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. 62057
(Solution given below)
Current value of the desired house
Expected value of house after 3 years considering 7% 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
15,313,038
10,719,126
18
8.50%
97,057
35,000
62,057

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. 75 lakh
(Solution given below)
Annual Living expenses required 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)

700,000
8.50%
6.00%
9
18
15,473,728
7,000,000
22,473,728
15,000,000
7,473,728
Rs. 75 lakh

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

12500000*(1+7%)^3
15313038*70%
55-37
PMT(8.5%/12,18*12,-10719126,0,0)
94361-35000

PV((1+6%)/(1+8.5%)-1,18,-700000,0,1)
15473728+7000000
22473728-15000000

Q6

D) Rs. 1.45 crore

(Solution given below)
Urvashi's salary gross per annum
Tax incidence
Net income in the current year
Income contribution to the family (25% 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
750,000
2,550,000
1,912,500
21
8.50%
5.00%
29,508,239
15,000,000
14,508,239
Rs. 1.45 crore

34
55
85
840,000
5.00%
2,340,209

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

3300000-750000
2550000*(1-25%)

PV((1+8.5%)/(1+5%)-1,21,-1912500,0,1)
29508239-15000000

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

840000*(1+5%)^(55-34)

7.00%
5.00%
30
54,116,810

p.a.
p.a.
yrs
Rs.

85-55
PV((1+7%)/(1+5%)-1,30,-2340209,0,1)

6.00%
5.00%
35
70,037,265
23%

p.a.
p.a.
yrs
Rs.

85-55+5
70,037,277
23%

Q8

C) Rs. 30,500
(Solution given below)
Current expenses for heads considered for retirement
840,000 Rs. p.a.
Inflation expected throughout
5.00% p.a.
Urvashi's working years (retirement at 55, current age 34)
21 yrs
Living expenses needed on retirement (60% of pre-retirement)
1,404,125 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.
Retirement Corpus estimation:
Required Corpus for living expenses at age 55 years
34,551,813 Rs. PV:1
Rs. 1 crore (gifts) provisioned in the corpus needed 20 years later
2,837,970 Rs. PV:2
Rs. 1 crore (charity) provisioned in the corpus needed 30 years later
1,511,861 Rs. PV:3
Total Corpus needed to be accumulated
38,901,644 Rs. (PV:1+2+3)
Suppose, a total monthly amount of Rs. 100 is invested in the asset allocation of equity and debt components cumulatively
Accumulation to meet the Retirment Corpus:
Demat account Equity Shares: Current balance
2,392,000 Rs.
Accumulation in 16 years, 5 years to retirement (considering 11% p.a. in first 5 yrs)
12,703,659 Rs.
Accumulation of this up to retirement (next 5 years) in 6.5% yield fund
17,405,114 Rs.
Balance to be accumulated through Asset Allocation Fund up to 50 years
21,496,530 Rs.
First Five years : Asset Allocation
Equity Returns
Debt returns
Equity investment per month
Debt investment per month
Equity component accumulation in 5 years
Debt component accumulation in 5 years
Total accumulation in asset allocation after 5 years
Next Eleven years : Rebalanced Asset Allocation
Rebalanced Equity component accumulated (40% )
Rebalanced Debt component accumulated (60%)
Revised Equity investment per month
Revised Debt investment per month
Equity component accumulation in total 16 years
Debt component accumulation in total 16 years
Total accumulation in asset allocation (in 16 yrs)
Last Five years : 6.5% p.a. Yield Retirement Fund
Monthly investment (doubled)
Investment accumulated up to retirement
Actual monthly investment equivalent to Rs. 100

Q9

11.00%
7.00%
70
30
5,538
2,148
7,686

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

3,074
4,612
40
60
19,630
21,497
41,127

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

200 Rs. p.m.

70,489 Rs.
30,496 Rs.

840000*60%*(1+5%)^21

PV((1+6.5%)/(1+5%)-1,30,-1404125,0,1)
10000000/(1+6.5%)^20
10000000/(1+6.5%)^30
34551813+2837970+1511861

2392000*(1+11%)^16
12703659*(1+6.5%)^5
38901644-17405114

FV((1+11%)^(1/12)-1,5*12,-70,0,1)
FV((1+7%)^(1/12)-1,5*12,-30,0,1)
5538+2148
7686*40/100
7686*60/100

FV((1+11%)^(1/12)-1,11*12,-40,-3074,1)
FV((1+7%)^(1/12)-1,11*12,-60,-4612,1)
19629+21498

FV((1+6.5%)^(1/12)-1,5*12,-200,-41127,1)
(21496530/70489)*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

A) 12.08% 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 the asset allocation fund to risk free instruments
Rate of return from risk free instruments
Required value in asset allocation fund before switch to risk free (3 years prior)
This is to be accumulated until 1-Apr-2022 by investing Rs. 1.05 lakh in 6 installments on
1-Apr-2015, 1-May-2015, --- --- --- , 1-Sep-2015.
The return to be obtained in asset allocation fund is calculated by finding xirr
1-Apr-15
1-May-15
1-Jun-15
1-Jul-15
1-Aug-15
1-Sep-15
1-Apr-22

B) 31%
(Solution given below)
PPF account is opened on
Initial maturity of PPF account due on
PPF account balance as on 31-Mar-2015
Amount to be invested on 1st April every year (beginning 1-Apr-2015)
Rate of interest (expected in the long term) on PPF account
Accumulated amount on initial maturity (31-Mar-2023)
Current age of Dhruvi (on 1-Apr-2015)
Funds for professional course required (on 1-Apr-2028)
1st extended 5-year term (from 1-Apr-2023 to 31-Mar-2028)
Maturity on 31-Mar-2028 after the 1st extended term with similar investments
Current cost of professional course
Cost escalation for professional course expenses
Estimated outlay for professional course when due (in 13 years)
A sum equivalent to 50% of required amount withdrawn from PPF account
Remaining amount in PPF A/c.
PPF account extended for 5 more years without further contribution, grows to
Marriage age of Dhruvi (tentatively on 1-Apr-2033)
Current cost of marriage
Cost escalation for marriage expenses
Estimated outlay for marriage when due (in 18 years)
Funds available as a percentage of marriage cost then

1,000,000
5.00%
1,628,895
1-Apr-2025
1-Apr-2022
6.00%
1,367,651

Rs.
p.a.
Rs.

1000000*(1+5%)^10

p.a.
Rs.

1628895/(1+6%)^3

-105,000
-105,000
-105,000
-105,000
-105,000
-105,000
1,367,651
12.08%

21-Dec-2007
31-Mar-2023
659,000
150,000
8.00%
2,942,897
9 years
22 years

XIRR(C125:C131,B125:B131)

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

Rs.
Rs.
p.a.
Rs.

5,274,470 Rs.
2,500,000
9%
7,664,512
3,832,256
1,442,214
2,119,086
27 years
2,000,000
7%
6,759,865
31%

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

FV(8%,8,-150000,-659000,1)

FV(8%,5,-150000,-2942897,1)

2500000*(1+9%)^13
7664512/2
5274470-3832256
1442214*(1+8%)^5

2000000*(1+7%)^18
(2119086/6759865)*100%

Q12

A) Rs. 13.5 lakh shortfall in Suryansh's higher education; Rs. 3 lakh shortfall in debt
schemes; Rs. 50,250 increase in equity SIP
(Solution given below)
Suryansh's current age is 14 years. After the current year expenses, the required
expenses in the 3-year block would be Rs. 2 lakh p.a. for 3 years (age 15,16,17).
Dhruvi's current age is 9 years. After the current year expenses, the required expenses in
the 3-year block would be Rs. 1.5 lakh p.a. for 3 years (age 10,11,12).
Escalation of Rs. 1.5 lakh and Rs. 2 lakh expenses
Return from Debt schemes
PV of 3 year block expenses when they are due after the current year in debt
PV today of the above 3-year block expenses in debt schemes
Debt MF schemes value today
Required money to be switched from equity schemes today
Equity MF schemes value today (before switch)
Equity MF schemes value today (after switch)
Current year expenses (Rs. 2 lakh + Rs. 1.5 lakh) redeemed from equity
Balance in Equity schemes today

10%
7%
1,187,686
1,109,987
579,000
530,987
1,245,000
714,013
350,000
364,013

p.a.

Return from Equity schemes

SIP amount in Equity schemes
Accumulated value in equity schemes after 4 years
Cost of higher education today
Escalation of Rs. 25 lakh (higher education) expenses
Required higher education expenses for Suryansh after 4 years
Shortfall

11%
25,000
2,048,361
2,500,000
8%
3,401,222
1,352,861

p.a.

SIP amount in Debt schemes

Accumulated value of SIP in debt schemes after 4 years
PV of next two years' debt SIP (at that stage)
The value of funds as assessed after 4 years for Dhruvi's education

15,000
829,179
337,655
1,166,835

Rs. p.m.

Education expenses at age 13 of Dhruvi (after 4 years)

p.a.
Rs.
Rs.

PV((1+7%)/(1+10%)-1,3,-350000*(1+10%),0,1)
1187686/(1+7%)

Rs.
Rs.

1109987-579000

Rs.
Rs.

1245000-530987

Rs.
Rs.

714013-350000

Rs. p.m.
Rs.

FV((1+11%)^(1/12)-1,4*12,-25000,-364013,1)

Rs.
p.a.
Rs.
Rs.

Rs.
Rs.
Rs.

219,615

PV of expenses for Dhruvi's basic education at her age 14,15,16,17 @ Rs. 2 lakh p.a. in
debt schemes after 4 years

1,255,713

Total PV of remaining basic education expenses for Dhruvi's (last 5 years) to be served by
debt schemes

1,475,328 Rs.

Shortfall in Debt schemes to sustain Dhruvi's basic education

308,494 Rs.

Required higher education expenses for Dhruvi after 4 years

2,965,780 Rs.

2500000*(1+8%)^4
3401222-2048361

FV((1+7%)^(1/12)-1,4*12,-15000,0,1)
PV((1+7%)^(1/12)-1,2*12,-15000,0,1)
829179+337655
150000*(1+10%)^4
PV((1+7%)/(1+10%)-1,4,200000*(1+10%)^5,0,1)/(1+7%)

1475328-1166835
2500000*(1+8%)^9/(1+11%)^5

The Equity SIP needed to achive this in the 4-year period after 4 years

75,250 Rs.

PMT((1+11%)^(1/12)-1,4*12,-2965780,0,1)

Effective increase in SIP in Equity schemes

50,250 Rs.

75250-25000

Q13

A) Revocable and Discretionary

Q14

C) Rs. 4.06 lakh, by 30th September 2015

(Solution given below)
Purchase cost
Sale proceeds on 1st April 2015
Less: Expenses on transfer
Net sale proceeds
CII for 2006-07
CII for 2015-16
Indexed cost of acquisition
Long-term capital gain
To be invested in bonds specified u/s. 54EC by

Q15

Note:

A) Rs. 7,45,270
(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
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
1081
604,027
405,973
30th September 2015

Rs.
Rs.
Rs.
Rs.

1012000-2000

Rs.
Rs.

290000*(1081/519)
1010000-604027

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
25,000
2,995,201

Rs.
Rs.
Rs.
Rs.

25,000
100,000
598,560
723,560
21,707
745,267
745,270

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

3158960-38759-100000-25000

(500000-250000)*10%
(1000000-500000)*20%
(2995201-1000000)*30%
25000+100000+598560
723560*3%
723560+21707
ROUND(748357,-1)

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