PREFACE
Dave RanseyIt is my great pleasure to present to the readers the first edition of the book Financial Literacy. Financial independence is not something which comes naturally. It required a great deal of discipline and skills for mastering it. It is not just about earning money but the way one manages his/her money is also a key factor. A prerequisite to attaining financial independence is to first become financially literate. Financial literacy can be defined as the knowledge of skills required to make an informed and responsible financial decision and having confidence in one’s ability to make such decisions. The need of financial literacy is in each stage of life be it saving for home, education, contingencies, travel or ultimately retirement. In today’s modern society, being financially illiterate is a major setback for an individual and can result in many adverse consequences like poor money management which will result in poor credit management, which might ultimately lead to bankruptcy and individual losing all his/her assets and hard earned money. It also adds to an individual’s mental stress and disappointment. A financially illiterate person is more prone to financial frauds which are at its peak in the current world. Thus, the need for financial literacy cannot be ignored any longer.
This course on Financial Literacy was introduced by University of Delhi as a Value Addition Course for the undergraduate students under the implementation of New Education Policy with the aim to equip them with the basic skills need to become financially sound and achieve financial independence. The motivation behind writing this book has been my students. I have been teaching subjects like financial planning and fundamental of investments since past many years and have been doing research in the similar domains. I have also given several lectures and seminars on financial literacy as well. So, when the opportunity came under New Education Policy implementation it became my moral responsibility to share my knowledge and experience to all the students.
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“I believe through knowledge and discipline; financial peace is possible for all of us.”
The book is divided into 4 units which comprises of 15 chapters each dwelling into the key concepts of financial literacy.
Unit 1 talks about financial literacy in general and introduce readers to the basic concept of financial planning, spending management and time value of money.
Unit 2 makes readers aware of the different banking products and services offered by banks, digitization of the payment systems and how to protect oneself from financial frauds.
Unit 3 sheds light on investment planning and management and different types of investment options available for readers. It also emphasis on the need for life, general and health insurance in every individual’s life.
Last but not the least, unit 4 is all about tax planning which is something where an individual lacks knowledge as well as confidence. This units introduces readers to the basic tax structure of India, taxation method, exemptions, deductions and filing of return.
The silent features of the test presented in this book are:
1. Learning outcomes: Each chapter begins with learning outcomes to give brief context about the content and what the readers will achieve after successful completion of the chapter.
2. Main Text: Various concepts and topics have been explained in simple and lucid language. Wherever required, the examples and cases are added to enhance readers understanding.
3. Solved Problems: Wherever required, main text ends with solved with solved numerical problems to help readers better understand the concept and its application.
4. Review Questions: Each chapter provides a list of questions to test the knowledge pf the readers. Readers can answer these questions to review their learning.
5. Practical Exercises: enjoyed unless it is applied to real life situation. Thus, each chapter offers practical exercises for readers to ensure learning by doing.
The book is written in simple language to enhance readers understandability. The book is filled with ample examples from the real-life world to ensure relevance for newbie learners. Sufficient care has been taken in writing the manuscript for the book. However, there may be some unintentional errors. Feedback from the readers is solicited and would be thankfully acknowledged.
I-6 PREFACE
Prof. (Dr.) Amit Kumar Singh (February, 2023)
ACKNOWLEDGEMENT
First and foremost, I would like to thank the god almighty for his grace, strength and sustenance from the beginning of my academic journey. His benevolence has made me excel in all my academic pursuits. I can only say that my faith in him has become more and more intense with each passing day.
I am thankful to University of Delhi, who introduced this course which is an absolute necessity, thereby providing me this opportunity and motivating me to write this book. I gratefully acknowledge the support and best wishes of my teachers and students.
I would like to extend my sincere thanks to the staff of Ratan Tata Library for making available all the necessary reference material, help and facilities timely. The book could not have taken the present shape without the support and encouragement of my family.
Last but not the least I would like to thank to the TAXMANN for bringing out this book timely.
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Prof. (Dr.) Amit Kumar Singh
SYLLABUS
VAC 1: FINANCIAL LITERACY COURSE CONTENTS
Unit I: Financial Planning and Financial Products (3 Weeks)
Introduction to Saving
Time value of money
Unit II: Banking and Digital Payment (4 Weeks)
Banking products and services
Cards, Net banking and UPI, digital wallets
Security and precautions against Ponzi schemes and online frauds
Unit III: Investment Planning and Management (4 Weeks)
Unit IV: Personal Tax (4 Weeks)
Introduction to basic Tax Structure in India for personal taxation
Aspects of Personal tax planning
Exemptions and deductions for individuals
Note: Some of the theoretical concepts would be dealt with during practice hours.
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Practical component (if any) - (15 Weeks)
Regular class activities to enhance students’ understanding of topics and the application of concepts. The case study method may be followed as a teaching pedagogy.
Numerical questions pertaining to each unit wherever applicable should be practiced.
For the second unit, students may be assigned a project wherein they can log on to the website of various banks and conduct an in-depth analysis and
For Unit III, a Project related to building a dummy portfolio of stocks and tracking their returns may be given.
An investment budget may be given to the students to select investment options that maximize the return and minimize the tax implications.
awareness in the form of a report.
Any other Practical/Practice as decided from time to time
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SYLLABUS
UNIT 1 FINANCIAL PLANNING AND FINANCIAL PRODUCTS
CONTENTS PAGE Preface I-5 Acknowledgement I-7 Syllabus I-9
CHAPTER 1 FINANCIAL LITERACY Introduction 1.3 Financial Literacy 1.3 Importance of Financial Literacy 1.4 Financial Literacy Basic Vocabulary 1.6 Annual Percentage Rate 1.6 Asset 1.6 Bait and Switch 1.6 Bank 1.6 Bankruptcy 1.6 Borrower 1.7 Budget 1.7 Comparison shopping 1.7 Credit 1.7 I-11
Credit card 1.7 Credit report 1.7 Credit score 1.8 Creditworthiness 1.8 Debit card 1.8 Debt 1.8 Default 1.8 Emergency fund 1.8 Expense 1.9 Income 1.9 Interest 1.9 Need vs. Want 1.9 Opportunity cost 1.9 1.10 Predatory lending 1.10 Principal 1.10 Rule of 72 1.10 Time value of money 1.10 Wealth 1.10 Review Questions 1.11 Practical Exercises 1.11 CHAPTER
SAVING
Introduction 2.1 Need vs. Want 2.1 Difference between Need and Want 2.2 Spending Management 2.4 Steps in Spending Management 2.4 2.5 PAGE I-12 CONTENTS
2
AND SPENDING MANAGEMENT
Income 2.6 Expenses 2.6 Savings 2.6 Saving 2.6 Financial Discipline 2.7 Review Questions 2.9 Practical Exercise 2.9 CHAPTER 3 FINANCIAL GOALS AND PLANNING Introduction 3.1 Financial Goals 3.1 How to Achieve Your Financial Goals 3.3 Short-term Goals 3.3 Mid-term Goals 3.3 Long-term Goals 3.3 3.4 3.4 M stands for Measurable 3.4 A stand for Achievable 3.4 R stands for Relevant 3.4 T stands for Timely/Time-Bound 3.5 Financial Planning 3.5 Financial planning process 3.5 3.6 3.7 Review Questions 3.7 Practical Exercise 3.8 PAGE CONTENTS I-13
TIME VALUE OF MONEY Introduction 4.1 Time Value of Money 4.1 Relevance of Time Value of Money 4.2 TVM Glossary 4.2 Annuity 4.2 Compound Interest 4.3 Compounding Frequency 4.3 Discount Rate 4.3 Future Value 4.3 Number of Periods 4.3 Perpetuity 4.4 Present Value 4.4 Compounding 4.4 Power of Compounding 4.4 Present Value of Single Cash Flow for Annual Compounding 4.5 Present value of Single Cash Flow for Non-Annual Compounding 4.5 Effective Rate of Interest 4.6 4.6 Future Value of Regular/Ordinary Annuity 4.7 Future Value of Annuity Due 4.7 Discounting 4.8 Present Value of Single Cash Flow 4.8 Present Value of Multiple Cash Flow 4.8 Present Value of Regular/Ordinary Annuity 4.9 Present Value of Annuity Due 4.9 Present Value of Perpetuity 4.9 Applications of Time Value of Money 4.10 Sinking Fund Problem 4.10 PAGE I-14 CONTENTS
CHAPTER 4
Capital Recovery Problem/Loan Repayment 4.10 Compounded Growth Rate Problem 4.11 Interest Rate Problem 4.11 Deferred Payment Problem 4.11 Solved Problems 4.12 Review Questions 4.15 Practical Exercises 4.16 UNIT 2 BANKING AND DIGITAL PAYMENT CHAPTER 5 BANKING PRODUCTS AND SERVICES Introduction 5.3 Banking Products and Services 5.3 Types of Banking Activity 5.4 Retail Banking Products and Services 5.4 Corporate Banking Products and Services 5.9 Marketing of Digital Banking Products 5.10 Review Questions 5.11 Practical Exercises 5.11 CHAPTER 6 DIGITIZATION OF FINANCIAL TRANSACTIONS Introduction 6.1 Impact of Digitization on Financial Services 6.2 Critical Analysis of Digitization of Financial Transactions 6.2 Digital Payment Initiatives 6.5 Credit card 6.6 Debit card 6.7 Prepaid cards 6.8 PAGE CONTENTS I-15
Aadhaar Enabled Payment System (AEPS) 6.9 Net Banking 6.10 Types of Funds Transfer Available 6.11 UPI and Digital Wallets 6.12 6.12 Digital Wallets 6.14 Review Questions 6.15 Practical Exercises 6.15 CHAPTER 7 PROTECTION AGAINST BANKING AND FINANCIAL FRAUD Introduction 7.1 Financial Frauds 7.2 Ponzi Schemes 7.2 Online Frauds 7.5 Types of online banking frauds 7.8 Protection and Security Against Online Fraud 7.8 Review Questions 7.14 Practical Exercises 7.14 UNIT 3 INVESTMENT PLANNING AND MANAGEMENT CHAPTER 8 INVESTMENT PLANNING AND MANAGEMENT Introduction 8.3 Meaning of Investment 8.4 Investment and Speculation 8.4 Objective of Investment 8.5 Investment Planning 8.6 PAGE I-16 CONTENTS
8.6 Investment Process 8.7 Risk and Return 8.9 Concept of Return 8.9 Measurement of Return 8.10 Holding Period Return 8.10 Expected Return 8.10 Real Rate of Return 8.11 Impact of Taxes on Investment Decisions 8.12 Concept of Risk 8.13 Risk vs. Uncertainty 8.13 Types of Risk 8.13 Systematic Risk 8.13 Unsystematic Risk 8.14 Sources of Risk 8.14 Measurement of Total Risk 8.16 Risk - Return Trade-off 8.18 Portfolio Management 8.19 Activities involved in the Portfolio Management 8.19 Portfolio Return 8.20 Portfolio Risk 8.20 8.21 Investment Alternatives and Finance Products 8.21 Stock 8.21 Debentures and Bonds 8.22 Mutual Funds 8.24 8.24 Fixed Deposits 8.24 Real Estate 8.25 Gold 8.26 Derivatives 8.26 PAGE CONTENTS I-17
Money Market Instruments 8.27 Government Saving Schemes 8.27 Life Insurance 8.29 Solved Problems 8.29 Review Questions 8.32 Practical Exercises 8.33 CHAPTER 9 MUTUAL FUNDS Introduction 9.1 Mutual Funds 9.2 Cost and Expenses of Mutual Funds 9.2 Entry Load and Exit Load 9.2 Expense Ratio 9.3 Net Asset Value 9.3 Misconceptions About NAV 9.4 Different Types of Mutual Funds Schemes 9.5 Based on Structure 9.5 Based on Asset Class 9.5 Based on the Investment Goal 9.6 9.6 Other Funds 9.7 Latest Development Associated with Mutual Funds 9.7 Systematic Investment Plan (SIP) 9.7 Systematic Withdrawal Plan (SWP) 9.8 9.10 Tax Implications on Mutual Funds 9.10 Key Points to Remember before Investing in Mutual Fund 9.10 Solved Problems 9.12 Review Questions 9.16 Practical Exercises 9.16 PAGE I-18 CONTENTS
CHAPTER 10 LIFE AND GENERAL INSURANCE Introduction 10.1 Principles of Insurance 10.2 Different Types of Risk Included in Insurance 10.3 Life Insurance 10.4 Need for Life Insurance 10.4 10.4 How to Decide on the Best Life Insurance Plan that Suits your 10.6 Types of Life Insurance 10.6 Term Life Insurance 10.6 Types of Term Plans 10.7 Whole Life Insurance 10.8 Types of Whole Life Insurance 10.8 Unit Linked Plans (ULIPs) 10.9 Endowment Plans 10.9 Retirement Plan 10.10 Other Types of Life Insurance 10.10 Claim Settlement Process 10.11 Life Insurance Companies in India 10.11 General/Non-Life Insurance 10.12 Review Questions 10.12 Practical Exercise 10.13 CHAPTER 11 HEALTH INSURANCE Introduction 11.1 Need for Health Insurance 11.2 Importance of Buying Health Insurance in India 11.2 Health Insurance Policies 11.4 PAGE CONTENTS I-19
Indemnity Plan 11.4 Types of Indemnity Plans 11.4 11.6 11.6 Government Sponsored Schemes 11.7 Rashtriya Swasthya Bima Yojana (RSBY) 11.7 Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PM-JAY) 11.7 Pradhan Mantri Suraksha Bima Yojana (PMSBY) 11.7 Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY) 11.8 Aam Aadmi Bima Yojana (AABY) 11.8 Central Government Health Scheme (CGHS) 11.8 Universal Health Insurance Scheme (UHIS) 11.8 Coverage of Health Insurance 11.9 Claim Settlement 11.9 Documents Required to Process Claims 11.9 Claim Process 11.10 Time taken to settle the claim 11.11 Exclusions 11.11 Things to Consider Before Buying a health Insurance 11.11 Review Questions 11.12 Practical Exercises 11.12 UNIT 4 TAX PLANNING CHAPTER 12 PERSONAL TAX PLANNING Introduction 12.3 Tax and its importance 12.3 Tax Planning 12.4 12.4 PAGE I-20 CONTENTS
Types of Tax Planning 12.5 12.6 Tax Management 12.6 Tax Avoidance 12.7 Tax Evasion 12.7 Methods of Tax Evasion 12.7 Review Questions 12.8 Practical Exercise 12.9 CHAPTER 13 TAXATION IN INDIA Introduction 13.1 Taxation System in India 13.2 Types of Taxes 13.2 Direct Tax 13.2 Indirect Tax 13.3 13.3 Difference between Direct Tax and Indirect Tax 13.4 Taxation Administration in India 13.4 Taxation Terminologies 13.5 13.5 5 Heads of Income-tax 13.6 Income from Salary 13.6 Income from House Property 13.8 13.9 Income from Capital Gains 13.10 Income from Other Sources 13.10 13.10 Taxation Slabs 13.11 CESS 13.11 Surcharge 13.11 PAGE CONTENTS I-21
New Tax Regime 13.12 13.13 13.14 Solved Problems 13.15 Review Questions 13.20 Practical Exercises 13.21 CHAPTER 14 DEDUCTIONS AND EXEMPTIONS Introduction 14.1 Exemption 14.1 Deduction 14.2 Exemption vs. Deduction 14.2 List of Exemptions During Employment 14.2 House Rent Allowance 14.2 Leave Travel Allowance 14.2 Helper Allowance 14.3 Research Allowance 14.3 Uniform Allowance 14.3 Travelling Allowance 14.3 Daily Allowance 14.3 Conveyance Allowance 14.3 Academic Allowance 14.3 Children Education Allowance 14.4 Hostel Expenditure Allowance 14.4 Tribal Area Allowance 14.4 Transport Allowance 14.4 Allowance to Transportation Industry employees 14.4 Underground Allowance 14.4 Car Maintenance Allowance 14.4 List of Exemptions at the Time of Retirement 14.5 PAGE I-22 CONTENTS
Gratuity 14.5 Commuted Pension 14.5 Leave Encashment 14.5 Voluntary Retirement Scheme 14.5 List of Exemptions (Special Allowances) 14.6 Deduction Under Section 16 14.6 Deductions (Sections 80C to 80U) 14.7 Conditions For Opting New Tax Regime 14.16 Best Tax Saving Schemes 14.16 Solved Problems 14.17 Review Questions 14.21 Practical Exercise 14.21 CHAPTER 15 Introduction 15.1 Income-tax Return 15.1 Types of Income-tax Returns 15.2 ITR-1 or Sahaj 15.2 ITR-2 15.2 ITR-3 15.3 ITR-4 or Sugam 15.4 ITR-5 15.4 ITR-6 15.5 ITR-7 15.5 Modes of Filing the Income-tax Return 15.6 Documents Required for Filing ITR 15.7 Importance of Filing Income-tax Returns 15.7 E-Filing of Return 15.8 Advantages of Electronic Filing of Returns 15.10 Precautions While Filing Income-tax Return 15.11 PAGE CONTENTS I-23
Review Questions 15.12 Practical Exercises 15.12 QUESTION PAPER Part 1/Sem. 1 (2022-23)) P.1 PAGE I-24 CONTENTS
Financial Literacy 1
LEARNING OUTCOMES
The learning from this chapter will enable students
1.3
INTRODUCTIONFINANCIAL
-
LITERACY
CHAPTER
IMPORTANCE OF FINANCIAL LITERACY
to better understand financial concepts and allows one to manage their financ-
in-depth knowledge of financial education and strategies that are indispensable
the market, such as credit card debt, debit card withdrawal opportunities andsions. It also increases financial discipline and financial opportunities. This will
1.4 -
-
of the time, we are faced with situations that want us to a rational informed decision, like
plan out his career and based upon the plan, he needs to take the decision that
workshops and meetups wherein people learn aspects of the financial world
making the most appropriate financial decision depending on the circumstances.
1.5
` -
-
FINANCIAL LITERACY BASIC VOCABULARY
Annual Percentage Rate -
Asset
cash. The purpose of an asset is to generate returns and create wealth. These
Bait and Switch
Bank of financial inclusion.
Bankruptcy
their debt or obligations. Under this, a legal proceeding is initiated where thestanding liabilities and obligations. It is also a fresh start for the people who are unable to honour their obligations.
1.6
Borrower -
one else. The intention behind this is to return it bank within a specified time from a bank such person will be called a borrower of the bank.
Budget is a major step towards financial discipline and attaining financial goals. Comparison shopping
efficient spending. Under this, while making a purchase customers indulge in
Credit
Credit card where the cards can be used to make financial transactions up to a certain limit -
Credit report
1.7
Credit score
borrower will be able to honour their debt or not. It is calculated based on the Creditworthiness
based on how one has managed his/her past debts and obligations.
Debit card
Debt
Default
Emergency fund
1.8
-
Expense are justified and not incurred on impulse, to ensure financial discipline.
Income
Interest
Interest is the certain percentage of the principal amount that the lender changes
Need vs. Want
The essence of personal financial planning is the classification between need
watch, designer bag, etc.
Opportunity cost
1.9
-
1.10
Pay yourself first -
Predatory lending-
Principal needs to be repaid. It does not include interest.
Rule of 72period estimated is in the presence of compounding.
Time value of money -
Wealth Wealth is a stock concept whereas income is a flow concept. The net worth of
REVIEW QUESTIONS
1.11
a. b. c. d. e. f. g.
-
PRACTICAL EXERCISES
FINANCIAL LITERACY UGCF
AUTHOR :
AMIT
KUMAR SINGH
PUBLISHER : TAXMANN
DATE OF PUBLICATION : MARCH 2023
EDITION : 2023 Edition
ISBN NO : 9789357780216
NO. OF PAGES : 268
BINDING TYPE : PAPERBACK
DESCRIPTION
Rs. 375 USD 33
This book aims to equip readers with the skills to become financially sound and achieve financial independence.
This comprehensive book is for the Value Addition Course introduced by the University of Delhi for Undergraduate students of all courses.
This book is divided into four units, each dwelling on the key concepts of financial literacy, which are as follows:
• Financial Planning & Financial Products
– Discusses financial literacy in general and introduces the basic concepts such as:
• Financial Planning
• Spending Management
• Time Value of Money
• Banking Products & Digital Payments
– Makes the readers aware of the different banking products and services that banks offer, digitization of payments systems, and how to protect oneself from financial fraud
• Investment Planning & Management – Discusses the various investment planning and management techniques. It delves into the different investment options available in the market. It also emphasizes the need for Life, General & Health Insurance in every individual's life
• Tax Planning – Discusses tax planning, introducing the basic tax structure of India, taxation meth odologies, exemptions, deductions and filing of returns
The Present Publication is the 1st Edition, authored by Prof. (Dr) Amit Kumar Singh, with the following noteworthy features:
• [Learning Outcomes] Every chapter begins with the list of Learning Outcomes which the readers will achieve after the successful completion of the chapter
• [Main Text in Simple & Lucid Language] to increase readers' understandability. The chapters are further divided into various headings and subheadings for easy navigation
• [Solved Numerical Problems] to enhance the understanding of the concept and learn its applicability
• [Review Questions] for the students to review their knowledge and understanding
• [Practical Exercises] helps readers implement their learning into hypothetical real-life situations. The aim is to prepare them to face real-life financial situations with confidence
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