wealth_management_icai_-dec_'21-2012 dr - jb nagar cpe study ...

Organised by : J B NAGAR, CPE STUDY CIRCLE,of WIRC of ICAI, 25 th December, 2011DR. PRAVIN P. SHAHChartered Accountantwealth.knowhowhub.com

New Practice Area for CAs :Wealth Management Emerging Important Practice Area Wealth Management reqd. throughout Lifecycle- Cradle to Grave Consultancy Not Taught in School/College/ CA : Opportunity for CAsUK experience© wealth.knowhowhub.com 2

LIFECYCLE &WEALTH MANAGEMENT CYCLE1. Wealth Accumulation / Enhancement Phase2. Wealth Preservation / Protection Planning3. Family Separation & Distribution of Wealth4. Wealth Passing / Distribution - as per HNI’s Wish© wealth.knowhowhub.com3

WHOOWNSWEALTH© wealth.knowhowhub.com 4

Global Wealth PyramidWealth Category(USD in Millions)Above $ 1 Million(More thanRs.5 crores)% of Adult WorldPopulation0.5%(2.4 crores)% of World WealthOwned by Them36%Between $1 lakh 7.5% 44%& $1 million (Rs. 50 lakhsto Rs. 5 crores)(33.4 crores)Subtotal 8.0% 80%Total Wealth(USD Trillions) 195Source : Global Wealth Report, 2011 by Credit Suisse© wealth.knowhowhub.com5

HNIs In INDIASource Wealth Category No. ofPersonsGlobal WealthReport 2011 byCredit SuisseCRISIL & Kotak2011 ReportForbesNov ‘ 2011Wealth(US $Billions)Wealth(Rs inCrores)• Total Wealth 3.5 Trillion 175 lakh• Between $ 1 lakh &$ 1 Million (Rs. 50lakhs to Rs. 5 Crores)• US $ Millionaires(Rs. 5+ crores)• Ultra HNIs (Net Wealthof Rs.25+ crores) :27.7lakhs1,70,00090+ % inRealProperty2010 – 11 62,000 900 45 lakh2015 – 16• 100 Richest(US $ 370Million+ Wealth)2,19,000(3 x )4,700100 241(7 % of 3.5Trillion)235 lakhs(5.2 x )12.5 lakh• US $ Billionaires57213(88 % of 241)10.7 lakh6

Wealth Sources-3 : Old & New 100 Wealth CreatorsParticularsForbes:Nov, 2011Breakup of 100 Richest(Nov’ 2011)In Top 500Cosof 1995Not in Top 500Cosof 19951. No. of Richest Persons 100 42 582. Total Wealth (US $ Billions) 243 123(in 2011)120(in 2011)3. Total Wealth(Rs. lakh crores)12.5 6.15(in 2011)6.35(in 2011)© wealth.knowhowhub.com7

SOURCES© wealth.knowhowhub.com 8

Sources of Wealth Creationin India:1 In the Past : Kings, Zamindars & Industrialists Post 1991 : Economic Boom broad-based wealth creation Wealth is Percolating Two Different Methods of Wealth Creation :Income = WealthIncome x P/E = Value = Wealth© wealth.knowhowhub.com9

Sources of Wealth Creationin India:21. Businesses : Diversified - IT, Financial Services, Distribution,Digital Economy, etc : Income x P/E = Value = Wealth2. Professionals, Actors, Sportsmen, etc. : Income = Wealth3. Corp. Exec : Monetization of Education : Income = Wealth4. Broad-based Investment Opportunities :Investment x (Growth or Depreciation) % = Value = Wealth5. Inheritance : Currently Small in India6. Marriage© wealth.knowhowhub.com10

Wealth Sources-3 : India’s 100 Richest per Forbes 2011SectorNo. ofPersonsWealth(US $ inBillions)% of TotalWealthOil& Gas 2 24 10 %Steel, Metal & Minning 4 33 14 %Information Technology * 7 24 10 %Pharmaceuticals & Healthcare 14 27 11 %Consumer Goods 17 24 10 %Infrastructure 8 14 6 %Real Estate 9 14 6 %Telecom * 2 10 4 %Media 5 9 4 %Automobile 6 9 4 %Banking & Financial Services : Invst. 1 * 5 7 3 %Diversified & Others 21 46 19 %Total 100 241 100 %11

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Wealth Building Process - 11. 1 st Wealth has to be Created :- Usually does not happen by Accident2. Select your Wealth Accumulation Goal- Need a Dream / Ambition / Passion- Think Big3. Match your Sources of Wealth Creation with your Goal- Mismatch will not help Fill up the Table on Next Slide© wealth.knowhowhub.com13

Wealth Building Process - 2Wealth Category(2010 – 11)No. ofPersonsWealthAccumulationGoal(Rs. in Crores)Select Sourcesof WealthCreation1. Between $ 1 lakh &$ 1 Million(Rs. 50 lakhs to Rs. 5 Crores)2. US $ Millionaires(Rs. 5+ crores)3. Ultra HNIs(Net Wealth of Rs.25+ crores)27.7 lakhs1,70,00062,000• Business• Profession• CorporateExecutive4. 100 Richest(US $ 370 Million+ Wealth)100• Investment5. US $ Billionaires57• Inheritance© wealth.knowhowhub.com14

Wealth Creation/Building Process- 34. Dual Sources :■Active Earning : Income – Expenses= Savings Wealth (Most Imp.)■Investment of WealthEnhancement / Reduction of Wealth- Wealth Managers concentrate onmanaging already created wealth© wealth.knowhowhub.com15

Wealth Creation/Building Process- 45. Wealth Creation begins with you- Most important Source- Foundation Building Phase of Life- Enhance your Capability(Education & Training)- Maximise your Active Income Earning- Maximise your Investible Surplus (savings)© wealth.knowhowhub.com16

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Wealth Building thru Investments - 1ESSENTIALS FOR THE SAME1. You have to play Active Role in Wealth Management2. Build Financial Literacy & Capability :- Understand Wealth Matrix- Spend little time for Learning- Objective of Our Wealth Portal3. Select Time Period for Investment : 85 Years Longevity© wealth.knowhowhub.com18

Wealth Building thru Investments - 2ESSENTIALS FOR THE SAME4. Set Lifetime Goals & Decide Lifestyle You Want5. List Major Future Events of Your LifeAssess Major Financial Needsduring entire Lifecycle6. Consider Every Family Member for :- PPF, Home Loan, S.80C, Tax Planning,Distribution of Income / Wealth© wealth.knowhowhub.com19

Wealth Building thru Investments - 3ESSENTIALS FOR THE SAME7. Prepare your Financial Personality Profile :Your Attitude / Expectations about Risks & Rewards8. Understand Risks, Reward & Tax Profile ofEvery Asset Class / Investment9. Define Your Investment & Asset Allocation Strategies :- Match with your Financial Personality Profile- Match with Your Wealth Creation Goals- Match with Short-term, Medium-term & Long-termFinancial Requirements (Liquidity v/s. Growth)- See Table on Next Slide© wealth.knowhowhub.com 20

Wealth Building thru Investments - 4ESSENTIALS FOR THE SAMESelection of Asset Allocation Strategies : IllustrativeYour Expectations / Goals(Financial Personality Profile)Asset ClassRisks & Reward Profile ofAsset Class■ Financial Needs / Goals for ■ Equity Investment :- Short-term Financial Assets - No Safety of Capital- Medium-term - Return not Assured- Long-termNon–Financial Assets- Must for Large WealthBuilding■ PPF :■ Capital Protection - Safety of Capital- Return Assured■ Returns Expectation - Tax Benefits- Can Build Large Wealth© wealth.knowhowhub.com21

Wealth Building thru Investments - 5ESSENTIALS FOR THE SAME10. Systematic Investment Plan (SIP) Required11. Start Early12. Action Plan for Implementation13. Record-Keeping14. Monitor : Review & Revise Financial Plan15. Illustrations of Wealth Creation thru Investment© wealth.knowhowhub.com22

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Asset Allocation Strategies – 1 Different Asset Classes : Make Tentative Selection of Asset Classes Equity : Directly or through Mutual Funds ? Should A.A.S. change with the Age ? Calculate Accumulation Possiblefrom Selected Asset Classes Adjust Asset Classes & / or Accumulation GoalsAnswers: Depend on Long-term Financial Plan© wealth.knowhowhub.com24

Asset Allocation Strategies - 2World Experience : 2010 (Mckinsey)CountryListedEquityFinancial AssetsOthersTotal(In US$trillion)% ofTotalDeveloped Countries 29 % 71 % 157 79 %Emerging Economies 15 % 85 % 41 21 %World Total 28 % 72 % 198 100 %China 14 % 86 % 20 10 %India 8 % 92 % 2 1 %Source : Mc kinsey & Co., 2011In US $ TrillionRemarksRemarksWith Age, equityinvestment willdecrease ---increase inEquity gapFinancial Assetswill increaseWas $ 113 trillionin 2000 -$ 371 T by 202025

Investment in Gold / Silver - 1Investment in Gold / Silver – 12 Years AgoParticulars Gold Silver1. Invested on 1.4.992. Value as on 31.3.11 (After 12 Yrs)Rs. 1 LRs. 4.9 LRs. 1 LRs. 7.5 L3. Multiplication4. CAGR (Annual Rate of Return)5. Appreciation in Last 8 Months4.9 Times 7.5 Times14 % 18 %39 % -1.8 %© wealth.knowhowhub.com26

Investment in Gold / Silver - 2Investment in Gold / Silver – Every Year for 12 YearsParticulars Gold Silver1. Invested every year on 1 st AprilFrom1.4.99 to 1.4.2010 (12 Yrs)2. Total InvestmentsRs. 1 LRs. 12 LRs. 1 LRs. 12 L3. Value as on 31.3.11 (12 Yrs) Rs. 38.5 L Rs. 60.8 L4. Multiplication 3.2 Times 5 Times5. IRR (Internal Rate of Return) 17 % 23 %© wealth.knowhowhub.com27

Investment in Equity Shares - 1Invested in Equity Shares of Large 35 Companies (NIFTY)on 1.4.99 (12 Yrs Ago) : Rs. 1 L per Co.Company (NIFTY) Nos. Return% p.a.No. ofTimesSesa Goa, Kotak M. Bank, Axis Bank 3 40 – 68 151Siemens, L&T, SAIL, Sun Pharma,Adani Ent., HDFC Bank, ICICIBHEL, M&M, SBI, Tata Power, ONGC,GAIL, Tata Steel, Reliance Cap., Hero Motocorp,Grasim , Infosys, RILITC, Ambuja Cement, Hindalco, Dr. Reddy’s,Cipla, BPCL, Wipro, Reliance Infra, ACC,Tata Motors7 30 – 40 3812 20 – 30 1410 12 – 20 7Ranbaxy, HUL, HDFC 3 01 – 11 2Total 35 31 % 27Rs. 35 L would have become Rs. 9.62 Cr : 27 Times© wealth.knowhowhub.com28

Investment in Equity Shares - 2Invested Rs. 1 L Every Year in Equity Shares of Large35 Cos (NIFTY) from 1.4.99 to 1.4.10 (12 Yrs) : Rs. 12 L per Co.Company (NIFTY) No. IRR % No. ofTimesSesa Goa, Kotak M. Bank, Axis Bank,Siemens , L&T, Adani Ent.6 40 – 68 44SAIL, BHEL, Sun Pharma, Tata Motors,M&M, HDFC, SBI, Tata Power, ONGC,ICICI, GAIL, HDFC BankTata Steel, Reliance Cap., Hero Motocorp,Grasim, ACC, Infosys, RIL, ITC,Ambuja Cements, HindalcoRs. 4.20 Cr (Average Rs. 2.1 Cr)12 30 – 40 81020 – 30 5Dr. Reddy’s, Cipla, BPCL, Wipro, Reliance Infra 5 12 – 20 3Ranbaxy, HUL 2 01 - 11 2Total 35 34 % 11.2Rs. 47 Cr : 22 Times© wealth.knowhowhub.com29

Accumulation of Rs. 100 croresAfter-TaxAppreciation% p.a.No. ofYrs’Invst.Reqd.Yearly Investment ofRs. 5 lakhsTotalInvst.(Rs. inLakhs)Total Invst.as % ofRs. 100croresNo. ofYrs’Invst.Reqd.Yearly Investment ofRs. 10 lakhsTotal Invst.(Rs. inLakhs)Total Invst.as % ofRs. 100crores24% 28 139 1.4 % 25 245 2.4%21% 31 154 1.5% 27 271 2.7%18% 35 173 1.7% 30 304 3.0%15% 40 199 2.0% 35 349 3.5 % Investment of Rs.10 L / year :(A) Increases Total Investment by 76% (B) Reduces Years by 3 to 5 Lessons : 1. Strive for Higher Yield 2. Require Small Amt. per year3. Systematic long-term investmentmust for Wealth building© wealth.knowhowhub.com30

After-TaxAppreciation% p.a.Accumulation of Rs. 50 croresNo. ofYrs’Invst.Reqd.Yearly Investment ofRs. 5 lakhsTotalInvst.(Rs. inLakhs)Total Invst.as % ofRs. 50croresNo. ofYrs’Invst.Reqd.Yearly Investment ofRs. 10 lakhsTotal Invst.(Rs. inLakhs)Total Invst.as % of Rs.50 crores24% 25 123 2.5% 21 213 4.2%21% 27 135 2.7% 23 235 4.7%18% 30 152 3.0% 26 263 5.2%15% 35 175 3.5% 30 300 6.0% Investment of Rs.10 L / year :(A) Increases Total Investment by 73%(B) Reduces Years by 4 to 6■ Lessons : Same as for Rs. 100 Cr© wealth.knowhowhub.com31

Accumulation of Rs. 25 croresAfter-TaxAppreciation% p.a.No. ofYrs’Invst.Reqd.Yearly Investment ofRs. 5 lakhsTotalInvst.(Rs. inLakhs)Total Invst.as % ofRs. 25croresNo. of Yrs’Invst.Reqd.Yearly Investment ofRs. 10 lakhsTotal Invst.(Rs. inLakhs)Total Invst.as % ofRs. 25crores24% 21 107 4.2% 18 181 7.2%21% 23 117 4.7% 20 199 8.0%18% 26 131 5.2% 22 222 8.9%15% 30 150 6.0% 25 251 10.0% Investment of Rs.10 L / year :(A) Increases Total Investment by 69%(B) Reduces Years by 3 to 5 years■ Lessons : Same as for Rs. 100 Cr© wealth.knowhowhub.com32

Accumulation after 30 Years atParticular Growth RateAfter-TaxAppreciation% p.a.No. ofYrs’ Invst.YearlyInvestment :Total Accumulation(Rs. in Cr.)YearlyInvestment :YearlyInvestment :Rs. 2 Lakhs Rs. 3 Lakhs Rs. 4 Lakhs418% 30 19 28 3715% 30 10 15 20Lessons : 1. Even smaller SIP can create large Wealth2. Double the Invst, double the Accumulation© wealth.knowhowhub.com33

SIP Vs. Churning - 1 Q. Should one follow SIP strategy on a fixed dateregardless of Prevailing Market Price?OR Q. Should one do Churning ,i.e., exit an EquityStock when he gets, say, 25 % return, invest inLiquid Funds & then again invest in EquityStock when the price falls by, say, 25 %.?© wealth.knowhowhub.com34

SIP Vs. Churning - 2CompanySIP : IRR (%)(Investment of Rs. 1lakh / year from1.4.99 to 1.4.2011)Churning : IRR (%)(Investment of Rs. 1 lakh / year from1.4.99 to 1.4.2011)Churning with 25%up/ down in SharePricesChurning with 50%up/ down in SharePricesAdani Enterprises51 % 19 % 14 %Hero Motocorp27 % 12 % 14 %Note : Switching is Different from Churning© wealth.knowhowhub.com35

Equity Mutual Funds SIP ReturnsAssumption : Investment of Rs.1.20 lakhs p.a. for 10 Years(Total Investment of Rs. 12 Lakhs – Average Invst. Rs.6 Lakhs)Fund10 yearAnnual SIPReturn (IRR)Value of Investmentat the end of 10 years(Rs. in Lakhs)1. Reliance Growth Fund Retail Plan 36 % 922. HDFC Top 200 Fund 31 % 723. SBI Magnum Global Fund 24 % 454. DSP Blackrock 22 % 425. SBI Magnum Contra Fund 22 % 416. LIC Nomura MF Growth Fund 20 % 367. LIC Nomura MF Equity Fund Growth 16 % 308. Taurus Discovery Fund Growth 13 % 249. Principal Tax Saver 7 % 17Total 23 % 401Rs. 1.08 Cr (Average Rs. 54 Lakhs) would become Rs. 4.01 Cr = 7 Times© wealth.knowhowhub.com36

Public Provident FundPre-tax Investment of Rs 70,000 / year : Post-tax : Rs. 49,000 / 56,000 / 63,000(Rs. in Lakhs)No.No. of Years’InvestmentCumulative Post-tax Investment in PPFconsidering Tax Deduxtion u/s. 80C & I.T.Rate of30 % 20 % 10 %ClosingBalanceofPPFA B C D E F1 30 Years 15 17 19 862 36 Years 18 20 23 1413 42 Years 21 24 26 2304 48 Years 24 27 30 3715 54 Years 26 30 34 594© wealth.knowhowhub.com37

Public Provident Fund + EquityPre-tax Investment in PPF of Rs 70,000 / year : Tax Saving (30% = Rs. 21,000,20% = 14,000, 10% = 7,000) invested in Equity@ 15% p.a. Appreciation(Rs. in Lakhs)No.No. of Years’InvestmentCumulative Investment :PPF + Equity(Post-tax consideringTax deduxtion u/s. 80C)Closing Balance ofPPF + Equity(Appreciation @ 15%)---- Income Tax RateA B C D E F1 30 Years 21 191 156 1212 36 Years 25 386 305 2233 42 Years 29 799 609 4204 48 Years 34 1,688 1,249 8105 54 Years 38 3,643 2,627 1,610© wealth.knowhowhub.com38

Asset Allocation & Age - 1 Q. HNI of 60 Years Age : Should he reduce his Equityinvestment ? Should he increase his Fixed- Incomeinvestment ?© wealth.knowhowhub.com39

Asset Allocation & Age - 2■ Ans. Depends upon Investing for selfor for next generationIllustration : Mr. & Mrs. A : Present Age 60 Existing Wealth : Rs.30 crores■ Present annual expenses : Rs.30 lakhs■ For Life expectancy up to 85 years : With 10% p.a. increasein Expenses & 5% p.a. after-tax return,Amt Reqd. : Rs. 9.2 croresLesson : Customise Financial Plan – No dogmas© wealth.knowhowhub.com40

Why Equity Growth in India will be Good ? Economic Boom requires more Capital Equity growth bound to take place Younger Age Structure in India- more risk taking ability / willingness Globally, more older people :- Shift from Equity to Fixed-income Assets Shortage of Equity Fund in Emerging Markets :- Globally, Equity Cap Gap of $ 12 Trillion by 2020© wealth.knowhowhub.com41

Liberalised Remittance Scheme : FEMA■■Individual can invest etc., $ 2 lakhs per yearSeveral Persons have formed companies abroad underLRS for investment / business abroad■ Q. Can he use this money to form a company abroad ?■Legal position : Investment in Foreign Securitiespermissible■RBI’s View : Not for setting up a Co. abroad - Can’tPurchase FCCB issued by ICOs© wealth.knowhowhub.com42

Objectives :Role of Life InsuranceProtection : No Substitute-- Term Insurance ? : Premium forSum Assured of Rs. 1 Cr, at Age 25 for 30 Years= Rs. 7,000 to Rs. 27,000 per Year-- Need only till Adequate Wealth Accumulated For Income Tax benefit ?Investment Alternative© wealth.knowhowhub.com43

RETIREMENTFINANCIALPLANNING© wealth.knowhowhub.com44

Retirement Financial Planning - 1 In India, R.F.P. not given required attention because of :Lack of knowhow, Lack of Options, Dependence onother Family Members, Rapidly rising IncomeIf Financially Independent, No need for Retirement FIN PlanFocus on Wealth Accumulation for Next GenerationOthers need Retirement Financial Planning Require Long-term Financial Planning : How to do ?© wealth.knowhowhub.com45

Retirement Financial Planning - 2 Instruments / Options for RFP :■■PPF / RPF / EPFSuper Annuation■ Gratuity■■■■Life Insurance / Annuity Policies / Pension PlansOther Savings & InvestmentsReverse MortgageCombination of the AboveQ. How to select ? : Need Long-term Financial PlanningCost-Benefit Analysis of each Option :Illustration© wealth.knowhowhub.com46

Pension Plan Illustration : LIC Jeevan Akshay (189)Particulars Option – A Option – F1. Age at Entry (Years) 40 50 60 40 50 602. Expected Age (Years) 85 85 85 85 85 853. One-Time Premium (Rs. in lakhs) 10 10 10 10 10 104. Yearly Pension (Rs. in thousands) 79.1 85.4 97.5 73.3 74.0 75.15. Total Pension for Life (Rs. in lakhs) 36 30 25 33 26 196. Return of Premium to Nominee(Rs. in lakhs)-- -- -- 10 10 107. Total of Pension + Return (5 + 6)(Rs. in lakhs) 36 30 25 43 36 298. IRR (%) 7.6 6.9 8.5 7.3 7.4 7.5Q.1 Is Pension Plan advisable ? Q.2 Alternatives ?© wealth.knowhowhub.com47

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No Permanency of Wealth / SuccessRange of marketCap as on31.3.1995(Rs. in Cr.)No. ofCos.No.BecameBillion $ Cos.(on 31.12.07)% ofTotal No.Growth inMarket Cap.In 12 Years(No. of Times)1 - 500 378 26 7 % 2.2501 - 1,500 86 37 43 %1,501 - 4,000 21 19 100 %4,001 - 15,000 15 15 100 %Total 500 97 19 % 1.3* Because of Merger Source : Building Billion $ Indian CompaniesBy Dr. Pravin P. Shah49

Breakup of Billion $ Cos on 31-12-2007(Movement in Last 12 Years)No.ParticularsNo. of Billion$ Cos. on31-12-2007% of theTotalCos.1 In existence on 31.3.1995 & listed :(Among Top 500 Cos. by Market Cap) 97 43 %2 In existence on 31.3.1995(listed or unlisted)But not in Top 500 List98 43 %3 Subtotal (Cos. in Existence on 31.3.1995) 195 86 %4 Not in Existence on 31.3.1995 31 14 %Total 226 100 %© wealth.knowhowhub.com50

Borrowing for Wealth Building? - 1 Illustration : Borrow Rs. 10 Lakhs @ 18% p.a. for 5 yearsInterest payable annually &loan repayable at the end of 5 years Invested in listed Equity Shares of XYZ Co. Break Even Point : Rs. 20.26 Lakhs(Interest + Interest on Interest@ 7% post tax)© wealth.knowhowhub.com51

Borrowing for Wealth Building? - 2 If invested Rs. 10 lakhs in RIL shares on 1.10.06- Sold on 30.9.11 for Rs. 13.43 lakhs- Loan & Interest Payable to Bank : Rs. 20.26 lakhs- Net Loss = Rs. 6.83 lakhs Over 5 Years, SENSEX increased by 32%, RIL by 34%© wealth.knowhowhub.com52

Borrowing for Wealth Building? - 3Conclusions : Compounded Interest – Major drain On Maturity of Loan, compulsory sale of shares– Market maybe unfavorable No Long-term borrowing for Equity Invest (Risky)© wealth.knowhowhub.com53

Lifestyle Asset ProtectionPlanning - 1Objectives Separate Lifestyle Assets from Business Assets Not to affect the lifestyle under most circumstances To protect from creditors To protect from unscrupulous financial claims For Whom more relevant ? Promoters who have given personal guarantees forborrowings by companies Partners / Proprietors : borrowed heavily for business etc.© wealth.knowhowhub.com54

Lifestyle Asset Protection Considerations :Planning - 2Control over WealthFlexibility in Use of WealthTaxationEase of Wealth Passing Options :Discretionary TrustSpecific TrustMWP Life Insurance PolicyAssets held by persons at lesser / no risk© wealth.knowhowhub.com55

FINANCIALPLANNINGFOR LIFE© wealth.knowhowhub.com56

Financial Planning for Life – 1Is Lifetime Financial Planning necessary?- Matching of Lifecycle & Wealth Cycle Is it possible to plan for lifetime ? wealth.knowhowhub.comprovides Tools & Techniques- Gives an Illustration of Planning for 50 Years(Age 35 to 85)© wealth.knowhowhub.com57

Financial Planning for Life – 2 Phase-I: Understand Wealth &Importance of Wealth Management Matching of Life Cycle Planning & Wealth Cycle Planning– They go hand-in-hand Consult Wealth Management Advisers/ FinancialPlanners/ Tax Advisers – CAs can play Imp Role Phase-II: Where You Are (Situation Analysis) Prepare an Inventory of your Strengths, Weaknesses,Opportunities & Threats (SWOT Analysis)© wealth.knowhowhub.com58

Financial Planning for Life – 3 Phase-III: Where You Want to Be (Goals Setting) Set Lifetime Goals &Decide the Lifestyle You Want List Major Future Events of Your Life Assess the Major Financial Needsduring the entire Lifecycle :MarriageResidenceChildrenEducationMarriage of ChildrenLiving & Leisure ExpensesRetirement© wealth.knowhowhub.com59

Financial Planning for Life – 6Phase–IV: Prepare Financial ProjectionsBorrow WiselyRisk Management & Contingency PlanningProjected Cash Flow & Wealth Statements“What If” Analysis Arrive at an Affordable Lifestyle by adjustingIncome / Expenses / Goals / Needs / WantsPhase–V: Implementation & MonitoringSee Illustration of Planning for 50 Years onwealth.knowhowhub.com60

WEALTH© wealth.knowhowhub.com61

Key Questions :Passing of Wealth :Legacy & Charity- What are the Options available ?- How to avoid Disputes re Will ?- How to Preserve Wealthfor Several Generations?© wealth.knowhowhub.com62

How to Avoid Disputes Re Will ? Options : Directly during Lifetime Living Trust :Discretionary or Specific Family Arrangement Will - Defensive Restrictive Clauses- Q. Does registration of Will help ? Combination of the above Considerations :Control over Wealth during his / her lifetimeFlexibility in Use of WealthTaxationStamp Duty© wealth.knowhowhub.com63

Wealth Passing : Rule Against Perpetuity S. 14 of TOPAParticulars Name In Existence Today? Valid ?• Settlor X• Present Beneficiary A Yes Yes• Next Beneficiary B Yes Yes• Next Beneficiary: C Unborn Children of BTrust to terminatewhen eldest child ofB becomes :18 years25 yearsYesNo In Will : Existence on the date of Death of the Testator Relevant© wealth.knowhowhub.com64

Private Trusts - 1 Trust Vehicle extensively usedin developed countries Useful forProviding Financial Support to Someone : ExampleProviding Income for ParentsFuture Beneficiaries in FamilyAsset ProtectionAccumulation & Passing of Wealth© wealth.knowhowhub.com65

Private Trusts - 2 Types of Trust : Specific Trust Discretionary Trust Accumulation Trust Generation-skipping Trust Living Trust vs Trust under Will© wealth.knowhowhub.com66

Family Separation-1 Trend : Joint Family being Disrupted Reasons : Liberalisation & Globalisation of Economy Economic Boom - Increased Opportunities Increase in Aspirations / Ambitions Intercaste Marriages Change in Value Systems Inequality of Opportunity to All Family Members© wealth.knowhowhub.com67

Family Separation-2 Brothers, Parents & Children, etc. :- With or Without Disputes Separation Need Succession Planning : BCA Journal July, 2011 Issues : Valuation & Division Taxation Stamp Duty Title to Property Method to be Adopted Documentation© PRAVIN P. SHAH & CO., CAs 68

Family Separation-3 Solution? : Family Arrangement not a transfer in lawNo Income TaxNo SD / RegistrationProper Documentation crucialCAs can play important Role© wealth.knowhowhub.com69

Family Separation–4Taxation : S.56(2)(vii) / (vii a) Gift of money Transfer for inadequate consideration :- of immovable property- of selected movable property Exceptions :- Transfer between Relatives Useful for Family Arrangement© wealth.knowhowhub.com70

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Azadi Bachao Andolan,263 ITR 706 (SC) Tax Payer entitled to plan his affairsto mitigate his tax liability- must do within the law Real Motive of tax payer irrelevant Not valid if intended legal resultnot achieved© wealth.knowhowhub.com72

Cap Gain from Sale ofProperty Under ConstructionScenario –I Scenario – II1. Date of Purchase 4.3.08 4.3.082. Date of Sale 9.3.11 9.3.113. Date of Possession 10.3.11 > 1.3.11

Cap Gain from Sale of PropertyUnder Construction …ContdScenario – I(Rs. in Cr)Scenario – II(Rs. in Cr)6. Nature of Capital Gain Long Term Short Term7. Tax Consequences Indexation NoLower Tax RateNormal Tax Rate8. Tax Planning Possible ? ?© wealth.knowhowhub.com74

Cap Gain from Sale of PropertyUnder Construction… Contd.Options for Tax Planning Scenario – I Scenario - II1. Use existing or potential capital loss Yes Yes2. Invest in Residence (S. 54 F) InvestConsideration3. Invest in Bonds u/s 54 EC Invest CG No4. Bonus Stripping(Investment required would be much morethan the Gain) :- Units of Mutual Fund- SecuritiesYesYesNoYesYes© wealth.knowhowhub.com75

Invest in Bond (S. 54 EC) :Breakeven Rate of ReturnCase–IRs. in LakhsCase - II1. Sale Consideration 600 6002. Taxable LT Cap Gain 195 1953. Less : Invest in Bonds u/s. 54EC Int @ 6% 0 504. Net Taxable LTCG 195 1455. Tax @ 20.6 % 40 306. After Tax / Investment Amt. available 560 5207. Breakeven Rate of Return Reqd. onAfter Tax Sale Proceeds18.6 %Pre Tax8. Accumulation at the end of 3 Years 805 8059. Q. Tax benefit if part Gift before Sale? Yes Maybe© wealth.knowhowhub.com76

Selection of Investment Vehicle - 1■ Options :■■■■■IndividualHUFTrust (discretionary or specific)LLPCompany© wealth.knowhowhub.com77

Selection of Investment Vehicle - 2■ Considerations :- Taxation- Applicable Laws & Regulations (eg. NBFC)- Control- Ease of Management of Funds- Smoothness in Separation© wealth.knowhowhub.com78

Investment in Listed Shares :Thru Co v. Individual v. LLP Disadvantages of Co :1. MAT2. Dividend Distribution Taxor CG on Buyback3. NBFC ?4. Separation Difficult© wealth.knowhowhub.com79

Investment in Listed Shares :Thru Multiple Companies Additional Disadvantage of Co :- No MAT where Book Loss- MAT where Book Profit- But No Set off where Book Loss Real Life Example© wealth.knowhowhub.com80

LTCG on Equity Shares [S.10(38)] Provisions Long-term equity shares oran unit of an equity-oriented fundSold through Stock ExchangeLTCG : Exempt from TaxQ. What if LTCL ? Any Tax Planning?© wealth.knowhowhub.com81

Roles CAs can play inWealth Management - 1Financial Planning– for Lifetime or Certain PeriodTax PlanningAdvising on Use of Trust StructureEvaluating Asset AllocationAlternatives© wealth.knowhowhub.com82

Roles CAs can play inWealth Management - 2Financial Planning for Residence BuyingFinancial Planning for RetirementLifestyle Asset Protection PlanningFamily ArrangementWealth Passing – Succession PlanningProviding Family Office Services© wealth.knowhowhub.com83

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