Solutions: Case 2 (Urvashi)

Q1

C) Code of Ethics of Confidentiality

Q2

B) To collect the quantitative and qualitative information of Urvashi

Q3

D) Rs. 59,361
(Solution given below)
Current value of the desired house
Expected value of house after 3 years considering 6% appreciation
Amount of loan to be availed
Tenure of loan = (Urvashi's retirement age - age when loan availed)
Rate of interest on housing loan
EMI on the housing loan
Current rental outgo
EMI in excess of current house rent

12,500,000
14,887,700
10,421,390
18
8.50%
94,361
35,000
59,361

Rs.
Rs.
Rs.
years
p.a.
Rs.
Rs. p.m.
Rs. p.m.

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) Rs. 40 lakh
(Solution given below)
Living expenses required in current terms
Annual expenses in current terms
Inflation rate
Return on risk free instruments
Current age of Dhruvi
No. of years expenses required (till 27 years of age of Dhruvi)
Corpus required today towards living expense provisioned
Funds required to purchase a house
Total Corpus for living expenses and house
Current insurance cover
Additional insurance cover required
(Approximate)

60,000
720,000
5.50%
6.50%
9
18
11,975,656
7,000,000
18,975,656
15,000,000
3,975,656
Rs. 40 lakh

Rs. p.m.
Rs. p.a.
p.a.
p.a.
years
years
Rs.
Rs.
Rs.
Rs.
Rs.

12500000*(1+6%)^3
14887700*70%
55-37
PMT(8.5%/12,18*12,-10421390,0,0)
94361-35000

PV((1+6.5%)/(1+5.5%)-1,18,-720000,0,1)
11975656+7000000
18975656-15000000

Q6

D) Rs. 1 crore
(Solution given below)
Urvashi's salary gross per annum
Tax incidence
Net income in the current year
Income contribution to the family (- 35% self consumption)
Remaining work life (retiring at 55, current age 34)
Investment Yield
expected rate of increase in salary
Present value of future income
Sum Assured under current term insurance
Shortfall in insurance cover
(Approximate)

Q7

A) 23% curtailment
(Solution given below)
Urvashi's current Age
Urvashi's retirement Age
Urvashi's Life expectancy
Current expenses for heads considered for retirement
Inflation expected pre-retirement
Expenses estimated at retirement
Retirement corpus calculated in the 1st calculation:
Rate of return expected
Inflation expected post-retirement
Period for which money would be needed in first calculation
Retirement corpus
Retirement corpus calculated in the 2nd calculation:
Rate of return expected
Inflation expected post-retirement
Period for which money would be needed in 2nd calculation
Retirement corpus
Curtailment of expenses required on retirement

3,300,000
730,000
2,570,000
1,670,500
21
10.00%
6.00%
24,835,179
15,000,000
9,835,179
Rs. 1 crore

34
55
85
840,000
5.50%
2,585,717

Rs.
Rs.
Rs.
Rs.
years
p.a.
p.a.
PV
Rs.
Rs.

3300000-730000
2570000*(1-35%)

PV((1+10%)/(1+6%)-1,21,-1670500,0,1)
24835179-15000000

yrs
yrs
yrs
Rs. p.a.
p.a.
Rs. p.a.

840000*(1+5.5%)^(55-34)

7.00%
5.00%
30
59,794,131

p.a.
p.a.
yrs
Rs.

85-55
PV((1+7%)/(1+5%)-1,30,-2585717,0,1)

6.00%
5.00%
35
77,384,779
23%

p.a.
p.a.
yrs
Rs.

85-55+5
PV((1+6%)/(1+5%)-1,35,-2585717,0,1)
1-(59794131/77384779)

Q8

Q9

C) Rs. 73,000
(Solution given below)
Current expenses for heads considered for retirement
840,000 Rs. p.a.
Inflation expected throughout
5.50% p.a.
Urvashi's working years (retirement at 55, current age 34)
21 yrs
Living expenses needed on retirement (60% of pre-retirement)
1,551,430 Rs. p.a.
No. of years retirement income stream required (up to age 85)
30 yrs
Yield of designated retirement fund post retirement
6.50% p.a.
Required Corpus for living expenses at age 55 years
40,727,869 Rs.
Rs. 1 crore (gifts) provisioned in the corpus needed 20 years later
2,837,970 Rs.
Rs. 1 crore (charity) provisioned in the corpus needed 30 years later
1,511,861 Rs.
Total Corpus needed to be accumulated
45,077,700 Rs.
Suppose, a total monthly amount of Rs. 100 is invested in the asset allocation of equity and debt components cumulatively
First Four years : Asset Allocation
Equity Returns
13.00% p.a.
Debt returns
10.00% p.a.
Equity investment per month
70 Rs. p.m.
Debt investment per month
30 Rs. p.m.
Equity component accumulation in 4 years
4,355 Rs.
Debt component accumulation in 4 years
1,760 Rs.
Total accumulation in asset allocation after 4 years
6,115 Rs.
Next Ten years : Rebalanced Asset Allocation
Rebalanced Equity component accumulated (40% of accumulation in first 4 years)
2,446 Rs.
Rebalanced Debt component accumulated (60% of accumulation in first 4 years)
3,669 Rs.
Normal expectation Equity Returns
11.00% p.a.
Normal expectation Debt Returns
7.00% p.a.
Revised Equity investment per month
40 Rs. p.m.
Revised Debt investment per month
60 Rs. p.m.
Equity component accumulation in total 14 years
15,443 Rs.
Debt component accumulation in total 14 years
17,539 Rs.
Total accumulation in asset allocation (in 14 yrs) before switch
32,982 Rs.
Final Seven years : Liquid Fund
Monthly investment
100 Rs. p.m.
Investment accumulated up to retirement
61,837 Rs.
Actual monthly investment equivalent to Rs. 100
72,897 Rs.

840000*60%*(1.055)^21

PV((1+6.5%)/(1+5.5%)-1,30,-1551430,0,1)
10000000/(1+6.5%)^20
10000000/(1+6.5%)^30
40727869+2837970+1511861

FV((1+13%)^(1/12)-1,4*12,-70,0,1)
FV((1+10%)^(1/12)-1,4*12,-30,0,1)
4355+1760

FV((1+11%)^(1/12)-1,10*12,-40,-2446,1)
FV((1+7%)^(1/12)-1,10*12,-60,-3669,1)
15443+17539

FV((1+6.5%)^(1/12)-1,7*12,-100,-32982,1)
(45077700/61837)*100

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.

Q10

Q11

D) 11.50% p.a.
(Solution given below)
Current cost of world tour vacation
Cost escalation for such vacation
Vacation fund required when due in 10 years
Expected date when vacation fund is to be utilized
Date of switch from balanced fund to Asset Allocation
Rate of return from investing in balanced scheme

1,000,000
5.00%
1,628,895
1-Apr-2024
1-Apr-2019
9.00%

Rs.
p.a.
Rs.

1000000*(1+5%)^10

p.a.

Years of investment of first Rs. 1.05 lakh from 1-May-2014

Years of investment of second Rs. 1.05 lakh from 1-Jun-2014
Years of investment of third Rs. 1.05 lakh from 1-Jul-2014
Years of investment of fourth Rs. 1.05 lakh from 1-Aug-2014
Years of investment of fifth Rs. 1.05 lakh from 1-Sep-2014
Years of investment of sixth Rs. 1.05 lakh from 1-Oct-2014
Balanced scheme accumulation before switch to Asset Allocation

4.92
4.83
4.75
4.67
4.58
4.50
945,343

Rate of return to be targeted from Asset Allocation in 5 years

11.50% p.a.

years
years
years
years
years
years
Rs.

4 year 11 months to 1-Apr-2019

4 year 10 months to 1-Apr-2019
4 year 9 months to 1-Apr-2019
4 year 8 months to 1-Apr-2019
4 year 7 months to 1-Apr-2019
4 year 6 months to 1-Apr-2019
105000*((1+9%)^4.92+(1+9%)^4.83+(1+9%)^4.75+(
1+9%)^4.67+(1+9%)^4.58+(1+9%)^4.5)
(1628895/945343)^(1/5)-1

B) Rs. 35.46 lakh; 52%

(Solution given below)
PPF account is opened on
Initial maturity of PPF account due on
PPF account balance as on 31-Mar-2014
Amount to be invested on 31st March every year (beginning 2015)
Rate of interest (credited end of financial year) on PPF account
Accumulated amount on initial maturity (31-Mar-2022)
1st extended 5-year term (till 31-Mar-2027), invest in FY beginning
Maturity on 31-Mar-2027 after the 1st extended term

21-Dec-2006
31-Mar-2022
659,000
150,000
8.70%
2,920,860

5,402,590 Rs.

FV(8.7%,5,-150000,-2920860,1)

Current age of Dhruvi (tentatively on 1-Apr-2014)

Funds for professional course required (on 1-Apr-2027)
Current cost of professional course
Cost escalation for professional course expenses
Estimated outlay for professional course when due (in 13 years)
Amount of lump sum to be withdrawn from PPF account (40%)
Funds remaining in the PPF account after withdrawal of lump sum

9 years
22 years
2,500,000
9%
7,664,512
3,065,805
2,336,786

Rs.
p.a.
Rs.
Rs.
Rs.

2500000*(1+9%)^13
7664512*40%
5402590-3065805

Marriage age of Dhruvi (tentatively on 1-Apr-2032)

Current cost of marriage
Cost escalation for marriage expenses
Estimated outlay for marriage when due (in 18 years)

27 years
2,000,000 Rs.
7% p.a.
6,759,865 Rs.

2000000*(1+7%)^18

Accumulated PPF balance after 2nd 5-year term (till 31-Mar-2032)

Funds available as a percentage of marriage cost then

3,546,227 Rs.
52%

2336786*(1+8.7%)^5
(3546227/6759865)*100%

15 years from close of FY in which a/c opened

Rs.
Rs.
p.a.
Rs.

FV(8.7%,8,-150000,-659000,0)

Q12

Q13

A) Rs. 2 lakh shortfall expected in meeting Dhruvi's higher education, Strategy workable
(Solution given below)
Dhruvi's current age is 9 years and higher education is at 18 years
Equity SIP shall be for 8 years and Debt SIP for 6 years from today
Basic education goal requirement for this year + next 4 (total 5) years
Expenses in current terms required each year for 5 years for Dhruvi
Expenses in current terms required each year for 4 years for Suryansh
Expenses are funded by redeeming Equity MF with return
Cost escalation for such expenses
PV of first four year basic education expenses in Equity MF schemes
PV of fifth year basic education expenses in Equity MF schemes
Total PV of basic education expenses for first 5 years
Equity MF schemes value today
SIP amount
PV of SIP for 8 years in Equity MF schemes
PV (today) of balance funds after meeting first 5 years expenses
Basic education goal requirement for years 5 to 8 from now
Debt fund returns
Expenses in current terms required for the latter 4 years of basic edu.
PV of these 4 year expenses in Debt MF schemes after 5 years
Debt MF schemes value today
SIP amount
FV in the next five years in Debt MF schemes
FV in debt MF schemes after meeting all basic edu. Exp. (end of 5 yrs)
FV in debt MF schemes: end of 6 years (SIP considered 1 more year)
Higher education expenses withdrawal for Suryansh
Equity shares portfolio value today
Accumulated value of equity shares portfolio after 4 years
Funds requirement in current terms for Suryansh's higher education
Cost escalation for such expenses
Funds requirement after 4 years for Suryansh's higher education
Balance in equity shares portfolio after 4 years
Balances in individual portfolio at the time of final withdrawal
Equity MF schemes: (PV today after meeting first 5 yr exp. expanded)
Debt MF schemes: (FV at yr end 6 after meeting latter 4 yr exp. expanded)
Equity shares portfolio expanded (end of 4 yr after Suryansh higher ed.)
Total available for Dhruvi's higher education goal
Funds required for Dhruvi's higher education goal
Shortfall expected
A) Revocable and Discretionary

150,000
200,000
11%
10%
1,381,194
144,667
1,525,862
1,245,000
25,000
1,634,357
1,353,496

Rs.
Rs.
p.a.
p.a.
Rs.
Rs.
Rs.
Rs.

7%
200,000
1,343,613
579,000
15,000
1,886,054
542,440
767,166

p.a.
Rs.
Rs.
Rs.

2,392,000
3,631,224
2,500,000
8%
3,401,222
230,002

Rs.
Rs.
Rs.
p.a.
Rs.
Rs.

3,462,292
939,811
387,567
4,789,670
4,997,512
-207,842

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

PV((1+11%)/(1+10%)-1,4,-(150000+200000),0,1)
150000*(1+10%)^4/(1+11%)^4
1381194+144667

Rs. p.m.
Rs.
Rs.

PV((1+11%)^(1/12)-1,8*12,-25000,0,1)
1634357+1245000-1525862

PV((1+7%)/(1+10%)-1,4,-200000*(1+10%)^5,0,1)

Rs. p.m.
Rs.
Rs.
Rs.

FV((1+7%)^(1/12)-1,5*12,-15000,-579000,1)
1886054-1343613
FV((1+7%)^(1/12)-1,12,-15000,-542440,1)

2392000*(1+11%)^4

2500000*(1+8%)^4
3631224-3401222
1353496*(1+11%)^9
767166*(1+7%)^3
230002*(1+11%)^5
3462292+939811+387567
2500000*(1+8%)^9
4789670-4997512

Q14

Q15

A) Rs. 4.38 lakh, by 29th September 2015

(Solution given below)
Purchase cost
Sale proceeds on 31st March 2015
Less: Expenses on transfer
Net sale proceeds
CII for 2006-07
CII for 2014-15
Indexed cost of acquisition
Long-term capital gain
To be invested in bonds specified u/s. 54EC by
A) Rs. 7,48,360
(Solution given below)
Income under the head salaries:
Basic
HRA
Less: exempt (See Note)
Other allowances
Total Income under the head salaries
Income from other sources(savings account up to Rs. 10000 exempt u/s. 80TTA)
Income from other sources(fixed deposits)
Income from Capital Gains (invested in bonds specified in Section 54EC)
Gross total income
Less: Deductions u/s. 80C
Insurance Premium
PPF
Less: Deduction u/s. 80D (restricted to maximum limit of Rs. 15,000)
Net income
Tax on net income:
up to Rs. 2,50,000
Rs. 2,50,001 to Rs. 5,00,000 @ 10%
Rs. 5,00,001 to Rs. 10,00,000 @ 20%
Rs. 10,00,001 and above @ 30%
Tax payable
Surcharge
Education cess and Higher education cess (2% + 1%)
Total tax payable
Rounded off

Note:

House Rent Allowance exempted:

Least of the following Allowance Received
Rent Paid - 10% of salary
50% of salary

290,000
1,012,000
2,000
1,010,000
519
1024
572,177
437,823
29th September 2015

Rs.
Rs.
Rs.
Rs.

1012000-2000

Rs.
Rs.

290000*(1024/519)
1010000-572177

2,500,000
500,000
(170,000)
300,000
3,130,000
28,960
3,158,960

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

38,759
100,000
15,000
3,005,201

Rs.
Rs.
Rs.
Rs.

25,000
100,000
601,560
726,560
21,797
748,357
748,360

Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.

500,000 Rs.
170,000 Rs.
1,250,000 Rs.

2500000+500000-170000+300000

3130000+28960

3158960-38759-100000-15000

(500000-250000)*10%
(1000000-500000)*20%
(3005201-1000000)*30%
25000+100000+601560
726560*3%
726560+21797
ROUND(748357,-1)

(35000*12)-(10%*2500000)
2500000*50%