AFP Workbook- Old Curriculum.

6. You observe that Roger is not covered adequately in case of any exigency with his life. You estimate an exclusive life cover to sustain 75% of current household expenses, after deducting 20% towards consumption by Roger himself. Such expenses required shall account for inflation year-on-year and shall sustain until Sumedha’s expected life. You consider the proceeds of the policy invested in a debt mutual fund scheme, the returns wherefrom have an average tax impact of 8%. What sum assured of such term insurance do you determine? [4 marks] A. Rs. 81 lakh B. Rs. 86 lakh C. Rs. 1 crore D. Rs. 1.08 crore 7. Roger tells you that he did not opt for his employer’s retirement plan. You analyze the current financial situation of the family in order to independently construct a retirement plan. You have studied and discussed with the family economic and life parameters. What processes do you find relevant to follow in preparing a retirement plan for Roger and Angela? [3 marks] A. Invest whatever little they can have towards dedicated retirement savings in equity assets; the couple still more than 25 years left to retire, there can be always be a catch-up with larger contributions later; the important goals of children’s education, repaying loans, etc. should take precedence. B. Invest a fixed sum in debt instruments on an ongoing basis up to retirement. Create fixed assets such as a second house which can be let out prior to as well as post retirement to generate a steady secondary retirement income. C. Estimate the size of retirement fund needed on retirement considering life expectancy of the last survivor; find out the amount of periodic saving that can be directed to an asset allocation for wealth building in the long term to realize such retirement fund; also identify assets that can be held till retirement which can be liquidated/converted to yield a supplementary retirement income. D. Focus on other important goals such as children’s education, Angela’s business, etc. Retirement is still some 30 years away and with good asset base in general, funds can be carved out later to address the retirement goal. 8. You draw a retirement fund strategy, in consultation with Roger and Angela, to draw the retirement expenses from two buckets: Bucket One has first 5 years of expenses drawn from liquid funds; Bucket Two has the expenses for the remaining years until the expected life of the last survivor, drawn from debt funds. You suggest that in order to cover risk of longevity, they Page # 101

should have a buffer of a lump sum Rs. 1 crore available at the expected life of Roger which should be invested on retirement in the balanced funds. Consider the current household expenses adjusted for inflation count for retirement expenses, which are drawn year in the beginning for every year from the respective buckets. What value of retirement corpus do you advise the couple to accumulate? [5 marks] A. Rs. 2.90 crore B. Rs. 3.28 crore C. Rs. 4.25 crore D. Rs. 3.04 crore 9. You inform Roger and Angela about taking exposure to Gold as an asset class through Sovereign Gold Bonds (SGB). Which of the attributes about the SGB is correct? [2 marks] A. The Capital Gains on redeeming these bonds on maturity are exempt from income tax. B. They work like zero-coupon bonds. C. The quoted prices of SGBs usually are very close to ruling Gold prices. D. The redemption price on maturity is guaranteed not to be below the issue price of the respective SGB. 10. You make a strategy to provide for the vacation expenses of Roger’s family. Based on his goal what parameters shall you consider? [4 marks] A. The goal being five years from now, Roger is advised to invest in bond funds a certain sum of money every year. Any windfall of money including bonuses can be directed to this fund to make it self-sustaining. B. You advise Roger to invest the present value of money required in the fifth year in 5-year fixed deposit of bank to gain advantage of taxes, and repeat the exercise every year until five years from retirement. C. The vacation goal is aspirational; has high cost escalation. Roger can consider moderate to high risk instruments to invest a certain sum of money. He is advised to postpone withdrawal from fund if the corpus after 5 years is not sufficient. In future, higher amount can be directed to this fund. D. You advise Roger to invest a lump sum equal to three initial years’ vacation expenses in a liquid fund for tax efficiency, with a certain sum every year in tune with escalated cost of vacation in the same fund to retain the tax efficiency of withdrawals towards vacation. Page # 102

11. Towards the goal of marriage of their children, you suggest Roger to make maximum permissible subscriptions to his PPF account in the beginning of every financial year and extend the account twice beyond initial maturity for terms of 5 years each with similar subscriptions. The third term of 5 years is continued without further contribution. Roger shall withdraw about 50% of accumulation for the marriage expenses of Mark and the remaining for the marriage expenses of Stephanie. What are the expected individual withdrawals and shortfalls in meeting the marriage expenses? [5 marks] A. Mark Rs. 51.5 lakh, 16% shortfall; Stephanie Rs. 64.8 lakh, 18% shortfall B. Mark Rs. 50.5 lakh, 17% shortfall; Stephanie Rs. 63.2 lakh, 20% shortfall C. Mark Rs. 52.3 lakh, 14% shortfall; Stephanie Rs. 65.9 lakh, 17% shortfall D. Mark Rs. 45 lakh, 26% shortfall; Stephanie Rs. 56.7 lakh, 28% shortfall 12. For the higher education expenses for Mark and Stephanie, Roger starts accumulating funds with monthly investment of Rs. 20,000 in an aggressive asset allocation yielding 12% p.a. After 7 years the allocation is moderated to yield 9% p.a. and while the investment is raised to Rs. 30,000 p.m. After 12 years, the funds accumulated are shifted to suitable debt instruments from which distribution towards higher education is made as proposed. What excess/shortfall of funds you expect after 12 years by following this investment strategy? [5 marks] A. Shortfall Rs. 44.72 lakh B. Shortfall Rs. 20.26 lakh C. Shortfall Rs. 19.12 lakh D. Excess Rs. 27.59 lakh 13. Roger asks for your guidance regarding different modes of tax efficient estate planning which can help in creating and distributing family assets. You opine that a Trust would be a more appropriate option because______. [2 marks] A. there is no taxation applicable on trust income B. they have fixed rate of tax which is far lower than tax rates for individual assessees C. future capital gains tax on assets transferred to trust could be lower D. all future earnings from assets transferred to trust are exempt Page # 103

14. Roger’s equity portfolio has 1,000 shares of M/s. ABC Ltd. which he accumulated very close to the average cost of Rs. 1,205, transactions conducted between April 2015 and July 2017. The grandfathering price of M/s. ABC Ltd. as on 31st January, 2018 on the National Stock Exchange was Rs. 1,380. Roger wishes to sell entire holding of the company at a target price of Rs. 1,650 before April 15, 2019. What would be approximate tax payable on this transaction in the assessment year 2020-21? [3 marks] A. Data insufficient; unless exact dates of purchase and respective cost prices are available, tax cannot be computed. B. Long term capital gains of Rs. 2.70 lakh subject to the category exemption of Rs. 1 lakh, taxable at 10.4%. C. Nil taxation. D. Long term capital gains of Rs. 4.45 lakh subject to the category exemption of R. 1 lakh, taxable at 10.4%. 15. Angela wants to invest the maturity proceeds of all her fixed deposit investments in a series of Sovereign Gold Bonds (SGB). You advise her to invest in a series issued in 2016 which is being quoted at 2,900 since long against its face value of Rs. 3,150 having coupon of 2.75% p.a., with interest payment dates being 30th September and 31st March. If she could purchase the said SGBs at the given quoted price, what tax liability would she have for AY2020-21 solely on account of maturity of her fixed deposits and its subsequent investment in SGBs? [5 marks] A. Rs. 9,375 is added to Angela's income under \"Income from Other Sources\" and is taxable at tax slab applicable to her. B. Rs. 33,803 is added under \"Income from Other Sources\" to Roger’s or Angela's income, whichever is higher, and is taxable at tax slab applicable. C. Rs. 61,928 is added to Angela's income under \"Income from Other Sources\" and is taxable at tax slab applicable to her. D. Rs. 21,589 is added to Angela's income under \"Income from Other Sources\" and is taxable at tax slab applicable to her. Page # 104

Solutions: Case 1 (Roger) Q1 B) It is a professional requirement under FPSB’s Practice Guidelines. Q2 D) Identify other issues that may potentially impact Roger’s ability to achieve financial goals D) As a Registered Investment Adviser, you are mandated to comply with segregation of Q3 advisory and its execution at the client level. The execution services can be independently sourced from another professional. Q4 A) Insure the houses for values equal to their respective reconstruction cost, used to bring each house back to its original condition, in case of happening of defined perilous event/s. Q5 C) The sum assured shall be applicable when Mark attains 12 years of age; withdrawal of Rs. 3 lakh each can be made during age 19, 20 and 21 of Mark. Q6 B) Rs. 86 lakh (Solution given below) Current annual household expenses of 480,000 Rs. p.a. family Expenses required for family excluding 384,000 Rs. p.a. 480000*(1-20%) self-expenses of Roger 75% of net household expenses to be 288,000 Rs. p.a. 384000*75% covered Present age of Angela 31 Life expectancy of Angela 80 Number of years of expenses to cover 49 years 80-31 Gross Returns from Debt MF scheme 7.50% p.a. Tax impact on returns from Debt 8.00% p.a. mutual fund scheme Tax adjusted returns from Debt MF 6.90% p.a. 7.5%*(1-8%) scheme Inflation 4.50% p.a. Returns adjusted for inflation 2.30% p.a. effective (1+6.9%)/(1+4.5 %)-1 Cover (PV) required today to cover 8,611,524 Rs. PV(2.2967%,49,- expenses till the expected life of Angela 288000,0,1) C) Estimate the size of retirement fund needed on retirement considering life expectancy of the last survivor; find out the amount of periodic saving that can be directed to an asset allocation Q7 for wealth building in the long term to realize such retirement fund; also identify assets that can be held till retirement which can be liquidated/converted to yield a supplementary retirement income. Q8 A) Rs. 2.90 crore (Solution given below) Page # 105

Current annual household expenses 480,000 Rs. 480000*(1+4. Bucket Two: Current age of Roger 29 years 5%)^29 Retirement age of Roger 58 years Current age of Angela 31 years PV((1+6%)/(1+ Life expectancy of Roger 75 years 4.5%)-1,5,- Life expectancy of Angela 80 years 1720338,0,1) Number of years the retirement 20 years expenses shall be required 4.50% p.a. Inflation 1,720,338 Rs. Retirement expenses in the first year of retirement 6.00% p.a. 8,361,664 Rs. Bucket One: Returns from Liquid Funds (1) Provision of first five year (increasing) expenses in liquid funds Returns from Debt Funds 7.5000% p.a. Retirement expenses in the sixth year 2,143,854 Rs. of retirement Provision of next 15 years (rising) 26,575,624 Rs. expenses in debt funds Total Provison of funds in Bucket Two 18,511,481 Rs. on retirement (2) Buffer required of Rs. 1 crore 17 years from retirement in balanced 2,137,765 Rs. funds (return 9.5%) (3) Total retirement corpus to be accumulated for arrangement 29,010,910 Rs. (1+2+3) Q9 Q10 A) The Capital Gains on redeeming these bonds on maturity are exempt from income tax. C) The vacation goal is aspirational; has high cost escalation. Roger can consider moderate to high risk instruments to invest a certain sum of money. He is advised to postpone withdrawal from fund if the corpus after 5 years is not sufficient. In future, higher amount can be directed to this fund. Q11 B) Mark Rs. 50.5 lakh, 17% shortfall; Stephanie Rs. 63.2 lakh, 20% shortfall (Solution given below) PPF account balance as on 31-March- 490,000 Rs. Page # 106

2019 10 p.a. Account's initial maturity (opened in 10 Dec-2013) is 1-April-2029 7.75% Rs. Number of subscriptions from 1-Apr- 150,000 FV(7.75%,20,- 2019 to 1-Apr-2028 9,375,038 Number of subscriptions from 1-Apr- Rs. 150000,- 2029 to 1-Apr-2038 (2 extensions) 10,101,604 490000,1) Rate of interest assumed throughout 5,050,802 Maximum subscription in the beginning 6,108,808 Rs. 9375038*(1+7.75 of every financial year (for 20 years) %) 17.32% Accumulated balance on 31-March- 6,318,474 Rs. 10101604/2 2039 (Mark's age 24, Stephanie' age 21) 7,911,083 Rs. 1000000*(1+9%)^ The account is maintained without 20.13% 21 subscription for 5 more years 1- Accumulated balance on 31-Mar-2040 (5050802/610880 (Mark's age 25 years) 8) 50% of accumulated amount Rs. (10101604/2)*(1+ withdrawn for Mark's marriage 7.75%)^3 expenses Rs. 1000000*(1+9%)^ Estimated expenses (current Rs. 10 24 lakh, escalating by 9% p.a.) for Mark 1- Shortfall in meeting Mark's marriage (6318474/79110 expenses 83) Remaining amount in PPF accumulated till 31-Mar-2043: Stephanie's marriage Estimated expenses (current Rs. 10 lakh, escalating by 9% p.a.) for Stephanie Shortfall in meeting Stephanie's marriage expenses Q12 B) Shortfall of Rs. 20.26 lakh 400,000 Rs. p.a. 8.00% p.a. (Solution given below) 7.50% p.a. Higher Education expenses, in current terms, at respective age 18, 19,20 & 21 Cost escalation for higher education expenses Expenses drawn from a fund invested in Debt instruments at Page # 107

Total accumulation period through monthly investments in Asset 12 years Allocation Fund Present Value of Higher Education Expenses after 12 years PV of Higher Edu. Expenses of Mark at 4,732,399 Rs. PV((1+7.5%)/(1+8 his age of 18 (after 14 years) in Debt 4,095,099 Rs. PV:1 %)-1,4,- instruments 400000*(1+8%)^1 PV of such expenses after 12 years 4,0,1) when drawn from Debt instruments 4732399/(1+7.5% )^2 PV of Higher Edu. Exp. Of Stephanie at 5,961,460 PV((1+7.5%)/(1+8 her age of 18 (after 17 years) in Debt Rs. %)-1,4,- instruments 4,152,506 8,247,605 400000*(1+8%)^1 PV of such expenses after 12 years 7,0,1) when drawn from Debt instruments 7 12.00% Rs. PV:2 5961460/(1+7.5% Total PV of Higher Edu. Exp. After 12 20,000 )^5 years in Debt instruments Rs. PV:(1+2) Accumulation Aggressive Asset 4095099+415250 Allocation (year 1 to 7) years 6 Return expectation (aggressive) p.a. Monthly investment Rs. Accumulation in 7 years 2,576,027 Rs. FV((1+12%)^(1/1 2)-1,12*7,- Moderate Asset Allocation (year 8 to 5 years 20000,0,1) 12) 9.00% p.a. Return expectation (moderate) 30,000 Rs. FV((1+9%)^(1/12) Monthly investment 6,221,682 Rs. -1,12*5,-30000,- Accumulation in 12 years -2,025,924 Rs. 2576027,1) 6221682- Excess/(Shortfall) expected after 12 8247605 years Q13 C) future capital gains tax on assets transferred to trust could be lower Q14 B) Long term capital gains of Rs. 2.70 lakh subject to the category exemption of Rs. 1 lakh, taxable at 10.4%. Page # 108

(Solution given below) Average cost of 1,000 shares purchased 1,205 Rs. 1,650 prior to 1-Feb-2018 1,380 Rs. 270,000 Rs. Targeted selling price after 31-Jan- Rs. 204,875 2018, after holding for more than 1 102,313 102,188 year (long term) 409,375 Grandfathering price as on 31-Jan-2018 9,375 Capital gains accrued up to 31-Jan-2018 2,900 141.16 are grandfathered, hence capital gains 141 on selling after 2.75% 3,150 D) Rs. 21,589 is added to Angela's 444,150 12,214 Q15 income under \"Income from Other 21,589 Sources\" and is taxable at tax slab applicable to her in AY2020-21. (Solution given below) Maturity proceeds to be received in July-2019 Maturity value of FD of Rs. 2 lakh, Rs. 200000*(1+9.75 purchased on 1-Jul-2016 @9.75% p.a. %/4) Maturity value of FD of Rs. 1 lakh, Rs. 100000*(1+9.25 purchased on 1-Jul-2017 @9.25% p.a. %/4) Maturity value of FD of Rs. 1 lakh, Rs. 100000*(1+8.75 purchased on 1-Jul-2018 @8.75% p.a. %/4) Total maturity proceeds of Fixed Rs. 204875+102313+ Deposits 102188 Interest accrued and receivable in the Rs. 409375-400000 FY2019-20 Approximate purchase price of SGB Rs. (issue date: 18-July-2016) Number of SGBs to be bought at the bonds 409375/2900 quoted price rounded-off 141*3150*2.75% Coupon to be received on bonds (half- p.a. yearly on 30-Sep'19 and 31-Mar'20) Rs. Face value per unit of SGB Rs. Rs. Face value of SGBs to be purchased Interest to be received on SGB in Rs. 21589 FY2019-20 Total interest due to these transactions under 'Income from Other Sources' Page # 109

Case 2: Ms. Urvashi (Reference Date: 1st April, 2019) Ms. Urvashi, aged 34 years, is employed in a senior position in a Mumbai-based firm. She has a son Suryansh aged 14 years and a daughter Dhruvi aged 9 years. She is the sole guardian of her children pursuant to her recent divorce. She is currently residing in a rented house. Suryansh has just passed 8th standard while Dhruvi is studying in 3rd standard. She has approached you, a CFPCM practitioner, for preparing a Financial Plan for her family. She has plans to retire early from service at her age of 55 years. She shares the following financial information with you: Salary Income (2019-2020) Annual (Rs. lakh) 25.00 Basic Salary : 2.50 5.00 Employer’s contribution to NPS : 3.00 HRA : Monthly (Rs.) Other allowances and reimbursements : 40,000 18,000 Regular Outgoings: 25,000 35,000 Basic Household Expenses : 12,000 Services availed : 18,275 School Fees : House Rent : (Rs.) Power, Telecom & Fuel : 25,000 (Systematic Investment Plan Car Loan EMI : - SIP) Outgoings towards investment and insurance: 15,000 (Systematic Investment Plan Equity Mutual Fund1 : - SIP) 38,759 Debt Mutual Fund2 : 27,631 Insurance Premium3 ` : 8,637 Health Insurance Premium4 : (Rs. lakh) Car Insurance Premium : 15.45 Assets: (Valued on 31st March, 2019) 7.65 23.92 Equity Mutual Fund schemes : 3.85 21.87 Debt Mutual Fund schemes : 6.59 10.75 Equity Shares in Demat Account : 4.50 Equity Linked Saving Scheme5 : 3.82 6.00 National Pension System (NPS) balance : 3.00 Public Provident Fund (PPF) A/c6 : Gold & Diamond Jewellery : Car7 : Bank Account (Salary) : Fixed Deposits8 : Deposit with House Owner : Page # 110

Liabilities: (Outstanding on 31st March, 2019) (Rs. lakh) 5.70 Car loan : 1 Diversified open-ended growth equity schemes; started 3 years ago with initial investment of Rs. 1 lakh; monthly SIP 2 Long duration debt schemes with growth option, started 3 years ago, initial investment of Rs. 1 lakh; monthly SIP 3 Total Cover Rs. 1.5 crore across three policies of Rs. 50 lakh each, all term plans having cover up to Urvashi’s age of 50, 53 and 58 year respectively; annual premium 4 Total cover Rs. 20 lakh on two policies, one is floater Rs. 10 lakh cover, the other in Urvashi’s name; annual premium 5 Invested Rs. 1 lakh in each of the previous three financial years in March every year 6 Account opened on 21st December 2014 7 Purchased on 1st March 2016 by availing a loan for Rs. 10 lakh (80% loan to value, 6-year, 9.5% p.a.) 8 Six Fixed Deposits each of Rs. 1 lakh at 7.75% p.a. interest, maturing on 1st date of months from April to September 2019, all deposits created from 15th September 2017 to 20th October 2017 on weekly intervals. Page # 111

Goals: You, in consultation with Urvashi, have crystallized the following financial goals, for which the strategy is to be devised and presented to Urvashi: 1. Purchase a house in the next three years costing currently Rs. 1.25 crore; provide for own funds, transfer and stamp duty expenses to the extent of 30% of market value. 2. Expenses toward professional courses to be pursued by children with current outlay of Rs. 25 lakh each required at their respective age of 22 years, such costs escalating at 8% p.a. 3. Marriage expenses of Rs. 10 lakh (current cost) for each child at their respective age of 27 years; cost escalation for such expenses is 6% p.a. 4. Retirement at age 55, to provide for current lifestyle at Rs. 1 lakh monthly till her expected life. 5. Vacation fund for alternate year travel starting from next year until she reaches age 74; current annual costs are Rs. 5 lakh escalating annually at 7%. Life Parameters: Urvashi’s expected life currently estimated : 85 years Assumptions regarding gross returns in various asset classes: 1) Equity & Equity MF schemes/ Index ETFs: 11.00% p.a. 2) Balanced MF schemes : 9.50% p.a. : 7.50% p.a. 3) Bonds/Govt. Securities/ Debt MF schemes 6.00% p.a. 6.00% p.a. 4) Liquid MF schemes : 6.50% p.a. 5) Gold and linked investments : 6.50% p.a. (for tenure exceeding 1 year) 6) Real Estate appreciation : 7.75% p.a. 7) Bank/Post Office Term Deposits : 8) Public Provident Fund/EPFO : Assumptions regarding economic factors: 1) Inflation : 4.50% p.a. 5.00% p.a. 2) Expected return in Risk free instruments : Cost Inflation Index: FY CII FY CII FY CII FY CII FY CII 2001-02 100 2005-06 117 2009-10 2017-18 272 2002-03 105 2006-07 122 2010-11 148 2013-14 220 2018-19 280 2003-04 109 2007-08 129 2011-12 2019-20 289 2004-05 113 2008-09 137 2012-13 167 2014-15 240 184 2015-16 254 200 2016-17 264 Page # 112

1) You are about to present the financial planning recommendations to Urvashi. You have a look at the checklist of things to do at this stage. What would you do that you could have previously missed? [2 marks] A. Present your logic on how risks have been mitigated in your recommendations. B. Disclose any conflict(s) of interest and how they impact your recommendations. C. Draw a future roadmap to convince Urvashi on how various goals would be achieved with the recommendations being made. D. Seek Urvashi’s approval to the recommendations by presenting instances of your clients who have been benefited in the past. 2) Urvashi wants to understand the rationale of having the periodic review of financial plan that you propose to prepare. Which one shall you avoid to mention? [ 2 marks] A. To find out if adjustments to the earlier recommendations are required due to changes in any personal or economic conditions. B. To assess the progress towards achieving the goals as per recommendations. C. To comply with the 6-step financial planning process, the review being the last step. D. To confirm that the recommendations as agreed are implemented as per roadmap. 3) Urvashi wishes to avail housing loan to the extent of 70% of the value of the desired house in the next 3 years. She wants to fully repay the loan by the time she intends to retire. You consider 8.5% p.a. as the average interest rate on the housing loan to be availed. She asks you by how much EMI on the loan would exceed her current monthly outgo towards house rent. [3 marks] A. Rs. 103,653 B. Rs. 44,228 C. Rs. 56,353 D. Rs. 60,703 4) Looking at Urvashi’s various insurance policies and the coverage they provide, what is the most appropriate conclusion from the following? [2 marks] A. Urvashi needs to take cover against disability and critical illness as she is the only earner in the family; other risks are well covered. B. Urvashi has to take personal accident cover which is required as she drives her own car. C. Urvashi’s life cover falls drastically after 53 years of age, she needs additional coverage till 60 years of her age. D. Urvashi needs comprehensive householder policy considering that she is single parent, is employed and is with small children. 5) Urvashi wants to create a Trust that would receive a corpus, in case of any eventuality with her life, towards managing her children’s living and educational expenses estimated at Rs. 10 lakh annually, inflation-adjusted, at 8% annual escalation, till her younger child attains 27 years of age. The expenses are supposed to be drawn from Debt instruments. What additional insurance cover do you estimate? [3 marks] Page # 113

A. Rs. 23 lakh B. Rs. 37 lakh C. Rs. 1.37 crore D. None, the existing life insurance cover is enough. 6) You, in consultation with Urvashi, adopt a different yardstick for assessing the adequacy of her life insurance. You estimate that Rs. 15 lakh in current terms would be enough to sustain the children’s sustenance including their specific goals. Urvashi wishes that this amount be incrementally available year-on-year at 5% escalation to provide income support until the respective age 30 of each child. You estimate drawing this income stream from appropriate mix of debt instruments in which the claim amount would be invested in case of Urvashi’s life exigency. What should be the ideal life insurance cover? [4 marks] A. Rs. 2.80 crore B. Rs. 2.06 crore C. Rs. 2.51 crore D. Rs. 2.27 crore 7) Urvashi wants to fix her retirement goal by her age of 45 years by buying a 10-year deferred annuity product which shall provide cash flow as per her retirement goal. What funds do you estimate to buy the deferred annuity of yield 6% p.a? [3 marks] A. Rs. 2.93 crore B. Rs. 4.12 crore C. Rs. 2.17 crore D. Rs. 2.65 crore 8) Urvashi’s retirement corpus as per her goal takes into account current Rs. 1 lakh drawn from 6.5% p.a. yield instruments. She expects her NPS contributions to rise by 5% year-on-year with matching contribution from employer as well. She would invest the maximum permissible subscription in the beginning of every financial year, starting immediately, in her PPF account and would extend the account till her proposed retirement with same discipline. You estimate average returns from NPS and PPF in the investment phase to be 7.5% p.a. and 6.5% p.a., respectively. What proximity of achieving Urvashi’s retirement goal do you assess by following this strategy? [5 marks] A. Rs. 1.23 crore B. Rs. 1.57 crore C. Rs. 1.50 crore D. Rs. 1.32 crore 9) Urvashi is investing through systematic investment plan (SIP) in equity and debt mutual fund schemes instead of taking direct exposure to equity shares and corporate bonds. Which of the following risks are sought to be reduced in her investment mode? [2 marks] A. Concentration risk and liquidity risk B. Market Risk and interest rate risk C. Systemic Risk Page # 114

D. Credit risk, governance and compliance risk 10) Urvashi wants to set aside a portion of her equity portfolio for the marriage of her children as per goal. You advise to redeem a part of such apportioned portfolio 3 years before the marriage of Suryansh and invest in secured debentures of coupon 6.5% p.a. with 3 years’ maturity. The same strategy shall be repeated for Dhruvi’s marriage expenses. The interest is cumulated and payable on respective maturity of each series of debentures. What do you estimate as the size of the equity portfolio to be carved out today to meet marriage goal expenses using this strategy? [4 marks] A. Rs. 8.16 lakh B. Rs. 11.16 lakh C. Rs. 11.32 lakh D. Rs. 9.37 lakh 11) Urvashi wants a lump sum to be invested immediately toward a vacation fund as per her goal. She would additionally contribute a certain fixed amount this year coinciding with receipt of her bonus and would repeat it every year until her proposed early retirement. Consider such contributions in June every year and withdrawal toward vacation to be in December. You consider a portion from equity shares in her demat account, being ETFs equal in value to Rs. 12.78 lakh today, to dedicate as lump sum immediate investment for the goal. You consider annual contributions to the same ETFs. What annual contributions should be directed to achieve this goal? [5 marks] A. Rs. 6,28,518 B. Rs. 4,49,932 C. Rs. 4,37,562 D. Rs. 4,08,671 12) Urvashi wants to fund from her equity mutual fund schemes, the professional courses of her children as per goals. You advise to rearrange her equity mutual fund schemes into four different strategic theme equity funds to give a combined return of 12.5% p.a. Also, regular monthly investments are started immediately in the same funds. As per a risk-off strategy made, half of the funds required for each child’s professional course will be redeemed three years and one year prior to actual requirement in an assured return instrument of 6.5% and 5%, respectively. What do you estimate as the size of monthly investments in rearranged theme equity schemes in the next 12 years to achieve goals using this strategy? [5 marks] A. Rs. 6,716 B. Rs. 75,149 C. Rs. 27,603 D. Rs. 1,11,341 Page # 115

13) Urvashi, in case of her life contingency, is apprehensive about managing the affairs of her children. You advise her to set up a common Minor Beneficiary Trust for Suryansh and Dhruvi. What do you put forth as your argument? [2 marks] A. Such a Trust shall protect assets transferred and shall manage them as per guidelines issued to the trustee until either or both of her children reach/es a specified age to be defined by Urvashi B. Such a Trust shall protect and manage assets for her children only until they individually reach majority, i.e. 18 years of age C. Such a Trust shall not take further resources/assets/inheritances once the benefits have been transferred to it and the guidelines specified by Urvashi for their use D. Such a Trust shall strictly prevent early distribution of assets before both Suryansh and Dhruvi attain majority, i.e. 18 years of age 14) Urvashi has 7,500 shares of an unlisted company in physical form which he acquired in private equity offering at Rs. 10 per share in March 2012. She has got an offer to transfer these for a consideration of Rs. 4.25 lakh. What would be the tax liability of this transaction alone for AY 2020-21? [3 marks] A. LTCG tax of Rs. 1,09,200 B. LTCG tax of Rs. 63,898 C. STCG tax of Rs. 36,400 D. STCG tax of Rs. 72,800 15) Urvashi does not want to continue with her investment in debt mutual fund scheme. You observe that the initial investment was made at NAV of Rs. 17.521 on March 1, 2016 and SIP of 36 months is continued on 15th of each month since April, 2016. The current NAV at which the fund value is quoted in her assets is Rs. 26.238. What would be the tax liability for the redemption transaction alone for AY2020-21 if all the units in the debt mutual fund scheme are redeemed at this NAV today? [5 marks] A. Rs. 26,000 B. Rs. 30,960 C. Rs. 23,130 D. Rs. 33,830 Page # 116

Solutions: Case 2 (Urvashi) B) Disclose any conflict(s) of interest Q1 and how they impact your recommendations. C) To comply with the 6-step financial Q2 planning process, the review being the last step. Q3 D) Rs. 60,703 (Solution given below) Current value of the desired house 12,500,000 Rs. Expected value of house after 3 years 15,099,370 Rs. 12500000*(1+6.5%)^3 considering 6.5% appreciation 15099370*70% 55-37 Amount of loan to be availed 10,569,559 Rs. PMT(8.5%/12,18*12,- Tenure of loan = (Urvashi's 18 years 10569559,0,0) retirement age - age when loan availed) 95703-35000 Rate of interest on housing loan 8.50% p.a. EMI on the housing loan 95,703 Rs. Current rental outgo 35,000 Rs. p.m. EMI in excess of current house rent 60,703 Rs. p.m. A) Urvashi needs to take cover against disability Q4 and critical illness as she is the only earner in the family; other risks are well covered. Q5 B) Rs. 37 lakh (Solution given below) Annual Living expenses required in 1,000,000 Rs. p.a. current terms Inflation rate 8.00% p.a. Return on Debt instruments 7.50% p.a. Current age of younger child Dhruvi 9 years No. of years expenses required (till 18 years her 27 years of age) Corpus required today towards living 18,729,593 Rs. PV((1+7.5%)/(1+8%)-1,18,- and eduction expenses 1000000,0,1) Current insurance cover 15,000,000 Rs. 18729593-15000000 Additional insurance cover required 3,729,593 Rs. Page # 117 Page 1 of 6

Q6 D) Rs. 2.27 crore (Solution given below) Current sustenance amount 1,500,000 Rs. Increment desired in the annual 5.00% p.a. sustenance amount Investment Yield from mix of debt 7.50% p.a. instruments 14 years Current age of Suryansh Current age of Dhruvi 9 years Number of years until Suryansh is 30, 16 years 30-14 when such full amount would be 20,235,754 Rs. PV((1+7.5%)/(1+5%)-1,16,- needed years Present value of full sustenance 5 Rs. 1500000,0,1) amount in debt instruments for 16 2,456,556 years PV((1+7.5%)/(1+5%)-1,5,- Remaining years when half such sustenance amount would be needed for Dhruvi Present value of half sustenance amount in debt for 5 more years after 16 years 1500000*(1+5%)^16/2,0,1)/(1 +7.5%)^16 Total amount of ideal insurance cover 22,692,310 Rs. 20235754+2456556 thus estimated is: Q7 B) Rs. 4.12 crore (Solution given below) Urvashi's current Age 34 yrs Urvashi's retirement Age 55 yrs Urvashi's Life expectancy 85 yrs Current expenses to be considered 100,000 Rs. p.m. through retirement Inflation considered 4.50% p.a, Annuity returns 6.00% p.a, Post retirement period after 55 years 30 years C48-C47 Corpus required for this annuity 73,868,937 Rs. PV(((1+6%)/(1+4.5%))^(1/12)- income at retirement age 1,30*12,- 100000*(1+4.5%)^21,0,1) Funds required to buy a 10-year 41,248,029 Rs. 73868937/(1+6%)^10 deferred annuity of yield 6% p.a. Page # 118

Page 2 of 6 Q8 C) Rs. 1.50 crore 1,200,000 Rs. p.a. 12*100000 (Solution given below) 1200000*(1+4.5%)^21 Retirement income considered in current terms Inflation expected throughout 4.50% p.a. Urvashi's working years (retirement 21 yrs at 55, current age 34) 3,024,289 Rs. p.a. Living expenses needed on 30 yrs retirement No. of years retirement income stream required (up to age 85) Yield of investment instruments post 6.50% p.a. retirement Retirement Corpus required at age 55 69,854,203 Rs. PV((1+6.5%)/(1+4.5%)-1,30,- of Urvashi 3024289,0,1) Accumulation: NPS account current balance 2,187,000 Rs. 2*250000 Total contributions in the current 500,000 Rs. year 7.50% p.a. Rate of return expected upto 5.00% retorement (21 years) Increment expected year-on-year in NPS contributions Value of NPS account on retirement 45,596,351 Rs. 2187000*(1+7.5%)^21+50000 age 0*((1+7.5%)^21- PPF Balance at age 34 (initial maturity 659,000 Rs. (1+5%)^21)/(7.5%-5%) in 11 years) 21 Rs. 11+5+5 Total contributions till Urvashi's age 150,000 55 (after 2 extension blocks of 5 years each) Annual contributions starting immediately Page # 119

Average rate of return considered 6.50% p.a. from PPF Rs. 9,238,263 Rs. Value of PPF account on retirement Rs. FV(6.5%,21,-150000,- age 54,834,614 659000,1) - Total accumulation toward 45596351+9237263 15,019,589 retirement corpus 54834614-69854203 Excess/(shortfall) in meeting retirement goal Q9 A) Concentration risk and liquidity risk Page 3 of 6 Q10 B) Rs. 11.16 lakh (Solution given below) Funds required for each child's 1,000,000 Rs. marriage at their respective age of 27 p.a. p.a. Cost escalation for marriage expenses 6% 1000000*(1+6%)^13 11% Rs. PV(6.5%,3,0,-2132928,0) Return expected from equity 2,132,928 portfolio Rs. 1765743/(1+11%)^10 Suryansh's marriage goal will have 1,765,743 Rs. 1000000*(1+6%)^18 then cost after 13 years (he is 14 621,867 (PV1) PV(6.5%,3,0,-2854339,0) now) Rs. 2362962/(1+11%)^15 Value of 3-year, 6.5% p.a. secured debentures to be bought 3 years Rs. 621867+493869 prior Rs. (PV1) Page # 120 PV in equity portfolio required today PV for this goal (10 years prior) (1+2) Dhruvi's marriage goal will have then 2,854,339 Rs. cost after 18 years (she is 9 now) 2,362,962 493,869 Value of 3-year, 6.5% p.a. secured debentures to be bought 3 years prior PV in equity portfolio required today for this goal (15 years prior) Total funds to be carved out from 1,115,737 equity potyfolio for the purpose 500,000 Q11 C) Rs. 4,37,562 (Solution given below) Current Amount required for

vacation today Cost escalation for vacation expenses 7% p.a. 500000*(1+7%)^1.75 562,849 Rs. Vacation to start from December (1+7%)^2-1 next year; first vacation expense 20 p.a. (1+11%)^2-1 14.49% Urvashi is currently 34, vacation 11.00% Rs. PV((1+23.21%)/(1+14.49%)- starts just before her age 36 and 23.21% Rs. 1,20,-562849,0,1) continues until she is Rs. Rs. 6120702/(1+11%)^1.5 74, i.e. total drawal years from fund Rs. 1278000*(1+11%)^(1/4) As the vacation is in alternate years, 5233796-1311796 the escalation rate between two PMT(11%,21,-3922014,0,1) successive vacations will be: Return from Equity ETF Impact of double year growth in Equity ETFs The size of vacation fund required on first withdrawal in Dec next year, considering Equity ETFs 6,120,702 PV of these funds when annual 5,233,796 contributions start 1,311,782 Accumulation: 3,922,014 437,562 Amount earmarked today from demat account, valued at June this year Balance funds to be accumulated through annual conributions beginning June this year until retirement, i.e. for 21 years (considering last conribution at age 54) Annual contributions required Page 4 of 6 Page # 121

Q12 C) Rs. 27,603 2,500,000 Rs. 2500000*(1+8%)^8 8% p.a. (4627325/2)/(1+6.5%)^3 (Solution given below) p.a. Funds required for each child's 12.50% Rs. (4627325/2)/(1+5%) professional course at their 4,627,326 1915363/(1+12.5%)^5+22034 respective age of 22 1,915,364 Rs. 2,203,488 88/(1+12.5%)^7 Cost escalation for professional 2,029,037 Rs. 2500000*(1+8%)^13 course expenses 6,799,059 (6799059/2)/(1+6.5%)^3 2,814,298 Rs. (6799059/2)/(1+5%) Combined return expected from 3,237,647 (PV1) 2814297/(1+12.5%)^10+3237 strategic theme equity funds 1,654,422 647/(1+12.5%)^12 3,683,459 Rs. 2029036+1654421 Suryansh's professional course will 1,545,000 have then cost after 8 years (he is 14 2,138,459 Rs. 3683459-1545000 now) Value to be redeemed and invested Rs. in 6.5% p.a. instrument of 3 years duraion Rs. Value to be redeemed and invested (PV2) in 5% p.a. instrument of 1 years duraion PV (1+2) Total funds required in equity Rs. schemes today for Suryansh's Rs. professional course Dhruvi's professional course will have then cost after 13 years (she is 9 now) Value to be redeemed and invested in 6.5% p.a. instrument of 3 years duraion Value to be redeemed and invested in 5% p.a. instrument of 1 years duraion Total funds required in equity schemes today for Suryansh's professional course Total funds required in equity schemes today for both children's prof. courses Funds available today in equity MF schemes rearranged Balance funds to be accumulated through regular monthly equity investments Page # 122

Monthly investment in Equity 27,603 Rs. PMT((1+12.5%)^(1/12)- segments for 12 years 1,12*12,-2138459,0,1) Q13 Q14 A) Such a Trust shall protect assets transferred and shall manage them as per guidelines issued to the trustee until either or both of her children reach/es a specified age to be defined by Urvashi B. LTCG tax of Rs. 63898 (Solution given below) Acquisition price of unlisted shares 75,000 Rs. 75000*289/184 (Sept 2014) Transfer price in April 2019 425,000 Rs. 75000*289/184 184 425000-117799 CII: 2014-15 289 307201*20.8% CII: 2019-20 117,799 307,201 Indexed cost of acquisition 63,898 Capital Gains with indexation Long Term Capital Gain Tax @20.8% Page 5 of 6 Q15 B) Rs. 30,960 (Solution given below) Initial investment made on 1st March 100,000 Rs. 2016 Rs. units NAV of initial investment 17.521 Rs. Units allotted in initial investment 5,707.44 Rs. 100000/17.521 Current fund value 765,000 Rs. Total funds invested through SIPs 540,000 with the last three years Current NAV at which the fund is 26.238 valued Page # 123

Value of units redeemed that were 149,752 Rs. 5707.437*26.238 allotted in the initial investment (more than 3 years) 615,248 Rs. 765000-149752 Value of units redeemed that were allotted in the SIPs (within last 3 254 Rs. 100000*289/254 years) 289 Rs. 149752-113780 Cost Inflation Index 2015-16 Rs. 615248-540000 113,780 Rs. 35972*20.8% Cost Inflation Index 2019-20 Rs. 75248*31.2% Cost of acquisition of initial 35,972 Rs. investmenmt for long term capital 75,248 7482+23477 gains 7,482 Long term capital gains 23,477 30,960 Short term capital gains Long term capital gains tax Short term capital gains tax Total tax liability on the redemption transaction alone for AY2020-21 Page # 124

Case Study Sample - 1 (Roger) (Source: FPSB) (Reference Date: 1st April, 2019) Roger, aged 29 years, is working with a multinational company since December 2012. He has approached you, a CFPCM practitioner, for preparing his Financial Plan. He is staying in his own house at Ahmedabad. His wife Angela, aged 31 years, is a fashion designer. She has set up a boutique on rent and earned a net profit of ₹ 5.5 lakh in the previous financial year. They have a son, Mark of age 4 years, and a year old daughter, Stephanie. Roger is also supporting his parents to the extent of ₹ 20,000 per month. They stay at their ancestral house at Surat. The family’s monthly house hold expenses are ₹ 40,000 p.m. (excluding insurance premium and EMIs). Roger normally gets 10% increase in his gross salary year-on-year in the beginning of every financial year, apart from bonus. The bonus for the previous financial year at ₹ 3.3 lakh (net of tax) is agreed to be credited to his account at the end of this month. He has taken a family floater policy for Health Insurance involving an annual premium of ₹ 16,268 and a total cover of ₹ 15 lakh. Roger’s monthly salary (for FY 2019-20): Basic Salary : ₹ 60,000 DA (forming part of Salary) : 50% of Basic salary House Rent allowance : ₹ 18,000 Transport Allowance : ₹ 5,000 Medical Reimbursement : Actual expenses up to ₹ 1,250 per month Executive Allowance : ₹ 10,000 Couple’s Current Assets & Liabilities (As on 31st March, 2019) Assets: House : ₹ 75.00 lakh (Current market value, purchase cost ₹ 40 lakh) Car : ₹ 4.00 lakh (Depreciated value) Public Provident Fund - PPF1 : ₹ 4.90 lakh Insurance – Money Back policy2 : ₹ 3.00 lakh (Sum assured) Child Plan – Life insurance3 : ₹ 12.00 lakh (Sum Assured) Gold ornaments4 : ₹ 4.50 lakh Equity Mutual Fund schemes5 : ₹ 7.85 lakh ________ 1 Opened in December, 2013 in the name of Roger Page # 125

2 Purchased on 25th October, 2015; annual premium paid ₹ 14,798; 20-year policy with 20% of sum assured payable on survival on 5th, 10th and 15th years and the balance on maturity. 3 Purchased when Mark was 2 year old; term of 15 years; annual premium ₹ 41,374 4 Gifted on marriage in November 2013 at then value ₹ 1.75 lakh. 5 Three schemes; current assets value in one scheme is ₹ 2.5 lakh, in second ₹ 3.5 lakh with monthly Systematic Investment Plan (SIP) of ₹ 10,000; the third is Equity Linked Saving scheme, invested ₹ 1 lakh in March 2017. Portfolio of Equity Shares6 : ₹ 3.95 lakh Bank fixed deposits7 : ₹ 4.00 lakh (Principal, in Angela’s Bank account – Roger name from her business income) : ₹ 0.75 lakh Bank account – Angela : ₹ 0.95 lakh Liabilities: Home loan8 : ₹ 17.85 lakh (Principal outstanding) Car Loan9 : ₹ 3.05 lakh (Principal outstanding) Goals: 1. Accumulate in a fund, higher education expenses of Mark and Stephanie. Expenses at their respective age of 18 years are ₹ 4 lakh p.a. (current cost) required for four years, cost escalation 8% p.a. 2. Marriage expenses of ₹ 10 lakh (current cost) for each child at around their respective age of 25 years, cost escalation 9% p.a. 3. Retirement corpus at Roger’s age of 58 years to sustain 70% of pre-retirement household expenses, inflation adjusted, till his lifetime and 70% of then expenses till Angela’s expected life. 4. A bigger house valued at ₹ 1 crore today, 5 years from now by disposing of the current house and foreclosing the loan. 5. Build a separate fund for vacation expenses of ₹ 1.5 lakh p.a. (current cost), first expenses to be drawn after 5 years and thereafter every year continuing up to the year of Roger’s retirement, cost escalation 7% p.a. A suitable lump sum is to be invested immediately followed by an investment regime. Life Parameters: Roger’s Expected Life : 75 years Angela’s Expected Life : 80 years _________________ 6 The Demat account in which Roger and Angela are respectively first and second holders was started in 2015 7 Three deposits; ₹ 2 lakh made on 1st July 2016 for 3 years at 9.75% p.a., ₹ 1 lakh made on 1st July 2017 for 2 years at rate 9.25% p.a. and ₹ 1 Lakh made on 1st July 2018 for 1 year and 1 day at 8.75% p.a.(interest is compounded quarterly and is cumulated to be received on respective maturities.) Page # 126

8 Home loan of ₹ 24 lakh for a 15-year term taken in April, 2013 at rate of interest fixed for first 3 years at 10% p.a., and floating thereafter at 1.5% above RBI Repo rate. 9 Car loan of ₹ 5.5 lakh taken in April, 2017 at a fixed interest of 11% p.a. for a 4-year term; Car cost ₹ 8 lakh. Assumptions regarding pre-tax returns on various asset classes : 1) Equity & Equity MF Schemes/Index ETFs : 11.00% p.a. 2) Balanced MF Schemes : 9.50% p.a. 3) Bonds/Govt. Securities/Debt MF Schemes : 7.50% p.a. 4) Liquid MF Schemes : 6.00% p.a. 5) Gold & linked investments : 6.00% p.a. 6) Real Estate Appreciation : 6.50% p.a. 7) Bank/Post Office Term Deposits (> 1 year) : 7.25% p.a. 8) Public Provident Fund/EPFO : 7.75% p.a. Assumptions Regarding Economic Factors: : 5.00% p.a. 1) Inflation : 5.50% p.a. 2) Expected Return in Risk Free Instruments Cost Inflation Index: 2001-2002 100 2004-2005 113 2007-2008 129 2010-2011 167 2013-2014 220 2016-2017 264 2002-2003 105 2005-2006 117 2008-2009 137 2011-2012 184 2014-2015 240 2017-2018 272 2003-2004 109 2006-2007 122 2009-2010 148 2012-2013 200 2015-2016 254 2018-2019 280 2019-2020>289 Page # 127

Questions 1) Before beginning work on Roger’s Financial Plan, you have drafted a document outlining the “Scope of Engagement” and sought Roger to mutually define and determine the activities that may be necessary to pursue. Roger asked you about relevance of such a document. In the context of Financial Planning Profession, you explain about the “Letter of Engagement” as a _________. [2 marks] A) professional requirement under Code of Ethics of FPSB India B) professional requirement under Practice Guidelines of FPSB India C) necessary legal requirement as per Contract Act 1872 D) document for his personal record 2) You have finished analysis of Roger’s financial situation and risk profile. Which of the following is the next appropriate step in the financial planning? [2 marks] A) Specify financial goals which can be achieved within Roger’s financial situation based on the information collected B) Fix the scope of engagement based on the available information already collected C) Consider such assumptions of investment returns, inflation, tax rates, etc as to maximize the chances of achieving Roger’s goals D) Identify other issues that may potentially impact Roger’s ability to achieve financial goals 3) Roger wants to estimate the amount of finance needed to buy the proposed new house after 5 yea₹ This could be arrived at by utilizing the net amount from the sale proceeds of his existing house after 5 yea₹ The outgoings from such proceeds would be the outstanding loan amount and a sum of ₹ 10 lakh towards meeting capital gains tax liability on existing house and the statutory charges, furnishing expenses of new house. You expect the average Repo rate of 6.5% to be maintained by RBI over the next 5 year [3 marks] A) ₹ 75 lakh B) ₹ 60 lakh C) ₹ 54 lakh D) ₹ 37 lakh 4) You give a quick look at the assets and liabilities of the couple, and before drawing a comprehensive picture of adequate insurance protection and a strategy to achieve the same, you suggest to take cover on an immediate basis, which is _______. [2 marks] A) They must take Mortgage Redemption Insurance or an equivalent term insurance to cover outstanding loans B) They must take Accident Insurance C) They must take Critical illness insurance Page # 128

D) They must take Unit Linked Insurance Policies for their financial goals 5) You compute the value of additional life cover for Roger by considering 80% of the current household expenses, (inflation adjusted) up to Angela’s age of 55 years and further 80% of then expenses inflation-linked for the remaining period of her expected life by considering investment in debt MF schemes. This cover required to be taken as term insurance exclusive of the sum assured under current insurance policies comes to ______. [3 marks] A) ₹ 120 lakh B) ₹ 135 lakh C) ₹ 220 lakh D) ₹ 105 lakh 6) Roger’s ideal life cover has to be estimated which in case of any exigency will first repay the outstanding loans and the remaining would be invested along with the couple’s existing financial assets. Such combined corpus would be invested in a 7.5% p.a. return instrument to sustain the family’s living expenses and the specific financial goals of higher education of their children. The living expenses need to be taken as inflation-adjusted to the extent of 80% of their present household expenses for 50 year. What should be this ideal cover? [4 marks] A) ₹ 147 lakh B) ₹ 165 lakh C) ₹ 180 lakh D) ₹ 230 lakh 7) Roger and Angela wish their retirement corpus, as per proposed goal, to also have a provision of gifting ₹ 50 lakh to each of their children and an additional ₹ 25 lakh towards charity to an Old Age Home at Roger’s age of 70 year. The sums are at absolute values then. They also wish to provide in the corpus an additional ₹ 10,000 per month (current costs) towards healthcare after Roger’s age of 70 year. You estimate the required corpus, considering the same shall be invested in investment yielding 6.5% p.a., to be _________. [3 marks] A) ₹ 3.53 crore B) ₹ 3.20 crore C) ₹ 3.78 crore D) ₹ 3.67 crore 8) You sensitize on the post-retirement parameters considered as: investment return 6.5% p.a., inflation 5% p.a., and the specified longevity as you work out retirement corpus. You stress test the same as: investment return 6% p.a., inflation 5.5% p.a., increased longevity of Roger by 5 years and of Angela by 2 years, and no further curtailment after Roger’s death. You work out the revised corpus. What additional funds need to be accumulated by Roger’s retirement age? Alternately, by what percentage the retirement expenses should be curtailed to retain this cushion? [5 marks] A) ₹ 57 lakh; 44% curtailment B) ₹ 14 lakh; 33% curtailment Page # 129

C) ₹ 129 lakh; 55% curtailment D) ₹ 26 lakh; 36% curtailment 09) You inform Roger and Angela about the recent vehicle of taking exposure to Gold, which is Sovereign Gold Bonds (SGB). Which of the attributes about the SGB is CORRECT? [2 marks] A) The Capital Gains on redeeming these bonds on maturity are exempt from income tax B) They work like zero-coupon bonds C) The quoted prices of SGBs currently are very close to ruling Gold prices D) The redemption price on maturity is guaranteed not to be below the issue price of the respective SGB 10) Towards the marriage goal of the children, you suggest Roger to make maximum permissible subscriptions to his PPF account towards the end of every financial year and extend the account twice beyond initial maturity for terms of 5 years each with similar subscriptions. The third term of 5 years is continued without further contribution. Roger shall withdraw about 50% of accumulation for the marriage expenses of mark and the remaining for the marriage expenses of Stephanie. What are the expected individual withdrawals and shortfalls in meeting the marriage expenses? [4 marks] A) Mark ₹ 51.5 lakh, 16% shortfall; Stephanie ₹ 64.8 lakh, 18% shortfall B) Mark ₹ 47.7 lakh, 22% shortfall; Stephanie ₹ 59.7 lakh, 24.5% shortfall C) Mark ₹ 52.3 lakh, 14% shortfall; Stephanie ₹ 65.9 lakh, 17% shortfall D) Mark ₹ 45 lakh, 26% shortfall; Stephanie ₹ 56.7 lakh, 28% shortfall 11) Roger and Angela will set aside immediately a sum of ₹ 10 lakh towards setting up a fund for vacation. They will start contributing annual investments beginning April 2020 till Roger’s age of 55. The annual investment will be doubled after 14 such investments. You devise an asset allocation for the vacation fund to yield 11% p.a. for the first 15 years and 9.5% p.a. thereafter. What should be the amount of initial annual investment? [5 marks] A) ₹ 1,75,500 B) ₹ 1,23,600 C) ₹ 97,900 D) ₹ 1,15,300 12) For the higher education expenses for Mark and Stephanie, Roger starts accumulating funds with monthly investment of ₹ 20,000 in an aggressive asset allocation yielding 12% p.a. After 7 years the allocation is moderated to yield 10% p.a. and while the investment is raised to ₹ 40,000 p.m. After 12 years, the funds accumulated are shifted to suitable debt instruments from which distribution towards higher education is made as proposed. What excess/shortfall of funds you expect after 12 years by following this investment strategy? [5 marks] A) Shortfall ₹ 28.16 lakh B) Shortfall ₹ 10.12 lakh C) Excess ₹ 7.60 lakh Page # 130

D) Excess ₹ 12.48 lakh 13) Roger asks for your guidance regarding different modes of tax efficient estate planning which can help in creating and distributing family assets. You opine that a Trust would be a more appropriate option because______. [2 marks] A) there is no taxation applicable on trust income B) they have fixed rate of tax which is far lower than tax rates for individual assessees C) future capital gains tax on assets transferred to trust could be lower D) all future earnings from assets transferred to trust are exempt 14) Roger invested ₹ 4 lakh on 20th September 2018 in an Equity Mutual Fund scheme at NAV of ₹ 28.273 per unit. The scheme declared dividend of ₹ 5 per unit, the Record Date being 4th December 2018. The prevailing NAV of the scheme is ₹ 22.367 per unit. If he sells all the units of the scheme today, what would be the implication of this transaction in his IT return of AY 2020-21? [3 marks] A) ₹ 12,818 short term capital loss to be set off against capital gains in AY 2020-21 or carried in 8 subsequent years B) ₹ 83,557 short term capital loss to be set off against capital gains in AY 2020-21 only C) ₹ 83,557 short term capital loss to be set off against capital gains in AY 2020-21 or carried in 8 subsequent years D) ₹ 12,818 short term capital loss to be set off against capital gains in AY 2020-21 only 15) Roger wants to invest the maturity proceeds of all his fixed deposit investments in the 2.50 %-SGB (Sovereign Gold Bonds) of a series quoted at ₹ 2,660 per bond, at a discount of 7.3% to their issue price (issue date: 18-July-2018). Roger wishes to hold SGBs till maturity. Calculate the impact of taxation in the AY 2020-21 in respect of these transactions if the SGBs could be bought at the quoted rate when FDs mature. Also evaluate capital gains on maturity in the 8-year tenure of these SGBs, if on maturity Gold price in its purest form is expected at ₹ 4,000 per gram. (CII expected in the year of maturity may be considered as 348). [5 marks] A) ₹ 1,31,556 \"Income from Other Sources\" in AY2020-21; Capital gains of 1,14,030 on maturity B) ₹ 1,31,556 \"Income from Other Sources\" in AY2020-21; Capital gains on maturity shall be tax- exempt C) ₹ 24,745 \"Income from Other Sources\" in AY2020-21; Capital gains on maturity shall be tax- exempt D) ₹ 29,477 \"Income from Other Sources\" in AY2020-21; Capital gains of 1,37,853 on maturity Page # 131

Solutions Q1 B) professional requirement under Practice Guidelines of FPSB India Q2 D) Identify other issues that may potentially impact Roger’s ability to achieve financial goals Q3 C) ₹ 54 lakh (approx.) (Solution given below) Current value of the desired house ₹10,000,000 Expected value of new house after 5 years considering ₹13,700,867 6.5% appreciation ₹ 10000000*(1+6.5%)^5 Existing market value of the occupied house 7,500,000 years Expected market value in five years considering ₹10,275,650 p.a. 6.5% appreciation 7500000*(1+6.5%)^5 Loan outstanding on existing home to be settled Principal value of 15-year loan (availed in April 2013) ₹ 2,400,000 EMI considering 10% p.a. interest for first three years ₹25,791 p.m. PMT(10%/12,15*12,-2400000,0,0) Loan outstanding as at end March, 2016 ₹2,158,061 PV(10%/12,(15-3)*12,-25791,0,0) The average rate on loan 1.5% above the Repo rate 8.00%p.a. of 6.5% Revised EMI (average) over the next 8 years ₹23,360 p.m. (3 years till Mar’19 + 5 years until sold) PMT (8%/12,(15-3)*12,-2158061,0,0) Loan outstanding as at end March, 2024 (five ₹956,870 years from today) PV(8%/12,(15-3-3-5)*12,-23360,0,0) Amount to be set aside for tax liability, duties ₹1,000,000 and furnishing Amount that can be utilized from sale proceeds to ₹8,318,780 buy new house (10275650-956870-1000000) Amount to be financed for new house ₹5,382,087 (13700867-8318780) Q4 A) They must take Mortgage Redemption Insurance or an equivalent term insurance to cover outstanding loans Q5 D) ₹ 105 lakh (approx.) 40,000 ₹ p.m. (Solution given below) Current household expenses Page # 132

Annual expenses in current terms 480,000 ₹ p.a. Inflation rate 5.00% p.a. Return on Debt MF schemes 7.50% p.a. Current age of Angela 31 years PV of 80% of current expenses required till Angela's ₹7,124,721 age of 55 years PV((1+7.5%)/(1+5%)-1,55-31,- 480000*80%,0,1) Household expenses (80% of current) in the 1,238,438 55th year of Angela ₹ 480000*80%*(1+5%)^(55-31) PV at Angela's age of 55, of 80% of then living ₹18,945,605 expenses for remaining 25 years PV((1+7.5%)/(1+5%)-1,80-55,- 1238438*80%,0,1) PV of post-55 years expenses today ₹3,339,684 (income stream drawn from debt funds) 18945605/(1+7.5%)^(55-31) Life cover required to the extent of covering living 10,464,405 expenses as proposed ₹ 7124721+3339684 (Approximate) ₹ 105 lakh Q6 A) ₹ 147 lakh (Solution given below) Current expenses 480,000 p.a. Rate of return to invest claim proceeds and other assets 7.50% p.a. Inflation 5.00% p.a. Living Expenses 80% of present expenses for the next 50 years 11,420,551 ₹ (PV):1 PV((1+7.5%)/(1+5%)-1,50,- 480000*80%,0,1) Higher Education Expenses Mark: ₹ 4 lakh p.a. for 4 years required after 14 years 1,719,344 ₹ (PV):2 at 8% escalation PV((1+7.5%)/(1+8%)-1,4, - 400000*(1+8%)^14,0,1)/(1+7.5%)^14 Stephanie: ₹ 4 lakh p.a. for 4 years required after 17 1,743,447 ₹ (PV):3 years at 8% escalation PV((1+7.5%)/(1+8%)-1,4, - 400000*(1+8%)^17,0,1)/(1+7.5%)^17 Loans outstanding Housing loan 1,785,000 ₹ (PV):4 Page # 133

Car loan 305,000 ₹ (PV):5 Total corpus required to meet the living and HE 16,973,342 ₹ (PV): 1 to 5 expenses and loans (PV:1 to 5) PV1+PV2+PV3+PV4+PV5 Financial Assets: Cash in bank accounts and FDs ₹ 570,000 Equity shares and Equity MF scheme investments ₹ 1,180,000 PPF A/c balance ₹ 490,000 Total of Financial Assets ₹ 2,240,000 Therefore, Life cover needed at this stage for Roger ₹ 14,733,342 16973342-2090000 (Approximate) ₹ 147 lakh Q7 B) ₹ 3.20 crore (approx.) (Solution given below) Monthly household expenses ₹ 40,000 p.m. Required Annual expenses in the first year after ₹ 1,383,022 retirement (age 58 of Roger) 12*40000*70%*(1+5%)^(58-29) Rate at which corpus is invested 6.5% p.a. Inflation 5.0% p.a. PV of expenses required from Roger's age of 58 to 70 ₹ 15,369,121 (corpus: 1) PV((1+6.5%)/(1+5%)-1,12,-1383022,0,1) PV (on retirement) of Provision of Gifts and Charity at 5,871,036 age 70 ₹ (corpus:2) 12500000/(1+6.5%)^12 Additional ₹ 10,000 p.m. (current cost) at Roger's 73,920 age of 70 ₹ p.m. 10000*(1+5%)^(70-29) Additional Annual expenses to be provided for medical 887,039 care at Roger's age of 70 ₹ 73920*12 Basic Household expenses at Roger's age of 70 2,483,708 ₹ 1383022*(1+5%)^(70-58) Total Annual expenses required at Roger's age of 70 3,370,747 ₹ 887039+2483708 Corpus (at 70 of Roger) for expenses required from age 16,385,620 70 to 75 of Roger ₹ PV((1+6.5%)/(1+5%)-1,5,- 3370747,0,1) Page # 134

PV of this sum (computed at Roger's age of 70) on 7,696,045 Roger's retirement (at age 58) ₹ (corpus:3) 16385620/(1+6.5%)^(70-58) Expenses further curtailed to 70% for Angela (Roger 3,011,415 dies at 75, Angela survives at 77) ₹ 3370747*(1+5%)^5*70% Corpus at Roger's age of 75 (death) for next three 8,907,600 years of Angela's survival# ₹ PV((1+6.5%)/(1+5%)-1,3,- 3011415,0,1) Corpus (at 58) for expenses required at Roger's age 3,053,637 75 for Angela's survival ₹ (corpus:4) 8907600/(1+6.5%)^(75-58) Total Corpus required at age 58 of Roger 31,989,838 ₹ (corp 1 to 4) Q8 A) ₹ 57 lakh; 44% curtailment #Angela (life exp. 80) survives Roger by (Solution given below) 3 years Corpus worked out in the Initial Scenario: Initial rate at which corpus is invested 6.5% p.a. Initially assumed Inflation rate 5.0% p.a. Current house hold expenses 480,000 ₹ p.a. Household expenses budgeted for retirement after 1,383,022 29 yrs (Rogers' age 58) ₹ p.a. 480000*70%*(1+5%)^29 Age of Angela on Roger's retirement (Angela is senior 60 years by 2 years) Life expectancy of Angela 80 years Retirement corpus to last (out of which last 3 years 20 years further reduced to 70%) PV of expenses: Initial 17 years (till the survival of 21,039,890 Roger up to age 75, Angela 77) ₹ PV((1+6.5%)/(1+5%)-1,17,- 1383022,0,1) PV of expenses: Balance 3 years (Angela's living 2,250,048 expenses from age 77 to 80) ₹ PV((1+6.5%)/(1+5%)-1,3, - 1383022*70%*1.05^17,0,1)/ Initially worked out corpus (1+6.5%)^17 23,289,939 ₹ 21039890+2250048 Page # 135

Stress test: lower yield, higher inflation, increased longevity Retirement corpus to last (Roger's 80 with now coincide 22 years with Angela's 82) 80-58 Revised Yield from investing corpus 6.00% p.a. Revised Rate of inflation 5.50% p.a. Retirement corpus required 28,965,848 ₹ PV((1+6%)/(1+5.5%)-1,22,- 1383022,0,1) Cushion built in the corpus 5,675,909 ₹ 28965848-23289939 Alternately, the reduction sought in post-retire expenses (2nd Scenario) Required expenses to be withdrawn in the 1st year 1,112,016 after retirement 1383022*(23289939/28965848) Pre-retirement expenses (at the given rate of inflation 1,975,745 up to retirement) 480000*(1+5%)^29 Curtailment in expenses 43.72% 1-(1112016/1975745) Q9 C) The Capital Gains on redeeming these bonds on maturity are exempt from income tax Q10 B) Mark ₹ 47.7 lakh, 22% shortfall; Stephanie ₹ 59.7 lakh, 24.5% shortfall (Solution given below) PPF account balance as on 31-March-2019 ₹ 490,000 Account's initial maturity (opened in Dec-2013) is 1-April-2029 Number of subscriptions from 31-Mar-2020 to 10 31-Mar-2029 Number of subscriptions from 31-Mar-2030 to 10 31-Mar-2039 (2 extensions) Rate of interest assumed throughout 7.75% p.a. Maximum subscription at the end of every financial ₹ 150,000 year (for 20 years) Accumulated balance on 31-March-2039 (Mark's age ₹ 8,857,561 24, Stephanie' age 21) FV(7.75%,20,-150000,-490000,0) The account is maintained without subscription for 5 more years Accumulated balance on 31-Mar-2040 (Mark's ₹ 9,544,022 age 25 years) 8857561*(1+7.75%) Page # 136

50% of accumulated amount withdrawn for Mark's ₹ 4,772,011 marriage expenses 9544022/2 Estimated expenses (current ₹ 10 lakh, escalating ₹ 6,108,808 by 9% p.a.) for Mark 1000000*(1+9%)^21 Shortfall in meeting Mark's marriage expenses 21.88% 1-(4772011/6108808) Remaining amount in PPF accumulated till ₹ 5,969,710 31-Mar-2043: Stephanie's marriage (9544022/2)*(1+7.75%)^3 Estimated expenses (current ₹ 10 lakh, escalating ₹ 7,911,083 by 9% p.a.) for Stephanie 1000000*(1+9%)^24 Shortfall in meeting Stephanie's marriage expenses 24.54% 1-(5969710/7911083) Q11 D) ₹ 115,300 (Solution given below) ₹150,000 The current cost of annual vacation (1-April-2019); Roger's age 29 7.00% p.a. Cost escalation provisioned in the vacation expenses ₹ 1,000,000 Lump sum invested on 1-April-2019 in the fund (Roger's age 29) 26 years Total annual investments from 1-April-2020 to 1-April-2045 (till Roger is 55) 25 years Total withdrawals from 1-April-2024 to 1-April-2048 (till Roger is 58) 29 years Total investment peiod (1-April-2019 to 1-April-2048) 11.00% p.a. Return expected from Asset allocation in the first 15 years (Initial + 14 investments) 9.50% p.a. Return expected from Asset allocation in remaining period ₹ 210,383 Vacation Expenses enumerated Vacation expenses to be first drawn after 5 year, ₹ 1,939,223 i.e. on 1-April-2024 PV((1+11%)/(1+7%)-1,11,-210383,0,1) PV of expenses (first 11 years, 1-Apr-2024 to 1,277,426 ₹ (PV:1) 1-Apr-2034) drawn from 11% return 1939223/(1+11%)^4 PV as on 1-April-2020 Page # 137

Likely vacation expenses on 1-April-2035 ₹ 442,825 150000*(1+7%)^16 PV of expenses (next 14 years, 1-Apr-2035 to ₹ 5,358,498 1-Apr-2048) drawn from 9.5% return PV((1+9.5%)/(1+7%)-1,14, -442825,0,1) PV as on 1-April-2020 1,135,291 ₹ (PV:2) 5358498/((1+11%)^14*(1+9.5%)) Total PV of all vacations provisioned (Pv:1 to 2) ₹ 2,412,718 1277426+1135291 Accumulation: Initial sum invested (1-April-2019) in the needed ₹ 1,000,000 fund for vacation Accumulation of initial sum as on 1-April-2020 ₹ 1,110,000 (1000000*1.11) Remaining amount to be provisioned by way of ₹ 1,302,718 annual investments 2412718-1000000 Let us assume that initial investment installment ₹ 100 (first 14) be PV of first 14 investments of ₹ 100 from 1-Apr-2020 ₹ 774.99 to 1-Apr-2033 PV(11%,14,-100,0,1) investments in the latter part, 12 annual investment ₹ 200 (from 1-Apr-2034 to 1-Apr-2045) PV of next 12 investments of ₹ 200 from ₹ 354.83 1-Apr-2034 to 1-Apr-2045 PV(9.5%,12,-200,0,1)/(1+11%)^14 PV of all 26 Annual Investments as provisioned ₹ 1,129.81 774.99+354.83 Amount of Annual Investment equivalent to the ₹ 115,304 assumption of ₹ 100 (1302718/1129.81)*100 Q12 B) Shortfall ₹ 10.12 lakh (Solution given below) ₹ 400,000 p.a. Higher Edu. expenses, in current terms, of Mark ₹ 400,000 p.a. (age 4) at his age 18, 19, 20 & 21 Higher Edu. expenses, in current terms, of Stephanie 8.00% p.a. (age 1) at her age 18, 19, 20, 21 7.50% p.a. Cost escalation for higher education expenses Expenses drawn from a fund invested in debt instruments at Page # 138

Accumulation period through monthly investments 12 years in Asset Allocation Fund Present Value of Higher Education Expenses after 12 years PV of Higher Edu. Expenses of Mark at his age of ₹ 4,732,399 18 (after 14 years) in Risk Free PV((1+7.5%)/(1+8%)-1,4,- 400000*(1+8%)^14,0,1) PV of such expenses after 12 years when drawn from 4,095,099 ₹ PV:1 debt investments 4732399/(1+7.5%)^2 PV of Higher Edu. Exp. of Stephanie at her age of ₹ 5,961,460 18 (after 17 years) in Risk Free PV((1+7.5%)/(1+8%)-1,4,- 400000*(1+8%)^17,0,1) PV of such expenses after 12 years when drawn from 4,152,506 ₹ PV:2 debt instruments 5961460/(1+7.5%)^5 Total PV of Higher Edu. Exp. After 12 years in Risk 8,247,605 ₹ PV:(1+2) Free instruments 4095099+4152506 Accumulation Aggressive Asset Allocation (year 1 to 7) 7 years Return expectation (aggressive) 12.00% p.a. Monthly investment ₹ 20,000 Accumulation in 7 years ₹ 2,576,027 FV((1+12%)^(1/12)-1,12*7,-20000,0,1) Moderate Asset Allocation (year 8 to 12) 5 years Return expectation (aggressive) 10.00% p.a. Monthly investment ₹ 40,000 Accumulation in 12 years ₹ 7,235,587 FV((1+10%)^(1/12)-1,12*5,-40000,- 2576027,1) Shortfall expected after 12 years ₹ -1,012,018 7235587-8247605 Q13 C) future capital gains tax on assets transferred to trust could be lower Q14 A) ₹ 12,818 short term capital loss to be set off against capital gains in AY 2020‐21 or carried in 8 subsequent years (Solution given below) Investment amount on 20‐Sep‐2018 ₹ 400,000 Investment made at a price ₹ 28.273 Page # 139

Units allotted 14,147.773units (400000/28.273) Dividend received ₹ 5 per unit (RD 4‐Dec‐2018 is within 3 months of purchase date) 70,739 (14147.773*5) Price prevailing today (1‐Apr‐2019) 22.367 Redemption proceeds (within 9 months of dividend) 316,443 (14147.773*22.367) Short term Loss in the transaction (83,557) 316443‐400000 Under Section 94(7) dividend stripping applies in this case Hence, short term capital loss allowable in AY 2020-21 -12,818 (‐83557+70739) Note: As per Section 94(7), dividend stripping is applicable only if: 1. Shares or MF units are bought within 3 months of dividend record date 2. Shares are sold within 3 months of dividend record date/MF units are sold within 9 months of dividend record date 3. There is short term capital loss (STCL) on such sale 4. Dividend received is less than the STCL on sale If it is applicable, the amount of dividend received is deducted from the total STCL figure for shares/MF units sold. Balance will be either set‐off against capital gains, if any, or carried forward to next assessment year. Q15 C) ₹ 24,745 \"Income from Other Sources\" in AY2020-21; Capital gains on maturity shall be tax‐ exempt (Solution given below) As on 31‐Mar‐2019 ₹ 260,663 Amount cumulated in ₹ 2 lakh, 3‐year fixed deposit made on 200000*(1+9.75%/4)^11 1‐Jul‐2016 @9.75% p.a. Amount cumulated in ₹ 1 lakh, 2‐year fixed deposit made on ₹ 117,355 1‐Jul‐2017 @9.25% p.a. 100000*(1+9.25%/4)^7 Amount cumulated in ₹ 1 lakh, 1‐year fixed deposit made on 1‐Jul‐2018 @8.75% p.a. ₹ 106,707 Maturity proceeds to be received as on 1‐Jul‐2019 100000*(1+8.75%/4)^3 Amount cumulated in ₹ 2 lakh, 3‐year fixed deposit made on 1‐Jul‐2016 @9.75% p.a. ₹ 267,016 Amount cumulated in ₹ 1 lakh, 2‐year fixed deposit made on 200000*(1+9.75%/4)^12 1‐Jul‐2017 @9.25% p.a. ₹ 120,069 Amount cumulated in ₹ 1 lakh, 1‐year fixed deposit made on 100000*(1+9.25%/4)^8 1‐Jul‐2018 @8.75% p.a. ₹ 109,041 100000*(1+8.75%/4)^4 Page # 140

Total maturity proceeds of Fixed Deposits ₹ 496,126 Interest accrued and receivable in the FY2019‐20 (267016+240137+109041) ₹ 11,402 Current Quoted price of SGB (issue date: 18‐July‐2018) 496126‐(260663+117355+106707) ₹ 2,660 Number of SGBs to be bought at the quoted price 186.51 bonds(round-off 186) Coupon to be received on bonds (half‐yearly on 18‐Jul'19 and 18‐Jan'20) 2.50% p.a. Discount to issue price 7.30% Face value per unit of SGB ₹ 2,869 2660/(1‐7.3%) Face value of SGBs to be purchased ₹ 533,722 2869*186 interest to be received on bonds in the FY2019‐20 ₹ 13,343 533722*2.5% Total interest due to these transactions under 'Income from Other Sources' ₹ 24,745 11402+13343 Capital Gains on maturity of the SGBs in July 2026 shall be exempt from income tax Page # 141

Case Study Sample - 2 (Urvashi) (Source: FPSB) (Reference Date: 1st April, 2019) Ms. Urvashi, aged 34 years, is employed in a senior position in a Mumbai-based firm. She has a son Suryansh aged 14 years and a daughter Dhruvi aged 9 years. She is the sole guardian of her children pursuant to her recent divorce. She is currently residing in a rented house. Suryansh has just passed 8th standard while Dhruvi is studying in 3rd standard. She has approached you, a CFPCM practitioner, for preparing a Financial Plan for her family. She has plans to retire early from service at her age of 55 yea₹ She shares the following financial information with you: Salary Income (2019-2020) Annual (₹ lakh) Basic Salary : 25.00 Employer’s contribution to NPS : 2.50 HRA : 5.00 Other allowances and reimbursements : 3.00 Regular Outgoings: Monthly (₹) Basic Household Expenses : 40,000 Services availed : 18,000 School Fees : 25,000 House Rent : 35,000 Power, Telecom & Fuel : 12,000 Car Loan EMI : 18,275 Outgoings towards investment and insurance: (₹) Equity Mutual Fund17 : 25,000(Systematic Investment Plan - SIP) Debt Mutual Fund2 : 15,000 (Systematic Investment Plan - SIP) Insurance Premium3 : 38,759 Health Insurance Premium4 : 27,631 Car Insurance Premium : 8,637 Assets: (Valued on 31st March, 2019) (₹ lakh) Equity Mutual Fund schemes : 15.45 1 Diversified open-ended growth equity schemes; started 3 years ago with initial investment of Rs. 1 lakh; monthly SIP 2 Long-term long duration debt schemes with growth option, started 2 years ago, initial investment of Rs. 1 lakh; monthly SIP 3 Total Cover Rs. 1.5 crore across three policies of Rs. 50 lakh each, all term plans having cover up to Urvashi’s age of 50, 53 and 58 year respectively; annual premium 4 Total cover Rs. 20 lakh on two policies, one is floater Rs. 10 lakh cover, the other in Urvashi’s name; annual premium Page # 142

Debt Mutual Fund schemes : 5.79 Equity Shares in Demat Account : 23.92 Equity Linked Saving Scheme5 : 3.85 Public Provident Fund (PPF) A/c6 : 6.59 Gold & Diamond Jewellery : 10.75 Car7 : 4.50 Bank Account (Salary) : 3.82 Fixed Deposits8 : 6.00 Deposit with House Owner : 3.00 Liabilities: (Outstanding on 31st March, 2019) (₹ lakh) Car loan : 5.70 You, in consultation with Urvashi, have crystallized the following financial goals, for which the strategy is to be devised and presented to Urvashi: 1. Purchase a house in the next three years costing currently ₹ 1.25 crore; provide for own funds, transfer and stamp duty expenses to the extent of 30% of market value 2. Create a pool account and manage the same to plan for basic education of both children till their respective 18 years of age; current costs are ₹ 1.5 lakh p.a. till age 14 and ₹ 2 lakh p.a. thereafter till age 18, such expenses escalate at 10% p.a. 3. Create a corpus for higher education of both children at their respective age of 18 years; ₹ 25 lakh is the outlay in current terms for each child, such costs escalate at 8% p.a. 4. Create a combined corpus for the professional courses to be pursued by children with current outlay of ₹ 25 lakh each required at their respective age of 22 years, such costs escalating at 9% p.a., such corpus sustaining till the marriage of both the children tentatively at their respective age of 27 years; marriage costs at ₹ 20 lakh per marriage, escalating at 7% p.a. 5. Retirement Corpus for post-retirement income stream equivalent to 60% current expenses arrived at by omitting rent, EMI and school fees and considering provisions for gifting a lump sum ₹ 1 crore to her children when Urvashi attains 75 years of age; a further provision of donating ₹ 1 crore posthumously to a charitable trust on reaching age 85. 6. Create a fund in 10 years for a family world tour at an estimated ₹ 10 lakh at current costs, such costs escalating at 5% p.a. Life Parameters: Urvashi’s expected life currently estimated : 85 years Assumptions regarding pre-tax returns on various asset classes (1-3 years): 1) Equity & Equity MF Schemes/Index ETFs : 11.00% p.a. 2) Balanced MF Schemes : 9.50% p.a. 3) Bonds/Govt. Securities/Debt MF Schemes : 7.50% p.a. Page # 143

___________ 5 Invested ₹ 1 lakh in each of the previous three financial years in March every year 6 Account opened on 21st December 2011 7 Purchased on 1st March 2016 by availing a loan for ₹ 10 lakh (80% loan to value, 6-year, 9.5% p.a.) 8 Six Fixed Deposits each of ₹ 1 lakh at 7.75% p.a. interest, maturing on 1st date of months from April to September 2019, all deposits created from 15th September 2017 to 20th October 2017 on weekly intervals 4) Liquid MF Schemes : 6.00% p.a. 5) Gold & linked instruments : 6.00% p.a. 6) Real Estate Appreciation : 6.50% p.a. 7) Bank/Post Office Term Deposits (> 1 year) : 7.25% p.a. 8) Public Provident Fund/EPFO : 7.75% p.a. Assumptions Regarding Economic Factors: : 5.00% p.a. 1) Inflation : 5.50% p.a. 2) Expected Return in Risk Free Instruments Cost Inflation Index: 2001-2002 100 2004-2005 113 2007-2008 129 2010-2011 167 2013-2014 220 2016-2017 264 2002-2003 105 2005-2006 117 2008-2009 137 2011-2012 184 2014-2015 240 2017-2018 272 2003-2004 109 2006-2007 122 2009-2010 148 2012-2013 200 2015-2016 254 2018-2019 280 2019-2020>289 Page # 144

Questions 1) Urvashi asks if you can show her the actual financial plan made of another client. Under which of the following Code of Ethics you are prohibited to reveal one client’s details to other. [2 marks] A) Code of Ethics of Professionalism B) Code of Ethics of Fairness C) Code of Ethics of Confidentiality D) Code of Ethics of Integrity 2) You have just defined and discussed with Urvashi the basic terms of the financial plan construction. As per Financial Planner Practice Standards, what should be your next logical step? [2 marks] A) To inform Urvashi about the terms of the engagement B) To collect the quantitative and qualitative information of Urvashi C) To define the financial goal of Urvashi D) To apprise Urvashi of your expertise in certain areas to elicit her goals accordingly 3) Urvashi wishes to avail housing loan to the extent of 70% of the value of the desired house in the next 3 years. She wants to fully repay the loan by the time she intends to retire. You consider 8.5% p.a. as the average interest rate on the housing loan to be availed. She asks you by how much EMI on the loan would exceed her current monthly outgo towards house rent. [3 marks] A) ₹ 103,653 B) ₹ 44,228 C) ₹ 56,353 D) ₹ 60,703 4) Looking at Urvashi’s various insurance policies and the coverage they provide, what is the most appropriate conclusion from the following? [2 marks] A) Urvashi needs to take cover against disability and critical illness as she is the only earner in the family; other risks are well covered. B) Urvashi has to take personal accident cover which is required as she drives her own car. C) Urvashi’s life cover falls drastically after 53 years of age, she needs additional coverage till 60 years of her age. D) Urvashi needs comprehensive householder policy considering that she is single parent, is employed and is with small children. 5) Urvashi wants to create a Trust that would receive a corpus, in case of any eventuality with Urvashi’s life, towards a ₹ 100 lakh house to accommodate both children and their living expenses currently estimated at annual ₹ 9 lakh till Dhruvi attains 27 years of age. The expenses are supposed to be drawn from debt instruments. Estimate additional insurance cover to achieve thus. [3 marks] A) ₹ 36 lakh B) ₹ 84 lakh Page # 145

C) ₹ 180 lakh D) ₹ 5 lakh 6) Urvashi’s net contribution to family in the year 2017-18 would be after an estimated tax of ₹ 7.5 lakh and 25% of such post-tax income on own consumption. This contribution is expected to increase at 5% p.a. in her service tenure. You estimate Urvashi’s income replacement considering investment yield of 8.5% p.a. What additional life cover would be needed? [4 marks] A) ₹ 1.16 crore B) ₹ 52 lakh C) ₹ 1.90 crore D) ₹ 1.45 crore 7) Urvashi’s retirement corpus is arrived at by considering current household expenses, services availed, power, telecom and fuel at her life expectancy. The investment yield at 7.5% p.a. and average inflation at 5% p.a. is considered. On a conservative note, at investment yield of 6.5% p.a. and 5 more years of expected life, what curtailment of expenses in the first year of retirement would be needed? [3 marks] A) 22% curtailment B) 12% curtailment C) 14% curtailment D) 10% curtailment 8) Urvashi’s retirement corpus as per goal needs to be accumulated by utilizing the Demat account holding along with a separate asset allocation fund. She will invest 70:30 in Equity: Debt for 10 years in this fund by beginning immediately a monthly SIP. After 10 years, the accumulated amount in asset allocation fund and the subsequent monthly investments are rebalanced 40:60 in Equity: Debt for the next 6 yea₹ After initial 16 years, the accumulations in asset allocation fund along with Demat account holdings are redeemed and transferred to a designated retirement fund yielding 6.5% p.a. The quantum of monthly investments maintained in the initial 16 years shall be doubled in the last 5 years, that is, up to retirement. This retirement fund is used for drawing expenses post- retirement. What quantum of initial monthly investment is required? [5 marks] A) ₹ 30,500 B) ₹ 63,200 C) ₹ 29,310 D) ₹ 32,100 9) Urvashi has recently heard about Inflation Indexed Bonds (IIB). She is not convinced about the real annual yield of just 1.5% in a recently issued IIB. You explain the features of such Bonds as _____. [2 marks] A) The principal amount is protected on maturity, and is repaid inflation adjusted. The annual coupons would be 1.5% of such periodically adjusted principal amount in tune with inflation index. B) The principal amount would be repaid on maturity just like other bond issues. The annual coupons would be paid at annual inflation rate plus 1.5%. Page # 146

C) The inflation adjusted principal would be repaid on maturity. The annual coupons however would be 1.5% of the face value of the bond. D) The principal amount would be repaid on maturity just like other bond issues. The annual coupons would be 1.5% above the cumulative percentage rise in inflation index measured annually. 10) For accumulating funds for the goal of world tour, you suggest investing the maturity proceeds of each of the bank fixed deposit on the respective maturity dates in an asset allocation fund. The accumulated amount from this fund is switched to Risk free instruments three years prior to the actual usage for the purpose. What return needs to be generated from the asset allocation fund to achieve the goal? [4 marks] A) 11% p.a. B) 7.5% p.a. C) 13.25% p.a. D) 14.6% p.a. 11) Urvashi utilizes fund in her PPF account for creating a combined corpus to meet the professional course expenses of Dhruvi and later to meet her marriage expenses. She would invest ₹ 1.5 lakh in the beginning of every financial year, starting immediately, in the PPF account and extend the account for a term of 5 years with the same discipline of investment. A lump sum equivalent to 50% of the professional course charges then is withdrawn from the PPF account after which it is extended for one more term of 5 years without further contributions. What percentage of sum required for Dhruvi’s marriage would be available on the final maturity of the account? [5 marks] A) 57% B) 28% C) 45% D) 71% 12) The cash flows required for the basic and higher education expenses of her children are managed in a pool account of existing equity and debt MF schemes. They have current year provisions. You advise to switch today suitable lump sum from Equity to Debt schemes so that Debt schemes withdrawal on yearly basis is enough to meet next 3 installments of basic education expenses of Suryansh and Dhruvi. After 4 years, you again switch from Equity to Debt schemes funds equivalent to Dhruvi’s remaining years’ basic education expenses. You utilize the remaining balance in Equity schemes to meet in one lump sum Suryansh’s higher education expenses. Consider expenses required for a year to be withdrawn at the beginning of the year. What incremental SIP in Equity MF schemes needs to be started immediately to ensure this strategy works? [5 marks] A) ₹ 12,860 per month B) ₹ 19.050 per month C) ₹ 16,270 per month D) ₹ 15,120 per month Page # 147

13) Urvashi, in case of her life contingency, is apprehensive about managing the affairs of her children. You advise her to set up a common Minor Beneficiary Trust for Suryansh and Dhruvi. You put forth the argument in favour as: [5 marks] A) Such a Trust shall protect assets transferred and shall manage them as per guidelines issued to the trustee until either or both of her children reach/es a specified age to be defined by Urvashi B) Such a Trust shall protect and manage assets for her children only until they individually reach majority, i.e. 18 years of age C) Such a Trust shall not take further resources/assets/inheritances once the benefits have been transferred to it and the guidelines specified by Urvashi for their use D) Such a Trust shall strictly prevent early distribution of assets before both Suryansh and Dhruvi attain majority, i.e. 18 years of age 14) Urvashi has decided to sell gold jewellery worth ₹ 11 lakh in April 2019. This was acquired for ₹ 2.15 lakh in FY 2005-06. She wishes to invest the proceeds of such sale after deducting tax in 2.50%-SGB (Sovereign Gold Bonds). These SGBs quote at ₹ 2,800 per bond, at a discount of 8.5% to their issue price (issue date: 28-June-2018). How these legs of transactions will reflect in her IT Return for AY2020-21? [3 marks] A) Long term capital gains of ₹ 5,63,486 ; Income from other sources ₹ 26,852 B) Long term capital gains of ₹ 5,63,486 ; Income from other sources ₹ 30,055 C) Long term capital gains of ₹ 8,68,932 ; Income from other sources ₹ 26,820 D) Long term capital gains of ₹ 5,82,478 ; Income from other sources ₹ 28,414 15) Urvashi contributes 10% of her Basic Salary to the National Pension System (NPS) Tier 1 account. Her employer also matches this contribution as 10% of her Basic Salary. She additionally contributes every year ₹ 50,000 in NPS Tier 2 account. Consider the interest on Savings Bank Account as ₹ 20,000 and that on Fixed Deposit as ₹ 25,000 during FY 2019-20. She intends to immediately buy Sovereign Gold Bonds (SGB) units for ₹ 10 lakh in a 2.5%-SGB series (issued in June 2018, with coupons payable half-yearly in June and December). The SGBs currently quote at ₹ 2,800 per unit, at a discount of 8.5% to its issued price. Calculate her income tax liability for AY 2020-21. [5 marks] A) ₹ 6,46,520 B) ₹ 7,15,200 C) ₹ 6,85,150 D) ₹ 7,46,510 Page # 148

Solutions Q1 C) Code of Ethics of Confidentiality Q2 B) To collect the quantitative and qualitative information of Urvashi Q3 D) ₹ 60,703 (Solution given below) Current value of the desired house ₹ 12,500,000 Expected value of house after 3 years considering ₹15,099,370 6.5% appreciation 12500000*(1+6.5%)^3 Amount of loan to be availed ₹ 10,569,559 15,099,370*70% Tenure of loan = (Urvashi's retirement age - age 18 years when loan availed) 55-37 Rate of interest on housing loan 8.50% p.a. EMI on the housing loan ₹ 95,703 PMT(8.5%/12,18*12,-10569559,0,0) Current rental outgo 35,000 ₹ p.m. EMI in excess of current house rent 60,703 ₹ p.m. 95703-35000 Q4 A) Urvashi needs to take cover against disability and critical illness as she is the only earner in the family; other risks are well covered. Q5 B) ₹ 84 lakh (Solution given below) Annual Living expenses required in current terms 9,00,000 ₹ p.a. Inflation rate 5.00% p.a. Return on risk free instruments 7.50% p.a. Current age of Dhruvi 9 years No. of years expenses required (till 27 years of 18 years age of Dhruvi) Corpus required today towards living expense ₹ 13,362,370 provisioned PV((1+7.5%)/(1+5%)-1,18,-900000,0,1) Funds required to purchase a house ₹ 10,000,000 Total Corpus for living expenses and house ₹ 23,362,370 13362370+10000000 Current insurance cover ₹ 15,000,000 Additional insurance cover required ₹ 8,362,370 23362370-15000000 (Approximate) ₹ 84 lakh Page # 149

Q6 D) ₹ 1.45 crore ₹ 3,300,000 (Solution given below) ₹ 750,000 Urvashi's salary gross per annum ₹ 2,550,000 Tax incidence 3300000-750000 Net income in the current year ₹ 1,912,500 2550000*(1-25%) Income contribution to the family 21 years (25% self-consumption) 8.50% p.a. Remaining work life (retiring at 55, current age 34) 5.00% p.a. Investment Yield 29,508,239 PV Expected rate of increase in salary PV((1+8.5%)/(1+5%)-1,21,-1912500,0,1) Present value of future income ₹ 15,000,000 ₹ 14,508,239 Sum Assured under current term insurance 29508239-15000000 Shortfall in insurance cover ₹ 1.45 crore (Approximate) 34 yrs Q7 A) 22% curtailment 55 yrs 85 yrs (Solution given below) 840,000 ₹ p.a. Urvashi's current Age 5.00% p.a. Urvashi's retirement Age 2,340,209 ₹ p.a. Urvashi's Life expectancy 840000*(1+5%)^(55-34) Current expenses for heads considered for retirement Inflation expected pre-retirement Expenses estimated at retirement Retirement corpus calculated in the 1st calculation: 7.50% p.a. Rate of return expected Inflation expected post-retirement 5.00% p.a. Period for which money would be needed in first calculation 30 yrs Retirement corpus 85-55 Retirement corpus calculated in the 2nd calculation: ₹ 50,952,803 Rate of return expected PV((1+7.5%)/(1+5%)-1,30,-2340209,0,1) 6.50% p.a. Page # 150