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# Basic Rules for Advance Financial Planning Nominal Rate: Basic rate which is without any adjustment or compounding

Effective Rate: Compounded rate Investment rates: Annual Effective rate. E.g. equity shares, mutual funds, gold ETF etc. Savings rate: Annual Nominal rate. E.g. bank FD Loan rate: Annual Nominal rate Rule 1: When investment is made every year, use Annual Effective rate as i/y Rule 2: When investment is made M/Q/S, use M/Q/S nominal rate. Note: The rates of return quoted on investment are the maximum return which can be achieved. So if we consider those rates as nominal our effective return will be more than the rate quoted, which is not possible. Rule 3: When withdrawals are subject to inflation use fishers real rate equation. Real rate = [(1+r)/(1+i)] 1 Where: r = rate of return, I = rate of inflation For M/Q/S withdrawal we need M/Q/S nominal real rate. Components of Loan Amortization Schedule Step 1: calculation of EMI Process: PV = loan amount N = no. of period i/y = applicable loan rate M/Q/S/A pmt = EMI (always use end mode of calculation) Step 2: Repayment Schedule (assume 1,00,000 loan, rate 12% and period is 10 years) Month Opening Balance Interest 1 100000 =100000*0.01=1000 2 =100000-435=99565 =99565*0.01=995.65 EMI 1435 1435 Capital =1435-1000=435 =1435-995.65=439.35

Loan and Taxation: Interest on housing loan is eligible for deduction u/s 24 and principal component is eligible for deduction u/s 80C up to maximum of Rs.1,00,000. Pre-construction interest is to be amortized equally over period of 5 years after the construction gets over.

Public Provident Fund Account: Interest Compounding Minimum Investment Maximum Investment Tenure Tax Benefit Loan Premature withdrawal 8% Yearly 500 70,000 15 year tenure, extend in a block of 5 years 80C After 3 years 25% of the 2nd preceding year th After 5 years 50% of the 4 preceding year At extension 60% of the closing bal of 15th year Individuals

## Who can invest?

Maturity of PPF is 15 full financial years i.e. account continues for 15 years after the year in which the account is opened. If the account is opened on 1st January 2000, then doesnt mature on 31st December 2015 but it matures on 1st April 2015. Deposit in the account should be made within first 5 days of the month to get the interest of that particular month. There can be maximum 12 monthly deposits in this account per year. Interest on monthly investment is calculated on simple basis during the year and gets compounded at the end of the year. Example: deposit of 1000 every month in an account which is opened on 1st January 2000. For the financial year 1999-2000 the accumulated value will be: Months for Deposit which interest Interest to be calculated 1000 3 20.00 1000 2 13.33 1000 1 6.67 Total 40 Hence accumulated value on 31st March,2000 is 3000+40 = 3040. Loan would be available from this account form 1st April,2003 which will be 25% of the balance of the year ended on 31st March 2002. Loan eligibility is only for 2 years after that withdrawal option commences. In the same case it commences from 1st April,2005 and eligible amount will be 50% of the closing balance of the year ended on 31 st March 2002. This account can be extended in the block of 5 years. Number of extensions is not limited.