000
n
m
m
i
PV
FV *
)
1
( 


46. Quarterly Compounding
Period will be multiplied by 4 and Interest rate will be
divided by 4
n
m
m
i
PV
FV *
)
1
( 


47. Compound value of annuity
Note: See the compound value of annuity table for
calculations





 


i
i
PV
FVA
n
1
)
1
(

48. Question for practice
• How much does a deposit of Rs.40,000 grow in 10
years at the rate of 6% interest and compounding is
done semi-annually. Determine the amount at the
end of 10 years.
• Table value i=6%/2=3%; n*2=10*2=20 years
• FV(3%,20 years)=1.8061 (Normal table not annuity
table)
• FV=1.8061*40000=72244
n
m
m
i
PV
FV *
)
1
( 


49. Practice problem
• What is the balance in an account at the end of 10 years
if Rs.2500 is deposited today and the account earns 4%
interest, compounded monthly, quarterly and bi-annually?
• PV=2500; i=4%, n=10 years
Monthly m=12; bi-annually=2; quarterly=4
Table value
i=4/12; 4/2; 4/4
N=10*12; 10*2; 10*4
n
m
m
i
PV
FV *
)
1
( 


50. Future value of uneven cash flows
n
n
t
t i
PV
FV )
1
(
1

 


51. PRESENT VALUE
Present value (PV) is the current worth of a future sum of money
or stream of cash flows given a specified rate of return.
The technique for finding the present value is termed as
discounting.

52. PV= Present Value
FV = Future value
i= interest rate
n= period
n
i
FV
PV
)
1
( 

If Mr. X, depositor, expects to get
Rs.600 after one year, at the rate of
12%, calculate the amount he will have
to forego at present
PV=100/(1+0.10)^1=Rs.90.909
FV= PV(1+i)^n
FV/(1+i)^n =PV

53. Present value of a series of uneven
cash flows

 

n
t
n
t
i
FV
PV
1 )
1
(
FVt = Future value after period 1,2…n
i= discount rate
n= period

54. Given the time value of money at 10% you are
required to find out the present value of future
cash inflows that will be received over the next 4
years.
Year 1 Rs.1,000
Year 2 Rs.2,000
Year 3 Rs.3,000
Year 4 Rs.4,000
Year PV Table value 10%
1 year =1000/(1+0.10)^1=909.1 =1000*0.9091=909.1
2 year =2000/(1+0.10)^2=1652.8
9
=2000*0.8264=1652.
8
3 year =3000/(1+0.10)^3=2253.9
4
=3000*0.7513=2253.
9
4 year =4000/(1+0.10)^4=2732.0
5
=4000*0.6830=2732
Total 7547.97 7547.8
PV=FV /(i+i)^n

55. Present value of annuity or even
cash flows
Cash flows are equal in amount.
PVAn = A * ADF
Where
A= Annual installment
ADF= Annuity Discount factor
P=PMT*[1-(1+r)^-n /r]
PV=500*[(1-(1+0.10)^-4)/0.10]=500*[(1-
0.6830)/0.10]=500*3.17=Rs.1585
Calculate the present value of annuity of Rs.500 received annually
for four years, when the discounting factor is 10%

56. Present value of perpetual annuity
It is a type of annuity that receives an infinite amount of periodic
payments. A person may like to find out the present value off his
investment, in case he is going to get a constant return year
after year.
P = A/i
Where
A=annual installment
i= interest or discount rate
Mr.Bharat, principal, wishes to institute a scholarship of
Rs.5,000 for an outstanding student every year. He wants to

57. Practice Problem
• Mr. Raj wishes to determine the Present value of the
annuity consisting of cash flows of Rs.40000 per annum
for 6 years. The rate of interest he can earn from his
investment is 10%.
• An investor wants to find the present value of Rs.40000
due 3 years. His interest rate is 10%.
• From the following information, calculate the present
value at 10% interest rate
Year 0 1 2 3 4 5
Cash inflow (Rs.) 2000 3000 4000 5000 4500 5500

58. Practice problems
• XYZ bank pays 12% interest. If you deposit Rs.1000
initially how much shall it grow at the end of 5 years?
• XYZ bank pays 12% interest. If you deposit Rs.50000
each year for 10 years, how much shall it grow at the end
of 10 years? (Annuity)

59. CAPITAL GAIN

60. CAPITAL GAIN
• Capital gains arise when you sell capital asset for an
amount that is more than what you paid for it

61. TYPES OF CAPITAL GAIN
• Long-Term Capital Gains
• Short-Term Capital Gains

62. LONG TERM CAPITAL GAIN
• 36 MONTHS
• For mutual funds and equities, this period is 12 months.

63. SHORT TERM CAPITAL GAIN
• Any asset that is sold within 36 months of purchasing it,
is termed as short-term asset

64. IDENTIFY
• Mr. Kumar is a salaried employee. In the month of April,
2017he purchased gold and sold the same in December,
2018. In this case gold is capital asset for Mr. Kumar. He
purchased gold in April, 2017and sold it in December,
2018

65. IDENTIFY
• Mr. Raj is a salaried employee. In the month of April,
2015 he purchased gold and sold the same in August
2018. In this case gold is capital asset for Mr. Raj. He
purchased gold in April, 2015and sold it in August 2018

66. COMPUTATION OF SHORT TERM
GAIN
PARTICULARS AMOUNT
Full Value of the Consideration (Sales value of
the asset)
Xxxx
(Less) Expenditure incurred wholly and
exclusively in connection with the transfer of
capital assets
xxxx
Net Sale consideration xxxx
Less: Cost of acquisition xxxx
Less: Cost of improvement xxxx
Short term capital gain XXXXX

67. PROBLEM
• Mr. Kaushal is a salaried employee. In the month of
December, 2015 he purchased gold worth Rs. 8,40,000
and sold the same in August 2018 for Rs. 9,00,000. At
the time of sale of gold, he paid brokerage of Rs. 10,000.
What is the amount of taxable capital gain
•

68. • For the purpose of determination of tax rate, short term
capital gains are classified as follows :
• Short term capital gains covered under section 111A.
• Short term capital gains other than covered under
section 111A

69. STCG covered under section 111A
• STCG arising on sale of equity shares listed in a recognised stock
exchange, which is chargeable to STT.
• STCG arising on sale of units of equity oriented mutual fund sold
through recognised stock exchange which is chargeable to STT.
• STCG arising on sale of units of a business trust STCG arising on
sale of equity shares, units of equity oriented mutual fund or units
of a business trust through a recognised stock exchange located in
any International Financial Services Centre and consideration is
paid or payable in foreign currency even if transaction of sale is not
chargeable to securities transaction tax (STT).

70. TAX RATE FOR STCG 111A
• STCG covered under section 111A is charged to tax @
15% (plus surcharge and cess as applicable)

71. Example
• Kumar bought Infosys shares worth Rs 100,000 today
and sells the same 10 days later for Rs.120,000
• Profit =120000-100000
=20000
Tax rate @15% =20000*15% = 3000

72. • Mr. Janak is a salaried employee. In the month of
December, 2017he purchased 100 equity shares of X
Ltd. @ Rs. 1,400 per share from Bombay Stock
Exchange. These shares were sold in BSE in August,
2018@ Rs. 2,000 per share (securities transaction tax
)was paid at the time of sale

73. • Sales Value = 200000
Purchase Value = 140000
Brokerage = 200
Short term capital gain = 199800-140000
= 59800

74. • Mr. Ashok (resident and age 40 years) is a salaried employee
working in SM Ltd. at an annual salary of Rs. 8,40,000. In
December, 2017 he purchased 10,000 equity shares of A Ltd.
at Rs. 100 per share and sold the same in April 2018at Rs.
125 per share (brokerage Re. 1 per share). The shares were
sold through Bombay Stock Exchange and securities
transaction tax was paid by Mr. Ashok. What will be the tax
liability of Mr. Ashok?

75. Examples of STCG not covered
under section 111A
• STCG arising on sale of equity shares other than through
a recognised stock exchange.
• STCG arising on sale of shares other than equity shares.
• STCG arising on sale of units of non equity oriented
mutual fund(debt oriented mutual funds)
• STCG on debentures, bonds and Government
securities.
• STCG on sale of assets other than shares/units like
STCG on sale of immovable property, gold, silver, etc

76. PROBLEM
• Mr. Kumar sold units of debt fund after holding them for a
period of 8 months. What will be the tax rate applicable
on the STCG?

77. • Mr. Kumar (resident and age 40 years) is a salaried
employee working in SM Ltd. at an annual salary of Rs.
8,40,000. In December, 2016 he purchased a plot of land
for Rs. 10,00,000 and sold the same in April, 2018
for Rs. 12,10,000 (brokerage Rs. 10,000). What will be
the tax liability of Mr. Kumar

78. Long term Capital gain
• An asset that is held for more than 36 months is a long-
term capital asset. The reduced period of the
aforementioned 24 months is not applicable to movable
property such as jewellery, debt-oriented mutual funds
etc.

79. • Some assets are considered short-term capital assets
when these are held for 12 months or less. This rule is
applicable if the date of transfer is after 10th July 2014
(irrespective of what the date of purchase is). The assets
are:a. Equity or preference shares in a company listed on
a recognized stock exchange in India
• b. Securities (like debentures, bonds, govt securities etc.)
listed on a recognized stock exchange in India
• c. Units of UTI, whether quoted or not

80. • d. Units of equity oriented mutual fund, whether quoted
or not
• e. Zero coupon bonds, whether quoted or not
• When the above-listed assets are held for a period of
more than 12 months, they are considered as long-term
capital asset

81. Tax
Type Condition Tax applicable
Long-term capital gains tax Except on sale of equity
shares/ units of equity
oriented fund
20% (Without indexation)
10%( With indexation)
Long-term capital gains tax On sale of Equity shares/
units of equity oriented fund
10% over and above Rs 1
lakh
Short-term capital gains tax When securities transaction
tax is not applicable
The short-term capital gain is
added to your income tax
return and the taxpayer is
taxed according to his income
tax slab.
Short-term capital gains tax When securities transaction
tax is applicable
15%.

82. Tax on Equity and Debt Mutual
Funds
Funds Short-Term Gains Long-Term Gains
Debt Funds At tax slab rates of the
individual
At 20% with indexation
Equity Funds 15% Nil
Debt Funds At tax slab rates of the
individual
At 20% with indexation
Equity Funds 15% Nil

83. Computation of long term capital gain
Particulars Rs.
Full value of consideration (i.e., Sales
consideration of asset)
XXXXX
Less: Expenditure incurred wholly and
exclusively in connection with transfer of
capital asset (E.g., brokerage, commission,
etc.)
(XXXXX)
Net sale consideration XXXXX
Less: Indexed cost of acquisition (i.e.
Purchased cost of asset with indexation )
(XXXXX)
Less: Indexed cost of improvement, if any (*) (XXXXX)
Exemptions provided under sections 54,
54EC, 54F, and 54B
-
Long-Term Capital Gain XXXXX

84. Cost Inflation Index
• Central Board of Direct Taxes (CBDT)
• Indexation =Cost of acquisition * Cost inflation index in the
year of sale
Cost inflation index in the year of acquisition

85. REVISED CII
2001-02 100
2002-03 105
2003-04 109
2004-05 113
2005-06 117
2006-07 122
2007-08 129
2008-09 137
2009-2010 148
2010-2011 167
2011-2012 184
2012-13 200
2013-14 220
2014-15 240
2015-16 254
2016-17 264
2017-18 272
2018-19 280
2019-20 289
2020-21 301

86. Tax Rates on Long Term Capital
Gains
• Sale of equity shares and equity-oriented mutual funds or
units of business trust held for more than one year, on or
after April 1, 2018 will be chargeable to tax at 10% plus
cess @ 4%.

87. Indexation Benefit
Calculated Indexation
Purchase price = 50 Lakhs
Purchase year March 2008
Sale year April 2019

88. Exemptions

89. Gain on sale of residential house property (Section
54)
• All Individuals & HUF are eligible to claim deduction u/s
54
• If cost of new residential house ≥ Long term Capital gain,
entire capital gains is exempt.
• If cost of new residential house < Long term Capital
gains, long term capital gain to the extent of cost of new
residential house is exempt

90. Capital gains exceeds Rs 2 cores
• Purchase one residential house in India within 1 year
before or 2 years after the date of sale
• Construct one residential house within a period of 3
years from the date of sale

91. capital gains does not exceeds Rs
2 cores
• Purchase two residential houses in India within 1 year
before or 2 years after the date of sale
• Construct two residential house within a period of 3 years
from the date of sale

92. If the capital gain is invested in long term specified
assets of NHAI or Rural Electrification Corporation
(Section 54EC)
• Any Assessee is eligible to claim deduction u/s 54EC
• There should be a transfer of long term capital asset
being land or building or both or depreciable asset held
for more than 36 months
• Quantum of Exemption: Amount of Capital gain or
amount invested in specified bonds which ever is lower.
The maximum amount of exemption that can be claimed
is limited to Rs 50 lakhs

93. • The Taxpayer should not transfer or convert or avail loan
or advance on the security of such bonds for a period
of 5 years from the date of acquisition of such bonds.
• The amount of capital gains should be invested in long
term specified assets i.e., bonds redeemable after 5
years issued by NHAI, RECL or any other bond specified
by Central Government. The investment should be
made within 6 months from the date of transfer

94. Gain from the sale of an asset other than a residential
house property is used to buy a residential house (Section
54F)
• All Individuals/ HUF are eligible to claim deduction u.s 54F
• The capital gain should be from a sale of a long term
capital asset which is not a residential house. Transfer of
Plot is also eligible for exemption
• Quantum of Exemption:
If cost of new residential house ≥ Net Sale of Consideration
of original asset, entire capital gains is exempt
• If cost of new residential house < Net Sale of
Consideration of original asset, only proportionate capital
gains is exempt

95. • The Taxpayer should purchase 1 residential house within
1 year before the date of sale or 2 years after the date of
sale or construct 1 residential house within a priod of 3
years

96. • If above investment is not made before the date of filing
Income tax return, the taxpayer should deposit the capital
gains amount in CGAS Scheme
• The Taxpayer should not own more than one residential
house on the date of sale. The Taxpayer should not
purchase any residential house within 2 years or
construct residential house within 3 years from the date
of sale

97. QUESTION
• For an asset purchased in 2002 for Rs. 10,000 and sold
in 2014, the inflation-indexed cost price will be calculated
as
Inflation-indexed cost price is = (Actual/Original price * CII
for year of sale /CII for year of purchase
= 10000 *(240/105) =22857

98. • On February 1, 2018, Finance Minister Arun Jaitley
announced the introduction of long-term capital gain tax
on sale of equity shares over Rs.1 lakh. The capital gains
rate as per the Union Budget 2018 can be given as
below:
• Long-term capital gains on equity shares are taxed at
10% without any indexation benefit.

99. • Mr. Mishra bought a plot of land for Rs.10,00,000 in the
year 2005. After 10 years had elapsed, in January 2018,
he sold off his land for Rs.30,00,000.
• Calculate Capital tax gain

100. CALCULATION
• INFLATION INDEXED COST PRICE =
10,00,000(280/117)

101. Options available
• In this case, only 10% of the non-indexed capital gain is
charged as tax. Individuals are free to choose to use
indexation and pay 20% tax or ignore indexation and pay
10% on their capital gains.

102. Tax Exemptions On Capital Gains
• Section 54 of the Income Tax Act- tax exemption on
profit earned if that entire profit amount is used to
buy another house.
• The seller can buy a new house within 2 years from the
date of sale of his previous property or construct a new
house within 3 years from the date of sale

103. • Section 54 EC - ax exemption if the entire capital profit is invested in bonds issued by
NHAI that is National Highway Authority of India or REC which is Rura There is a limit to exemption
under 54 EC and is Rs.50 lakh. l Electrification Corporation.
• investing gains in the Capital Gains Accounts Scheme (CGAS) in any public sector bank.

104. LONG TERM GAIN ON EQUITY
SHARES
• As per the provisions of the Financial Budget of 2018, if a
seller makes long term capital gain of more than Rs. 1
lakh on sale of equity shares or equity oriented units of
mutual fund, the gain made will attract a capital gains tax
of 10% and the benefit of indexation will not be available
to the seller.
• Before the introduction of budget 2018, long-term capital
gain made on sale of equity shares or equity-oriented
units of mutual fund was exempt from tax under Section
10(38)

105. SHORT TERM CAPITAL GAIN
• short-term capital gain, capital gain = final sale price –
(the cost of acquisition + house improvement cost +
transfer cost).