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State Board · Class 9 · Mathematics Part 1

Lesson 6: Financial Planning

4 concepts · 32 practice questions with answers · Free to read

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Savings, investment and financial planning

From daily life

For a fair or a new computer we save money bit by bit. If we keep aside ₹100 every month, we have ₹1200 in a year. Even if a doctor's bill suddenly comes, there is money in hand.

Simple definition

The money left after spending on necessities is savings. Keeping savings in a bank, post office, shares or land is investment. Planning income, expenses, savings and investment in advance is financial planning. Its aim is to protect and grow wealth.

Examples of predictable and unpredictable expensesTwo kinds of expenses in lifePredictable expensesUnpredictable expenses• Children's education• Capital for a business• Buying a vehicle• Buying / building a house• Provision for old age• Natural disasters• Medical expense of a family member• Loss due to an accident• Sudden death

In the figure: On the left are expenses we can predict and on the right are expenses that come suddenly. We must plan for both.

Rule 1: Savings = income − expenses — Spend on needs first; what is left is savings. If expenses are given in percent, savings percent = 100 − expense percent.

  • Easy: Monthly income ₹18,000 and expenses ₹15,500: savings = 18,000 − 15,500 = ₹2,500.
  • Medium: Anita earns ₹24,000 and spends 80%. Savings = 100 − 80 = 20%. 20% of 24,000 = 24,000 × 20 ÷ 100 = ₹4,800.
Income minus insurance, provident fund and emergency fund leaves the amount for expensesPlanning an annual income of ₹5,00,000Insurance premiums₹ 18,000Provident fund (12%)₹ 60,000Emergency fund₹ 4,800Left for the year's expenses₹ 4,17,200

In the figure: Annual income ₹5,00,000: insurance premiums 1,500 × 12 = 18,000; provident fund 12% = 60,000; emergency fund 400 × 12 = 4,800. The remaining ₹4,17,200 is for the year's expenses.

  • Exam type: Annual income ₹5,00,000. Planned amounts: 18,000 + 60,000 + 4,800 = ₹82,800. Left for the year's expenses = 5,00,000 − 82,800 = ₹4,17,200.

Rule 2: Identify predictable and unpredictable expenses — Costs of education, a house, a vehicle, a business and old age are known in advance. Disasters, illness and accidents come suddenly.

  • Easy: Children's school fees: a predictable expense.
  • Medium: Damage to a vehicle in an accident: an unpredictable expense.
  • Exam type: (a) buying land for a house, (b) crop loss due to a flood, (c) expenses after retirement, (d) a sudden hospital bill. Predictable: (a) and (c). Unpredictable: (b) and (d).

Rule 3: Look at both risk and gain when investing — Money is safe in a bank or post office, but the gain is smaller. Shares and mutual funds can give a bigger gain, but they can also give a loss.

Risk and possible gain rise from savings accounts to sharesMore risk can mean more possible gainSavingsaccountFixeddepositPost office /PPFMutualfundShareslow riskhigh risk

In the figure: From left to right the risk rises and so does the possible gain. That is why all the money should not go into one risky place.

  • Easy: Bank fixed deposit: low risk, a fixed but smaller gain.
  • Medium: Shares: a gain if the company makes a profit, a loss if it makes a loss. So the risk is higher.
  • Exam type: A farmer needs sure money for his daughter's education after 2 years: a fixed deposit is safe. If he can wait long and accept some risk, a mutual fund can be considered.
Remember

Savings are invested so that they stay safe and grow. Look at both risk and gain when investing.

Common mistake

Keeping cash at home as it is. With time the same money buys fewer things, and there is a fear of theft too.

Shortcut

As soon as income arrives, first set aside the planned savings and then spend. Memory clue: "Save first, spend later"; set aside the saving percentage as soon as you are paid.

Spot the difference

Bank / post office (fixed deposit, savings account)Shares / mutual funds
Risklowhigh
Gainsmaller but fixedcan be bigger
Lossusually nonepossible

Practice questions

Easy
  1. 1If monthly income is ₹30,000 and expenses are ₹26,500, how much is the saving?
  2. 2Is "expenses after retirement" a predictable or an unpredictable expense?
  3. 3Which has lower risk: a bank fixed deposit or shares?
Medium
  1. 4Ravi spends 70% of his income and saves ₹9,000. What is his income?
  2. 5Group as predictable and unpredictable: (a) a son's college fees, (b) house damage in a storm, (c) buying a new two-wheeler, (d) a sudden operation.
  3. 6Annual income ₹4,80,000. Provident fund 10%, insurance premiums ₹2,000 a month and an emergency fund of ₹500 a month. How much is left for the year's expenses?
Challenging
  1. 7Shobha saves 25% of her income. If her monthly income is ₹36,000, how much does she save in a year?
  2. 8Today ₹40 buys 4 pencils. After some years the same money buys 2 pencils. By what percent has the value of money fallen?
Show answers (try them yourself first)
  1. 130,000 − 26,500 = ₹3,500. 2) Predictable. 3) The fixed deposit.
  2. 4Savings = 100 − 70 = 30% = ₹9,000. Income = 9,000 ÷ 30 × 100 = ₹30,000. 5) Predictable: (a) and (c). Unpredictable: (b) and (d). 6) Provident fund 48,000; insurance 2,000 × 12 = 24,000; emergency 500 × 12 = 6,000. Total 78,000. Left = 4,80,000 − 78,000 = ₹4,02,000.
  3. 7Monthly saving 36,000 × 25 ÷ 100 = 9,000. Yearly saving 9,000 × 12 = ₹1,08,000. 8) 2 pencils out of 4 are lost, which is half. 2 ÷ 4 × 100 = 50%.

Investment calculations: percentages, compound interest and ratio

From daily life

Two friends invested money on the same day. After a year one gained ₹600 and the other ₹510, but the first had invested ₹2,000 and the second ₹1,500. In percent we can see who gained more: 30% and 34%.

Simple definition

Percent gain = gain ÷ amount invested × 100. In compound interest the interest earned each year is added to the principal for the next year. Amount = principal × (1 + rate ÷ 100) multiplied as many times as there are years; interest = amount − principal.

Rule 1: Find income or savings from percentages — Add up all the expense percents. Subtracting from 100 gives the savings percent. The given amount belongs to that percent.

Live figure

Investment calculations: percentages, compound interest and ratio

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  • Easy: Income ₹20,000, spending 75%: savings 25% = 20,000 × 25 ÷ 100 = ₹5,000.
  • Medium: Sneha spends 60% and gives 10% to a social cause. ₹4,500 is left. The rest is 100 − 70 = 30%. 30% = 4,500 ⇒ income = 4,500 ÷ 30 × 100 = ₹15,000.
  • Exam type: Ravi used 30% for rent, 25% for food, 10% for education and 15% for investment. ₹8,000 is left. Total 30 + 25 + 10 + 15 = 80%; the remaining 20% = 8,000 ⇒ income = 8,000 × 100 ÷ 20 = ₹40,000.

Rule 2: Compound interest: multiply by (1 + rate ÷ 100) every year — At a 10% rate the amount is multiplied by 1.1 each year. Interest = amount − principal.

Both are equal in year 1; later the compound-interest amount grows more₹10,000 at 10%: simple and compound interest11,00011,0001 year12,00012,1002 years13,00013,3103 yearsSimple interest: amountCompound interest: amountBars in the figure are measured from ₹10,000

In the figure: In the first year both amounts are equal. From the second year compound interest earns interest on the earlier interest too, so the amount grows more.

Live figure

Investment calculations: percentages, compound interest and ratio

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  • Easy: ₹10,000, 10%, 2 years: amount = 10,000 × 1.1 × 1.1 = 12,100. Interest = 12,100 − 10,000 = ₹2,100.
  • Medium: ₹25,000, 8%, 2 years: amount = 25,000 × 1.08 × 1.08 = 29,160. Interest = 29,160 − 25,000 = ₹4,160.
  • Exam type: ₹50,000 in a bank at 6% compound interest for 2 years: amount = 50,000 × 1.06 × 1.06 = 56,180; interest 6,180; gain 6,180 ÷ 50,000 × 100 = 12.36%. ₹40,000 in a mutual fund returned ₹45,200 after 2 years: gain 5,200; 5,200 ÷ 40,000 × 100 = 13%. Since 13% > 12.36%, the mutual fund was more profitable.
12.36% gain in the bank and 13% gain in the mutual fundWhich investment gave more gain? (percent)Bank (compound)12.36%Mutual fund13%

In the figure: Because the amounts differ, do not compare using rupees alone. In percent the difference is clear: 13% (mutual fund) against 12.36% (bank).

Rule 3: Share an amount by a ratio or find income and expenses — Multiply the parts of the ratio by one letter (say x). All the parts together equal the total amount.

Live figure

Investment calculations: percentages, compound interest and ratio

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  • Easy: A profit of ₹30,000 is to be invested in a fixed deposit and shares in the ratio 2 : 1. Total parts 3. Fixed deposit 30,000 ÷ 3 × 2 = 20,000; shares ₹10,000.
  • Medium: ₹1,50,000 is to be shared in the ratio 3 : 2. Total parts 5; one part is 30,000. The larger share is ₹90,000 and the smaller is ₹60,000.
  • Exam type: The ratio of Meera's income to expenses is 7 : 5 and her monthly saving is ₹6,000. Income 7x, expenses 5x; saving 7x − 5x = 2x = 6,000 ⇒ x = 3,000. Income ₹21,000 and expenses ₹15,000.
Remember

Percent gain is always worked out on the amount invested: gain ÷ amount invested × 100.

Common mistake

Mixing up "amount" and "interest" in compound interest. Amount = principal + interest; interest = amount − principal.

Shortcut

Multiply by 1.1 for 10%, 1.05 for 5% and 1.08 for 8%. Memory clue: Compound: "rate + 100 = multiplier"; for 10 % it is 110 ÷ 100 = 1.1.

Spot the difference

Simple interestCompound interest
Interest onoriginal principal every yearthe grown amount every year
Amount after 2 years (₹10,000, 10%)₹12,000₹12,100
Growthsame every yearmore every year

Practice questions

Easy
  1. 1If income is ₹40,000 and spending is 60%, how much is saved?
  2. 2₹8,000 is kept for 2 years at 10% compound interest. What is the total amount?
  3. 3A profit of ₹45,000 is to be invested in a fixed deposit and shares in the ratio 2 : 3. How much goes into each?
Medium
  1. 4Meena spends 70% and gives 5% to a social cause. She is left with ₹7,500. What is her income?
  2. 5₹20,000 is kept at 5% compound interest for 2 years. How much is the interest?
  3. 6₹60,000 was invested and ₹72,000 was received after 2 years. What is the percent gain?
Challenging
  1. 7A kept ₹50,000 in a bank at 12% compound interest for 2 years. B invested ₹80,000 in a mutual fund and received ₹1,00,800 after 2 years. Whose gain is greater?
  2. 8The ratio of Seema's income to expenses is 4 : 3. If her monthly saving is ₹2,500, find her income and expenses.
Show answers (try them yourself first)
  1. 1Spending 60% ⇒ savings 40%. 40,000 × 40 ÷ 100 = ₹16,000. 2) 8,000 × 1.1 × 1.1 = ₹9,680. 3) Total parts 5; one part is 9,000. Fixed deposit ₹18,000 and shares ₹27,000.
  2. 4The rest is 100 − 75 = 25% = 7,500. Income = 7,500 × 100 ÷ 25 = ₹30,000. 5) Amount = 20,000 × 1.05 × 1.05 = 22,050. Interest = 22,050 − 20,000 = ₹2,050. 6) Gain = 72,000 − 60,000 = 12,000. 12,000 ÷ 60,000 × 100 = 20%.
  3. 7A: 50,000 × 1.12 × 1.12 = 62,720; gain 12,720; 12,720 ÷ 50,000 × 100 = 25.44%. B: gain 1,00,800 − 80,000 = 20,800; 20,800 ÷ 80,000 × 100 = 26%. B's gain is greater. 8) Income 4x, expenses 3x; saving x = 2,500. Income ₹10,000 and expenses ₹7,500.

Taxes and income tax terms

From daily life

Roads to school, water supply, the police and the army need a lot of money. The government collects it from people as various taxes. There are taxes in the price of goods in a shop and also on the salary we earn.

Simple definition

The money the government collects from people for development work is called tax. The person who pays tax is the taxpayer. The tax paid on income received is income tax.

Examples of direct and indirect taxesTypes of taxesTaxesDirect taxesIndirect taxespaid by the taxpayer himselfcollected through prices• Income tax• Wealth tax• Professional tax• Sales tax / VAT• Service tax• Excise duty• Customs duty• GST

In the figure: A tax paid directly by the taxpayer is a direct tax; a tax collected through the price of goods or services is an indirect tax.

Rule 1: Identify direct and indirect taxes — Ask, "Do I pay it myself on my income?" If yes, it is a direct tax; if not and it is built into the price, it is indirect.

  • Easy: Income tax: a direct tax.
  • Medium: Customs duty: an indirect tax, because it comes in the price of the goods.
  • Exam type: (a) professional tax, (b) GST, (c) wealth tax, (d) excise duty. Direct: (a), (c). Indirect: (b), (d).

Rule 2: Financial year and assessment year — 1 April to 31 March is the financial year. Income is earned in it. The next year is the assessment year, in which the tax on last year's income is worked out.

1 April to 31 March is the financial year and the year after it is the assessment yearFinancial year and assessment yearFinancial year 2019-20income is earnedAssessment year 2020-21tax on last year's income is worked out1 Apr 201931 Mar 20201 Apr 202031 Mar 2021

In the figure: The tax on income earned in the financial year 2019-20 is worked out in the assessment year 2020-21.

  • Easy: The assessment year for the financial year 2019-20 is 2020-21.
  • Medium: If the assessment year is 2023-24, the financial year in which the income was earned is 2022-23.
  • Exam type: The income was received on 15 August 2020. The financial year starts on 1 April 2020, so it falls in the financial year 2020-21. Its assessment year is 2021-22.

Rule 3: Taxable income = total income − deductions — Under sections 80C, 80D and 80G some investments and donations can be deducted from total income. Tax is levied only on the remaining taxable income. The maximum under section 80C is ₹1,50,000.

Investments under section 80C and the ₹1,50,000 limitSection 80C: maximum deduction ₹1,50,000Provident fund (GPF)Public Provident Fund (PPF)Life insurance premiumNational Savings Certificate (NSC)Sukanya Samruddhi schemeHome-loan principalTuition fees of childrenMutual fund (certain schemes)Together these can be deducted only up to ₹1,50,000

In the figure: Many investments come under 80C, but their total deduction cannot go above ₹1,50,000.

  • Easy: Total income ₹7,00,000; investment under 80C ₹1,20,000. Taxable income = 7,00,000 − 1,20,000 = ₹5,80,000.
  • Medium: Total income ₹8,00,000; PPF 90,000 and insurance 80,000 make 1,70,000. But the 80C limit is 1,50,000, so only 1,50,000 is deducted. Taxable income = 8,00,000 − 1,50,000 = ₹6,50,000.
  • Exam type: Total income ₹9,20,000; PPF 60,000 + life insurance 55,000 + NSC 30,000 = 1,45,000 (within the limit). Donation to the Chief Minister's Relief Fund (80G) 15,000. Deductions 1,45,000 + 15,000 = 1,60,000. Taxable income = 9,20,000 − 1,60,000 = ₹7,60,000.
Remember

Tax is levied on taxable income, not on total income. Income from agriculture is exempt from tax.

Common mistake

Deducting all 80C investments in full. The deduction is allowed only up to ₹1,50,000.

Shortcut

First add up the 80C items. If the total is above 1,50,000, take 1,50,000, and then subtract the other deductions (80D, 80G). Memory clue: Tax deduction: remember the maximum limit of 80C; never count more than the limit.

Spot the difference

TermMeaning
Taxpayer (assessee)a person liable to pay income tax
Financial year1 April to 31 March, the year the income is earned
Assessment yearthe year after the financial year, when tax is worked out
PANa unique 10-character alphanumeric number issued by the Income Tax Department
Taxable incometotal income − deductions

Practice questions

Easy
  1. 1Is income tax a direct tax or an indirect tax?
  2. 2What is the assessment year for the financial year 2021-22?
  3. 3How many characters does a PAN number have?
Medium
  1. 4Total income ₹6,00,000. 80C: provident fund 40,000 and life insurance 50,000. What is the taxable income?
  2. 5Total income ₹10,50,000 and 80C investments ₹2,00,000. What is the taxable income?
  3. 6If the assessment year is 2024-25, which was the financial year of earning?
Challenging
  1. 7Total income ₹8,40,000. PPF 70,000, NSC 30,000, children's tuition fees 20,000 (all under 80C), health insurance premium 25,000 (80D) and a donation of 10,000 (80G). What is the taxable income?
  2. 8A person got a salary of ₹5,00,000 and agricultural income of ₹3,00,000. There is no deduction. What is the taxable income and why?
Show answers (try them yourself first)
  1. 1A direct tax. 2) 2022-23. 3) 10.
  2. 480C = 40,000 + 50,000 = 90,000. Taxable income = 6,00,000 − 90,000 = ₹5,10,000. 5) 2,00,000 is above the limit, so only 1,50,000 is deducted. 10,50,000 − 1,50,000 = ₹9,00,000. 6) The financial year 2023-24.
  3. 780C = 70,000 + 30,000 + 20,000 = 1,20,000. Deductions 1,20,000 + 25,000 + 10,000 = 1,55,000. Taxable income = 8,40,000 − 1,55,000 = ₹6,85,000. 8) Taxable income ₹5,00,000. Agricultural income is exempt from tax, so only the salary is counted.

Computing income tax

From daily life

Suppose a school trip has no fee up to the first ₹100, a small fee on the next amount and a larger fee on the amount above that. Each part has a different rate. Income tax is also worked out slab by slab.

Simple definition

Once the taxable income is known, find its slab in the table for the person's age and work out the income tax. Then add 2% education cess and 1% secondary and higher education cess, both on the amount of income tax. All three together make the total tax. These rates follow the textbook tables; rates change in the budget, so always use the table given in the question.

Taxable-income slabs with tax rates of 0, 5, 20 and 30 percentIncome tax slabs (age below 60)0 to 2,50,000no tax2,50,001 to 5,00,0005%5,00,001 to 10,00,00020%Above 10,00,00030%+ 2% and 1% cess (on the tax amount)

In the figure: For people below 60: no tax up to 2,50,000; after that rates of 5%, 20% and 30% apply slab by slab.

Tax slabs (the textbook's Tables I, II, III)

Taxable incomeTable I: below 60Table II: 60 to 80Table III: above 80
No taxup to 2,50,000up to 3,00,000up to 5,00,000
5%2,50,001 to 5,00,000 (on the part above 2,50,000)3,00,001 to 5,00,000 (on the part above 3,00,000)none
20%5,00,001 to 10,00,000: 12,500 + 20% of the part above 5,00,0005,00,001 to 10,00,000: 10,000 + 20% of the part above 5,00,0005,00,001 to 10,00,000: 20% of the part above 5,00,000
30%above 10,00,000: 1,12,500 + 30% of the part above 10,00,000above 10,00,000: 1,10,000 + 30%above 10,00,000: 1,00,000 + 30%
Live figure

Computing income tax

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Rule 1: Below 60: use Table I — Identify the slab, apply the rate to the part above the slab's starting value and add the fixed amount of that slab.

  • Easy: Age 30, taxable income 2,10,000: this is below 2,50,000, so there is no tax.
  • Medium: Age 30, taxable income 4,00,000: 4,00,000 − 2,50,000 = 1,50,000. Tax = 5% of 1,50,000 = 7,500. Cess: 2% = 150 and 1% = 75. Total tax = 7,500 + 150 + 75 = ₹7,725.
  • Exam type: Age 40, taxable income 7,50,000: 7,50,000 − 5,00,000 = 2,50,000. Tax = 12,500 + 20% of 2,50,000 = 12,500 + 50,000 = 62,500. Cess: 2% = 1,250 and 1% = 625. Total tax = 62,500 + 1,250 + 625 = ₹64,375.

Rule 2: Table II and III for senior citizens — Use Table II for ages 60 to 80 and Table III for ages above 80. The tax-free limit is higher.

  • Easy: Age 65, taxable income 2,80,000: Table II has no tax up to 3,00,000. Tax is 0.
  • Medium: Age 65, taxable income 4,20,000: 4,20,000 − 3,00,000 = 1,20,000. Tax = 5% = 6,000. Cess: 120 + 60. Total 6,000 + 120 + 60 = ₹6,180.
  • Exam type: Age 82, taxable income 8,00,000: Table III. 8,00,000 − 5,00,000 = 3,00,000. Tax = 20% = 60,000. Cess: 1,200 + 600. Total 60,000 + 1,200 + 600 = ₹61,800.

Rule 3: The full calculation from total income to total tax — First subtract deductions to get taxable income, then find the tax from the table, and finally add the cess.

The 6 steps from gross income to the total tax payableSteps to compute the taxGross total annual income− Deductions (80C, 80D, 80G ...)= Taxable incomeIncome tax from the slab / table+ 2% and 1% cess= Total tax payable

In the figure: Doing these six steps in order gives the correct income tax of any person.

  • Easy: Age 35, total income 6,00,000; 80C investment 1,00,000. Taxable 5,00,000. Tax = 5% × 2,50,000 = 12,500; cess 250 + 125. Total ₹12,875.
  • Medium: Age 30, total income 9,00,000; 80C 1,50,000 and a donation (80G) of 10,000. Taxable = 9,00,000 − 1,60,000 = 7,40,000. Tax = 12,500 + 20% × 2,40,000 = 12,500 + 48,000 = 60,500. Cess 1,210 + 605. Total ₹62,315.
  • Exam type: Age 40, total income 12,40,000; 80C 1,35,000 and 80G 5,000. Taxable = 12,40,000 − 1,40,000 = 11,00,000. Tax = 1,12,500 + 30% × 1,00,000 = 1,42,500. Cess 2,850 + 1,425. Total tax = 1,42,500 + 2,850 + 1,425 = ₹1,46,775.
Remember

Cess is charged on the amount of income tax, not on the taxable income. 2% + 1% means 3% of the income tax.

Common mistake

Applying one rate to the whole income. A slab's rate applies only to the part above that slab's start.

Shortcut

Quick check: income tax × 1.03 = total tax. For example 62,500 × 1.03 = 64,375. Memory clue: Tax slab by slab: find the tax of each slab separately and add.

Spot the difference

Taxable income 8,00,000Income taxTotal tax (with cess)
Age 30 (Table I)72,50074,675
Age 70 (Table II)70,00072,100
Age 82 (Table III)60,00061,800

Practice questions

Easy
  1. 1Age 28, taxable income ₹2,40,000. Does the person have to pay income tax?
  2. 2Age 66, taxable income ₹3,00,000. Does the person have to pay income tax?
  3. 3Age 30, taxable income ₹3,50,000. Find the total tax.
Medium
  1. 4Age 45, taxable income ₹6,00,000. Find the total tax.
  2. 5Age 62, taxable income ₹6,50,000. Find the total tax.
  3. 6Age 85, taxable income ₹12,00,000. Find the total tax.
Challenging
  1. 7Age 38, total income ₹9,60,000. PPF 80,000 and insurance 90,000 (80C), donation (80G) 8,000. Find the total tax.
  2. 8Age 72, total income ₹7,30,000. 80C investment 1,10,000 and health insurance premium (80D) 20,000. Find the total tax.
Show answers (try them yourself first)
  1. 12,40,000 is below 2,50,000. No, there is no tax. 2) Table II has no tax up to 3,00,000. No. 3) 3,50,000 − 2,50,000 = 1,00,000; tax 5% = 5,000; cess 100 + 50. Total ₹5,150.
  2. 46,00,000 − 5,00,000 = 1,00,000. Tax = 12,500 + 20,000 = 32,500; cess 650 + 325. Total ₹33,475. 5) Table II. 6,50,000 − 5,00,000 = 1,50,000. Tax = 10,000 + 30,000 = 40,000; cess 800 + 400. Total ₹41,200. 6) Table III. 12,00,000 − 10,00,000 = 2,00,000. Tax = 1,00,000 + 60,000 = 1,60,000; cess 3,200 + 1,600. Total ₹1,64,800.
  3. 780C = 80,000 + 90,000 = 1,70,000 ⇒ limit 1,50,000. Deductions 1,50,000 + 8,000 = 1,58,000. Taxable = 9,60,000 − 1,58,000 = 8,02,000. Tax = 12,500 + 20% × 3,02,000 = 12,500 + 60,400 = 72,900. Cess 1,458 + 729. Total ₹75,087. 8) Deductions 1,10,000 + 20,000 = 1,30,000. Taxable = 7,30,000 − 1,30,000 = 6,00,000. Table II: tax = 10,000 + 20% × 1,00,000 = 30,000; cess 600 + 300. Total ₹30,900.