PFM Answers
PFM Answers
PFM Answers
Module 1
Financial instruments can be classified as money market and capital market [study from old QB]
1. Regulatory institutions
● Regulatory are the ones who provides rules and guidelines for a particular market.
● It comprises of RBI, SEBI, IRDA, AMC, etc. Primarily, an investor would want the
funds to be under the control and to be safe to invest. This assurance is rendered by
the regulatory authority that is regulating the particular market.
● For example, money market instruments are regulated by the RBI whereas the
capital market instruments are regulated by SEBI.
2. Banking Institutions
● Non-Intermediaries :
They are engaged in providing funds on long-term basis to individuals as well as
corporate clients. They comprise of institutions who are lending on term basis.
For example, financial corporations and investment institutions like IDBI, NABARD,
IFCI, etc.
3. Non-Banking Institutions
● Investment Companies :
They may be called a trust or a corporation which facilitates an individual to invest
in different diversified and professionally managed securities by arranging pool of
funds from other investors. The individual need not invest in single company stocks
but can rather purchase units directly from the investing company which are well
diversified. For example, UTI and Mutual Fund.
● Insurance Companies :
They create a risk pool by way of collection of premium from the people at large
who wishes to buy a protection either for a person or for a property. It helps to
mitigate the loss and preserve the wealth and meet out the uncertainties. By
insuring large groups, risk is spread over the entire insured and even in the event of
paying claims, they end-up with sufficient amount of profits unless there is a
natural calamity or disaster.
12. Explain the classification of financial institutes [+Q11]
Stock exchange may be termed as a place where these transactions take place and a location for
the financial market.
- Marketplace for Securities: Stock exchanges are centralized platforms where buyers and
sellers trade securities like stocks and bonds.
- Capital Formation: Companies list their securities on exchanges to raise capital, which can
be used for business expansion and other corporate activities.
- Liquidity and Price Discovery: Exchanges enhance liquidity by facilitating easy buying and
selling of securities, and they contribute to price discovery through market dynamics.
- Regulation and Oversight: Government regulations ensure fair and transparent trading
practices, with exchanges enforcing rules to maintain market integrity.
- Global Connectivity and Investor Protection: Stock exchanges are globally interconnected,
allowing cross-border trading. They also engage in initiatives to educate investors and
protect their interests.
- The first step in creating your personal financial plan is determining your current
financial situation.
- Having a thorough understanding of your current financial situation will help you to
formulate realistic and well-informed goals.
- You will have to devise strategies to help you bridge the gap from where you are
today to where you would like to be.
- Alternative courses of actions will fall into one of two categories:
- Reallocating existing resources, or Generating new ones.
Existing resources can be utilized by earmarking current savings or shifting
current allocations as in the example above.
- Generating new resources may require changing jobs to improve your wage
outlook, taking on additional hours or investing your savings more
aggressively to generate higher rates of return.
4. Evaluate alternatives.
- Once you have given serious thought to the options available that could lead you to
your goals, you may begin to realize just how many options there are. So, which
courses of action should you take to achieve your desired goals?
- The answer is: that depends
- Before you can select strategies to complete your financial plan, you’ll have to
thoroughly evaluate and weigh your options.
- When assessing your options consider the pros and cons of each option.
- Having identified options for reaching your goals and having weighed each
strategy, it’s now easier to look at the cost of your goals in terms of your current
situation.
- This can help you to prioritize your goals as you consider how much it will cost you
to implement each one.
- Finalizing your plan will require you to make decisions as to which goals to pursue
and the best courses of action to take.
- Once you’ve gone through the effort of creating your plan, discipline is paramount.
- Be conscious about establishing actionable steps you can take to lead you to
success when creating your plan. Having concrete steps to take will help you
ensure you are doing what you need to do to stay on track to accomplish your goals.
- One fact remains: life happens. For this reason, it is important to review your plan
often and revise it as needed.
- Reviewing your financial plan can help you to gauge your progress toward meeting
your goals.
- Your financial situation will change from time to time. You may incur unplanned
expenses or receive unplanned incomes. These events may require you to change
the path you will follow to reach your goal.
- The fact is your life will change. Your financial plan will have to change too. Be
faithful in reevaluating your plan from time to time to ensure your goals haven’t
changed and that you are on pace to reach those goals.
- Psychology behind credit card spending. Since consumers aren’t spending “real”
money, they’re more likely to make use of their plastic cards. The bill that comes at
the end of the month is in the back of their minds.
● Contribute to Savings
- A goal for expert money managers is to grow wealth and stability through financial
security.
- Experts believe that savings accounts are the best place to start investing and
managing money
- A savings account is important because it is the backstop for your financial life.
- Overall, consistent saving allows people to meet their money management goals.
● Be Consistent
- To put all of your money management skills to use, you must be consistent.
- People who have successful saving habits stick to their goals and only change them
when life events such as pay raises and career changes occur.
- “A financial plan is simply a guide,” Hyde said. “You’re stating where you want to go.”
- Without consistency, it is easy for money management beginners to fall back into
old habits or make money mistakes.
18. What is the difference between tax planning and financial planning?
Scope The scope of tax planning is solely In contrast, financial planning involves a
limited to helping you receive the more holistic approach to managing your
maximum possible tax benefits wealth. It often covers various aspects
each successive year. So, even if such as cash flow management, asset
you employ the services of a management, insurance, investments,
professional tax planner, all they retirement planning, and even tax
can help you with is filing efficient planning.
tax returns and helping you invest
in tax-free avenues.
Benefits Apart from increasing your overall Financial planning helps increase your
tax efficiency, efficient tax savings by planning and tracking your
planning can also enable you to expenditures. It can also facilitate an
budget and manage your taxes at overall better standard of living by
the beginning of each fiscal year helping you utilize your money in the
instead of scrambling to file best manner possible.
optimum tax returns at the
eleventh hour.
Consumer credit provides access to more spending power, which enables you to do things like take
out a home loan or make purchases with a credit card. Responsible use of consumer credit can
open doors to new opportunities, but borrowing also has the potential to result in unmanageable
levels of debt.
● Building your credit history: If you establish a solid payment history for consumer credit
accounts, including credit cards and personal loans, and otherwise handle credit
responsibly, consumer credit can be a valuable tool for building your credit.
● Boosting your credit score: A positive history of making payments on credit cards, loans
and other types of consumer credit can positively affect your credit score.
● Providing perks and rewards: Consumer credit, particularly credit cards, can deliver
goodies like airline miles, hotel points and cash back rewards.
● Protecting you against fraud: Credit cards provide all sorts of ways to protect yourself
against fraud, such as contactless cards, virtual card numbers, card-locking capabilities and
little to no cardholder liability for unauthorized purchases.
● Consumer credit can come at a cost, including interest charges and potential fees.
● Access to consumer credit might enable you to spend beyond your means.
● Missed payments and high debt levels could damage your credit and impact your ability to
obtain credit in the future.
● Piling up a lot of consumer debt could result in your debt being turned over to a debt
collector, who might constantly nag you about paying the debt.
1. Installment Credit:
Typically refers to loans, such as mortgages, auto loans, personal loans and student loans.
With instalment credit, you repay what you borrow in fixed payments made each month
over a set period of time, or term. The monthly payments, or instalments, are based on the
amount you borrow plus the interest you owe.
2. Revolving Credit:
You can borrow money numerous times a month as long as you stay below your credit limit.
You'll have to make at least a minimum monthly payment on revolving credit on or before
the account's due date. The amount of your monthly payment will depend on how much
money you've borrowed and whether you regularly pay off the full balance to avoid
interest changes. If you don't pay off your debt immediately, it rolls over—or "revolves"—to
the next billing period. The most familiar and common type of revolving credit is a credit
card.
21. What is the purpose of tax planning? How do we conduct tax planning? How could tax
planning lead to unethical behaviour?
Tax planning is the analysis of a financial situation or plan to ensure that all elements work
together to allow you to pay the lowest taxes possible. Proper tax planning makes it easier to build
your personal finances and afford the things you want. Taxation becomes relevant at various
stages of your financial plan. For example,
1) There is a tax rebate when you invest in select categories of investments.
2) There is also a tax implication when you earn regular returns in the form of interest or
dividends.
3) There is a tax implication at the time the capital gains are realized on assets.
- One of the basic principles of long term investing is that you must not focus overly
on the tax aspect. But given a choice, you need to consider a more tax efficient
option.
- If you need to make an allocation of Rs.100,000 during the year to mutual funds,
then should you do it in diversified equity funds or an ELSS. Remember, an ELSS is
also an equity fund with a 3-year lock period and giving the additional benefit
under Section 80C.
- The 30% exemption in the year of investing substantially improves your yield on
the fund.
- This factor is very relevant when you are actually comparing equity versus debt.
- The definition of capital gains is much more favourable in the case of equities as
compared to debt.
- For example, in case of equities and equity mutual funds, the definition of long term
is determined by the holding period of 1 year. Additionally, STCG for equities is
charged at a concessional rate of 15% while the LTCG on equities are entirely tax
exempt.
- Alternatively, if you own a debt fund with a growth option then it will be long term
only if it is held for 3 years. In this case, short term capital gains will be taxed at your
peak rate while long term gains will be taxed at 20% after considering indexation.
- A good option for you to consider will be the Balanced Fund plan since it combines
the benefits of debt and equity.
- Understanding Tax Laws: Begin by comprehensively understanding the tax laws and
regulations relevant to your jurisdiction. This includes income tax, capital gains tax, and
other applicable taxes.
- Income and Deduction Analysis: Analyze sources of income and identify eligible
deductions, credits, and exemptions. This involves a careful review of personal and
business finances.
- Timing of Income and Expenses: Plan the timing of income recognition and expenses. This
may involve deferring income to a later period or accelerating deductible expenses into the
current period.
- Investment Strategies: Employ tax-efficient investment strategies. This could involve
choosing investments with favorable tax treatment or utilizing tax-advantaged accounts
like IRAs or 401(k)s.
- Aggressive Tax Planning: Some individuals or businesses may engage in aggressive tax
planning, pushing the boundaries of legal interpretation to minimize taxes. This can
sometimes cross ethical lines if it involves exploiting loopholes or engaging in practices
perceived as abusive.
- Tax Evasion: Deliberate evasion of taxes, which involves hiding income or providing false
information to tax authorities, is illegal and unethical. It undermines the integrity of the tax
system and can lead to severe legal consequences.
- Transfer Pricing Manipulation: Multinational corporations may engage in unethical
behavior by manipulating transfer prices (prices charged between subsidiaries of the same
company) to shift profits to low-tax jurisdictions, reducing their overall tax burden.
- Shell Companies and Offshore Accounts: Establishing shell companies or maintaining
offshore accounts solely for the purpose of evading taxes is considered unethical and, in
many cases, illegal. It undermines the principles of tax fairness and transparency.
Module 2
1. Why to invest money and what are the factors to be consider while investing?
Investing is an effective way to use your money to work and potentially build wealth.
Objectives of Investment: Safety, Income, Capital gains
1. Life Insurance:
Provides a payout to beneficiaries in the event of the policyholder's death. It can serve as
financial protection for dependents and cover expenses like funeral costs, debts, and
income replacement.
2. Health Insurance:
Covers medical expenses and provides financial protection against the high costs of
healthcare. It can include coverage for hospital stays, surgeries, prescription drugs, and
preventive care.
3. Auto Insurance:
Protects against financial losses due to car accidents, theft, or damage to the insured
vehicle. It typically includes liability coverage for third-party injuries and property damage.
4. Homeowners Insurance:
Covers damage to the home and its contents caused by events like fire, theft, or natural
disasters. It also provides liability coverage for injuries that occur on the property.
5. Property Insurance:
Broader than homeowners insurance, property insurance covers physical assets beyond
homes, such as commercial properties, rental properties, and business premises. It
protects against damage and loss due to various perils.
6. Travel Insurance:
Provides coverage for unexpected events during travel, including trip cancellations,
medical emergencies, lost baggage, and travel delays. It offers financial protection for
travelers both domestically and internationally.
7. Disability Insurance:
Offers income protection in the event of a disability that prevents the policyholder from
working. It provides a regular income stream to cover living expenses during the disability
period.
1. Coverage Needs:
Evaluate your financial situation and assess the financial needs of your dependents.
Consider factors such as outstanding debts, future expenses (e.g., education for children),
and the standard of living you want your family to maintain in case of your death.
3. Coverage Amount:
Determine the appropriate coverage amount. This should be sufficient to meet the
financial needs of your beneficiaries. A common rule of thumb is to have coverage that is at
least 5 to 10 times your annual income, but individual circumstances may vary.
4. Premium Costs:
Understand the premium structure of the life insurance policy. Premiums can be fixed
(level) or variable, and they may change over time. Consider your budget and ensure that
you can comfortably afford the premiums throughout the life of the policy.
5. Insurer Reputation and Financial Stability:
Research and choose a reputable insurance company with a strong financial standing.
Check the insurer's ratings from credit rating agencies to assess its financial stability. A
financially stable insurer is more likely to meet its financial obligations and pay out claims
when needed.
1. Coverage Needs: Assess your healthcare needs and those of your dependents. Consider
factors such as pre-existing conditions, anticipated medical expenses, and the type of
medical services you may require. Choose a health insurance plan that provides adequate
coverage for your specific healthcare needs.
2. Type of Health Insurance Plan: Understand the different types of health insurance plans,
such as Health Maintenance Organization (HMO), Preferred Provider Organization (PPO),
and High Deductible Health Plan (HDHP). Each plan has its own network of healthcare
providers, cost-sharing arrangements, and coverage options. Select a plan that aligns with
your preferences and healthcare habits.
3. In-Network Providers: Check the list of in-network healthcare providers and facilities
covered by the insurance plan. In-network providers typically result in lower out-of-pocket
costs. Ensure that your preferred doctors, specialists, and hospitals are part of the plan's
network.
4. Costs and Premiums: Evaluate the overall costs of the health insurance plan, including
premiums, deductibles, copayments, and coinsurance. Consider your budget and how
much you can afford in terms of monthly premiums and out-of-pocket expenses. Balance
the trade-off between lower premiums and higher out-of-pocket costs.
5. Prescription Drug Coverage: If you take prescription medications regularly, review the
plan's prescription drug coverage. Check if your medications are included in the plan's
formulary (list of covered drugs) and understand the cost-sharing arrangements for
prescriptions. Some plans may have tiers with different copayment or coinsurance levels
for different drugs.
1. Coverage Types: Understand the different types of coverage offered by car insurance,
including liability, collision, comprehensive, and uninsured/underinsured motorist
coverage. Assess your needs and the level of protection required based on factors such as
the value of your car and potential financial risks.
2. State Requirements: Familiarize yourself with the minimum car insurance requirements
mandated by your state. Ensure that your insurance policy meets or exceeds these
requirements to comply with local regulations.
3. Deductibles and Premiums: Consider the trade-off between deductibles and premiums. A
higher deductible typically results in lower premiums, but you'll pay more out of pocket in
the event of a claim. Evaluate what deductible amount aligns with your budget and risk
tolerance.
4. Discounts and Benefits: Inquire about available discounts. Many insurers offer discounts
for factors such as safe driving records, bundling multiple policies, completing defensive
driving courses, or having safety features in your vehicle. Explore these opportunities to
reduce your premium costs.
5. Claims Process and Customer Service: Research the insurer's reputation for customer
service and the claims process. A responsive and efficient claims process is crucial in the
event of an accident. Read reviews, seek recommendations, and ensure that the insurer
has a reputation for fair and timely claims settlements.
Module 3
- The Government provide Health care through Government hospitals (usually they offer
service without any cost), Education (In Municipal and Government schools the fee is
negligible).
- Of course the major expenditure of Government has to be incurred on National Defense,
Infrastructure Developments etc.
- Taxes are used by the government for carrying out various welfare schemes including
employment programs.
- There are Lakhs of employees in various departments and the administrative cost has to be
borne by the Government.
- On judicial system: the Salaries, perks of Judges, Magistrates and judicial staff has also to
be paid by the Government.
2. Who is an Assessee?
As per S. 2(7) of the Income Tax Act, 1961, unless the context otherwise requires, the term
“assessee” means a person by whom any tax or any other sum of money is payable under this Act,
and includes Person in respect of whom any proceedings under this Act has been taken for
assessment of his income. Deemed assessee under provisions of this Act. Any person deemed to
be an assesse in default under any provisions of this Act.
4. In what way does the liability of tax of a "not ordinarily resident" person differ from that
of a "resident" person under the Income-tax Act?
5. How will you decide the question of residence of an individual and a Hindu undivided
family? Explain fully.
The determination of the residential status of an individual or a Hindu Undivided Family (HUF)
under the Income-tax Act is crucial for ascertaining their tax liabilities in a particular jurisdiction.
In India, residential status is primarily categorized into three types: Resident, Non-Resident, and
Not Ordinarily Resident. The criteria for determining the residential status involve both
quantitative and qualitative factors, and these rules are specified in Sections 6(1) and 6(6) of the
Income-tax Act.
For Individual:
● Resident: An individual is considered a resident in India if they satisfy any one of the
following conditions during the financial year: They are in India for 182 days or more in the
relevant financial year, or They are in India for 60 days or more in the relevant financial
year and 365 days or more in the four financial years immediately preceding the relevant
financial year.
● Non-Resident: If an individual does not meet any of the conditions mentioned above, they
are considered a non-resident.
● Not Ordinarily Resident (NOR): An individual qualifies as NOR if they have been a
non-resident in India in 9 out of 10 previous years preceding the relevant financial year, or
they have been in India for a total of 729 days or less in the seven financial years preceding
the relevant financial year.
● Resident HUF: An HUF is considered a resident if the control and management of its affairs
are wholly or partly situated in India during the relevant financial year.
● Non-Resident HUF: If the control and management of the HUF's affairs are situated wholly
outside India, it is considered a non-resident.
● Not Ordinarily Resident HUF: Similar to individuals, the concept of NOR is not explicitly
applied to HUFs under the Income-tax Act. The focus is on the residential status as a
whole.
6. Can one claim deduction for personal and household expenditure while calculating
taxable income or profit?
In most tax jurisdictions, personal and household expenditures are not deductible when
calculating taxable income or profit. Tax authorities generally allow deductions for specific
business-related expenses, certain investments, and eligible deductions outlined in tax laws, but
personal and household expenses are typically considered non-deductible. Here are some key
points:
1. Business Expenses: Deductions are usually allowed for legitimate business expenses
incurred in the process of generating income. This may include expenses related to
business operations, marketing, travel, and necessary supplies.
2. Investment Deductions: Some jurisdictions provide deductions for certain types of
investments, such as contributions to retirement accounts or eligible charitable donations.
However, these deductions are often subject to specific rules and limits.
3. Personal and Living Expenses: Expenses related to personal living, such as rent or
mortgage payments, groceries, clothing, and other personal expenditures, are generally
not deductible. These are considered personal choices and are not directly related to the
generation of income.
4. Tax Credits vs. Deductions: While personal expenses are generally not deductible, some
jurisdictions provide tax credits for specific expenditures, such as education expenses,
child care costs, or energy-efficient home improvements. Tax credits directly reduce the
amount of tax owed.
5. Documentation and Compliance: Proper documentation is essential to support any
deductions claimed. Taxpayers should keep accurate records of business expenses and
eligible deductions to comply with tax regulations and provide evidence if requested by tax
authorities.
7. I am an Indian scientist, who had gone abroad on a government project. Should my return of
income include income earned/received abroad?
As an Indian scientist who has gone abroad on a government project, you need to consider the
rules related to the taxation of foreign income in India. The taxation of foreign income for Indian
residents is determined by their residential status in India. Residential status is classified as
Resident, Non-Resident, or Not Ordinarily Resident, and it depends on the number of days an
individual spends in India over a specified period.
3. Tax Credits and Double Taxation Avoidance Agreements (DTAA): If you are taxed on the
same income in both India and the foreign country due to the residency rules, you may be
eligible for relief under the DTAA, which aims to avoid double taxation. India has signed
DTAA agreements with many countries to provide relief from double taxation.
4. Filing of Tax Return: Regardless of whether your foreign income is taxable in India, it is
advisable to file an income tax return in India to comply with regulatory requirements. You
may need to disclose your foreign income and provide details of any tax paid in the foreign
country.
5. Documentation: Keep detailed records of your foreign income, tax payments made abroad,
and any relevant documentation to support your tax return.
1. Income Earned Abroad: Foreign income refers to earnings, gains, or profits generated by
an individual or entity in a foreign country. This includes salaries, wages, business income,
and investment income earned outside the individual's home country.
2. Business Profits: Profits derived from business operations conducted in a foreign country
are considered foreign income. This may include income from foreign branches,
subsidiaries, or other business activities conducted abroad.
5. Rental Income: Income received from renting out properties located in foreign countries is
considered foreign income. This includes rental payments from real estate, equipment, or
other assets situated abroad.
1. Definition: National income is the total value of all goods and services produced by a
country's residents within its borders over a specific period, usually a year. It is a key
economic indicator that reflects the overall economic performance of a nation.
2. Components: National income comprises various components, including wages, profits,
rents, and taxes minus subsidies. It can be categorized into gross national income (GNI) and
net national income (NNI), depending on whether depreciation (capital consumption) is
included.
3. Measurement Methods: There are three primary methods for measuring national income:
the production approach, the income approach, and the expenditure approach. Each
method provides a different perspective on the overall economic output of a country.
4. Gross and Net Concepts: Gross national income (GNI) includes all earnings generated by a
country's residents, both domestically and abroad, while net national income (NNI)
deducts depreciation to account for the wear and tear on capital goods.
5. Significance: National income is a crucial economic indicator used for various purposes,
including assessing a country's standard of living, monitoring economic growth,
formulating economic policies, and comparing the economic performance of different
countries. It provides insights into the distribution of income and the overall health of an
economy.
10. What type of deductions are allowed from gross total income?
Deductions from gross total income are provisions in the tax laws that allow individuals and
businesses to reduce their taxable income, thus lowering their overall tax liability. The types of
deductions allowed can vary by country, and specific rules often apply. In India, for example, the
Income Tax Act provides for various deductions from gross total income. Here are common types
of deductions:
1. Section 80C Deductions: Investments and expenditures under Section 80C are eligible for
deductions. This includes contributions to the Public Provident Fund (PPF), Employee
Provident Fund (EPF), life insurance premiums, equity-linked savings schemes (ELSS), and
tuition fees for children's education.
2. Section 80D Deductions: Premiums paid for health insurance policies for self, family, and
parents are eligible for deductions under Section 80D. Additionally, preventive health
check-up expenses can be claimed as deductions.
3. Section 24 Deductions: Interest paid on home loans is eligible for deductions under Section
24. The deduction is available for both the principal repayment (Section 80C) and the
interest component (Section 24) of the home loan.
4. Section 10 Deductions: Certain allowances and exemptions are provided under Section 10
of the Income Tax Act. This includes House Rent Allowance (HRA), Leave Travel Allowance
(LTA), and exemptions for special allowances.
5. Section 80E Deductions: Interest paid on loans taken for higher education is eligible for
deductions under Section 80E. This includes interest on loans for the taxpayer, spouse,
children, or for a student for whom the taxpayer is a legal guardian.
11. Give the tax slabs as per the current finance bill for individual and HUF.
The Central Board of Direct Taxes (CBDT) is a statutory body that functions under the
Department of Revenue in the Ministry of Finance, Government of India. It plays a central role in
the administration of direct taxes in the country.
● Policy Formulation: CBDT formulates policies and procedures for the administration of
direct taxes in India.
● Legislation and Rules: It drafts and amends legislation, including the Income Tax Act, and
formulates rules to guide tax administration.
● Tax Administration: CBDT oversees the functioning of the Income Tax Department, setting
targets for revenue collection and providing guidelines for tax assessment.
● International Taxation: It manages international taxation matters, negotiating Double
Taxation Avoidance Agreements and addressing transfer pricing issues.
● Exemption for Agricultural Income: Income derived from agriculture, including the
cultivation and sale of agricultural produce like coffee and tea, is considered agricultural
income.
● Section 10(1) Exemption: Section 10(1) of the Income Tax Act provides an exemption for
agricultural income. As per this section, agricultural income is not included in the total
income for the purpose of income tax computation.
● No Tax on Agricultural Income: Farmers and agricultural producers are not required to pay
income tax on the agricultural income they earn.
● Nature of the Produce: The exemption is not limited to specific crops. It applies to the
income generated from the cultivation and sale of various agricultural produce, including
coffee and tea.
The determination of Non-Resident Indian (NRI) status is based on the residential status criteria
outlined in the Income Tax Act of India. An individual can be considered an NRI if the following
conditions are met:
15. If any industrial organization grows crops and sells half of the produce as raw material in the
market and remaining (further processed) as finished goods, what will be the tax treatment?
The tax treatment for an industrial organization engaged in both the cultivation and processing of
crops involves consideration of various factors, including the nature of income, deductions, and
applicable tax laws.
16. Mr. Arnav had sold an agricultural land in a rural area, which is outside jurisdiction of the
Municipal Authority. Whether the sales proceeds are exempt or taxable?
The sale of agricultural land in a rural area outside the jurisdiction of a Municipal Authority is
generally considered exempt from capital gains tax in India. The Income Tax Act provides specific
exemptions for capital gains arising from the sale of agricultural land meeting certain criteria.
● Agricultural Land Exemption: As per Section 2(14) of the Income Tax Act, agricultural land
is generally exempt from capital gains tax. However, the exemption is subject to specific
conditions.
● Qualifying Criteria: To qualify for the exemption, the land must be classified as agricultural
land, and the sale proceeds should arise from the transfer of such land. Additionally, the
land should be used for agricultural purposes in the preceding two years.
● Rural Area and Municipal Authority: The exemption is not contingent on the rural or urban
classification but rather on the use of the land for agricultural purposes. If the land is
situated in a rural area and outside the jurisdiction of a Municipal Authority, it is more
likely to meet the criteria for exemption.
● Municipal Authority Jurisdiction: The condition of being outside the jurisdiction of a
Municipal Authority is not explicitly mentioned in the exemption provisions. The key
consideration is the use of the land for agricultural purposes.
18. Give ten instances of income completely exempt from tax giving a brief account of the
conditions, if any, to be fulfilled, in respect of each to be eligible for the exemption.
1. Agricultural Income: Income derived from agricultural operations on land situated in India
is exempt. There are no specific conditions for exemption, but the land must be used for
agricultural purposes.
2. Gifts Received: Gifts received by an individual are tax-exempt. However, gifts exceeding a
certain limit are subject to tax. The exemption applies to gifts received from relatives, on
specified occasions, or as an inheritance.
3. Gratuity: Gratuity received by an employee on retirement or death is exempt, subject to
certain conditions. The exemption is based on a formula involving the last drawn salary and
years of service.
4. Life Insurance Proceeds: Amount received from a life insurance policy, including the sum
assured and bonuses, is exempt from tax. This exemption is applicable for the proceeds
received on the death of the insured.
5. Leave Travel Allowance (LTA): The LTA received by an employee for travel within India is
exempt from tax. The exemption is available for the actual expenses incurred on travel.
6. Interest on PPF and EPF: Interest earned on investments in the Public Provident Fund
(PPF) and Employee Provident Fund (EPF) is exempt from tax, subject to certain conditions
and limits.
7. Scholarships and Awards: Scholarships granted to meet the cost of education are exempt.
Awards received in recognition of literary, scientific, artistic, or sports achievements are
also exempt.
8. Commuted Pension: Amount received as commuted pension is exempt from tax. The
exemption is applicable to government employees and non-government employees.
9. VRS Proceeds: Proceeds received under a Voluntary Retirement Scheme (VRS) are exempt
up to a certain limit. The exemption is available to employees of public sector companies
and other specified entities.
10. Income of Religious and Charitable Trusts: Income of trusts and institutions registered
under Section 10(23C) or Section 12A for religious or charitable purposes is exempt.
Conditions include utilization of income for charitable purposes and compliance with
registration requirements.
Computing total tax liability involves determining the taxable income, applying the applicable tax
rates, and considering deductions and credits.
20. Under How Many Heads the Income of a Taxpayer Is Classified? Explain.
1. Income from Salary: This includes earnings from employment, including basic salary,
allowances, bonuses, and other perks. Employers deduct taxes at source (TDS) on salary
income, and individuals receive Form 16 detailing their income and tax deductions.
2. Income from House Property: This covers income generated from owning a house or
property, such as rental income. The taxable income is calculated after deducting property
taxes paid and standard deductions. Home loan interest is also eligible for deduction.
3. Income from Business/Profession: This head includes income earned from business or
professional activities. Business owners and self-employed professionals calculate their
taxable income after deducting business expenses, depreciation, and other allowable
deductions.
4. Income from Capital Gains: Capital gains arise from the sale of capital assets like real
estate, stocks, or mutual funds. It is categorized into short-term and long-term gains based
on the holding period. Tax rates vary for each category, and exemptions may apply.
5. Income from Other Sources: This includes income that doesn't fall under the above heads,
such as interest income, winnings from lotteries or game shows, and gifts received.
Taxpayers must declare such income and may be eligible for certain exemptions or
deductions.
● Individuals and HUFs: Individuals and Hindu Undivided Families (HUFs) may be subject to
a surcharge if their total income exceeds a certain threshold. The surcharge is computed as
a percentage of the income tax before applying education cess. The surcharge rates can
vary based on income slabs.
● Companies: Companies may also be subject to a surcharge based on their taxable income.
The surcharge is generally a percentage of the income tax before education cess. Different
surcharge rates may apply to domestic companies and foreign companies.
● Capital Gains: In the case of capital gains, the surcharge is often applied if the total income
exceeds a specified threshold. For long-term capital gains, the applicable surcharge is
calculated on the income tax before applying indexation.
● Tax on Distributed Income: Certain specified income distributed by companies (like
dividends or income distributed by mutual funds) may attract a surcharge.
Apply Surcharge:
Surcharge = 15% of INR 30 lakhs = INR 4.5 lakhs.
22. I win a lottery or prize money in a competition. Am I required to pay taxes on it?
If you receive money from winning the lottery, Online/TV game shows etc., it will be taxable under
the head Income from other Sources. The income will be taxable at the flat rate of 30% which after
adding cess will amount to 30.9%
● Individuals: Tax liability is based on residential status, with income calculated across
various heads. Applicable tax slabs and deductions under sections like 80C are considered.
● Hindu Undivided Families (HUFs): Similar to individuals, HUFs determine tax liability
based on residential status, income from various sources, and applicable tax slabs.
● Companies: Tax rates for companies vary based on type (domestic or foreign). Additional
considerations include Minimum Alternate Tax (MAT), Alternate Minimum Tax (AMT), and
Dividend Distribution Tax (DDT).
● Other Entities: Partnerships, LLPs, AOPs, BOIs, and similar entities have specific tax rules.
Tax liability is determined based on income and entity type.
24. "The Income-tax Act gives absolute exemptions in respect of certain income, while some
income is included in the total income for determining the rate only". Discuss.
The Income Tax Act provides for both absolute exemptions and inclusions in total income for
determining the tax rate. These provisions play a crucial role in determining the taxable income of
an assessee. Here's a discussion on both aspects:
Absolute Exemptions:
● Agricultural Income: Income derived from agricultural operations is absolutely exempt
from income tax. This exemption is absolute and is not included in the total income of the
taxpayer.
● Gifts and Inheritances: Gifts received from specified relatives and inheritances are
generally exempt from income tax. These amounts are not included in the total income.
● Proceeds from Life Insurance: The amount received under a life insurance policy, including
the sum assured and bonuses, is exempt from tax. This exemption is absolute and does not
contribute to the total income.
● Certain Allowances and Perquisites: Certain allowances and perquisites, such as the House
Rent Allowance (HRA), Leave Travel Allowance (LTA), and others, may be exempt up to
specified limits.
25. Mrs. A, an Indian citizen, leaves India, for the first time, on September 10, 2010, for the
purpose of employment outside India. Determine her residential status for the assessment year
2019-20.
To determine the residential status of Mrs. A for the assessment year 2019-20, we need to
consider her physical presence in India during the relevant financial year, which is from April 1,
2019, to March 31, 2020. The residential status is determined based on the number of days of stay
in India in the financial year and in the preceding years. The classification includes Resident,
Non-Resident, and Not Ordinarily Resident.
Given that Mrs. A left India for the first time on September 10, 2010, we need to consider her
cumulative stay in India for the relevant financial year and the preceding years.
● Determine the Financial Year in Question: Mrs. A is concerned with the assessment year
2019-20. The relevant financial year for this assessment year is from April 1, 2019, to
March 31, 2020.
● Calculate the Number of Days Stayed in India: Determine the number of days Mrs. A
stayed in India during the financial year 2019-20.
● Consider the Preceding Years: Assess Mrs. A's stay in India during the four financial years
preceding 2019-20. This includes the financial years from 2015-16 to 2018-19.
● Apply Residential Status Criteria: Based on the number of days of stay, Mrs. A can fall into
one of the following categories:
Resident if she is in India for 182 days or more during the financial year.
Non-Resident if she is in India for less than 182 days during the financial year.
Not Ordinarily Resident (NOR) if she is a Resident and has been a Non-Resident in
9 out of 10 preceding financial years or has been in India for 729 days or less in the
preceding seven financial years.
26. What are the different categories of assessees according to their residential status?
Resident:
- An individual is considered a resident if either of the following conditions is met:
- The individual is in India for 182 days or more in the financial year (April 1 to March 31).
- The individual is in India for 60 days or more in the financial year and 365 days or more in
the four financial years immediately preceding the relevant financial year.
Non-Resident:
- An individual is considered a non-resident if they do not meet any of the conditions
mentioned above for resident status.
27. The dividend is declared and paid outside India. Discuss the tax liability on the transaction
according to lndian income-tax on these dividends?
● Resident Individuals: Resident and Ordinary Residents (ROR) are taxed on global income,
including foreign dividends. Resident but Not Ordinarily Residents (RNOR) may not be
taxed on dividends from foreign sources.
● Non-Resident Individuals: Non-resident individuals are generally taxed on income earned
or received in India, and foreign dividends may not be taxable.
● Companies: Domestic companies are taxed on global income, including foreign dividends.
Foreign companies are typically taxed on income earned in India, and foreign dividends
may not be taxable.
● Double Taxation Avoidance Agreements (DTAA): DTAA provisions may affect the taxation
of foreign dividends to avoid double taxation.
30. Can I claim deduction for my personal and household expenditure in calculating my income
or profit?
No, in general, personal and household expenditures are not eligible for deduction while
calculating your income or profit for income tax purposes. The Income Tax Act typically allows
deductions for specific expenses that are incurred for the purpose of earning income or running a
business.
31. Write a note on computation of income in case of a house property which is in business or
profession of the assessee?
● Rental Income: Rental income is included in the business or profession income, with
deductions available under Section 24 for standard deduction and housing loan interest.
● Self-Occupied Property: Notional rental value of a self-occupied property used for
business is considered as income from house property, eligible for deductions.
● Interest on Housing Loan: Deductible under Section 24(b) if the loan is used for
construction, acquisition, repair, or renovation.
● Loss Set-off: Loss from the property can be set off against other income or carried forward.
● Maintenance Expenses: Deductions can be claimed for maintenance and repair expenses
related to the property.
32. What is capital gain? Explain long term capital gains and how is it different from short term
capital gains?
Capital gains refer to the profits earned from the sale of capital assets such as real estate, stocks,
or other investments. Capital gains are categorized into two main types: long-term capital gains
(LTCG) and short-term capital gains (STCG), each with its own set of tax implications.
33. What are the deductions under Salary Head? Name the items?
1. Standard Deduction (Section 16): Fixed deduction (e.g., Rs. 50,000 for the assessment year
2022-23).
2. Professional Tax (Section 16): Deduction for professional tax paid to the state government.
3. Entertainment Allowance (Section 16): Government employees get a deduction on
entertainment allowance.
4. Transport Allowance (Section 10): Exemption for transport allowance, subject to
conditions (as of April 1, 2018, not applicable).
5. House Rent Allowance (HRA) (Section 10(13A)): Exemption for HRA, subject to specified
conditions and limits.
6. Leave Travel Allowance (LTA) (Section 10(5)): Exemption for travel expenses within India,
subject to conditions and limits.
7. Gratuity (Section 10(10)): Exemption for gratuity received by employees, up to a certain
limit.
34. Define Capital Assets? What is not considered as transfer of Capital Asset?
Capital assets refer to property held by a person, including individuals, companies, or any other
entity, typically for the purpose of investment or personal use. Examples of capital assets include
real estate, stocks, bonds, jewelry, and other valuable possessions.
35. What is the difference between profit and gain, give examples also?
36. What is Entertainment Tax? Is there any Exemption related to Entertainment Tax?
Entertainment tax is a levy imposed on revenue from entertainment events like movies, shows,
and amusement parks, contributing to cultural and recreational funding.
Exemptions:
- Educational or non-profit events.
- Government-sponsored cultural activities.
- Artistic, cultural, or charitable performances.
- Events for social causes or awareness.
- Religious events.
- Specific categories of socially relevant movies.
- Film festivals promoting cultural exchange.
- Local performances contributing to cultural development.
37. What are the types of Provident funds? What are the tax implications of different types of
Provident Fund?
Tax Implications:
39. Write any five items under section 80 C of Income Tax Act, 1961.
1. Employee Provident Fund (EPF): Contributions made to the EPF by both the employee and
employer are eligible for deductions under Section 80C.
2. Public Provident Fund (PPF): Contributions made to the PPF account are eligible for
deductions under Section 80C, subject to specified limits.
3. Life Insurance Premiums: Premiums paid for life insurance policies for oneself, spouse, and
children are eligible for deductions under Section 80C.
4. Equity-Linked Savings Schemes (ELSS): Investments made in ELSS mutual funds, which are
equity-linked tax-saving instruments, qualify for deductions under Section 80C.
5. National Savings Certificate (NSC): Investments made in NSCs are eligible for deductions
under Section 80C, providing a safe avenue for saving with tax benefits.
Direct Taxes: Direct taxes are imposed directly on individuals or entities, and the burden cannot be
shifted. These include income tax, corporate tax, and wealth tax. The taxpayer pays these taxes
directly to the government.
Indirect Taxes: Indirect taxes are imposed on goods and services, allowing the burden to be shifted.
Examples include GST, excise duty, and customs duty. An intermediary initially pays these taxes,
but the economic impact may fall on the end consumer.
41. How many heads are there under total income? Name them.
1. Income from Salary: Income earned through employment, including wages, salary, bonuses,
commissions, and allowances.
2. Income from House Property: Income generated from owning and renting out a property,
whether residential or commercial.
3. Profits and Gains of Business or Profession: Income derived from business activities, trade, or
profession, including self-employment.
4. Capital Gains: Income arising from the sale or transfer of capital assets such as real estate,
stocks, or other investments.
5. Income from Other Sources: Income that does not fall under the above heads, including
interest income, dividends, rental income not covered under house property, etc.
42. What is Advance Tax? How to Calculate & Pay Advance Tax?
Advance tax is the amount of income tax that is paid much in advance rather than a lump-sum
payment at the year-end. Also known as earn tax, advance tax is to be paid in installments as per
the due dates decided by the income tax department.
43. Who should pay Advance Tax? Due Dates for payment of Advance Tax?
As per section 208 of the Income Tax Act 1961, every person whose estimated tax liability for the
year is more than or equal to 10,000 is liable to pay advance tax. Those who are excluded from
paying advance tax are senior citizens who are above the age of 60, not having any income from
business or profession.
44. Discuss the provisions/rules regarding set-off and carry forward and set-off of business
losses.
1. Set-off of Business Losses: Losses can be set off within the same head of income or against
income from other heads, subject to certain restrictions.
2. Carry Forward of Business Losses: Unabsorbed business losses can be carried forward for up to
eight assessment years.
3. Conditions: Continuity of business, filing returns on time, and preserving books of accounts are
essential for set-off and carry forward.
4. Changes in Law: Tax laws may be amended, so businesses should refer to the latest provisions.
5. Set-off Against Agricultural Income: Business losses cannot be set off against agricultural
income.
46. What is TDS? What is TDS Certificate? When TDS should be deducted?
The concept of TDS was introduced with an aim to collect tax from the very source of income. As
per this concept, a person (deductor) who is liable to make payment of specified nature to any
other person (deductee) shall deduct tax at source and remit the same into the account of the
Central Government. The deductee from whose income tax has been deducted at source would be
entitled to get credit of the amount so deducted on the basis of Form 26AS or TDS certificate
issued by the deductor.
A TDS certificate is a document issued by the deductor to the deductee as proof of the TDS
deducted and deposited with the government. There are different types of TDS certificates based
on the nature of income, such as Form 16 for salary income and Form 16A for non-salary
payments.
- Salary Payments: Employers deduct TDS from the salary paid to employees.
- Interest Payments: TDS is deducted on interest payments made by banks, financial
institutions, or others.
- Rent Payments: TDS is deducted on rent payments above a specified limit.
- Professional Fees: TDS is deducted on payments made for professional or technical
services.
- Commission Payments: TDS is deducted on commission payments.
47. Explain the provisions of TDS for salary and interest on securities.
48. Can a return submitted by the assessee be revised? If so, what are the circumstances under
which it can be revised?
Yes, a return submitted by the assessee can be revised under Section 139(5) of the Income Tax Act.
The circumstances for revision include the discovery of mistakes or omissions. The revised return
must be filed within the specified time frame, generally before the end of the relevant assessment
year or before the completion of the assessment, whichever is earlier. The option for revision is
available before the original return is processed, and the revised return should be submitted using
the appropriate form on the income tax e-filing portal.
If an income is exempt from tax, then it is not included in the computation of income. However, the
deduction is given from income chargeable to tax. Exempt income will never exceed the amount of
income. However, the deduct may be less than or equal to or more than the amount of income.
Q. Explain following terms in brief Financial Year, Previous Year, Assessee and Assessment Year
● Financial year - The financial year is the year in which you have earned the income. It starts
on the 1st of April of the calendar year & ends on the 31st of March of the next calendar
year.
● Previous year - The financial year immediately preceding the assessment year
● Assessee - As per S. 2(7) of the Income Tax Act, 1961, unless the context otherwise
requires, the term “assessee” means a person by whom any tax or any other sum of money
is payable under this Act
● Assessment year - Assessment year means the period starting from April 1 and ending on
March 31 of the next year.
Yes, in India, taxpayers can claim a refund for overpaid taxes. File your income tax return
accurately, ensuring correct bank details. After verification, the Income Tax Department processes
the return, and if eligible, a refund is issued directly to the taxpayer's bank account. Track the
refund status online and contact the Income Tax Department if there are issues or delays.
Marginal relief is a provision in the income tax system designed to provide relief to taxpayers
when the tax liability is disproportionately high due to certain factors like an abrupt increase in
income. This relief is commonly applied in cases where the taxpayer's income exceeds a certain
limit, leading to a steep rise in the applicable tax rate.
● Calculate Regular Tax Liability: Determine the tax liability based on the regular tax
computation, considering the applicable tax rates and income slabs.
● Calculate Marginal Relief Amount: Compute the additional tax liability due to the marginal
increase in income that triggered a higher tax rate.
● Apply Marginal Relief Formula: Use a predetermined formula to calculate the marginal
relief amount. This formula is typically designed to moderate the impact of the abrupt
increase in tax liability.
● Adjust Tax Liability: Subtract the calculated marginal relief amount from the regular tax
liability. The result is the adjusted tax liability after considering marginal relief.
Module 4
2. Who are the persons to be considered as distinct persons under the concept of GST?
- Separate Business Verticals: Different GST registrations for distinct business verticals
within the same state or Union territory.
- Multiple Registrations in Different States: Separate GST registrations for operations in
different states or Union territories.
- Branches and Head Office: Each branch with a separate GST registration and the head
office.
- Entities Under Common Control: Different entities under common management or
control.
3. Who are the persons to be considered as related persons under the concept of GST?
- Officers or Directors: Persons who are officers or directors of one another's businesses.
- Partnerships: Persons who are legally recognized as partners in business.
- Employer and Employee: An employer and an employee are considered related persons.
- Principal and Agent: A principal and an agent acting on behalf of the principal in business
transactions.
- Members of Family: Persons who are related by blood or marriage.
- Complexity in Multiple Slabs: Having multiple tax slabs can make the system complex, and
businesses may find it challenging to classify goods and services correctly.
- Compliance Burden: The compliance process involves detailed documentation and regular
filing, which can be burdensome for small businesses.
- Technology Challenges: Small businesses may face challenges in adopting and adapting to
the required technology for GST compliance.
- Transition Issues: The transition from the previous tax regime to GST posed challenges,
and some businesses experienced difficulties in the initial implementation phase.
- Simplified Tax Structure: Replaces multiple indirect taxes with a unified tax system,
reducing complexity.
- Uniform Tax Rates: Aims for uniform tax rates across the country, promoting ease of doing
business.
- Elimination of Cascading Effect: Reduces the cascading effect of taxes, as GST is applied
only on the value addition at each stage.
- Input Tax Credit (ITC): Allows businesses to claim credit for taxes paid on inputs, promoting
efficiency and reducing the overall tax burden.
- Wider Tax Base: Expands the tax base by including previously untaxed sectors, increasing
government revenue.
Integrated Goods and Services Tax (IGST) is a pivotal aspect of India's GST system, designed for
transactions occurring between different states or Union Territories. It serves as a single tax
collected by the central government, simplifying the taxation process for inter-state supplies. The
revenue generated from IGST is distributed between the central and state governments through
the Integrated GST mechanism.
State Goods and Services Tax (SGST) is a vital element of India's GST system, applying to
transactions conducted within a specific state or Union Territory. The revenue collected goes
directly to the respective state government, supporting local development initiatives. SGST rates
are determined by the GST Council, providing states with flexibility.
GST replaces several indirect taxes, including Central Excise Duty, Service Tax, Additional Customs
Duty, Value Added Tax (VAT), Central Sales Tax, Entertainment Tax, Luxury Tax, Entry Tax, Octroi,
and other local taxes.
Module 5
Microcredit refers to very small loans for unsalaried borrowers with little or no collateral,
provided by legally registered institutions. Currently, consumer credit provided to salaried
workers based automated credit scoring is usually not included in microcredit.
Microfinance refers to micro credit, small savings, insurance and money transfers of poor and low
income people. Microfinance is a broad category of financial services which includes microcredit
also.
2. What are the objective of Microfinance?
3. What are the different types of institutions that offer Microfinance in India?
Microfinance is often defined as financial services for poor and low-income clients offered by
different types of service providers. The term is often used more narrowly to refer to loans
and other services from providers that identify themselves as “microfinance institutions”
(MFIs).
Microfinance institutions commonly tend to use new methods developed include, group
lending and liability, pre-loan savings requirements, gradually increasing loan sizes, and an
implicit guarantee of ready access to future loans if present loans are repaid fully and
promptly.
● Joint Liability Group (JLG):
- Formation: Individuals join together for a common economic purpose, often for
microfinance services.
- Liability: Members share joint liability for the repayment of loans taken by any
individual member.
- Size: Small groups typically comprising 4 to 10 members.
- Purpose: Mainly for availing microfinance services, such as small loans for
income-generating activities.
- Facilitator Role: Facilitated by microfinance institutions or banks.
● Grameen Model:
Group lending is a microfinance approach where small groups of individuals, often with similar
socio-economic backgrounds, collectively borrow and support each other. The group is jointly
responsible for loan repayment, and members provide mutual assistance and encouragement.
Effectiveness:
- Tailoring Products: Designing products that meet the specific needs of borrowers.
- Financial Literacy: Providing comprehensive financial education to enhance borrowers'
understanding.
- Technology Integration: Leveraging technology for efficient loan disbursement, repayment,
and monitoring.
- Risk Management: Implementing effective risk assessment and management strategies to
reduce default rates.
- Diversified Services: Offering a range of financial services beyond credit, such as savings
and insurance.
- Social Impact Measurement: Regularly assessing and measuring the social impact of
microfinance interventions.
- Capacity Building: Providing ongoing training and support to enhance borrowers' business
and financial management skills.
10. What is the extent of success of microfinance in poverty alleviation and economic
development?
Poverty Alleviation:
Economic Development:
- Financial Inclusion: Microfinance has successfully expanded financial inclusion for women,
providing them with access to financial services such as credit, savings, and insurance. This
inclusion empowers women to manage their finances independently.
- Entrepreneurship and Income Generation: Microfinance has enabled women to start and
expand small businesses. By providing access to credit, women can engage in
income-generating activities, fostering economic independence and contributing to
household income.
- Skill Development and Training: Many microfinance programs incorporate skill
development and training components. Women borrowers receive training in financial
literacy, business management, and other relevant skills, enhancing their capabilities and
confidence.
- Empowerment in Decision-Making: Economic empowerment through microfinance often
translates into greater decision-making power for women within their households. Women
gain a voice in financial matters, contributing to a shift in traditional gender roles.
- Asset Ownership: Microfinance loans often support women in acquiring assets such as
livestock, equipment, or inventory for their businesses. This ownership enhances women's
economic standing within their households and communities.
Economic Viability:
- Interest Rates: Balancing rates is crucial for covering costs without causing
over-indebtedness.
- Financial Sustainability: Generating revenue to cover costs and potential losses ensures
long-term viability.
- Diversification: Offering various financial products beyond microcredit contributes to
economic sustainability.
Operational Viability:
13. How far do you agree that micro-finance can empower women? Discuss with reference to
examples.
- Financial Access: Microfinance provides women with small loans for entrepreneurship.
- Entrepreneurship Development: Enables women to start businesses, fostering economic
independence.
- Improved Living Standards: Increased income from microfinance positively impacts
education, healthcare, and living conditions.
- Savings Empowerment: Microfinance institutions offer savings, helping women
accumulate funds and build assets.
- Social Impact: Challenges traditional gender roles, promoting equitable distribution of
responsibilities.
15. Explain the process of team development in Self Help Group (SHG).
- Formation: Identify members with similar backgrounds and Convene a meeting to explain
SHG purpose and benefits.
- Training and Orientation: Provide capacity building and skill development workshops.
- Social Mobilization: Build trust through regular interactions and Foster a supportive
environment for members.
- Norms and Rules: Establish group norms and leadership structure.
- Regular Meetings: Hold frequent meetings to discuss group matters and Conduct financial
transactions during meetings.
- Microcredit and Savings: Encourage regular savings contributions and Disburse
microcredit for income-generating activities.
- Problem-Solving: Encourage open dialogue and address conflicts.
- Leadership Structure: Establish clear roles and responsibilities and Rotate leadership
positions for equal participation.
- Decision-Making: Promote inclusive decision-making within the group and Implement
democratic processes for consensus.
- Record Keeping: Maintain accurate records of financial transactions and Document
meeting minutes and group decisions.
- Conflict Resolution: Develop mechanisms for conflict resolution and Encourage open
communication to address disputes.
- Monitoring and Evaluation: Regularly assess group activities and progres and Use
feedback for continuous improvement.
17. List the indicators for Good Self Help Group (SHG)
● Formation:
○ Individuals with similar socio-economic backgrounds come together voluntarily.
○ A meeting is held to explain SHG objectives and encourage participation.
● Financial Operations:
○ Regular meetings involve financial transactions like savings collection and loan
disbursement.
○ Savings contribute to a common fund, and small loans are provided for
income-generating activities.
● Formation:
○ Small groups of individuals with similar economic activities voluntarily form a Joint
Liability Group (JLG).
○ Typically, 4-10 members, often engaged in similar livelihoods.
● Liability Sharing:
○ Members share collective responsibility and liability for each other's loans.
○ Group solidarity is a key feature, encouraging mutual support.
● Credit Access:
○ JLGs access small loans collectively, eliminating the need for individual collateral.
○ Loans are typically used for income-generating activities.
● Group Dynamics:
○ Regular meetings are held to discuss loan utilization and repayment schedules.
○ Group cohesion is emphasized to ensure mutual trust and support.
● Risk Mitigation:
○ JLGs facilitate risk-sharing among members, enhancing the chances of successful
loan repayment.
○ Peer pressure and mutual accountability act as incentives for responsible financial
behavior.
● Formation:
○ Founded by Muhammad Yunus in Bangladesh, the Grameen Bank focuses on
providing financial services to the poor.
○ Operates on the principle of microcredit to alleviate poverty.
● No Collateral Requirement:
○ Grameen Bank does not require traditional collateral for loans.
○ Trust-based lending relies on the strength of social ties within the community.
● Microenterprise Development:
○ Loans are often directed towards microenterprises, empowering borrowers to
generate income.
○ Encourages entrepreneurship, particularly among women.
- Entrepreneurs and Small Business Owners: Individuals running small businesses seek
microfinance for funding and expansion.
- Women: Microfinance programs often empower women through financial inclusion.
- Rural and Agricultural Communities: Residents in rural areas, especially in agriculture,
access microfinance for farming and related activities.
- Informal Sector Workers: Workers in the informal sector, like day laborers, benefit from
microfinance for financial needs.
- Micro-entrepreneurs: Small shop owners use microfinance for business operations.
The Joint Liability Group (JLG) is typically formed by small groups of individuals, ranging from 4 to
10 members, who share similar economic activities or livelihoods. These individuals voluntarily
come together to collectively apply for and manage loans, sharing responsibility and liability for
each other's repayments. JLGs are often formed in rural or semi-urban areas, comprising
members engaged in similar professions or businesses, such as farming, handicrafts, or small
businesses.
23. What is the difference between Joint Liability Group (JLG) and Self Help Group (SHG)?
24. How are MFIs Funded?
- High Operating Costs: MFIs often face challenges associated with high operating costs,
including expenses related to staff, infrastructure, and technology.
- Interest Rate Regulation: Regulatory restrictions on interest rates can impact the financial
sustainability of MFIs, limiting their ability to cover costs and generate surpluses.
- Credit Risk and Delinquency: Managing credit risk is a significant challenge, especially
when dealing with clients who may have limited credit histories and face economic
uncertainties.
- Competition from Informal Sources: Informal lending sources, such as moneylenders, can
pose competition to MFIs, as they may offer quicker and easier access to funds without the
regulatory constraints faced by MFIs.
- Over-Indebtedness of Borrowers: Overborrowing by clients from multiple MFIs or
informal sources can lead to a cycle of debt, affecting their financial well-being and posing
challenges for MFIs in ensuring responsible lending.
Demand:
- Financial Inclusion Needs: Large segments of the population lack access to formal banking
services, creating a substantial demand for microfinance to address financial inclusion
needs.
- Entrepreneurial Initiatives: Increasing entrepreneurial activities, especially in the informal
sector, drive demand for microfinance to support small businesses and income-generating
activities.
- Empowerment of Women: The focus on women's empowerment through economic
activities contributes to the demand for microfinance services, as many programs target
women entrepreneurs.
- Rural and Semi-Urban Development: In rural and semi-urban areas, where traditional
banking infrastructure is limited, there is a significant demand for microfinance to spur
economic development.
- Job Creation and Livelihoods: Microfinance is sought after to create job opportunities and
improve livelihoods, particularly in regions with high levels of unemployment or
underemployment.
Supply: