Solutions: Case 1 (Roger)

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1 Solutions: Case 1 (Roger) Q1 Q2 Q3 Q4 Q5 B) professional requirement under Practice Guidelines of FPSB India D) Identify other issues that may potentially impact Roger s ability to achieve financial goals C) Rs. 75 lakh (approx.) Current value of the desired house 10,000,000 Rs. Expected value of new house after 5 years considering 7% appreciation 14,025,517 Rs *(1+7%)^5 Existing market value of the occupied house 7,500,000 years Expected market value in five years considering 5% appreciation 9,572,112 p.a *(1+5%)^5 Loan outstanding on existing home to be settled Principal value of 15-year loan (availed in April 2013) 1,700,000 Rs. EMI considering 10% p.a. interest for first three years 18,268 Rs. p.m. PMT(10%/12,15*12, ,0,0) Loan outstanding as at end March, ,528,627 Rs. PV(10%/12,(15-3)*12,-18268,0,0) The average rate on loan 1.5% above the Repo rate of 6.5% 8.00% % p.a. Revised EMI (average) over the next 5 years 16,547 Rs. p.m. PMT(8%/12,(15-3)*12, ,0,0) Loan outstanding as at end March, 2021 (five years from today) 1,061,622 Rs. PV(8%/12,(15-3-5)*12,-16547,0,0) Amount to be set aside for tax liability, duties and furnishing 2,000,000 Rs. Amount that can be utilized from sale proceeds to buy new house 6,510,490 Rs Amount to be financed for new house 7,515,027 Rs A) They must take Mortgage Redemption Insurance or an equivalent term insurance to cover outstanding loans D) Rs. 100 lakh (approx.) Current household expenses 40,000 Rs. p.m. Annual expenses in current terms 480,000 Rs. p.a. Inflation rate 5.00% p.a. Return on Debt MF schemes 7.00% p.a. Current age of Angela 31 years PV of 80% of current expenses required till Angela's age of 55 years 7,481,764 Rs. PV((1+7%)/(1+5%)-1,55-31, *80%,0,1) Household expenses (80% of current) in the 55th year of Angela 1,238,438 Rs *80%*(1+5%)^(55-31) PV at Angela's age of 55, of 60% of then living expenses for remaining 25 years 14,950,115 Rs. PV((1+7%)/(1+5%)-1,80-55, *60%,0,1) PV of post-55 years expenses today 2,947,365 Rs /(1+7%)^(55-31) Life cover required to the extent of covering living expenses as proposed 10,429,129 Rs Additional insurance cover required 10,129,129 Rs. (Money back policy of Rs. 3 lakh reduced) (Approximate) Rs. 100 lakh

2 Q6 A) Rs. 140 lakh Current expenses 480,000 Rs. 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 25 years 7,343,030 Rs. (PV):1 PV((1+7.5%)/(1+5%)-1,25, *80%,0,1) 60% of present expenses for subsequent 30 years 3,481,985 Rs. (PV):2 Higher Education Expenses Mark: Rs. 4 lakh p.a. for 4 years required after 14 years at 8% escalation 1,719,344 Rs. (PV):3 Stephanie: Rs. 4 lakh p.a. for 4 years required after 17 years at 8% escalation 1,743,447 Rs. (PV):4 Loans outstanding Housing loan 1,528,000 Rs. (PV):5 Car loan 162,000 Rs. (PV):6 PV((1+7.5%)/(1+5%)-1,30, *60%*(1+5%)^25,0,1)/(1+7.5%)^25 PV((1+7.5%)/(1+8%)-1,4, *(1+8%)^14,0,1)/(1+7.5%)^14 PV((1+7.5%)/(1+8%)-1,4, *(1+8%)^17,0,1)/(1+7.5%)^17 Total corpus required to meet the living and HE expenses and loans (PV:1 to 6) 15,977,806 Rs. (PV): 1 to 6 PV1+PV2+PV3+PV4+PV5+PV6 Financial Assets: Cash in bank accounts and FDs 420,000 Rs. Equity shares and Equity MF scheme investments 1,180,000 Rs. PPF A/c balance 490,000 Rs. Total of Financial Assets 2,090,000 Rs. Therfore, Life cover needed at this stage for Roger 13,887,806 Rs (Approximate) Rs. 140 lakh Q7 B) Rs crore (approx.) Monthly household expenses 40,000 Rs. p.m. Required Annual expenses in the first year after retirement (age 58 of Roger) 1,383,022 Rs. 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 Rs. (corpus:1) PV((1+6.5%)/(1+5%)-1,12, ,0,1) PV (on retirement) of Provision of Gifts and Charity at age 70 5,871,036 Rs. (corpus:2) /(1+6.5%)^12 Additional Rs. 10,000 p.m. (current cost) at Roger's age of 70 73,920 Rs. p.m *(1+5%)^(70-29) Additional Annual expenses to be provided for medical care at Roger's age of ,039 Rs *12 Basic Household expenses at Roger's age of 70 2,483,708 Rs *(1+5%)^(70-58) Total Annual expenses required at Roger's age of 70 3,370,747 Rs Corpus (at 70 of Roger) for expenses required from age 70 to 75 of Roger 16,385,620 Rs. PV((1+6.5%)/(1+5%)-1,5, ,0,1) PV of this sum (computed at Roger's age of 70) on Roger's retirement (at age 58) 7,696,045 Rs. (corpus:3) /(1+6.5%)^(70-58) Expenses further curtailed to 70% for Angela (Roger dies at 75, Angela survives at 77) 3,011,415 Rs *(1+5%)^5*70% Corpus at Roger's age of 75 (death) for next three years of Angela's survival# 8,907,600 Rs. PV((1+6.5%)/(1+5%)-1,3, ,0,1) Corpus (at 58) for expenses required at Roger's age 75 for Angela's survival 3,053,637 Rs. (corpus:4) /(1+6.5%)^(75-58) Total Corpus required at age 58 of Roger 31,989,838 Rs. (corp 1 to 4) #Angela (life exp. 80) survives Roger by 3 years

3 Q8 A) Rs. 57 lakh; 44% curtailment 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 Rs. p.a. Household expenses budgeted for retirement after 29 yrs (Rogers' age 58) 1,383,022 Rs. p.a *70%*(1+5%)^29 Age of Angela on Roger's retirement (Angela is senior by 2 years ) 60 years Life expectancy of Angela 80 years Retirement corpus to last (out of which last 3 years further reduced to 70%) 20 years PV of expenses: Initial 17 years (till the survival of Roger up to age 75, Angela 77) 21,039,890 Rs. PV((1+6.5%)/(1+5%)-1,17, ,0,1) PV of expenses:balance 3 years (Angela's living expenses from age 77 to 80) 2,250,048 Rs. PV((1+6.5%)/(1+5%)-1,3, *70%*1.05^17,0,1)/(1+6.5%)^17 Initially worked out corpus 23,289,939 Rs Stress test: lower yield, higher inflation, increased longevity Retirement corpus to last (Roger's 80 with now coincide with Angela's 82) 22 years Revised Yield from investing corpus 6.00% p.a. Revised Rate of inflation 5.50% p.a. Retirement corpus required 28,965,848 Rs. PV((1+6%)/(1+5.5%)-1,22, ,0,1) Cushion built in the corpus 5,675,909 Rs Alternately, the reduction sought in post-retire expenses (2nd Scenario) Required expenses to be withdrawn in the 1st year after retirement 1,112, *( / ) Pre-retirement expenses (at the given rate of inflation up to retirement) 1,975, *(1+5%)^29 Curtailment in expenses 43.72% 1-( / ) Q9 C) This is a play on long duration with expected moderate trend in interest rates, thus scheme return though capital appreciation is expected.

4 Q10 B)Mark Rs lakh, 19% shortfall; Stephanie Rs lakh, 21% shortfall PPF account balance as on 31-March ,000 Rs. Account's initial maturity (opened in Dec-2010) is 1-April-2026 Number of subscriptions from 31-Mar-2017 to 31-Mar Number of subscriptions from 31-Mar-2027 to 31-Mar-2036 (2 extensions) 10 Rate of interest assumed throughout 8.00% p.a. Maximum subscription at the end of every financial year (for 20 years) 150,000 Rs. Accumulated balance on 31-March-2036 (Mark's age 24, Stephanie' age 21) 9,148,164 Rs. FV(8%,20, , ,0) The account is maintained without subscription for 5 more years Accumulated balance on 31-Mar-2037 (Mark's age 25 years) 9,880,017 Rs *(1+8%) 50% of accumulated amount withdrawn for Mark's marriage expenses 4,940,008 Rs /2 Estimated expenses (current Rs. 10 lakh, escalating by 9% p.a.) for Mark 6,108,808 Rs *(1+9%)^21 Shortfall in meeting Mark's marriage expenses 19.13% 1-( / ) Remaining amount in PPF accumulated till 31-Mar-2040: Stephanie's marriage 6,222,988 Rs. ( /2)*(1+8%)^3 Estimated expenses (current Rs. 10 lakh, escalating by 9% p.a.) for Stephanie 7,911,083 Rs *(1+9%)^24 Shortfall in meeting Stephanie's marriage expenses 21.34% 1-( / ) Q11 D) Rs. 120,600 The current cost of annual vacation (1-April-2016); Roger's age ,000 Rs. Cost escalation provisioned in the vacation expenses 7.00% p.a. Lump sum invested on 1-April-2016 in the fund (Roger's age 29) 1,000,000 Rs. Total annual investments from 1-April-2017 to 1-April-2044 (till Roger is 57) 28 years Total withdrawals from 1-April-2018 to 1-April-2045 (till Roger is 58) 28 years Total investment peiod (1-April-2016 to 1-April-2045) 29 years Return expected from Asset allocation in the first 10 years (Initial + 9 investments) 11.00% p.a. Return expected from Asset allocation in the second 10 years (investment 10 to 19) 9.50% p.a. Return expected from Asset allocation in the balance period (investment 20 to 28) 8.00% p.a. Vacation Expenses enumerated Vacation expenses to be drawn in the very first year, i.e. on 1-April ,735 Rs. PV of expenses (first 8 years, 1-Apr-2018 to 1-Apr-2025) drawn from 11% return 1,212,540 Rs. PV((1+11%)/(1+7%)-1,8, ,0,1) PV as on 1-April ,125 Rs. (PV:1) /(1+11%)^2 Likely vacation expenses on 1-April ,073 Rs *(1+7%)^10 PV of expenses (next 10 years, 1-Apr-2026 to 1-Apr-2035) drawn from 9.5% return 2,665,310 Rs. PV((1+9.5%)/(1+7%)-1,10, ,0,1) PV as on 1-April ,681 Rs. (PV:2) /(1+11%)^10 Likely vacation expenses on 1-April ,453 Rs *(1+7%)^20 PV of expenses (next 10 years, 1-Apr-2036 to 1-Apr-2045) drawn from 8% return 5,568,547 Rs. PV((1+8%)/(1+7%)-1,10, ,0,1) PV as on 1-April ,354 Rs. (PV:3) /((1+11%)^10*(1+9.5%)^10) Total PV of all vacations provisioned (Pv:1 to 3) 2,714,160 Rs Accumulation: Initial sum invested (1-April-2016) in the needed fund for vacation 1,000,000 Rs. Remaining amount to be provisioned by way of annual investments 1,714,160 Rs Let us assume that initial investment installment (first 9) be 100 Rs. PV of first 9 investments of Rs. 100 from 1-Apr-2017 to 1-Apr Rs. PV(11%,9,-100,0,0) Annual investments in the second 10-year period (from 1-Apr-2026 to 1-Apr-2035) 200 Rs. PV of next 10 investments of Rs. 200 from 1-Apr-2026 to 1-Apr Rs. PV(9.5%,10,-200,0,1)/(1+11%)^10 Annual investments in the remaining period (from 1-Apr-2036 to 1-Apr-2044) 400 Rs. PV of last 9 investments of Rs. 400 from 1-Apr-2036 to 1-Apr Rs. PV(8%,9,-400,0,1)/((1+11%)^10*(1+9.5%)^10) PV of all 28 Annual Investments as provisioned 1, Rs Amount of Annual Investment equivalent to the assumption of Rs ,589 Rs. ( / )*100

5 Q12 B) Rs lakh Higher Edu. expenses, in current terms, of Mark (age 4) at his age 18, 19,20 & 21 Higher Edu. expenses, in current terms, of Stephanie (age 1) at her age 18,19,20,21 Cost escalation for higher education expenses Expenses drawn from a fund investing in Risk Free instruments at Accumulation period through monthly investments in Asset Allocation Fund 400,000 Rs. p.a. 400,000 Rs. p.a. 8.00% p.a. 6.00% p.a. 12 years Present Value of Higher Education Expenses after 12 years PV of Higher Edu. Expenses of Mark at his age of 18 (after 14 years) in Risk Free 4,834,196 Rs. PV((1+6%)/(1+8%)-1,4, *(1+8%)^14,0,1) PV of such expenses after 12 years when drawn from Risk Free investments 4,302,417 Rs. PV: /(1+6%)^2 PV of Higher Edu. Exp. Of Stephanie at her age of 18 (after 17 years) in Risk Free 6,089,694 Rs. PV((1+6%)/(1+8%)-1,4, *(1+8%)^17,0,1) PV of such expenses after 12 years when drawn from Risk Free instruments 4,550,574 Rs. PV: /(1+6%)^5 Total PV of Higher Edu. Exp. After 12 years in Risk Free instruments 8,852,991 Rs. PV:(1+2) Accumulation Aggressive Asset Allocation (year 1 to 7) 7 years Return expectation (aggressive) 12.00% p.a. Monthly investment 20,000 Rs. Accumulation in 7 years 2,576,027 Rs. FV((1+12%)^(1/12)-1,12*7,-20000,0,1) Moderate Asset Allocation (year 8 to 12) 5 years Return expectation (aggressive) 9.00% p.a. Monthly investment 40,000 Rs. Accumulation in 12 years 6,974,397 Rs. FV((1+9%)^(1/12)-1,12*5,-40000, ,1) Shortfall expected after 12 years -1,878,594 Rs Q13 C) future capital gains tax on assets transferred to trust could be lower

6 Q14 B) Rs. 12,100 Number of shares Purchase price Sales price 500 nos. 225 Rs. Per share 460 Rs. Per share Alternative 1 Cost of acquisition 112,500 Rs. 500*225 Sales consideration 230,000 Rs. 500*460 Less: Indexed cost of acquisition 148,548 Rs. (500*225)*1125/852 Long-term capital gain 81,452 Rs % 16,290 Rs *20% Add: Education 3% (2% + 1%) 489 Rs *3% Tax liability from capital gains 16,779 Rs Tax liability rounded off 16,780 Rs. ROUND(16779,-1) Alternative 2 Sales consideration 230,000 Rs. 500*460 Less: cost of acquisition (without indexation) 112,500 Rs. 500*225 Long-term capital gain 117,500 Rs % 11,750 Rs *10% Add: Education 3% (2% + 1%) 353 Rs *3% Tax liability from capital gains 12,103 Rs Tax liability rounded off 12,100 Rs. ROUND(12100,-1) Note: An assessee can choose lower of the two alternatives for payment of capital gains tax liability

7 Q15 A) Rs. 57,600 For 800 shares: Sale consideration (Date: 20th October 2016) 29,600 Rs. 800*37 Less: Cost of acquisition (Date: 10th May 2016) 44,800 Rs. 800*56 Short term capital loss (STCL) (15,200) Rs Dividend received 4,000 Rs. (0.50*10)*800 Whether Section 94(7) is applicable Yes For 200 shares: Sale consideration (Date: 20th December 2016) 4,000 Rs. 200*20 Less: Cost of acquisition (Date: 10th May 2016) 11,200 Rs. 200*56 Short term capital loss (STCL) (7,200) Rs Dividend received 1,000 Rs. (0.50*10)*200 Whether Section 94(7) is applicable No Computation of income from capital gains LTCG on sale of gold 76,000 Rs. Less: STCL on sale of 800 shares (11,200) Rs. (15200)+4000 Less: STCL on sale of 200 shares (7,200) Rs. Net LTCG for AY ,600 Rs (11200)+(7200) 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.

1.5% above RBI Repo rate. 9 Car loan of Rs. 5.5 lakh taken in April, 2013 at a fixed interest of 11.5% p.a. for a 4-year term; Car cost Rs. 8 lakh.

1.5% above RBI Repo rate. 9 Car loan of Rs. 5.5 lakh taken in April, 2013 at a fixed interest of 11.5% p.a. for a 4-year term; Car cost Rs. 8 lakh. Case: Mr. Roger (Reference date: 1st April, 2016) Roger, aged 29 years, is working with a multinational company since December 2010. He has approached you, a CFP CM practitioner, for preparing his Financial