Mod 2: Income Management (12 hours)

 Provident Fund Schemes EPF, PPF and NPS

 Pension, Retirement and Estate Planning
 4% rule of Financial Freedom
 Pension Schemes run by Government of India: NPS, Atal Pension Yojana
 Post Office Saving Schemes: Sukanya Samridhi Yojana, National Saving Certificate
 Life Insurance: Term, Endowment, Whole life, Unit Linked Insurance
 Rule of 20X
 Personal Accidental Cover, Motor, Health and Group Insurance
 Basic Insurance Schemes Run by Government of India
 PM Suraksha Bima Yojana, PM Jeevan Jyoti Yojana, Ayushman Bharat
 Protection against Ponzi Scheme and Fraud, Grievance Redressal Agencies for
Banking, Securities Market, Insurance and Pension Industry
Government Schemes for Various Savings and Investment Options
Government of India accepts deposits from the public and some of them are also tax saving
instruments. National Saving Certificates (NSC), Kisan Vikas Patra, Sukanya Samridhi
Deposit, Public Provident Fund (PPF) etc are some of the examples of various schemes run by
Government of India. These schemes have different durations for investments and carry
specific interest rates.

Public Provident Fund (PPF)

PPF is a government backed, long term small savings scheme. The main thought behind this
product was that people who work in the unorganised sector or are not covered under
Employee’s Provident Fund (EPF) scheme can invest in PPF to build their retirement corpus.
This scheme has been made available in post offices and banks across the country, so that more
and more citizens can have access to this investment option. Since PPF provides guaranteed
returns, people who are more risk averse prefer to invest in this product. The scheme offers an
investment avenue with decent returns coupled with income tax benefits.

Key Features:
 Minimum deposit Rs.500 and Maximum deposit Rs.1,50,000 in a financial year
 Maturity Period of 15 years and current Interest rate is 7.1% p.a.
 Loan facility is available from 3rd financial year upto 6th financial year
 Withdrawal is permissible from 7th financial year (not more than 50%)
 After maturity, account can be extended for any number for a block of 5 years
 Account can be retained indefinitely without further deposit
 Deposit qualifies for deduction under Section 80-C of Income Tax Act

Employee Provident Fund (EPF)

Employee’s Provident Fund is a social security benefit that an employee may get after the
employment period or at the time of retirement. EPF is a retirement savings scheme for salaried
professionals. It is a savings platform that enables employees to save a portion of their monthly
salary for use upon retirement or unemployment. A large number of salaried professionals
heavily rely upon the accumulated sum in their EPF accounts for post-retirement stability.

Key Features:
 EPF receives contribution from employee and employer as well.
 The employer deducts 12% of the employee’s salary (basic+dearness allowance)
directly every month for a contribution towards EPF. While the entire contribution of
the employee goes towards EPF, only 3.67% of the employer's share goes towards EPF,
while the remaining 8.33% is contributed towards EPS (Pension Scheme).
 It covers every establishment in which 20 or more people are employed
 UAN (Universal Account Number), a 12 digit number that the EPF Organisation
provides to an employee. It remains same throughout life irrespective of the number of
jobs one changes.
 It accumulates compound interest on monthly running balance basis, currently at 8.10%
 If no contribution is received into a PF account for 3 consecutive years the account shall
not earn any interest after 3 years from the stopping of contribution.
Employee’s Pension Scheme (EPS)
It is a superannuation Fund i.e. a regular payment made into a fund by an employee towards a
future pension.
This scheme backed by the Government of India. The nominees will also receive a pension
under this scheme. The employer contributes 8.33% of the 12% share of the employee's basic
salary and DA towards the scheme. However, the maximum amount that can be contributed
towards the scheme is Rs.1,250.
 The individual must be a member of the EPFO.
 The individual must have completed at least 10 years of service.
 The individual must have attained the age of 58 years.

𝑃𝑒𝑛𝑠𝑖𝑜𝑛𝑎𝑏𝑙𝑒 𝑆𝑎𝑙𝑎𝑟𝑦 𝑋 𝑃𝑒𝑛𝑠𝑖𝑜𝑛𝑎𝑏𝑙𝑒 𝑆𝑒𝑟𝑣𝑖𝑐𝑒

Pension = 70

Note: Pensionable Salary is average of last 60 months salary.

1. Ms. Isha joins Employee’s Pension Scheme in 2005 at the age of 33 and superannuates
at the age of 60 and contributing to the wage ceiling of Rs.15,000 (maximum threshold).
What would be her pension amount?

Solution:
15,000 𝑋 27
Pension = 70
She will receive the pension amount of Rs.5,785.

Self Study
Given below is an example of EPF calculation assuming that the basic salary and DA of the
individual are Rs.25,000
 Basic Salary plus DA: Rs.25,000
 Employee's contribution towards EPF (12% of Rs.25,000): Rs.3,000
 Employer's contribution towards EPF (3.67% of Rs.25,000): Rs.917.50
 Employer's contribution towards EPS (8.33% of Rs.25,000): Rs.2082.50
 Employer's contribution towards EPF on Rs.15,000, which is the threshold income
(8.33% of Rs.15,000): Rs.1249.50
 Excess contribution that has been made by the employer (Rs.2082.50 - 1249.50):
Rs.833
 Total monthly contribution towards EPF (Rs.917.50 + Rs.833): Rs.Rs.1750.50
 The total contribution made by the employee and employer per month: Rs.4,750.50

Further Information on EPF and EPS:

https://www.epfindia.gov.in/site_en/FAQ.php#:~:text=Ans%20%3A%20There%20is%20no
%20restriction,from%20the%20stopping%20of%20contribution

Compound Interest Rate: Annuity

Your investments can give you better rewards when savings/investments are compounded over
longer horizons. Compounding, in short, is earning interest on previously earned interest.
Annuity is the fixed amount (payment/receipt) each year for a specified number of years.
In the case of PPF, an individual can make an annual payment between Rs.500 to Rs.1,50,000
for 15 years.
 1. Ms.Asha is making annual payments of Rs.1,00,000 towards PPF investment for 15
years at 7.1% interest rate. How much money would she receive/accumulate during the
maturity period?
𝑛
(1+𝑟) −1
Fn = P[ ]
𝑟
15
(1+0.071) −1
Fn = P[ ]
𝑟
15
(1.071) −1
Fn = 1,00,000[ ]
0.071
( 2.798 −1)
Fn = 1,00,000[ 0.071 ]
Fn = 1,00,000 (25.324)
Fn = Rs.25,32,400

If she makes an investment at the beginning of each year instead of the end of the year,
the accumulated amount increases due to Compound Interest Annuity Due (Cash inflow
occurring at the beginning of each period is called Annuity Due)
𝑛
(1+𝑟) −1
Fn = P[ ](1+r)
𝑟
15
(1+0.071) −1
Fn = P[ ](1+0.071)
𝑟 15
(1.071) −1
Fn = 1,00,000[ ] (1.071)
0.071
( 2.798 −1)
Fn = 1,00,000[ 0.071 ] (1.071)
Fn = 1,00,000 (25.324)(1.071)
Fn = Rs.27,12,139

https://groww.in/calculators/ppf-calculator (Online PPF Calculator)

Pension, Retirement and Estate Planning:

Retirement is when one chooses to permanently leave the workforce behind and do not
generate any financial resources. Therefore it is crucial to generate adequate financial backup
during this period. The retirement age in India is between 58 and 65 years. While the age is
58 years for private employees, it is up to 65 years in many government departments.

A pension provides a monthly income to the people during their unproductive years/
retirement.

Estate planning is the preparation of tasks that serve to manage an individual's asset base in
the event of their incapacitation or death. It is passing assets/investments down from one to
another. A pension holder would pass on his asset to the spouse, then to nominees.

Need for pension

 Decreased income earning potential with age.
 The rise in nuclear family
 Migration of earning members
 Rise in cost of living
 Increased longevity
 Dignified life in the old age due to less financial dependence.
National Pension System (NPS)
NPS is a government sponsored social security scheme for effective long term retirement
planning. Investors are encouraged to invest in their NPS during their employment. Post
retirement, about 60% of the matured sum can be withdrawn either lumpsum or instalments,
while the remaining 40% must be used to purchase annuity.
It is a market-linked voluntary contribution retirement scheme. By investing in NPS, you can
build a retirement corpus and avail pension amount during your retirement years and any Indian
national between the age of 18 and 65 can join it.
Since it is a retirement scheme, an investor cannot redeem his money before the age of 60. A
long term lock-in period ensures that the money is used only for post-retirement purpose.
Partial withdrawal is allowed for specific needs like children’s education, children’s marriage,
critical illness.

Atal Pension Yojana (APY)

Atal Pension Yojana, a pension scheme launched by Government of India is focussed on the
unorganised sector workers. Under APY, minimum guaranteed pension of Rs.1000 or
Rs.2000 or Rs.3000 or Rs.4000 or Rs.5000 per month will start after attaining the age of 60
years, until death, depending on the contributions by the subscribers for their chosen pension
amount.
 Any Indian citizen can subscribe between 18-40yrs, having a savings bank or post
office savings bank account, irrespective of their employment status (employed or
unemployed)
 The contribution amount depends on the age, time of opening, frequency of
contribution and pension slab chosen.
 Contribution frequency: Monthly/quarterly/half yearly
 Closure not before 60yrs
 Interest rate 7.1%
 Once the subscriber dies, his/her spouse will receive the exact pension amount. After
the death of the subscriber's spouse, the nominee of this account gets a corpus
amount. This corpus amount is the total of the premiums subscriber has paid
towards the scheme
Pension Amount Corpus Amount
Rs.1000 Rs.1,70,000
Rs.2000 Rs.3,40,000
Rs.3000 Rs.5,10,000
Rs.4000 Rs.6,80,000
Rs.5000 Rs.8,50,000

Post Office Saving Schemes

Post office is one of the oldest organisations in India, initially focussing only on delivering
mail(post) and later started providing an array of other financial services i.e. banking, insurance
and investments. The biggest advantage of these schemes is their sovereign guarantee i.e. it is
backed by the Government of India.
National Savings Certificate
It is a fixed income scheme that can be opened at post office and is a low risk product and
highly secure.
 A Government of India initiative, primarily to invest while qualifying for deduction
under Income Tax Act
 Any number of accounts can be opened under the scheme
 Can be opened from any post office
 Joint account allowed, can be opened by an adult on behalf of a minor
 Maturity period of 5 years
 Minimum deposit of Rs.1000 and thereafter in multiple of Rs.100. No maximum limit
 Interest rate 6.8% is compounded annually but payable at maturity

Ms.Isha is planning to invest Rs.50,000 in National Saving Certificate. What would be the
maturity value of her investment, given, maturity period of 5 years and interest rate is 6.8%?

Note: Interest rate is compounded annually. Therefore, use Compound Interest Rate formula.

Future Value = P(1 + i)n

= 50,000 (1+0.068)5
= 50,000 (1.389)
= Rs.69,475

Maturity value of Rs.50,000 invested in NSC after 5 years at 6.8% will be Rs.69,475

Sukanya Samridhi Yojana

The scheme is aimed at betterment of girl child in the country. It has been launched to offer a
means of saving to the girl child in every family under Beti Bachao and Beti Padhao campaign.

Key Features
 Interest rate 7.6% is compounded annually and is payable at maturity.
 Minimum Rs.250 and maximum of Rs.1,50,000 per annum
 Account can be opened by the guardian in the name of the girl child below the age of
10yrs
 Deposit can be made maximum up to completion of 15yrs from the date of opening.
 Deposit qualify for deduction under Income Tax Act
 Closure on maturity: After 21yrs from date of account opening or at the marriage of
girl child after attaining the age of 18yrs.

4% Rule of Financial Freedom

The Four Percent Rule is known as the percentage amount a retiree should withdraw from their
retirement account per year. It is meant to be a benchmark that provides individuals with a
steady set stream of income while allowing the invested balance to continue to grow throughout
retirement.
Ex: Corpus required: 25 times of your estimated annual expense.
If your annual expense after 50 years of age is Rs.5,00,000 and you wish to take VRS, then
corpus with you required is 1.25crs.
Therefore invest 50% of this into fixed income and 50% into equity. You can withdraw 4%
every year i.e.5 lakh.
(The above works for 30 year period)
Insurance and Protection
Insurance is an arrangement through which one can plan for the continuation of income when
certain events like disasters, illness, accident, death or old age disrupt one’s ability to earn
his/her livelihood.

Insurance allows you to transfer the risk of a potential loss, from you to the insurance company,
in exchange for a fee or premium.
 The premium or the fees is a relatively fixed and affordable amount that you pay
periodically to be covered against a highly uncertain and potentially catastrophic loss
and probable financial disaster.

It is important to keep your insurance premium payments up-to-date to protect against

unforeseen events. The amount that the insurance company pay and under what circumstances
depends on initial terms of your policy.

Common Insurance Policies

 Personal: Life, Health, Accident cover
 Property: Home, Auto, Appliances
 Commercial: Agriculture, Industry, Building, Equipment
 Others: Weather, Travel, Retirement

Life Insurance
Life insurance policies are termed as benefit policies of protection against unforeseen
circumstance of death of the earning member. It is a contract providing for payment of a sum
of money to the person assured or following him to the person entitled to receive the same, on
happening of a certain event.

Life Insurance: Term Life Insurance

 In event of unfortunate demise of the policy holder, the nominees will receive the Sum
Assured’ selected during the purchase of policy.
 It is active for a fixed period of time therefore it is called Term Policy, policies are
usually for 20, 30, till the attainment of age 99 etc
 Low premium compared to other insurance policies
 Does not carry any cash value
 It has different meaning and purpose when term insurance is bought at different ages.

Life Insurance: Endowment Policies

 Provide periodic payment of premiums and a lump sum amount either in the event of
death of the insured or on the date of expiry of the policy, whichever occurs earlier

Whole Life Insurance

This is a term insurance accompanied with a savings accumulation benefit. The policy provides
death benefit till the life insured is alive. The savings get accumulated in cash value as per the
investment mandate.
 The premium payments in these policies are higher as compared to term insurance due
to saving element
 There are two variants of whole life insurance policies i.e. traditional and unit-linked,
each having their unique features and benefits.
Rule of Income Replacement
It is assumed that life insurance should replace the lost earnings of the breadwinner. One of the
simplest way to calculate your income replace value is
Insurance Cover = Current Annual Income*Years left to Retirement

Example: If a person is 40yrs old and his yearly income is Rs.15 lakh and if he plans to retire
at the age of 60yrs, how much insurance coverage does he need?
Insurance Cover = Current Annual Income*Years left to Retirement
= Rs.15 lakh * 20years
= Rs 3 crore

Class Activity: Taking Life Insurance --- Decision Process

I. Do I need a Life Insurance Cover Now?

1. I am the only earning member of my family Yes/No
2. I have at least one person financially dependent on me Yes/No

II. How much Cover do I need?

1. Five times my gross annual income Rs.______
2. Life cycle needs of my dependents Rs.______
(Children’s education, parent’s retirement etc)
3. My emergency fund amount Rs.______
(3 to 6 months of monthly income)
4. My total outstanding debt Rs.______
5. Total estimate of my financial needs Rs.______
(1+2+3+4)
6. Total of my cash assets Rs.______
(Balance in savings account & other cash/liquid money)
7. Estimate of life insurance cover I need Rs.______
(Amount 6 – Amount 5)

An Illustration: If the annual income is Rs.15,00,000 and other assumed values

I. How much Cover do I need?

1. Five times my gross annual income Rs.45,00,000
2. Life cycle needs of my dependents Rs.90,00,000
(Children’s education, parent’s retirement etc)
3. My emergency fund amount Rs.3,75,000
(3 to 6 months of monthly income)
4. My total outstanding debt Rs.50,00,000
5. Total estimate of my financial needs Rs.1,88,75,000
(1+2+3+4)
6. Total of my cash assets Rs.10,00,000
(Balance in savings account & other cash/liquid money)
7. Estimate of life insurance cover I need Rs.1,78,75,000
(Amount 6 – Amount 5)
Unit Linked Insurance Plans
Financial planning entails two important aspects – wealth creation from money invested
and security for dependents in case of an eventuality. Unit Linked Insurance Plans
(ULIPs) offered by the insurance industry takes care of both.
 These plans provide optimal mix of insurance and wealth creation based on
investor’s risk-return profile and investment horizon.
 ULIPs are a long-term investment product which provides investors the
opportunity to generate wealth and an insurance cover until the product maturity
date.
 A portion of the premium paid by the policy holder is utilised to provide insurance
coverage to the policyholder and the remaining portion is invested in equity and debt
instruments.
 Insurance coverage can be increased based on the investor’s preference.
Meanwhile, wealth is created through investment of the investor’s money in
equity and debt, again, based on the investor’s preference.
 ULIPs allow for switching between funds, mitigating the risk. ULIPs offer tax
benefits (under Section 80 C)
 A ULIP is a life insurance policy which provides a combination of risk cover and
investment
 The dynamics of capital have a direct bearing on performance of ULIPs
 The investment risk is generally borne by the investor

Personal Accident Cover Policy

 Insurance plan which provides monetary compensation in the event of bodily injuries
or disability or death caused solely by accident
 It is one of the popular classes of accident insurance and as a supplement to life
insurance; it provides ideal protection against death or disability.

Health Insurance:
 Insurance coverage that covers the cost of an insured individual’s medical and surgical
expenses
 The insured is the owner of the health insurance policy or the person with health
insurance coverage

Motor Insurance
 Insurance for cars, trucks, motorcycles and other road vehicles
 Also called as vehicle insurance, auto insurance

Group Insurance
Group insurance, on the other hand, is one contract covering a group of lives. The terms of the
contract of insurance cover depend upon the characteristics of the group as a whole. A master
policy is issued as evidence of contract between the insurance company and another legal
entity, which may be an employer, trustees, or an association.
 The master policy defines the group of lives to be covered, benefit it confers, the amount
of contribution to be paid and other conditions and privileges of the participating group
members.
 Insurance policy that covers defined group of people, for example the members of
society or professional association or the employees of a particular employer.
  Group insurance involves providing insurance to a group of individuals who share some
common attribute, through a single policy contract.
 Group insurance policies offer life insurance protection to all types of groups such as
Employer-employee groups, Professionals, Cooperatives, Weaker sections of society,
etc.

Basic Insurance Schemes Run by Government of India

PM Suraksha Bima Yojana

 Provides accidental insurance cover to bank account in the age group of 18 to 70 years
 A fixed annual premium is deducted from the bank account of the insured through auto-
debit facility
 Person would be eligible to join the scheme through one savings bank account only
 Insurance covers permanent and partial disability due to accident

PM Jeevan Jyoti Yojana

 Provides life insurance cover to bank account holders in the age group of 18 to 50 years
 A fixed annual premium is deducted from the bank account of the insured through auto-
debit facility
 Person would be eligible to join the scheme through one savings bank account only

Ayushman Bharat
 Provides healthcare facilities targeting poor, deprived rural families and identified
occupational category of urban worker’s families.
 There is no restriction on family size, age or gender
 No money needs to be paid by the family for treatment in case of hospitalisation
 All pre-existing conditions are covered from day one of the policy. The benefit cover
will include pre & post hospitalisation expenses. You can go to public or empanelled
private hospitals across the country and get free treatment.

Ponzi scheme and Grievance Redressal Mechanism

Ponzi scheme is a fraudulent investment scheme promising high rates of return to investors.
The scheme generates returns for earlier investors from their own money or money paid by
subsequent investors, rather than any actual profit earned. The perpetuation of the returns that
a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors
to keep the scheme going.

Ponzi scheme usually attract new investors by offering returns that other investments cannot
guarantee, in the short term, returns are either abnormally high or unusually consistent.

Mass Marketing Fraud: You receive a fraudulent email that looks like it comes from a
legitimate company, asking you to click on a link that brings you to a fake website. To be safe,
never invest, donate or make purchases on the phone unless you can validate the company’s
existence.

Credit and Debit Card Fraud: Credit card and debit card fraud happen when someone uses your
card, card information or personal identification number (PIN) without your permission. Never
share your PIN with anyone.
Investment Fraud: Someone recruits you to invest in a business or to buy merchandise to sell.
You are expected to recruit new members. After a while, new people stop joining. That’s when
the promoters vanish, taking your money with them.

Lottery Scam: “Congratulations, You’ve won the lottery/sweepstakes/big prize!! All you have
to do to claim your prize I send a small fee or tax payment” Legitimate contests don’t charge
fees for you to collect your prize.

Affinity Fraud: Fraudsters can win your trust more easily if you’re who share a common cause,
such as a religious or social organisation. Scammers may ask investors to keep the matter quiet.

How to identify a Ponzi scheme?

1. High returns with little or no risk: Higher the return, higher is the risk involved. Be
highly suspicious of any guaranteed high return investment opportunity.
2. Overly consistent returns: Investments tend to go up and down over time. Be sceptical
about an investment that regularly gives positive returns regardless of overall market
conditions.
3. Unregistered investments: Ponzi schemes typically involve investment schemes that are
not registered with the regulators or any government agency for their activity.
4. Unlicensed sellers: Any investment scheme requires to be registered with concerned
authority and State securities laws require investment professionals and firms to be
licensed or registered. Most Ponzi schemes involve unlicensed individuals or
unregistered firms.
5. Non transparent disclosure: Avoid investments if you don’t understand them or can’t
get complete information about them. Account statement errors may be a sign that funds
are not being invested as promised.
6. Difficulty in receiving payments: Be suspicious if you don’t receive a payment or have
difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants
from cashing out by offering even higher returns for staying invested.
Protection from Fraud
Recently, in India, many of the investors lost money because of the operation of unregistered
entities offering investment schemes. The Sharada Chit Fund Scam in West Bengal and the
illeagal mobilisation of funds by Sahara firms are relevant examples.

One needs to caution himself or herself about the operation of fraudulent agencies luring
investors by offering higher returns within short period. You can keep your money safe by
being aware of these risks.

1. Never fall for a deal that is too good to be true. If you do not understand what the
product is all about and how your money will be invested, do not buy.
2. Do not invest in unfamiliar products just because the returns appeals to you. Do
thorough research on the company’s background and financial performance. Weigh
your risk appetite against the products that you are investing.

Grievance Redressal – Securities Market

Grievance Redressal – Banking Industry

Grievance Redressal – Insurance Industry

Grievance Redressal – Pension Industry

Category of Activity Concerned Regulator/Authority

Mobilisation of Deposits by NBFC Reserve Bank of India
Nidhi or mutual benefit society Reserve Bank of India (RBI)
Gold Saving schemes launched by jewellers Reserve Bank of India/ Ministry of
Corporate Affairs
Deposits accepted by Companies Ministry of Corporate Affairs
Schemes offered by Cooperative Societies State Governments
Chit Fund business State Governments
Multi-level marketing/ Pyramid Marketing State Governments
schemes
Contract of Insurance Insurance Regulatory and Development
Authority of India (IRDAI)
Pension Schemes Pension Fund Regulatory and Development
Authority (PFRDA)
Grievance against companies, intermediaries in Securities and Exchange Board of India
securities market etc (SEBI)