AFP PART 1

HUMAN LIFE VALUE • Human Life Value (HLV) — the monetary value of a human life, measured by determining the net present value of benefits that others (the decedent's spouse, dependents, partners, employers) might reasonably expect to receive from the future efforts of the individual whose life is being valued. • The amount of HLV is used to calculate the benefit amount needed to replace lost future earnings of a wage earner to set the amount of life insurance or the amount of a liability award or settlement. Also known as the economic value of an individual life There are basically two approaches to calculate HLV: • (1) Income replacement method • (2) “Need Based” approach INCOME REPLACEMENT METHOD • IT is the ‘capitalized value’ (or present value) of all future earnings meant for the dependants. • This concept earnings can is based on the fact that all future reasonably be estimated 1. Calculate HLV to recommend adequate insurance cover for Mr. RAJEEV, age 30 retirement age 60 as per income replacement method • Present annual income Rs.550000. • Self maintenance expenses Rs.50,000 p.a: • House hold expenses = Rs.3 lacs p.a. • Rate of Interest assumed is at 8% p.a. • Salary increment = 7% p.a. • Sol. Begin, n = 30, I = (8-7)/1.07, pmt = 550000-50000, • Pv = solve = -13149777 • REAL RATE OF RETURN = R-I/1+I 2. A family’s monthly expenditure is Rs. 40,000. The earner accounts for 15% of the expense. He wants to cover his family’s inflation-adjusted expenses for the next 40 years considering average inflation at 5.5% p.a. and the investment return at 7.5% p.a. The approximate life insurance needed is ______. • Sol. Begin, n = 40*12, I = (7.5-5.5)/1.055 • Pmt = 40000*.85, p/y = 12 • Pv = solve = -11484273

Need Based Approach • Analyze ‘needs’ of the client • Then earmark funds against each need like : • 1. Spouse fund • 2. Education Fund • 3. Marriage fund • 4. Clean up fund ( Final Cost ) • 5. Outstanding loan • Then we need to check financial assets. Mr. Rao’s Case • Mr. and Mrs. Rao aged 46 and 42 years. • Life expectancy of Mr. Rao 80 age and Mrs. Rao is 85 of age. • Calculate the insurance required based on need based method • You have following information: • Current investment Rs 25,00,000 • Expenses Rs.3’00,000 (include 1 lac of Mr. Rao,s Personal • Final costs Rs.1 lac • Marriage fund required Rs.25 lacs • Education fund required Rs.10 lacs • Outstanding loan Rs.20 lacs • Interest rate is 10% p.a. and inflation is 7% p.a. • Sol. Spouse fund : b, n = 43, I = (10-7)/1.07, pmt=2 lacs • Pv1 = solve = -5100181 • Total liability = 5100181+1L+25L+10L+20L, Assets = 25 lacs • Net liability= 10700181-25L = 8200181

Types of Benefit Plans The plans are classified as i. Defined Contribution Plans; ii. Defined Benefit Plans; and iii. Hybrid Plans (Combination of Defined Benefit and Defined Contributions Plans). Defined Benefit (DB) Plan The benefit may be -A fixed benefit; A benefit representing a percentage or a multiple of salary. Example: 1. Gratuity 2. Leave encashment 3. Retrenchment compensation 4. Voluntary Retirement Defined Contribution (DC) Plan  Also called a ‘Money Purchase Plan’  A pre-determined quantum of money – called contribution - is set aside every month / year.  The contribution could be a fixed rate or fixed amount.  But the final benefit payout is never fixed. Ø Defined Benefit Plans GRATUITY 1. Gratuity  Payment of Gratuity is a Defined Benefit.  Gratuity is a lump sum payment to any employee when he retires or leaves service.  Gratuity means, “money given in per Oxford recognition of services” as Dictionary.  It is a gratuitous payment or a parting gift towards his employees  when the employees rendering part long and faithful with him after service. Passing of Legislation:  The states of Kerala and West Bengal initiated to make gratuity a legal payment by passing legislations.  Kerala in 1970 and  West Bengal in 1971.  The Central Government got a legislation passed by the Parliament in 1972.  Now, it is a statutory benefit under the Payment of Gratuity Act 1972.

Payment of Gratuity Act, 1972 Coverage : Section 1 (2) – 1. The whole of India 2. But in the State of Jammu & Kashmir, not applicable to plantations or ports. Application: Section 1 (3) (a) every factory, mine, oilfield, plantation, port and railway company; (b) every shop or establishment - within the meaning of any law in a State, and in which 10 or more persons are or were employed, on any day of the preceding 12 months; WAGES  “Wage” as per act = Basic + D.A. Entitlement of Gratuity  Gratuity shall be payable to an employee on the termination of his employment  after he has rendered continuous service for not less than 5 years,  continuous service of 5 years shall not be necessary where the termination of the employment is due to death or disablement. Calculation of Gratuity Monthly rated employee : Rate as per section 4(2) a. 15 days wages ( basic + D.A.) for each year of completed service ( more than 6 months to be taken as one year) b. Wages – Terminal ( last drawn salary ) c. To calculate per day wage monthly wage is divided by 26. Mr. X joined on 1st day of September 1983 and retired on 30th April 2017 at Superannuation age of 60 years when his monthly emoluments were as under: Basic salary Rs. 7,000 Dearness allowance Rs. 3,000 City Compensatory allowance Rs. 1,000 House rent allowance Rs. 15,000. The company pays gratuity as per the Payment of Gratuity Act, 1972. Mr. X is entitled to get the gratuity amount of:

SOL. 15/26*10000*34 =196154 Tax treatment of Gratuity Section 10 (10) (i): Any death-cum-retirement gratuity received by the Central Government or the State Government employees or the employees of a local authority or the employees of civil and services Is exempt from tax Non Govt. Employees Covered under the ‘the payment of Gratuity Act’ u/s 10(10)(ii) FOR MONTHLY RATED EMPLOYEE : Minimum of three is exempted. 1. Actual Gratuity Received 2. Rs.2000000 3. 15/26 multiply No. of completed year of services or part thereof exceeding 6 months * last drawn salary. Q1. Mr. X retired from a company on 23rd May 2018 where Gratuity Act is applicable after completing 30 years and 9 months. At the time of retirement his last drawn salary is Rs.35000 including HRA of Rs.5000. He got the gratuity of Rs.5,50,000. Calculate what is the amount of his Taxable Gratuity? Nil Sol. Least of three is exempted i. 550000 ii. 2000000 iii. 15/26 * (35000-5000) *31 = 536538 TAXABLE = 550000-536538 = 13462 In case other employees, u/s 10(10)(iii) Minimum of the following: 1. Actually gratuity received. 2. Rs.20,00,000 3. Half months avg. salary based on average salary ( Basic + DA which forming part of retirement benefits + Fixed % commission on turn-over) of last 10 months preceding the month in which event occurs for every completed year.

Q2. Mr. X retired from XYZ Ltd. after completing 26 years 7 months. Salary at the time of retirement is Rs.75000 p.m. Actual gratuity received is Rs.1235000. Avg salary for previous 10 months is Rs.74000 Calculate the exempted amount of gratuity if XYZ Ltd. is not covered under Payment of Gratuity Act. SOL. 1 1235000 2. 2000000 3. 15/30 * 74000*26 = 962000 Defined Benefit Plans LEAVE ENCASHMENT Taxation ENCASHMENT DURING THE COURSE of EMPLOYMENT 1. Is fully taxable Encashment of accumulated leave at the time of retirement Section 10(10AA) (i) a. Is fully exempt for only Central and State government employees b. OTHER EMPLOYEES Section 10(10AA)(ii) LEAVE ENCASHMENT is exempt minimum of the following: 1. Leave Encashment actually received 2. 10 * Avg salary of last 10 months 3. Rs.300000 4. Cash equivalent of un-availed leave calculated on the basis of maximum 30 days leave for every completed year SALARY = Basic Pay + D. A. forming part of retirement benefit + Commission based upon fixed % of the turnover Average salary Average of the salary drawn by the employee during the period of 10 months immediately preceding the date of retirement or otherwise. LEAVE SALARY paid to legal heirs of a deceased employee is not liable to tax.

Q3. Mr. X joined on 1st December 1995 in XYZ Ltd. and retired on 1st December 2017. He got leave encashment of Rs.415000. His last drawn salary is Rs.40000.His last 10 months salary is 3.5 lacs. He availed 160 leave during the service. What will be his taxable leave salary amount? He is entitled 30 days EL in a year. Ans. 115000 Least of four is exempted i. Actually received i.e. 415000 ii. 300000 iii. 10*(350000/10) * = 350000 iv. (22*30-160)/30 * 35000 = 583333.333 Taxable ( 415000 – 300000 ) = 115000 Retrenchment Compensation Retrenchment compensate payment received by an employee from an employer in lieu of being asked to exit a job or his service is being interrupted due to management decisions. Retrenchment Compensation : A legal provision to protect the interest Of a ‘workman’ who falls under the ‘Industrial dispute Act 1947’ Whose service is retrenched. i. Wage includes: All payments and also value of benefits like concession accommodation etc. but except bonus. ii. Average salary of last three months. Taxation Least of following : i. Amount actually received , or ii. 15 days’ wages for each completed years of service or part thereof excess of 6 months iii. Rs.5,00,000/-  If workman is getting monthly salary, on the basis of last 3 calendar months  If weekly wages, on the basis of last 4 completed weeks  If daily wages, on the basis of last 12 full working days  Calculate the amount exempted from tax in case of Mr. Salim (a monthly paid employee) who gets Rs. 500000 on account of retrenchment compensation. He has worked for 16 years and 7 months. The average pay for the last three months is Rs. 4000? A. Rs. 32143 B. Rs. 500000 C. Rs. 34000 D. Rs. 400000 Answer C

Minimum amount of compensation received on retrenchment compensation is:  1. Actual amount received Rs.500000  2. Amount calculated in accordance with the provision of Industrial Dispute Act =  3. 4000/30x17x15 = 34000 Rs.500000 Voluntary Retirement Scheme Why VRS Many employers feel the need for Becoming cost efficient By reducing the number of employees. Why reduction of staff strength?  They wish to reduce high level of  Fixed expenses and  Wages Hence the employers prepare lucrative scheme  Providing some extra monetary benefits  To those employees who would seek VR  Extra benefits under the VRS may be :  i. a lump sum cash payments, or  Partly cash or partly annuity  Because of ‘Extra lucrative Benefits’  it is also referred as a ‘ Golden Hand Shake Scheme’. Taxation Least of the following exempted : 1. Actually received 2. Rs.500000 3. Least of two : a. The amount equivalent to 3 months salary for each completed year of service; or b. Salary at the time of retirement multiplied by the balance months of service left before the date of his retirement on superannuation. SALARY = Basic pay + D.A. ( forms part of retirement benefit ) + Commission based upon fixed % of the turnover. Q1. Use the following data to answer the question that follows: Basic Salary = Rs.8500 p.m. D.A. (ret benefit ) = Rs.2000 p.m. VRS Received = Rs.480000 Mr. Y age is 46 years and has served in the company for the last 16 years. Calculate the taxable amount of VRS in special scheme received by Mr. Y if the retirement age is 58 years.

Sol. Least of following is exempt : i. Actually received i.e. 480000 ii. Rs.500000 iii. Leaset of two : a. 16*3*10500 = 504000 b. 12*12*10500 = 1512000 Therefore nothing is taxable. EPF & Miscellaneous Provision Act 1952 Applicability : i. It extends to the whole of India except the State of Jammu & Kashmir. ii. to every establishment which is a factory engaged in any industry specified in Schedule I and iii. to any other establishment notified by the Central Government In which 20 or more persons are employed. 1. Employees who are getting salary up to Rs.15000 are covered statutorily. 2. Employees who are getting more than Rs.15000, it will be the wish of employer to include in EPF Act or not. If employee is covered under the EPF Act,1952 he will get all three statutory benefits 1. Employees Provident Fund Scheme 2. Employees Pension Scheme 3. Employees Deposit Linked Insurance Scheme Salary = Basic Wage + D.A. + Retaining Allowance + Cash value of food concession Rate of contribution for EPF Scheme  By the employee :  @12% of the EPF Salary every month.  Full amount of the employee’s contribution ngoes to his Provident fund account.  Contribution by the Employer :  @12% of the EPF Salary every Month  But the employer’s Contribution is bifurcated  8.33% of the salary up to Rs.15000 goes to Employee’s pension Scheme  Balance to the EPF account.

Administration Charge 0.65% of salary from 1-4-2017 till 30th May 2018 then from 1-6-2018 > 0.5% of salary Taxation  Amount withdrawal before 5 years of service is taxable.  But, it is not taxable if his service are terminated by reasons of : a. His illness b. For a cause beyond the control of the employee. c. Discontinuation of the employer’s business. Employees’ Deposit Linked Insurance Contribution under EDLI Scheme  Contributions:  (i). By the employer only  (ii) @0.50% of the salary p to  Rs15000 pm  Salary = Basic + D.A. + Retaining Allowance + Cash value of food concessions. Administrative Charges under EDLI Scheme  Administrative Charges:  By the employer only  @0.01% of the salary up to Rs15000 pm.  But from 1st June 2018, no admin charge. 8 JUNE 2016  30 times of average salary of last 12 months + 50% of the average balance of last 12 months.  Overall total claim amount subject to max 6 lacs. Employees Pension Scheme 1995  The EPS came into effect from 16th NOV 1995

Pensionable Service a. The pensionable service of the member shall be determined with reference to the contributions received or receivable on his behalf in the EPS. PENSIONABLE SALARY The average monthly pay in the span of 60 months preceding the date of exit The maximum pensionable salary shall be limited to Rs.15000 p.m. PENSION AMOUNT The monthly superannuation or early pension shall be computed as under Pensionable salary x Pensionable service = 70 P P F Act, 1968 Account can be opened by:  Individual resident who is 18 years age  Any resident individual can open an additional (more than one) a/c on behalf of minor  For whom he is guardian PPF A/C can be opened in ..  State Bank of India or its subsidiaries  Head Post Office or  Any selected sub post office or  Any nationalized bank  Any other office authorized by the central government. Under the Public Provident Fund Act, 1968.. YEAR means 1st April to 31st March. Subscription  Minimum amount n Rs.500 p.a.  Maximum amount  Rs.150000 Should be in multiples of  Rs.5.

Frequency  Can be deposited :  A. in lump sum or  B. in installments (Maximum 12 ) Note > Maximum amount in a year not to be exceeded Rs.1,50,000 including the defaulted payments. Amount not deposited then…. 1. It will be treated discontinued account. Discontinued a/c holder can not a. Open new account b. take loan c. withdraw money Charge Rs.50 charge for per year of default plus minimum subscription i.e. Rs.500 If invest more than Rs.150000  A/C will be treated irregular account.  Excess amount will not earn any interest  Excess amount will be returned  Tax benefit up to Rs.150000 Term of fund  Duration is 15 years from the end of financial year in which the account is opened.  Ex. DOC 14-6-2019  DOM – 1-4-2020+15 = 1-4-2035 Mode of Payment 1. cash or 2. cheque or 3. Demand draft or 4. Pay order Extension  After maturity of PPF A/c it can be extended for a block of  5 years.  No restriction about no. of such extensions.

LOAN FACILITY  The first loan can be given in the third year of opening the account  But before expiry of 6th year including the year in which the initial subscription was made Loan Amount  25% of the balance in the PPF account including interest at end of 2nd year immediately preceding the year in which the loan is applied.  Loan can be taken only once in a year.  2nd loan can be taken on full payment of first loan. Ex. PPF a/c is opened on 21/10/2014, calculate when and how much amount one can avail as first loan facility from the details below: Balance in PPF A/c on 31/03/15 70000 31/03/16 164000 31/03/17 192000 31/03/18 240000  First loan can be availed in the year  ( from 1/4/2016 to 31/03/2017 )  25% balance of amount Rs.70000  Ans. 17500 Repayment of loan Principal amount has to be paid back before the expiry of 36 months from the 1st day of the month following the month in which loan is sanctioned.  Repayment of Principal loan can be paid in one lump sum or in two or more monthly installments.  After principal paid, interest on loan should be paid not more than 2 installments  Interest on loan is  2% p.a.  If loan not paid within 36 months then interest rate will increase to 6% p.a. Withdrawals 1. The first withdrawal can be made in the 7th year including the year in which a/c was opened. 2. When the withdrawal facility starts, no loan is available. 3. Only one withdrawal in a year. 4. Maximum amount of withdrawal is – 50% of the balance at the end of the 4th year preceding the withdrawal Year, or at the end of the preceding year, whichever is lower.

Ex. PPF a/c is opened on 21/10/2011, Calculate when and how much amount one can avail as the first withdrawal facility from the details below : Balance in PPF A/c on 31/03/12 72000 31/03/13 164000 31/03/14 192000 31/03/15 240000 31/03/16 325000 31/03/17 415000 31/03/18 489000 31/03/19 516000 Solution  He can withdraw on  01/04/2017  50% balance on  31/03/2014  Hence 50% balance of Rs.192000  Ans. Rs.96000 Withdrawal in extended period 1. One withdrawal in a year. 2. The total of withdrawals during the 5 years block period shall not exceed 60% of the balance at the commencement of the said period. 3. This limit shall apply on every extended block. Interest given on PPF A/C 1. Interest is calculated on the lowest balance between the close of the month 5th day and the last day of every 2. The interest credited to the a/c at the end of each Financial Year i.e. 31st March Q1. Mr. x opens his PPF A/c on 1-4-2019 with amount Rs.150000 and decides to deposit the same amount in the beginning of every coming financial year including the extension of 3 blocks of PPF. Calculate the maturity amount ASSUMING ROI 8% p.a.? CMPD SET – BEGIN N=16+15 I=8

PPF Q2. DOC = 7-6-2018 with Rs.1 lac  And decide to invest maximum amount at the end of every coming financial year.  Roi 8% p.a.  Maturity?  Sol.  S.I. = 100000*9/12*8/100  Balance on 31-3-19 = 100000+6000  End  n=15  I=8  Pv = -106000  Pmt =-150000  Fv =solve = 4409067  Q3. Doc 1-4-2018 with Rs.50,000 ,  Decide to invest the same amount after every  6 months till maturity, as well as throughout its four extensions each of 5-year blocks. CALCULATE maturity amount in PPF A/c after the proposed four block period extensions.  ( 8% p.a. )  Sol.  S.I. = 50000*8/100(12/12+6/12) = 6000  Balance of 31-3-2019 = 50000+50000+6000 = 106000  End  N= 16  I=8  Pmt = -106000  Fv=sol=3214374 NATIONAL PENSION SYSTEM (NPS)  Central Government made the National Pension System (NPS) mandatory for its new recruits (except defence forces) from 1st January, 2004.  A majority of State Governments have also shifted to the defined contribution based new pension system from varying dates. Who’s who  REGULATOR: Pension Fund Regulatory and Development Authority (PFRDA) is the prudential regulator for the NPS.  NPS TRUST: A trust, set up under the Indian Trusts Act, that is responsible for taking care of the funds under the New Pension Scheme (NPS) and protect subscriber interests

POINTS OF PRESENCE (PoPs)  PoP performs the functions relating to registration of subscribers,  undertaking Know Your Customer (KYC) verification,  receiving contributions and instructions from subscribers and  transmission of the same to designated NPS intermediaries.  The PFRDA has appointed mutual funds, financial distribution firms, insurers, banks as PoP. CENTRAL RECORDKEEPING AGENCY  The back office for maintaining records, administration and customer service functions.  CRA acts as an operational interface between PFRDA and other NPS intermediaries such as Pension Funds, Annuity Service Providers, Trustee Bank etc.  i. NSDL e-Governance Infrastructure Limited n  ii. Karvy Computershare Private Limited PENSION FUND MANAGERS updated on 7/2/2020 A. Pension Funds (PFs) for Government Sector  LIC Pension Fund Limited  SBI Pension Funds Pvt. Ltd  UTI Retirement Solutions Ltd B. Pension Funds (PFs) for Private Sector  HDFC Pension Management Co. Ltd.  ICICI Prudential Pension Fund Management Co. Ltd.  Kotak Mahindra Pension Fund Ltd.  LIC Pension Fund Ltd.  SBI Pension Funds Pvt. Ltd  UTI Retirement Solutions Ltd  Birla Sun Life Pension Management Ltd TRUSTEE BANK: Axis bank> is the designated agency to facilitate fund transfers across various entities such as the fund managers and the annuity service providers. Annuity Service Providers (ASP) ASP will offer Annuity schemes to the Subscribers.  The member has to purchase an annuity from one of the Life Insurance Companies regulated by IRDA.

1. Life Insurance Corporation of India 2. SBI Life Insurance Co. Ltd. 3. ICICI Prudential Life Insurance Co. Ltd. 4. Bajaj Allianz Life Insurance Co. Ltd. 5. Star Union Dai-ichi Life Insurance Co. Ltd. 6. Reliance Life Insurance Co. Ltd. 7. HDFC Standard Life Insurance Co Ltd Who can join the New Pension Scheme?  Any Indian citizen between 18 and 55 years.  Tier-I A/C ( w.e.f. 1 may 2009 ), involving a contribution to a non-withdrawable account. Subsequently tier-II accounts ( 1 Dec 2009 ), which permit voluntary savings that can be withdrawn at any point of time, can be opened. But to be eligible to open a tier-II account, you need a tier-I account.  This withdrawable account does not constitute pension investment How much can I invest?  There is no investment ceiling.  Minimum amount to be paid in a year is Rs.1000  But the Minimum Contribution one time is Rs 500/- Penalty for failure to make the minimum payment?  You will have to bear a penalty of Rs 100 per year of default and will need to pay it with the minimum amount to reactivate the account.  (1000-amount already contributed in the financial year) for each year + 500 for current year + penalty of Rs.100 for each year the account is frozen. How should I select my investment option?  You can choose the investment mix between  The funds in the new pension scheme will be invested  in Equity,  corporate bonds  government bonds.  Asset class A: Investment in Alternative Investment Schemes including instrument like CMBS (Commercial mortgage-backed securities), MBS, REITS(Real estate investment trust)  AIFs (Alternative Investment Funds),  InvIts (Infrastructure Investment Trust) etc.

EXIT  Individuals can normally exit at or after age 60 years for tier –I of the pension system.  At exit the individual would be mandatorily required to invest 40% of pension wealth to purchase an annuity.  But minimum annuity amount should be Rs.1000 p.m.  Individuals would have the flexibility to leave the pension system prior to age 60. However, in this case, the mandatory annuitisation would be 80% of the pension wealth.  a unique 16 digit Permanent Pension Account Number (PPAN) Tax Benefits Section 80 CCD  This sub-section is applicable to both self-employed as well as salaried individuals to claim deductions on the contributions made towards the National Pension Scheme or the Atal Pension Yojana Section 80CCD (1)  If the tax-payer is between the ages of 18 years and 60 years, contributions made towards both the schemes would be allowed as a deduction under Section 80CCD (1).  If the tax-payer is a salaried employee, the maximum deduction allowed under this section would be limited to 10% of the salary which means basic salary and dearness allowance.  In case of self-employed individuals, the maximum available deduction is 20% of the gross total income of the financial year earned by the tax-payer  In both the instances, the maximum limit is INR 1.5 lakhs which would include the options of Section 80C too. Section 80CCD (1B)  Moreover, an additional deduction of INR 50,000, over and above INR 1.5 lakhs can be claimed under Section 80CCD (1B). Section 80 CCD (2)  This Section is applicable for salaried employees where their employer is also contributing to the National Pension Scheme.  The employer can make contributions towards National Pension Scheme besides contribution to EPF.  Amount Contributed or 14% of Basic Salary + Dearness Allowance  (in case the employer is Central Government) 10% of Basic Salary+ Dearness Allowance(in case of any other employer) - Whichever is lower?