Budget benefits for you: Higher PPF, exemptions

Written by Express news service | New Delhi | Updated: Jul 14 2014, 15:29pm hrs
Tax consultantLal Singh Rawat with his family in Ghaziabad (IE Photo: Praveen Khanna)
Name: Lal Singh Rawat (44)

Resides in: Delhi

Profession: self-employed

Other details: Spouse Prema (38), Daughters Yamini (14) and Rakshita (11)

Annual income: Rs 6.00 lakh

Status & goals

Lal Singh Rawat is a consultant in accounts and taxation. His wife is a homemaker and they have two daughters. Being self-employed, he does not enjoy the benefits like Provident Fund and hence there is no forced saving. His primary concern is his daughters education and marriage. Lal Singh has been a very conservative investor and his investments lie in debt instruments and gold. His conservative approach is also due to the liabilities he is shouldering. He has not covered his family with any insurance, which poses a great risk in case of contingencies. He wants to draw a road map for his future.

Needed

A financial plan which can guide him on the right mix of insurance, investments and focus on financial goals

Goals in order of priority

Yaminis Education (2017) (Inflation 10%)

Current value Rs 16 lakh

Future value Rs 21 lakh

Yaminis marriage (2024) (Inflation at 7%)

Current value Rs 15 lakh

Future value Rs 30 lakh

Rakshitas Education (2020) (Inflation 10%)

Current value Rs 16 lakh

Future value Rs 28 lakh

Rakshitas marriage (2027) (Inflation at 7%)

Current value Rs 15 lakh

Future value Rs 36 lakh

Retirement Planning (2035)

(Pre-Retirement Inflation at 7%, life expectancy 83 years)

Present monthly expenses Rs 20,000

Future monthly expenses Rs 82,000

Corpus required Rs 1.5 crore

Current investments

Cash

Rs 60,000

Insurance surrender value

Rs 1,00,000

PPF

Rs 2,35,000

Gold

Rs 2,00,000

Findings

Emergency fund

Lal Singh is maintaining

Rs 60,000 in savings account

Life Insurance

Covered for Rs 4 lakh through two traditional policies and paying a premium of Rs 35,000 p.a.

health insurance

Family is not covered through any health insurance scheme.

Existing Investments

He takes all financial decisions himself.

Liabilities

Outstanding car loan of

Rs 1.60 lakh and home

loan of Rs 5 lakh

financial planning

For a self-employed person, there are no forced savings and the irregular income makes it difficult as there can be months with no earnings. Although there are benefits which help in reducing taxability, the job of keeping yourself covered for contingencies and having a proper investment plan rest on yourself. To ensure your money grows beating inflation, some risk-taking is necessary. Lal Singh has stayed away from volatile asset classes which will be detrimental to his future goals, especially retirement. His low insurance poses a bigger risk to his entire family as any emergency can wipe out his entire savings. Hence effective planning is required to counter the risk which can arise in future.

Recommendations

Emergency Fund

Lal Singh should enhance his emergency fund to Rs 1.6 lakh and Rs 1 lakh can be invested in ultra short-term mutual funds schemes and rest he can continue maintaining as bank deposits.

Express Tip: Emergency fund should be adequate enough to take care of not only your living expenses but your liabilities, if and when emergency arises.

childrens Education

The elder daughters education requirements are immediate. Lal Singh does not have much assets to support it and so he may have to rely on education loan. He can consider an education loan with repayment responsibilities on the child as she starts working. For his second daughters education needs, he can allocate his insurance proceeds. For meeting the

shortfall he will need approximately

Rs 25,000 p.m. which is difficult with current resources. Thus, Lal Singh doesnt have enough resources to meet the shortfall for his childrens education and will have to look for options like reducing goal budget or alternative earning sources.

Returns Assumed- 12% p.a.

Express Tip: The cost of education is one of the major hindrances for reaching life goals and so its necessary that planning starts along with the birth of the child.

childrens marriage

Lal Singh can allocate his gold investment for this goal. For shortfall he will need a monthly investment of Rs 27,000. He does not have enough resources, thus the ideal approach will be to start saving small amounts and enhance contribution along with increase in earnings.

Returns Assumed- 12% p.a.

Express Tip: There are lots of emotions attached to childrens marriage but its necessary for parents to avoid stretching ones finances.

Life Insurance

Lal Singh is grossly underinsured. His life insurance requirement is approximately Rs 1 crore. He can meet this through a pure-term insurance policy for which his outgo will be approximately Rs 15,000 p.a.

Express Tip: A life insurance gives your family an adequate protection for meeting their needs and liabilities which may arise in the future on your death.

Investment planning

Lal did not consider investing elsewhere till now. Much of his planning hovered around PPF and gold. But post-retirement he will need growth assets for a reasonable growth of his corpus. Since he will be investing for the first time in equity, he can consider balanced mutual funds which have a judicious mix of equity and debt. As he gains confidence, he can add other categories but keep the equity exposure within his risk tolerance limits. He should also consider increasing allocation to PPF. As he moves towards retirement, he should switch his equity assets towards debt, but post-retirement continue investing in equities.

Budget impact

Few new provision have been introduced in the Union Budget 2014-15. Lal Singh will benefit to some extent from these provisions. The immediate benefit will be savings getting enhanced through higher exemption up to Rs 2.5 lakh. The other benefit which he can take in future is higher contribution to PPF which he can utilise for his retirement goal. The other provisions will not have much impact immediately on his financial situation.

Conclusion

Its essential to start early. Procrastination has a huge impact on your financial planning and you end up with inadequate resources and curtailing the budget allocated for goals. Also, right investing avenues are important. An over-conservative approach can create wide gaps in meeting long-term requirements as it is unable to beat inflation. For effective financial planning, one should have exposure to growth assets so that goals can be reached without stretching ones finances.

Plan Constructed by:

Jitendra P.S.Solanki,

Investment Adviser & CFPCM

Member of The Financial Planners Guild, India (www.fpgindia.org)