Solution Sheet

1 Calculate tax free gratuity amount

Least of the following is tax free Amount

Actual amount of gratuity received 6,00,000

Statutory limit 3,50,000
15 days' salary based on salary last drawn for each year of service 3,04,038 Tax Free

Salary calculation (Basic salary+dearness allowance)*(15/26)*Completed year of service(31)

Taxable gratuity= Actual Gratuity-Tax free gratuity

6,00,000-3,04,038
2,95,962

2 40% Commuted Pension= Rs 5,00,000

Total commuted pension= Rs 12,50,000 (500000/(40%))

Since, he is in receipt of gratuity one third of the total commuted pension is Exempt
Rest of the commuted pension is taxable

One-third commuted pension= 4,16,667 (1250000/3) Tax Free

Remaining Commuted pension= 83,333 (500000-416667) Taxable

3 (I) u/s 10(10) of the Income Tax Act, 1961 gratuity amount due and received after the death of the person
neither can be taxable in the hands of the concerned person nor is taxable in the hands of the legal heirs who received
such amount as it does not partake the character of the income in their hands but is only a part of the eastate
devolving upon them.
Rs 6,00,000 is totally tax free.

(ii) u/s 57 (ii a ) , in the case of income in the nature of family pension, the amount deductible is Rs 15,000
or 1/3 rd of such income, whichever is less.
4 Total cost of Medical education in UK in 2008 ( current price level )= Rs 21,00,000

Education expenses= Rs 20,00,000

Miscellaneous expenses= Rs 1,00,000
Total Rs 21,00,000

Considering Inflation @4.5 %, required amount will be= A Rs 22,93,253 (2100000*((1.045)^2))

PPF a/c will mature in Sep,2008. It's accumulated amount @8 % p.a = Rs 9,63,446 (826000*((1.08)^2))
NSC maturing in 2009 will accumulate @8 % compounding half yearly= Rs 3,79,596 (300000*((1.04)^6))
Present value of NSC amount in 2008 = Rs 3,63,250 363249.8
B Rs 13,26,696

Required amount for Education Net ( A-B ) Rs 9,66,557

5 (I) Pension required with no estate left

Post Retirement expenses= Rs 17,500 (25000*0.7)

Pension receivable= Rs 10,000

Required amount= Rs 7,500 per month

Inflation= 4.50%
Long term return= 8%
Inflation adjusted return= 3.35% ((1.08/1.045)-1)*100

Retirement corpus = Rs 10,60,065 1,060,064.58

(ii) Pension required with estate left ( 10 % of corpus )

Retirement corpus required = Rs 10,60,065

Let total corpus after the above corpus and 10% of it = Rs X
10% of the estate be .10 X
 Value of X Rs 11,77,850 (1060065/0.9)
(X=10,60,065+.10X)

6 Cash Flow
Sep,06 Oct,06 Nov, 06 Dec , 06 Jan , 07 Feb ,07 March ,07 April ,07 May , 07 June , 07 July ,07 August ,07
1 2 3 4 5 6 7 8 9 10 11 12

Opening
Balance 60000 90000 120000 150000 180000 370800 400800 380800 400800 420800 440800 1960800
Inflow
Salary 35000 35000 35000 35000 35000 35000 35000 0 0 0 0 0
Pension 0 0 0 0 0 0 0 10000 10000 10000 10000 10000

Annuity from
Retirement
corpus 0 0 0 0 0 0 0 7500 7500 7500 7500 7500
Rent 20000 20000 20000 20000 20000 20000 20000 20000 20000 20000 20000 20000
other 0 0 0 0 160800 0 0 0 600000 0 1500000 0
A 115000 145000 175000 205000 395800 425800 455800 418300 1038300 458300 1978300 1998300

Outflow
Living
Expenses 25000 25000 25000 25000 25000 25000 25000 17500 17500 17500 17500 17500
other 0 0 0 0 0 0 50000 0 600000 0 0 0
B 25000 25000 25000 25000 25000 25000 75000 17500 617500 17500 17500 17500

Net (A-B) 90000 120000 150000 180000 370800 400800 380800 400800 420800 440800 1960800 1980800

7 Life Insurance coverage ratio=( Net worth+death benefits ) / salary of principal wage earner

Net worth
Flat 1 3000000
Flat 2 1500000 4500000

Shares Company A 270000

Company B 268000 538000
 PPF 826000
NSC 200000
NSC 300000
Cash & Bank balance 60000 1386000

Provident Fund 1500000

Gratuity 600000 2100000

Net worth 8524000

Death benefits 1000000

Total 9524000
Salary 420000

Life Insurance Coverage Ratio 22.67 (9524000/420000)

8 Capital Gains Exemption

Capital Gains
Mumbai Flat Amount ( Rs )

Sale proceeds 3500000

Less: Brokerage @2% 70000

Net Proceeds (A) 3430000

Less : Indexed cost of acquisition ( B ) 2400000

Long Term capital Gains (A-B ) 1030000

Shares

Sale proceeds (A) 134000 (500*268)

Less: Indexed Cost of acquisition ( B ) 87000 (500*174)

Long Term Capital Gains (A-B ) 47000

 Total LTCG 1077000
Less:Exemption U/s 54 EC 200000 *

Taxable LTCG 877000

* Rs 2,00,000 invested within six months from the date of sale ,in the month of Dec, 06
Rs 8,00,000 invested after six months from the date of sale , in the month of April, 07

9 Amount available from the sale proceeds of mumbai Flat and Company B shares= Rs 35,64,000

Mumbai Flat 3430000

Shares 134000
Total 3564000

Less: Investment in REC Bonds

Dec, 06 200000
April,07 800000 Rs 10,00,000

Net Proceeds Available Rs 25,64,000

Less: Retirement corpus as required Rs 11,77,850

Surplus Rs 13,86,150

# Extended Liquidity Ratio= ( Liquid assets+ other financial assets ) / monthly expenses

Liquid Assets
Cash & Bank balance 60000

Other financial assets

Shares Company A 270000

Company B 268000 538000
adjustment for liquidity=multiplying factor 0.5 (538000*0.5) 269000

Total 329000

Monthly
expenses 25000

Extended liquidity ratio= (329000/25000)

13.16