Investment Objectives & Advice

How far from being a Billionaire: Calculate Your Net-worth

“To know where you stand is the first step to start navigating yourself.”

Recently the news article was published stating that the Net-worth of Mr. Mukesh Ambani will be highest by 2014 and he’ll become world’s richest person. Somewhere deep down in our hearts we all want to be rich and billionaire like him, but if we ask from any individual about his Net-worth in 99% of the cases he’ll not be able to answer it. That’s basically we like to dream but not to plan to reach them and know our current standing. Today’s article will help you in determining the Net-Worth of yours.

Net-worth is a fairly simple concept and it is used in assessing your financial standing on a particular date. Net-worth of any individual is calculated on a particular date and will vary from day to day. Since the basis of calculating the value of two different categories Assets and Liabilities, the difference between these two is called as Net-worth. If the Assets of individual are more than his liabilities, he will have positive Net-worth and if assets are less than liabilities, he is too burdened with loans and might be bankrupt. Assets are things which are either cash or can be converted to cash as and when required. Some examples of the Assets are

  • Land and buildings
  • Jewellery
  • Investments as Fixed Deposits, Mutual Funds, Insurance, Provident Funds
  • Stocks and Shares
  • Car
  • Gold
  • Provident Fund
  • Etc etc

While calculating the value of these assets, we should take care of that the value of assets should be at a current market price means the price at which it can be sold at, not at the price at which it is bought. For e.g. Ranu has bought a house in 2000 for INR 500,000 but at present due to the soaring market prices of real estate he can sell his house in march 2010 at INR 1,500,000. So while calculating his Net-worth on March 2010 the value of the house should be taken as INR 1,500,000.

Now it’s very rare in current life cycle and in early stages of life we have only huge amount of assets on our sheet. With most of the assets we have attached liabilities, which are the amounts we have to repay for our borrowings. Some of the common liabilities are

  • Personal Loan
  • Education Loan
  • Home Loan
  • Car Loan
  • Credit card Bills
  • Etc etc

After each months EMI payment these liabilities also keep on changing and vary from date to date. So we have to put the current outstanding liability amount only and interest should not be included in that for e.g. Ranu had taken home loan of INR 2,000,000 in 2009 his annual Installment towards repayment is INR 200,000. Now if rate of interest is assumed to be 8% then on rough estimate his interest payment is INR 160,000 and rest INR 40,000 is towards Loan amount. So in march 2010 while valuing his liability INR 1,960,000 should be put in liability side. Hence the Net-worth of any individual is calculated at a particular date, on the current market value of assets and liabilities.

To know your current Net-worth you can download the sheet from the following link the password to download is eduform3

In next article we’ll understand how to determine “your speed to become billionaire” by doing the fund flow analysis. Article will be published on October 23rd,2010.


Calculating Taxable Income

There are only two things in life you can’t duck: Death and Taxes

I agree that you can’t duck the first but second part I disagree. We, the salaried people, have to pay our taxes and as a patriotic person we should not avoid to do so. We are generous people and we do charity by distributing money to poor people, we do consider there how much should I give but while paying taxes we don’t. We leave our taxes part to be handled by a tax filing agent or broker, without knowing what he did was that right? We have to do it but still we never plan it. This is to take the first step to know our liabilities in terms of taxes and making us little more educated to plan it accordingly to minimize it, to have larger share to spend by ourselves.

In case of a salaried person our incomes are segmented under various heads. Different companies have different type of salary structures to be followed, but the major components you can find are

  • Basic salary
  • House rental allowance (HRA)
  • Dearness allowance (DA)
  • City compensatory allowance (CCA)
  • Conveyance
  • PF deductions
  • Bonuses
  • Special allowances/ Reimbursements (Cell phone, Travel, Entertainment, Attire, Education etc.)

Not all the components of the salary are taxable and most of the companies try to structure their Employees salary in a manner that company and employees both should get the most out of it.  

Fully taxable components are

  • Basic salary
  • Dearness allowance
  • Bonuses

Partially taxable parts and their treatments are as follows

1.       House rental allowance (HRA): HRA which is deducted for our income tax calculations is the minimum among

  • 50% of the basic salary (In 4 Metros), 40% of the basic salary (In rest of country)
  • Actual rent -10% of your basic salary (In Non metro), Actual rent (In 4 Metros)
  • HRA given by  Company

If the HRA received is more than any other calculations on the remaining amount one have to pay the income tax as per his tax bracket. For e.g. if;

Naresh works in Delhi and his HRA is INR 10,000 pm while his basic salary is INR 22,000 pm and he stays in a rented flat of INR 8,000 pm. Then calculations will be

  • 50% of basic salary à INR 11,000
  • Actual rent à INR 8,000
  • HRA given by company à INR 10,000

Therefore out of actual HRA only INR 8,000 is Non-taxable and extra INR 2,000 becomes taxable.

2.       Special Allowances: Most of the special allowances are based on actual bills and can be treated as Non taxable components for general considerations. But in cases when actual bills under various heads are for less than the amount received then the extra amount is taxable at your end. For e.g. if;

Mahesh is eligible to get LTA of INR 22,000 pa but his cost of travel is INR 12,000 so company pays him his extra eligible amount of INR 10,000 then this amount is taxable as per your tax brackets.

Non-taxable components in ones’ salary are

  • PF deductions
  • Conveyance

Apart from normal salary people have various other sources of incomes which are taxable as per applicable income tax rate these other incomes can be

  • Rent received from house
  • Capital gains on sales of real estate property
  • Capital gains through Investments
  • Income from business or secondary employment

All these are treated differently, for which consult your investment advisor.

Once you know your taxable components we can look for availing deductions under various sections of income tax through investments and repayments which we’ll cover in next blog on Deductions under income tax on 1st Oct, 2010. Till then you can start using income tax calculation sheet after down loading from following link:

the password for the link is eduform1

To use it just fill in the cells in yellow and it will automatically calculate your income tax payable to Govt. at the end of the financial year.