Section VI: Income Tax and Your Financial Planning

• Ques: Financial planning helps in controlling and improving fund flow
• Ans: Key points:
  • To have a better control over your financials. It helps in taking stock of assets/investments in hand i.e. Shares 2 lakh, PPF 10 lakh @8%, fixed deposit in bank 5 lakh @ 8%, NSC 4 lakh, house 50 lakh, gold 1 lakh, and so on. Now compare the risk and return associated with these: how much you need and afford, keeping in view your cash flows and future goals.
  • There is a continuous change in circumstances of everybody’s life with time, like marriage, kids marriage, your retirement, number of dependents, disability, your age etc.
  • Life events affect your income and regular expenses and the very nature of expenses like house EMI and foreign tour in young age. Medical expenses and kids marriage at middle age.
  • Different circumstances need different cash flow; therefore, customization of your financials is required and that is called financial planning.
  • For example, at the age of 21 years, with no dependents, risk capacity is more and expenses are less with respect to income. Hence one can save more and take high risks for higher returns. Major part of savings should be invested in equity oriented mutual funds for superior returns. In different circumstances, at the age of 21 years, if you are having dependants, then term insurance is necessary and it is better to keep funds in PPF, NSC.