VALUE ADDED COURSE (VAC)

FINANCIAL
LITERACY
 LEARNING
OBJECTIVES
• Familiarity with different aspects of financial literacy such as savings,
investment, taxation, and insurance

• Understand the relevance and process of financial planning

• Promote financial well-being

 LEARNING
OUTCOMES
• Develop proficiency for personal and family financial planning

• Apply the concept of investment planning

• Ability to analyse banking and insurance products

• Personal tax planning

INTRODUCTION
Financial Literacy
Financial literacy is the cognitive
understanding of financial components
and skills such as budgeting, investing,
borrowing, taxation, and personal
financial management. The absence of
such skills is referred to as being
financially illiterate.
 SYLLABUS
UNIT- I Financial Planning and Financial Products

• Introduction to Saving

• Time value of money

• Management of spending and financial discipline

 UNIT- II Banking and Digital Payment

• Banking products and services

• Digitisation of financial transactions: Debit Cards {ATM Cards) and Credit

Cards , Net banking and UPI, digital wallets

• Security and precautions against Ponzi schemes and online frauds

 UNIT- Ill Investment Planning and Management

• Investment opportunity and financial products

• Insurance Planning: Life and non-life including medical insurance schemes

 UNIT- IV Personal Tax

• Introduction to basic Tax Structure in India for personal taxation

• Aspects of Personal tax planning

• Exemptions and deductions for individuals

• e-filing
INTRODUCTION TO SAVINGS
What is Savings?

Saving is setting aside money or reducing expenses to accumulate funds for

future use. This can be done by putting money into various accounts or
investments, or by cutting back on unnecessary spending for example on
monthly basis.

People who buy on credit and have incremental EMI commitments would
have little or none to save on a monthly basis
Why is Savings Important?

Here are some points that highlight the importance of saving:

Emergency Fund: Saving money can provide a financial cushion in case of

unexpected expenses or emergencies, such as a medical emergency or job
loss.
Long-term Goals: Saving can help achieve long-term financial goals, such as
buying a house, funding a child's education, or retiring comfortably.
Financial Independence: Building savings can lead to greater financial
independence and security, giving individuals more control over their lives
and reducing financial stress.
Retirement: Saving for retirement is crucial to ensure a comfortable and
financially secure future.
 Opportunities: Having savings can provide opportunities for investments or
business ventures that may not be possible without the necessary funds.

Debt Management: Saving can help with debt management by providing

funds to pay off high-interest debts or make extra payments on loans.

Better Credit: Saving money and managing finances responsibly can lead to
better credit scores, which can lead to lower interest rates and better
borrowing options.

Overall, saving is important because it can provide financial stability, security,

and opportunities for the future.
Example

Let's say Ms. Y earns Rs. 4,000 per month and has expenses like rent, car
payment, student loan, credit card payment, groceries, utilities, cellphone, and
gas, which add up to Rs. 2,100 per month. This means she has Rs. 1,900 leftover
each month.

If Ms. Y saves this extra money, she can build an emergency fund that will help
her cover unexpected expenses such as medical emergencies, car repairs, or
sudden job loss.

However, if Ms. Y spends all of her income without saving any of it, she will be
living paycheck to paycheck. This means that in case of an emergency, she will
not have any money to cover her day-to-day expenses, bills, or emergency
expenses. Therefore, it's important for Ms. Z to save a portion of her income to
ensure financial stability and security in the long run .
TIME VALUE OF MONEY (TVM)
Query term

Time value of money: A sum of money is worth more now than the same sum
of money in the future because of the potential to earn interest or returns on
investment.
Principle of time value of money: Money can grow only through investing, and
delaying an investment means losing out on potential returns.
Formula for computing time value of money: The formula considers the
present value of money, its future value, the interest rate, and the time period
for which the money is invested.
Compounding periods: For savings accounts, the number of compounding
periods is an important determinant of the return on investment.
Inflation: Inflation reduces the purchasing power of money over time and has
a negative impact on the time value of money, as the future value of money
will be worth less in terms of purchasing power.
Understanding the Time Value of Money (TVM)

The time value of money concept states that people prefer to receive money now
rather than the same amount of money in the future because invested money
grows over time. This is evident in savings accounts, where interest earned on
the principal is added over time, resulting in the power of compounding interest.
On the other hand, money that is not invested tends to lose its value over time
due to inflation, reducing its purchasing power.

For example, if you were to stash away $1,000 in a mattress for three years,
you would miss out on the additional earnings it could have generated if invested
and would have even less buying power due to inflation.
Another example to understand the time value of money is choosing between
receiving $10,000 now or the same amount in two years. Despite the equal value,
receiving the money now is more valuable due to the opportunity cost associated
with waiting. Delaying a payment means missing out on potential gains.

Inflation and the time value of money have an inverse relationship. Inflation
refers to the increase in the prices of goods and services, which leads to a
decrease in the value of money over time. As a result, a dollar today can
purchase more than the same dollar in the future when prices are expected to be
higher.
(TVM) Time Value of Money Formula

Basic formula for the time value of money takes into account the future value
and present value of money, the interest rate, the number of compounding
periods per year, and the number of years. The formula for TVM is:

where:
FV = Future value of money
PV = Present value of money
i = Interest rate
n = Number of compounding periods per year x number of years
Example

To show how the time value of money works. Let's assume a sum of $10,000 is
invested for one year at 10% interest compounded annually. The future value of
that money is:

Using the formula for TVM, we have:

where:
PV = $10,000 (present value of money)
i = 10% (interest rate)
n = 1 (number of years)
Plugging in these values, we get:
So, after one year, the $10,000 investment at 10% interest compounded annually will
have a future value of $11,000. This means that the time value of money has increased
the value of the investment by $1,000.

To find the present-day dollar amount that would be worth $5,000 one year from today,
compounded annually at 7% interest, you can reorganize the future value formula as:
Compounding periods significantly affect future value

The number of compounding periods can significantly impact time value of money
(TVM) calculations. For example, let's consider the example of investing $10,000. If
we increase the number of compounding periods for a given investment, it can
significantly affect the ending future value calculations.
MANAGEMENT OF SPENDING &
FINANCIAL DISCIPLINE
Management of spending

Spend management refers to a collection of practices that enable organizations

to make informed procurement and sourcing decisions that are beneficial to
their overall efficiency and financial bottom line. Its main focus is to optimize
company spend, reduce costs, manage financial risks, and enhance supplier
relationships. Spend management involves various activities such as spend
analysis, strategic sourcing, and supplier relationship management, primarily
related to procurement. Spend management software helps CPOs and CFOs
maintain transparency and control over company spend.
Financial Discipline

Financial discipline is the ability to manage your money effectively and wisely in
order to achieve your financial goals. It involves controlling your spending,
making informed investment decisions, and avoiding unnecessary expenses. This
is especially important for businesses, where maintaining financial discipline can
help to reduce risk and prevent future problems. Key elements of financial
discipline in business include managing contracts, ensuring profitability,
managing vendor payments, managing receivables, tracking expenses, and
making smart purchases. While financial discipline requires effort and attention,
it can ultimately lead to greater financial stability and success.
Understanding the Time Value of Money (TVM)

The time value of money concept states that people prefer to receive money now
rather than the same amount of money in the future because invested money
grows over time. This is evident in savings accounts, where interest earned on
the principal is added over time, resulting in the power of compounding interest.
On the other hand, money that is not invested tends to lose its value over time
due to inflation, reducing its purchasing power.

For example, if you were to stash away $1,000 in a mattress for three years,
you would miss out on the additional earnings it could have generated if invested
and would have even less buying power due to inflation.
Why Financial Discipline matters ?

1. To Survive
As an entrepreneur, you will be facing a lot of ups and downs in the initial stage
of your brand. So, practising financial discipline from the start will help you in
becoming financially stable at first. And then you can invest your money in more
valuable equipment and hire more labourers.

2. To Maintain Positive Cash Flow

Maintaining cash flow is a very important aspect of any business. When you
spend and work according to the financial budget you have planned and stick to
it your cash flow will be the same. And this indeed will help you in emergency
expenses later.
 How to incorporate Financial Discipline?

To practice financial discipline as an entrepreneur, it's important to:

1. Prepare a clear and comprehensive list of your goals, project budget, and
expenses - including both fixed and variable costs - to get a clear
understanding of your financial situation.
2. Control your expenses by identifying unnecessary costs and finding ways to
reduce them, such as negotiating better deals with suppliers or cutting back
on non-essential purchases.
3. Measure your spending and adjust your financial strategy accordingly, by
regularly tracking your expenses, identifying areas where you can save
money, and making changes to your budget and spending habits to achieve
your goals.
BANKING PRODUCTS & SERVICES
1. Checking Accounts: Bank accounts that allow deposits and withdrawals, and
are useful for managing bill payments and monitoring expenses.

2. Savings Accounts: Deposit accounts that offer a modest interest rate and are
useful for building emergency savings or saving for short-term or medium-term
goals.

3. Money Market Accounts: Checking accounts that offer higher interest rates in
exchange for maintaining a higher minimum balance. These accounts can be
useful for building emergency savings or paying for occasional expenses.

4. Certificates of Deposit: Savings accounts that offer higher interest rates in

exchange for committing money for a set period of time.
5. Mortgages: Loans used to purchase a home, with the home itself serving as
collateral.

6. Home Equity Loans: Loans offered to homeowners based on a percentage of

the equity they have in their homes.

7. Auto Loans: Unsecured loans used to finance the purchase of a vehicle, with
the vehicle serving as collateral.

8.Personal Loans: Unsecured loans offered to bank customers.

9.Credit Cards: Unsecured, revolving loans used primarily for purchases, with
interest charged on the amount charged to the account. Borrowers make
monthly payments and the funds become available for borrowing again
10. Debit Cards: Cards issued in association with checking or savings accounts
that allow point-of-sale purchases and ATM withdrawals.

11. ATM Cards: Cards issued in association with checking or savings accounts
that allow cash deposits and withdrawals at ATMs but not point-of-sale
purchases.

12. Cashier's Checks: Checks written by banks that guarantee sufficient funds to
cover the check, often required for home purchase closing costs.

13. Money Orders: Documents that provide a receipt and are converted to cash by
the recipient, often used to pay bills when someone does not have a checking
account.
14. Traveler's Checks: Checks that become valid when completed with the
payee's name and signed by the owner, less commonly used now.

15. Wire Transfers: A way to move money from one person to another, often used
for international transactions.

16. Foreign Currency Exchange: Converting one country's currency to another.

17. Safe Deposit Boxes: Personal boxes located at a bank for storing possessions
that can only be accessed with the assistance of bank personnel.
 DIGITISATION OF FINANCIAL TRANSACTIONS:
DEBIT CARDS {ATM CARDS} AND CREDIT CARDS.,
NET BANKING AND UPI, DIGITAL WALLETS
What is Digital Payment?

Digital payment refers to a payment method where the exchange of money for
goods or services is carried out electronically without the need for physical cash
or cheque transactions.

Digital Payment Options are as follows:

1.Banking Cards

Banking cards such as debit/credit or prepaid cards are widely used as a

convenient and secure payment method. They can also be used for other types of
digital payments by storing card information in digital payment apps or mobile
wallets.

To get a banking card, customers can apply with their respective bank and
provide KYC details. The card will typically be activated within a week and a 4-
digit pin will be allotted for all transactions.
2. USSD

To use *99# for mobile transactions, follow these steps:

1. Dial *99# on your mobile phone.
2. You will see a menu with different options for transactions.
3. Select the option for registration.
4. Enter your bank's IFSC code or select it from the list provided.
5. Enter your bank account number.
6. Verify your account details and confirm your registration.
7. Set a 6-digit MPIN (Mobile Personal Identification Number) for your
transactions.
8. Once registered, you can use *99# to initiate fund transfers, check your
account balance, and view bank statements by selecting the appropriate
options from the menu.
3. AEPS

To use AEPS, you need to follow these steps:

1. Visit a banking correspondent or a merchant who is authorized to carry out
AEPS transactions.
2. Provide your Aadhaar number to the banking correspondent or merchant.
3. The banking correspondent or merchant will use a biometric scanner to
authenticate your identity using your fingerprints or iris scan linked with your
Aadhaar.
4. Once your identity is verified, you can carry out various banking transactions
such as balance enquiry, cash withdrawal, cash deposit, payment
transactions, Aadhaar to Aadhaar fund transfers, etc.
5. After the transaction is completed, you will receive a confirmation message
on your registered mobile number.
4. UPI
To use UPI, follow the steps given below:
1. Download a UPI-enabled mobile app from the Google Play Store or Apple App
Store.
2. Install the app and select your preferred language.
3. Click on 'Register' and enter your registered mobile number.
4. Verify your mobile number with the OTP (One-Time Password) sent to your
mobile number.
5. Set up a four or six-digit M-PIN (Mobile Personal Identification Number) that
will be required for all transactions.
6. Select the bank account you want to link with UPI.
7. Create a Virtual Payment Address (VPA) by choosing a unique username.
Your VPA will look like an email address, for example, yourname@bankname.
8. Link your VPA to your bank account.
9. Once your VPA is linked to your bank account, you can start using UPI to send
or receive money.
5. Mobile Wallets

A mobile wallet is a virtual wallet that stores encoded bank account or card
information for secure payments. It can be downloaded as an app and used to
add money, make payments and purchases, and send or receive money. Popular
mobile wallet apps include Paytm, Mobikwik, and Freecharge. Some may charge
a transaction fee.

To use a mobile wallet:

1. Download the app

2. Register and provide all necessary details
3. Load money into the wallet.
6. Bank pre-paid Cards

A prepaid card is a payment card that can be loaded with a specific amount of
money, and it can be used to make purchases just like any other card. It is not
necessarily linked to a customer's bank account, unlike a debit card.

To use a prepaid card, you need to apply for the card, obtain a PIN, and load
money from your bank account or debit card.
7. PoS terminals

PoS terminals traditionally referred to devices installed at stores where

customers used credit/debit cards for payments. With digitization, PoS is
expanding to mobile and web-based platforms. Physical, mobile and virtual PoS
terminals are the different types available. Physical PoS is placed at stores,
mobile PoS works through smartphones, and virtual PoS is web-based.
8. Internet Banking

Internet banking is the process of carrying out banking transactions online,

including transferring funds, opening and closing accounts, and more. Also
known as e-banking or virtual banking, it offers the convenience of 24/7 access
to banking services via a bank's website or mobile app, and enables online fund
transfers through NEFT, RTGS or IMPS.
9. Mobile Banking

Mobile banking is the process of performing banking transactions through a

smartphone using various apps and services, including digital payment apps and
mobile wallets. It offers customers the convenience of carrying out banking
activities at their fingertips, without having to visit a physical bank. With the
increasing popularity of mobile banking, many banks have their own dedicated
apps that allow customers to perform transactions with ease. It encompasses a
wide range of services, making it a versatile and convenient banking option for
customers.
10. Bharat Interface for Money (BHIM) app

The BHIM app is a UPI-based payment application that enables users to transfer
funds via VPA or Aadhaar number. It can be linked to multiple bank accounts and
used by anyone with a mobile number, debit card, and valid bank account.
Several banks have partnered with BHIM and NPCI to offer this service to their
customers.

To use BHIM app:

1. Download and install BHIM app

2. Choose language
3. Register with mobile number linked to bank account
4. Add bank-related information
5. Set up UPI PIN as per instructions
SECURITY & PRECAUTIONS AGAINST
PONZI SCHEMES & ONLINE FRAUDS
What is Ponzi Scheme?

A Ponzi scheme is a type of scam where the person running the scheme uses the
money from new investors to pay returns to earlier investors, instead of using
legitimate profits. The scheme promises high returns on investment, but the
money paid to early investors is not generated from actual profits. Eventually,
the scheme will collapse, and investors will lose all their money, including their
initial investment.
Cautionary Indicators of Ponzi Scheme?

1. Promise of high returns with minimal risk: If an investment promises high

returns with little to no risk, it is likely too good to be true.
2. Overly consistent returns: Legitimate investments typically experience
fluctuations, so be skeptical of those that generate high returns consistently.
3. Unregistered investments: Check if the investment company is registered
with the SEC or state regulators to determine if it is legitimate.
4. Unlicensed sellers: Federal and state law require investment sellers to have a
license or be registered with a regulating body. Be wary of deals with
unlicensed individuals or companies.
5. Secretive, sophisticated strategies: Avoid investments with complex
procedures that are difficult to understand.
Ponzi Scheme History

The Ponzi scheme was named after Charles Ponzi, a notorious fraudster who
swindled thousands of investors in 1919. Ponzi promised a 50% return within
three months on profits earned from international reply coupons. He hired
agents to buy cheap coupons which he exchanged for more expensive stamps to
make a profit. However, Ponzi became greedy and started inviting people to
invest in his company under the Securities Exchange Company, promising high
returns. He never invested the money and instead used it to pay off some
investors. The scheme went on until 1920 when it was investigated.
Tips to Aviod Ponzi Schemes

1.Use only trusted financial advisors who are certified by reputable

organizations.

2. Do your research on the organization and ask to see the required paperwork
filed with the Securities and Exchange Commission.

3. Follow your instincts and be cautious of investments that seem too good to be
true.

4. Individuals nearing retirement should be especially wary and make investment

decisions with sound judgment.
Tips to Aviod Ponzi Schemes

1.Use only trusted financial advisors who are certified by reputable

organizations.

2. Do your research on the organization and ask to see the required paperwork
filed with the Securities and Exchange Commission.

3. Follow your instincts and be cautious of investments that seem too good to be
true.

4. Individuals nearing retirement should be especially wary and make investment

decisions with sound judgment.
INVESTMENT OPPORTUNITY &
FINANCIAL PRODUCTS
What is Investment opportunity?

An investment opportunity refers to anything, whether physical or not, that is

being marketed or sold based on claims, either explicitly or implicitly, about its
potential to generate income, profits, or increase in value, in the past, present, or
future.

Identification of Investment opportunities

1. Risk Assessment: Evaluate the level of risk associated with a particular

investment, including market risk, credit risk, liquidity risk, and operational
risk.
2. Potential Return: Assess the potential return from the investment,
considering factors such as historical performance, industry trends, and
economic conditions.
3. Comparison with other Opportunities: Compare the merits of the investment to
other investment opportunities, considering factors such as risk, return, liquidity,
and diversification.

4. Duration: Analyze the duration required to reap the investment's benefits,

considering factors such as the investment's maturity and any potential exit
barriers.

5. Expertise: Determine whether you have the expertise needed to manage the
investment, including any required knowledge or skills in the investment's
underlying assets or markets.

6. Balancing Risk and Return: Make sure your investments are balanced between
risk and return, ensuring that your portfolio is not too risky for your needs or too
conservative that it won't return enough to meet your financial goals.
What is financial product?

A financial product is a type of contract or service that is offered by financial

institutions, including banks, insurance companies, brokerage firms, consumer
finance companies, and investment companies. These products are provided to
both individual consumers and businesses or other organizations, such as
municipalities or sovereigns, and are designed to meet a wide range of financial
needs, from investing and saving to borrowing and insurance. The financial
services industry is responsible for providing these products and is made up of a
variety of institutions that offer them to customers.
Types of financial products

There are 4 major types of financial products bought and sold on markets:

1.Securities - includes Stocks, bonds & Mutual Funds

2. Derivatives - includes Futures , Options & Swaps

3. Commodities

4. Currencies
1.What are Securities?

Securities are instruments used to provide direct financing to entities such as

companies, banks, public entities, or governments. They represent an
entitlement to something, like an underlying asset or contractual agreement.
Securities can be short-term or long-term, and purchasing them directly finances
the issuing entity. Essentially, securities are a promise made to the holder of the
security that entitles them to something proportional to the number of securities
they hold.
Stocks

Stocks are a type of security that represents a portion of ownership in a

company. Purchasing stocks means buying a piece of ownership in the company
and may come with voting rights about certain issues. Owning stocks entitles
investors to a portion of the company's value. Companies sell stocks to individual
investors to raise funds for their operations. Stock values can fluctuate
depending on market conditions, and investors can make money by buying
stocks at a lower price and selling them for profit when their value increases.
Bonds

Bonds are loans that an individual gives to a company, public entity, or

government. Unlike stocks, bonds do not represent ownership but instead
represent an obligation on the part of the issuer to pay back the loan plus
interest by a specific maturity date. Bonds are considered long-term investments
with maturation dates typically ranging from 20 to 35 years. The bond market is
considered less risky than the stock market, but with lower returns as the
primary source of profit on bonds is through interest, not capital appreciation.
Mutual Funds

Mutual funds are a financial vehicle created by pooling money from several
investors to purchase securities. The advantage of mutual funds is that it
enables investors to buy more securities than they could individually. Investors
receive a portion of the fund proportionate to their investment. Two popular
types of mutual funds are index funds and exchange-traded funds (ETFs). Index
funds track a specific index, while ETFs are traded on the market like stock.
Mutual funds can include various financial products, such as cash instruments,
insurance companies’ debt, foreign exchange, shares, derivatives, and more.
2.What are Derivatives?

Derivatives are financial instruments whose value is derived from an underlying

asset or group of assets, such as stocks, bonds, commodities, or currencies. The
value of a derivative is based on the price movements of the underlying asset,
and investors can use them to speculate on future price movements or to hedge
their risk. However, derivatives can also be complex and carry a high level of risk,
as the value of the derivative can be affected by various factors such as market
volatility, interest rates, and changes in the underlying asset's price.
Futures

A future is a derivative contract between two parties to buy or sell an asset at a

fixed price and a fixed date. It allows investors to hedge their risk and potentially
profit from price movements of an underlying asset. If the price of the asset
increases above the fixed price, the investor can sell the futures contract for a
profit.

Options

Options are a type of financial derivative that give the holder the right, but not
the obligation, to buy or sell an underlying asset at a specific price and time.
Options can be used to hedge against risk or speculate on the future price
movement of the underlying asset. Unlike futures, options do not require the
holder to fulfill the contract, giving them more flexibility in their investment
strategy.
Swaps

A swap is a derivative that enables two parties to exchange cash flows based on
the price or interest rate of an underlying asset. Swaps allow traders to convert
from a fixed interest rate to a variable rate or vice versa and are used to hedge
risks or speculate on market movements. Different types of swaps include
commodity swaps, interest rate swaps, currency swaps, and credit default
swaps.
What is a Commodity?

A commodity is a financial product representing ownership or a share of a

physical good or raw material, such as precious metals, natural resources, or
agricultural products. Commodity trading involves buying and selling these
goods based on the changing market price. Commodities are often included in
portfolios as a hedge against inflation, as their quantity is generally fixed. One
can invest in commodities indirectly by investing in securities of companies that
process or manufacture those commodities, or through the derivative market,
which includes futures and contracts.
What are Currencies?

Currencies are traded on foreign exchanges, and allow people to convert one
type of currency into another. Forex markets have no centralised marketplace
for trading, unlike securities, and the majority of foreign currency transactions
occur between individual investors. Investors can make money on forex markets
by trading currencies as the relative price changes. Before the advent of the
internet, currency trading was difficult, but it is now more accessible with the
rise of online foreign exchanges.
 INSURANCE PLANNING: LIFE AND NON-LIFE
INCLUDING MEDICAL INSURANCE SCHEMES
What is Insurance Planning ?

Insurance planning is a strategic process of identifying and selecting the right

insurance policies that can provide financial security and protection against
unexpected losses, such as accidents, illness, damage to property, or loss of
income. It involves assessing the potential risks and vulnerabilities and choosing
suitable insurance plans that can offer coverage and financial assistance during
difficult times. By carefully planning and choosing the right insurance policies,
individuals can have peace of mind and protect themselves, their family, and
their assets from unforeseen events.
Life insurance & general insurance Understanding

Life insurance, as the name suggests, provides protection against life risks and
uncertainties related to death. This type of insurance is considered as an
investment because the policyholder is promised to receive the benefits of the
insurance coverage in the long-term. The policy period for life insurance is
usually long-term, and the policy is not a contract of indemnity. In other words,
the policyholder receives the sum assured at the maturity of the policy or in the
event of their death.
General insurance is an indemnity contract that compensates the policyholder
for the damage caused due to an unfortunate circumstance or loss. This type of
insurance protects valuable assets of people such as homes, vehicles, and
businesses. The policy period for general insurance is usually short-term, and the
cost of the policy depends upon the value of the insured asset.

In terms of the insured individuals, life insurance only covers the policyholder,
whereas general insurance covers the policyholder and other people insured
under the policy. Additionally, the claims for life insurance are paid at the
maturity of the policy or death of the policyholder, while the claims for general
insurance are processed based on the damage or financial loss suffered by the
policyholder.
INTRODUCTION TO BASIC TAX STRUCTURE
IN INDIA FOR PERSONAL TAXATION
Basic Tax Structure in India

The tax system in India follows a three-tier federal structure, with the central
government, state governments, and local municipal bodies responsible for
levying taxes. There are two broad categories of taxes in India: direct taxes and
indirect taxes. Direct taxes are imposed on individuals and organizations based
on their income or profits, while indirect taxes are levied on the production and
sale of goods and services. Overall, the Indian tax system is well-organized and
aims to balance the needs of the government with the interests of taxpayers.
1.Central government levies taxes such as customs duty, central excise duty,
income tax, and service tax on individuals and businesses operating within the
country.

2. State governments in India are authorized to levy taxes such as income tax on
agricultural income, state excise duty, professional tax, land revenue, and stamp
duty on individuals and businesses operating within the state.

3. Local municipal bodies in India are permitted to impose taxes on services like
water and drainage supply, as well as other taxes such as property tax and
octroi, to collect revenue from individuals and businesses operating within their
jurisdiction.
 Existing Tax Structure in India

Indirect Tax
Direct Tax
(Centre/State) Taxes

Income Tax

Central Excise Custom Service Tax VAT Sales Tax Other Taxes
Types of Taxes in India

Taxation in India is majorly divided into Central and State Govt taxes with two
types of taxes:

1.Direct Taxes

2. Indirect Taxes
What is Direct Tax?

Direct tax is a type of tax that is levied directly on individuals and corporate
entities by the government.
The burden of paying direct taxes falls directly on the taxpayer and cannot
be transferred to others.
Income tax is the most common form of direct tax for individuals, and it is
levied on your annual income.
The Income Tax Act of 1961 mandates that taxpayers must pay income tax if
their annual income exceeds the minimum exemption limit.
Taxpayers can claim tax benefits under various sections of the Income Tax
Act, which can help them reduce their tax liability.
Examples of Direct Tax

Income tax: This is a tax on the income earned by individuals and businesses.
It is levied by the government on an annual basis and is calculated based on
the income earned in the previous financial year.

Corporate tax: This is a tax on the profits earned by companies and other
corporate entities. It is also levied by the government on an annual basis and
is calculated based on the profits earned in the previous financial year.

Capital gains tax: This is a tax on the profits earned from the sale of assets
such as stocks, bonds, and real estate. It is typically calculated as a
percentage of the profit earned and is paid by the seller.
Wealth tax: This is a tax on the net wealth of individuals and businesses. It is
typically calculated as a percentage of the total value of assets owned by the
taxpayer.

Inheritance tax: This is a tax on the transfer of assets from one person to
another after the death of the owner. It is typically calculated as a
percentage of the value of the assets transferred.

Gift tax: This is a tax on the transfer of assets from one person to another
during their lifetime. It is typically calculated as a percentage of the value of
the assets transferred.
What is Indirect Tax?

Indirect tax is a type of tax that is not directly levied on individuals or entities
but is passed on to the consumer through the price of goods and services.

Unlike direct taxes, indirect taxes can be transferred to others, and the
burden of paying these taxes falls on the end consumer.

Indirect taxes can be regressive, meaning they may have a disproportionate

impact on low-income individuals who spend a larger proportion of their
income on goods and services that are subject to indirect taxes.
Examples of Indirect Tax

Value-added tax (VAT): This is a tax on the value added at each stage of
production and distribution of goods and services. VAT is commonly used in
many countries around the world, including the European Union.

Sales tax: This is a tax on the sale of goods and services. It is typically a
percentage of the sale price and is added to the final price paid by the
consumer.

Excise duty: This is a tax on the production of goods, such as alcohol,

tobacco, and petroleum products. It is typically levied at the point of
production or importation and is included in the price of the final product.
Customs duty: This is a tax on goods that are imported into a country. It is
typically a percentage of the value of the imported goods and is paid by the
importer.

Service tax: This is a tax on services provided by businesses to their

customers. It is typically a percentage of the price charged for the service
and is added to the final price paid by the consumer.

Entertainment tax: This is a tax on entertainment activities, such as movies,

concerts, and sporting events. It is typically levied by local governments and
is included in the price of the ticket.
ASPECTS OF PERSONAL TAX PLANNING
What is Tax Planning?

Tax planning is the process of arranging financial affairs to reduce taxes

owed while following relevant tax laws and regulations.
Effective tax planning requires understanding tax laws, regulations, and
current strategies and trends.
Tax planning strategies include deductions, credits, deferrals, and
exemptions.
Common tax planning strategies include taking advantage of deductions and
credits, deferring income, and accelerating expenses.
Tax planning is important for businesses of all sizes and can help maximize
profits.
Business tax planning strategies may include taking advantage of tax credits
and deductions, structuring transactions tax-efficiently, and using tax-
advantaged retirement plans.
Aspects of personal tax planning

Income tax planning: Identifying sources of income, understanding how they

are taxed based on tax brackets, considering deductions and credits, and
planning for retirement account contributions and income timing.

Investment tax planning: Considering the tax implications of investments,

such as the capital gains and dividends generated, and optimizing the timing
of investment transactions to minimize tax liabilities.

Estate tax planning: Developing an estate plan that includes trusts, gifts, and
other tax-efficient strategies to minimize estate taxes.
Retirement tax planning: Understanding how retirement income is taxed and
developing a tax-efficient withdrawal strategy from retirement accounts,
such as IRAs and 401(k)s.

Charitable tax planning: Maximizing tax benefits from charitable

contributions, such as donating appreciated assets or using a donor-advised
fund.

Health care tax planning: Understanding the tax implications of health care
expenses, such as the medical expense deduction and the health savings
account (HSA) deduction.

Education tax planning: Maximizing tax benefits from education-related

expenses, such as the American Opportunity Tax Credit and the Lifetime
Learning Credit.
ASPECTS OF PERSONAL TAX PLANNING
Exemptions

Exemptions are reductions in taxable income that taxpayers can claim for
themselves and their dependents. However, the Tax Cuts and Jobs Act (TCJA) of
2017 eliminated personal exemptions for tax years 2018-2025. Therefore,
taxpayers are not able to claim personal exemptions during this period.

However, there are certain exemptions that taxpayers may still be able to claim,
such as:

1. Exemption for dependent children - Taxpayers may be able to claim an

exemption for each of their dependent children, subject to certain
requirements.
2. Exemption for qualifying relatives - Taxpayers may be able to claim an
exemption for a qualifying relative, such as a parent or sibling, who meets
certain criteria.

3. Exemption for disabled dependents - Taxpayers may be able to claim an

additional exemption for a dependent who is disabled.

4. Exemption for elderly or blind individuals - Taxpayers who are elderly or blind
may be eligible for an additional exemption.

It's important to note that the rules for claiming exemptions can be complex, and
they can vary depending on the taxpayer's filing status, income, and other
factors. Additionally, exemptions are not the same as deductions, which are
reductions in taxable income based on specific expenses or other factors.
Deductions

Deductions are expenses that taxpayers can subtract from their taxable income,
which can lower their overall tax liability. Here are some examples of deductions
that individuals may be able to claim:

1.Standard deduction - A fixed amount that taxpayers can deduct from their
taxable income, based on their filing status.

2. Itemized deductions - These are deductions that taxpayers can claim for
certain expenses, such as mortgage interest, charitable contributions, and
medical expenses
3.State and local taxes (SALT) - Taxpayers can deduct a portion of their state
and local income, property, and sales taxes.

4. Retirement contributions - Taxpayers can deduct contributions made to

certain retirement accounts, such as traditional IRA, 401(k), or SEP IRA.

5. Student loan interest - Taxpayers can deduct up to a certain amount of

interest paid on qualified student loans.

6. Educator expenses - Teachers and other educators can deduct up to a certain

amount of expenses related to classroom supplies and professional
development.
7. Health savings account (HSA) contributions - Taxpayers can deduct
contributions made to an HSA, which is a tax-advantaged account used to pay
for qualified medical expenses.

8. Self-employment expenses - Self-employed taxpayers can deduct certain

expenses related to their business, such as office supplies, travel expenses, and
health insurance premiums.

9.Casualty and theft losses - Taxpayers may be able to deduct losses due to
theft, vandalism, or natural disasters, subject to certain limitations.

It's important to note that tax laws and regulations can change, so it's always a
good idea to consult with a tax professional or use tax preparation software to
ensure you are taking advantage of all available deductions.
E-FILING
e-filing

E-filing (or electronic filing) is the process of submitting a tax return to the
government using electronic means, typically over the internet. E-filing has
become increasingly popular in recent years due to its convenience, speed, and
accuracy. Here are some key things to know about e-filing:

1.Benefits - E-filing can help taxpayers avoid errors and reduce processing time
compared to paper filing. E-filing can also help taxpayers receive refunds faster
and confirm that the government has received their tax return.

2. Security - E-filing is generally considered to be secure, as long as taxpayers

take appropriate precautions to protect their personal information and file their
return using a secure connection.
3. Free options - The IRS provides free e-filing options for certain taxpayers,
based on income and other factors. Additionally, many tax preparation software
programs offer free e-filing for simple tax returns.

4. Filing deadline - The deadline for e-filing is typically the same as the deadline
for paper filing, which is usually April 15th, although it can be extended in certain
circumstances.

5. State taxes - Many states also offer e-filing options for state tax returns,
although the process and requirements can vary by state.

Overall, e-filing can be a convenient and secure way for taxpayers to file their
tax returns and receive refunds.