PROJECT MANAGEMENT & ECONOMICS

Unit 4: Introduction to Economics

PROJECT MANAGEMENT & ECONOMICS
Unit 4: Introduction to Economics

Engineering Decision-Makers, Engineering and

Economics, Problem solving and Decision
making, Intuition and Analysis, Tactics and
Strategy.
Engineering Economic Decision.
Law of demand & supply, Law of returns,
Interest and Interest factors: Interest rate, Simple
interest, Compound interest, Cash - flow
diagrams, Personal loans and EMI Payment, Tax
concepts, Income tax
Introduction to Economics 2
 What is Engineering Economy?
• Economic decision making for engineering
systems is called engineering economy.

• This definition may seem restricted to

engineering projects and systems only,
engineering economy however is also the
study of industrial economics and the
economic and financial factors which
influence industry.
Introduction to Economics 3
 What is Engineering Economy?
• Engineering economy is a collection of
techniques that simplify comparisons of
alternatives on an economic basis.

• Engineering economy is not a method or

process for determining what the alternatives
are.

Introduction to Economics 4
 What is Engineering Economy?
• Engineering economics begins only after the
alternatives have been identified.

• If the best alternative is actually one that the

engineer has not even recognized as an
alternative, then all the engineering economic
analysis tools will not result in its selection.

Introduction to Economics 5
 What is Engineering Economy?
Engineers are the people who are familiar
with all the technicalities of machinery and
production therefore they are the best judges
of:
a) the useful lives of an asset, and
b) they also have the technical knowledge to
calculate the number of units a proposed
plant would produce when operational.

Introduction to Economics 6
 What is Engineering Economy?
• In today’s competitive world of business it has
become essential that engineers should
practice financial project analysis for
engineering projects and make rational
decisions.

Introduction to Economics 7
 What is Engineering Economy?
• Engineering economy also includes the study
of accounting practices for manufacturing
concerns.

• Unique features of accounting for

manufacturing concerns are process costing,
batch costing, cost allocation, etc.

Introduction to Economics 8
 What is Engineering Economy?
• Engineering economy deals with justification
and selection of projects.
• Many engineers work on projects which
address a specified activity or a problem.
• Any decision regarding the project must be
justified.

Introduction to Economics 9
 What is Engineering Economy?
• In business environments, many if not all,
decisions are justified using monetary criteria
such as “profit”.
• Such decisions are made at the managerial
level and many engineers become managers
in manufacturing environment.

Introduction to Economics 10
 What is Engineering Economy?
• Therefore, all engineers, regardless of their
employment, should know methods and tools
used in evaluation of projects.
• The purpose of engineering economy is to
expose all engineering students to the
methods which are widely used for evaluation
of projects.

Introduction to Economics 11
 What is Engineering Economy?
• Even though, engineering economy deals
mostly with selection of projects in business
environment, the tools and methods can be
and are used by individuals and non-profit
organizations such as government, hospitals,
and charitable entities, etc.

Introduction to Economics 12
 SOME EXAMPLES
Let us present few examples in different
environments where engineering economy can
facilitate the decision making process.
• Business Environment:
A small manufacturing company needs to buy a
forklift truck for material handling. Two different
brands, say A and B, are being considered. Which
truck should be bought? The decision will
probably be based on minimization of cost.
Introduction to Economics 13
 SOME EXAMPLES
• Individuals:
A new college graduate needs a new car.
Should this new car be bought or leased?
Methods from engineering economy can be
used for determining the best choice.

Introduction to Economics 14
 SOME EXAMPLES
The following figure shows how engineering is
composed of physical and economic components:

Physical Produce products and services based

Environment on physical laws (e.g. Newton’s Law)

ENGINEERING Production / Construction

Economic Assessing the worth of these

Environment products/services in economic terms

Total Environment

Introduction to Economics 15
 SOME EXAMPLES
Physical Environment:
Engineers produce products and services
depending on physical laws. Physical efficiency
takes the form:
System output(s)
Physical (efficiency) = ------------------------
System input(s)

Introduction to Economics 16
 SOME EXAMPLES
• Economic Environment:
Much less of a quantitative nature is known about
economic environments -- this is due to economics
being involved with the actions of people, and the
structure of organizations.

System worth
Economic (efficiency) = ------------------------
System cost

Introduction to Economics 17
 SOME EXAMPLES
• Satisfaction of the physical and economic
environments is linked through production
and construction processes.

• Engineers need to control systems to achieve

a balance in both the physical and economic
environments, and within the bounds of
limited resources.

Introduction to Economics 18
Rational Decision-Making Process
1. Recognize a decision problem
2. Define the goals or objectives
3. Collect all the relevant
information
4. Identify a set of feasible
decision alternatives
5. Select the decision criterion to
use
6. Select the best alternative

Introduction to Economics 19
Rational Decision Making Process
Rational decision making is a complex process
that contains a number of essential elements.

4. Identify a
2. Define 5. Select the
1. Recognize 3. Collect all set of 6. Select the
the goals decision
a decision relevant feasible best
and criterion to
problem information decision alternative
objectives use
alternatives

Introduction to Economics 20
 Which Car to Lease?
E.g. Hyundai vs. Honda
1. Recognize a decision problem • Need a car

2. Define the goals or objectives • Want mechanical security

3. Collect all the relevant • Gather technical as well

information as financial data
4. Identify a set of feasible • Choose between
decision alternatives Hyundai or Honda
5. Select the decision criterion • Want minimum total cash
to use outlay
6. Select the best alternative • Select Honda

Introduction to Economics 21
Financial Data Required to Make an Economic
Decision

Introduction to Economics 22
 Intuition and Analysis
• two main styles of decision-making: intuitive and
analytical.
• Intuitive decision style: The ability to make
quick decisions when time is short, based
on previous experience. This does not
mean decisions are made haphazardly, or
merely on a gut feeling.
• An intuitive decision style may be
developed through experience.

Introduction to Economics 23
 Intuition and Analysis(Contd..)
• two main styles of decision-making: intuitive and
analytical.

• Analytical decision style: Making decisions

in a thorough, systematic manner. Spending
time reviewing all the details and making
sure all decisions comply with formal
guidelines and requirements. For the
novice and the inexperienced, analysis is a
necessary tool in decision-making.
Introduction to Economics 24
 DEMAND
Demand and its Determinants:
A General Definition:
Demand is the quantity of a good or
resource that buyers (or demanders) are
willing and able to buy under a given set of
conditions over a given period of time.
Conditions: price, income, taste, prices of
related goods, expected prices, number of
buyers, etc.
Introduction to Economics 25
 Law of Demand
Other things unchanged, as price rises, the
quantity demanded decreases, and as price
falls, the quantity demanded increases; the
relationship between price and the quantity
demanded is negative.

Introduction to Economics 26
 The Demand Curve:A graphical
representation of the demand schedule
The demand curve is a line or a curve showing the
relationship between price and quantity
demanded; it is a curve plotted in a two-
dimensional space with price measured along the
vertical axis and the quantity demanded measured
along the horizontal axis.
A demand curve shows the relationship between
price and quantity demanded only; all (other)
factors affecting demand are assumed to remain
unchanged along a demand curve.

Introduction to Economics 27
 DEMAND CURVE FOR MILK
D A
$1.50
B
1.40
Price per Quart

C
1.30
E
1.20
F
1.10
G
1.00
H
.90
D
0 45 50 55 60 65 70 75
Quantity Demanded
in Billions of Quarts per Year
C opyri ght ã 2000 by Harc ourt, Inc . Al l ri ght s rese rved.

Introduction to Economics 28
 The Reasons Behind the Law of
Demand
• The price a consumer pays for a good is, in
fact, the opportunity cost of having it
• The principle of diminishing marginal utility
• Income and substitution effects

Introduction to Economics 29
Factors causing changes (shifts) in
demand (curve):
• Changes in income
• taste
• prices of related goods (substitutes or
complementary goods)
• expectations about future prices,
• number of buyers
• Other non-self-price factors

Introduction to Economics 30
 Individual Demand and Market
Demand
An individual demand curve reflects the
quantities of a good a consumer is willing and
able to purchase at a range of possible prices,,
during a given period of time.

A market demand (curve) is the (horizontal)

sum of individual demands.

Introduction to Economics 31
Demand (Curve) versus Quantity
Demanded
By “demand”or “demand curve” we mean a
range of quantities corresponding to various
prices reflected along a line or a curve. By
“quantity demanded” we mean a specific
quantity demanded corresponding to a
specific price.

Introduction to Economics 32
 Supply
A General Definition: Supply is the quantity of
a good or resource that sellers (or suppliers)
are willing and able to offer to the market for
sale under a given set of conditions over a
specific period of time.

Introduction to Economics 33
 Determinants of Supply

Factors affecting supply of a good

include price, prices of inputs,
technology, prices of related
goods, taxes, expectations,
number of firms, Production
capacity etc.

Introduction to Economics 34
 SUPPLY CURVE FOR MILK
a
$1.50 S
b
1.40
c
Price per Quart

1.30
e
1.20
f
1.10
g
1.00
h
.90
S
0 30 40 50 60 70 80 90
Quantity Supplied
in Billions of Quarts per Year
C opyri ght Introduction toIncEconomics
ã 2000 by Harc ourt, . Al l ri ght s rese rved. 35
 Law of Supply
Other things remaining constant, as
the price of a good rises, the
corresponding quantity supplied
increases, and as the price falls the
quantity supplied decreases; the
relationship between price and the
quantity supplied is positive.
Introduction to Economics 36
 The Reason Behind the Law of
Supply
As more and more of a good is
produced, beyond some production
level, the costs of producing
additional units begin to rise. In
order for a firm to produce more of
that good it has to charge (or be
offered) higher prices.
Introduction to Economics 37
 Individual Supply and Market
Supply
An individual supply curve reflects the
quantities of a good a producer (a firm) is
willing and able to produce and offer for sale
at a range of possible prices, during a given
period of time.

A market supply (curve) is the (horizontal) sum

of individual supply curves.

Introduction to Economics 38
 Supply (Curve) versus Quantity
Supplied
By Supply or supply curve we mean a
range of quantities corresponding to
various prices reflected along a line
or a curve. By quantity supplied we
mean a specific quantity supplied
corresponding to a specific price.

Introduction to Economics 39
 Supply and Quantity supplied
• A change in price results in a change in quantity
supplied ( a movement along the curve), not a
change in supply.
• A change in supply (or the supply curve) is caused
by changes in factors other than price. Such
changes cause shifts of the supply curve.
• Changes in resource prices, technology, prices of
related goods (substitutes or accompanying
products), expectations, number of firms, etc. will
result in changes in (market) supply or shifts of
the supply curve.
Introduction to Economics 40
 Relation Between Demand &Supply
• Quantity Demand = Quantity supply.

• Quantity Demand ˃ Quantity supply.

• Quantity Demand ˂ Quantity supply

Introduction to Economics 41
 Tactics and Strategy
Tactics are the actions, projects or
events, to reach a particular point
or the desired end,

Strategy is defined as a game

plan, which can help the
organization to achieve its mission
and objectives
Introduction to Economics 42
 Tactics and Strategy
Basis for
Comparison Tactics Strategy
Meaning A carefully planned action A long range blue
made to achieve a specific print of an
objective is Tactics. organization's
expected image
and destination is
known as Strategy.
An organized set of
activities that can
Determining how the strategy lead the company to
Concept be executed. Introduction to Economics differentiation. 43
 Tactics and Strategy(Contd..)
Basis for Comparison Tactics Strategy
Nature Preventive Competitive
What is it? Action Action plan
Focus on Task Purpose
Formulated at Middle level Top level
Risk involved Low High
Orientation present conditions Future oriented
Introduction to Economics 44
 Types of Strategic Engineering
Economic Decisions
1) Equipment and process selection
2) Equipment replacement
3) New product and product expansion
4) Cost reduction, and
5) Service or quality improvement

Introduction to Economics 45
 Types of Strategic Engineering
Economic Decisions
• Selecting the best course of action
1. Equipment &
from various alternatives to get best
process selection returns

• Decision involves considering the

2. Equipment
expenditure necessary to replace
replacement worn-out or obsolete equipments

• To increase the revenue

• Two common types:
3. New product &
• Through existing production/distribution,
product expansion • Through new product or expand to a new
geographical area
Introduction to Economics 46
 Types of Strategic Engineering
Economic Decisions
• Attempts to lower operating costs
of the company
4. Cost • Whether a company should buy
equipment to perform an
Reduction operation currently done manually
or spend money now in order to
save more money later

5. Service • To improve of the quality of

improvement products/ services

Introduction to Economics 47
LAW OF Returns

Introduction to Economics 48
LAW OF Returns(Contd..)

Introduction to Economics 49
LAW OF Returns(Contd..)

Introduction to Economics 50
LAW OF Returns(Contd..)

Introduction to Economics 51
LAW OF Returns(Contd..)

Introduction to Economics 52
LAW OF Returns(Contd..)

Introduction to Economics 53
LAW OF Returns(Contd..)

Introduction to Economics 54
 LAW OF Returns(Contd..)
common example is adding more people to a job,
such as the assembly of a car on a factory floor. At
some point, adding more workers causes problems
such as workers getting in each other's way or
frequently finding themselves waiting for access to a
part. In all of these processes, producing one more
unit of output per unit of time will eventually require
increasingly more usage of the input, due to the
input being used less effectively

Introduction to Economics 55
 Interest Rate
• The interest is always defined as an “Interest rate" i
(%). It expresses the interest per unit time as a
percentage of the principal.

Interest rate(%)= interest accrued per unit time ×100%

Original amout

• When the interest rate is viewed from the supplier

perspective, it may be called the “Rate of Return”

Introduction to Economics 56
 Rate of Return and Interest
• The Interest Rate (i) is the percentage change in
value earned over a specific period of time.
• For simple interest, a return is earned only on the
original amount (principal, p) each period.
• where F is the future amount, P is the principal, i is
the interest rate and n is invested periods
Total Interest Earned = (p)(n)(i)

• If the principal is invested for n periods:

• Total Money Returned(F) = p(1 + (n)(i))

Introduction to Economics 57
 Compound Interest

where F is the future amount, P is the principal,

i is the interest rate and n is invested periods

F  P(1  i) n n  mt

m is the number of compounding periods in one year

and t is the total number of years

For compound interest, a return is earned on the entire

amount (principal + total interest already earned)
Introduction to Economics 58
invested at the beginning of the current period.
 Compound vs Simple Interest

For simple interest, a return is earned only on the

original principal each period.

• For compound interest, a return is earned on the

entire amount (principal + total interest already
earned) invested at the beginning of the current
period.

• Effectively, you are also earning interest on your

interest (and on your investment principal)!

Introduction to Economics 59
 Example
• Find the amount to which $1500 will grow if compounded
quarterly at 6.75% interest for 10 years.
• Solution: Use

F  P(1  i) n

Introduction to Economics 60
 Same problem using simple
interest
• Using the simple interest formula, the amount
to which $1500 will grow at an interest of
6.75% for 10 years is given by:

• Total Money Returned(F) = p(1 + (n)(i))

• F=1500(1+0.0675(10))=2512.50,
• which is more than $400 less than the amount earned using
the compound interest formula.

Introduction to Economics 61
Changing the number of compounding
periods per year
To what amount will $1500 grow if compounded daily
at 6.75% interest for 10 years?
10(365)
 0.0675 
A  1500 1  
 365 
Solution:

= 2945.87
This is about $15.00 more than compounding $1500 quarterly at 6.75% interest.
Since there are 365 days in year (leap years excluded), the number of
compounding periods is now 365. We divide the annual rate of interest by
365. Notice too that the number of compounding periods in 10 years is
10(365)= 3650. Introduction to Economics 62
 Cash Flow- expenses and receipts
• Engineering projects generally have economic
consequences that occur over an extended period of
time
– For example, if an expensive piece of machinery is
installed in a plant were brought on credit, the
simple process of paying for it may take several
years
• Each project is described as cash receipts or expenses
at different points in time

Introduction to Economics 63
 Categories of Cash Flows
• The expenses and receipts due to engineering projects
usually fall into one of the following categories:
– First cost: expense to build or to buy and install
– Operations and maintenance (O&M): annual
expense, such as electricity, labor, and minor repairs
– Salvage value: receipt at project termination for sale
or transfer of the equipment (can be a salvage cost)
– Revenues: annual receipts due to sale of products or
services
– Overhaul: major capital expenditure that occurs
during the asset’s life
Introduction to Economics 64
Examples of Cash Inflows & Outflows

• Receipts from customers--

operating activity
• Loans made to other firms--
investing activity
• Dividend payments--financing
activity
• Payments to investing activity
• Payments of taxes--operating
activity 65
 Types of Cash Flows
• Single cash flow
• Uniform series
• Linear gradient series
• Geometric gradient series
• Irregular series

Introduction to Economics 66
 Cash Flow Diagrams
• The costs and benefits of engineering
projects over time are summarized on a
cash flow diagram.
• Cash flow diagram illustrates the size,
sign, and timing of individual cash
flows, and forms the basis for
engineering economic analysis
• Tool! To show expenses and receipts
Introduction to Economics 67
 Cash Flow Diagrams
• Pictorial representation of
engineering economic problem
–incomes and expenditures
–time period
–interest rate

Introduction to Economics 68
 Cash Flow diagrams--How
• A cash flow diagram is created by first
drawing a segmented time-based
horizontal line, divided into
appropriate time unit. Each time when
there is a cash flow, a vertical arrow is
added  pointing down for costs and
up for revenues or benefits. The cost
flows are drawn to relative scale

Introduction to Economics 69
 Cash Flow Diagrams

P-Pattern “present”
1 2 3 n

F-Pattern “future”
1 2 3 n

A-Pattern “annual”
1 2 3 n

G-Pattern “gradient”
1 2 3 n

Introduction to Economics 70
 Cash Flow Diagrams

$15,000

Positive net Cash flow $2000

(receipts) $13,000 is net positive cash flow

1 2 3 4 5 Time (# of interest periods)

0

Negative net Cash Flow

(payments)

Introduction to Economics 71
 Single Cash Flow

F
Compounding Process
P
Discounting Process

F
F  P(1  i) N P
(1  i) N
P=Present equivalent value A=Annual equivalent value
F= Future equivalent value

Introduction to Economics 72
 Example: Value and Interest
• The “value” of money depends on the amount
and when it is received or spent.
Example: What amount must be paid to settle a
current debt of $1000 in two years at an interest
rate of 8% ?

Solution: $1000 (1 + 0.08) (1 + 0.08) = $1166

$1000

1 2

Introduction to Economics $1166 73

 An Example of Cash Flow Diagram
• Amit (right) borrowed $1,000
from a bank at 8% interest.
Two end-of-year payments: at
the end of the first year, he
will repay half of the $1000
principal plus the interest that
is due. At the end of the
second year, he will repay the
remaining half plus the interest
for the second year.
Introduction to Economics 74
 An Example of Cash Flow Diagram
• Cash flow for this problem is:
End of year Cash flow
0 +$1000
1 -$580 (-$500 - $80)
2 -$540 (-$500 - $40)

Introduction to Economics 75
 Cash Flow Diagram
$1,000

Time (# of interest periods)

1 2

$540
$580

Introduction to Economics 76
 EQUATED MONTHLY INSTALLMENTS (EMI)

 An Equated Monthly Installment (EMI) is the

amount paid by a borrower each month to
lender of the loan.

 The EMI is an unequal combination of

principal (the actual loan you have taken) and
interest rate.
Introduction to Economics 77
 EQUATED MONTHLY INSTALLMENTS (EMI)

 EMI payments are made every month, generally on

a fixed date, for the entire tenure of the loan, till the
outstanding amount has been completely repaid.

 It is important to understand how banks work out

the EMI so that you would find it easier to evaluate
various loan options.
Introduction to Economics 78
 EQUATED MONTHLY INSTALLMENTS (EMI)

So how does the bank arrive at the

future value of a loan & interest to be
repaid at future dates?

Introduction to Economics 79
 EQUATED MONTHLY INSTALLMENTS (EMI)

•The answer is ‘Time value of money’. The theory of time

value of money says that a rupee receivable today is more
valuable than a rupee receivable at a future date. This is
because the rupee received today can be invested to earn
interest.

•For instance: Rs. 100 receivable today can be invested at,

say, 9% interest and therefore enables one to earn
additional Rs. 9 in a year.
Introduction to Economics 80
 EQUATED MONTHLY INSTALLMENTS (EMI)

• In the earlier years of loan repayment, it is mainly the

interest payments that are being made while the

principal amount is much less. As the loan matures, and

as the principal gradually gets paid, the outstanding loan

amount reduces. The interest component thus becomes

lower than the principal, and finally minimal.

Introduction to Economics 81
 EQUATED MONTHLY INSTALLMENTS (EMI)
PAYMENT OPTIONS

FIXED RATE EMI: Fixed rate loans are those which

remain same throughout the tenure. This can be best
option only when interest rate have reached bottom,
from where upward trend is expected.

FLOATING RATE EMI: Floating rates move in tandem

with market and RBI measures which are prone to
fluctuation depending on the market and economy.
Introduction to Economics 82
 EQUATED MONTHLY INSTALLMENTS (EMI)
Does my EMI stays constant?

Unless:
 If you prepay part of the loan, the amount of your remaining EMIs will
not remain the same if you leave the duration of your loan constant.
 In case you have taken a floating rate loan, the EMI will change as the
interest rates change. Of course, some have the option of the EMI not
changing but the tenure increasing or decreasing.

 You opt for a loan where the EMI keeps increasing over the years. To
give an example, let's say you have a 10 year loan. The EMI stays
constant for three years, then rises for the next three years and rises
again for the last four years. This will help young individuals who cannot
afford a huge EMI at this point but can do so as their earnings rise.
Introduction to Economics 83
 EQUATED MONTHLY INSTALLMENTS (EMI)

• The calculation of EMI depends on three major

factors:

Interest Rate
Loan Amount
Tenure of the Loan
Introduction to Economics 84
 EQUATED MONTHLY INSTALLMENTS (EMI)

Mathematically, EMIs are computed using the formula mentioned below:

EMI = (LOAN AMOUNT x INTEREST) x (1+INTEREST)^N

[(1 + Interest)^N] - 1

Introduction to Economics 85
 EQUATED MONTHLY INSTALLMENTS (EMI)

• Let’s consider an example here:

Loan amount = Rs. 10,00,000/-

Interest rate = (% rate) / 12 months = 11% / 12
months = 0.0091

Loan period (N)= 15 years = 180 months

Introduction to Economics 86
 EQUATED MONTHLY INSTALLMENTS (EMI)
• EMI = (loan amount x interest) x (1+interest)^n
[(1 + Interest)^n] - 1

• EMI = (10,00,000 x 0.0091) x (1+0.0091) ^180

[(1+ 0.0091) ^180]-1

• EMI – Rs. 11,365.96 which has to be paid every month

towards principal and interest amount.
Introduction to Economics 87
EQUATED MONTHLY INSTALLMENTS
(EMI)(Formula)

Introduction to Economics 88
EQUATED MONTHLY INSTALLMENTS (EMI)

Introduction to Economics 89
 EQUATED MONTHLY INSTALLMENTS (EMI)
• METHOD OF COMPUTATION

• The various methods adopted are:

 Annual reducing method: A method of calculating interest on

the reduced principal at the end of every year. However as
repayments for all loans are EMI, though the principal is
reduced every month, the interest is calculated on the original
loan amount for twelve months after which the repayments
towards principal are taken into account. Basically, this
method will benefit you the least.
Introduction to Economics 90
 EQUATED MONTHLY INSTALLMENTS (EMI)
 METHOD OF COMPUTATION
 Monthly reducing loans: This is a better and easy to understand
method of EMI calculation and is usually the most common
calculation method adopted. In this calculation methodology there is
a reduction in principal with EMI being paid every month. The
interest is calculated on the outstanding balance.
 Daily reducing loans: In this method the principal reduces every day,
with daily loan repayments. The interest is charged on the
outstanding balance. However, daily EMI payment is not a very
feasible option. Introduction to Economics 91
Personal Loans
• A personal loan is a handy tool to manage your various
financial needs
• It enables you to close any budget gaps that
might occur, regardless of your income bracket
• One can take up a personal loan for various
needs such as home renovations, paying huge
bills, making a major purchase, weddings etc
• A personal loan is unsecured as it is not backed
by any collateral The interest rates of a personal loan is
much
higher as compared to other types of loans
Introduction to Economics
Personal Loans
• It is provided on the basis of key criteria such
as income level, credit and employment history,
repayment capacity, etc.
Unlike a home or a car loan, a personal loan is
not secured against any asset. As it is unsecured
and the borrower does not put up collateral like
gold or property to avail it, the lender, in case
of a default, cannot auction anything you own

Introduction to Economics
Personal Loans
• Maximum loan duration
It can be 1 to 5 years or 12 to 60 months.
Shorter or longer tenures may be allowed on a
case by case basis, but it is rare.
• Disbursal of loan amount
Typically, it gets disbursed within 7 working days of the loan
application to the lender. Once approved, you may either
receive an account payee cheque/draft equal to the loan
amount or get the money deposited automatically into your
savings account electronically.
Introduction to Economics
Personal Loans
• How much can one borrow?
• It usually depends on your income and varies
based on whether you are salaried or self-
employed. Usually, the banks restrict the loan
amount such that your EMI isn't more than 40-
50% of your monthly income.

Introduction to Economics
 TAX Concepts
• A tax is a compulsory financial charge imposed upon a
taxpayer (an individual or legal entity) by a governmental
organization in order to fund various public expenditures.

• The levying of taxes aims to raise revenue to fund

expenditures on economic infrastructure (roads, public
transportation, sanitation, legal systems, public safety,
education, health-care systems), military, scientific
research, culture and the arts, public works, distribution,
data collection and dissemination, public insurance, and
the operation of government itself.
Introduction to Economics 96
Types of Taxes

Introduction to Economics 97
GOODS AND SERVICES TAX (GST)
Simplified

98
Existing Indirect Tax Structure

Entry Tax & Octroi

Customs Excise
Duty Entertainment Tax
Duty
Purchase Tax
Central
Levies Luxury Tax

Central VAT
Cess Service
Sales Tax
Tax
State
Levies

99
 Tax structure under GST

• Stands for Central GST

CGS • Tax collected by Central Government
T • Applicable on supplies within the state

SGS • Stands for State GST

• Tax collected by State Government
T • Applicable on supplies within the state

• Stands for Union Territory GST

UTG • Tax collected by Union Territory
ST • Applicable on supplies within the Union
Territory

• Stands for Integrated GST

IGST • Tax collected is shared between Centre and State
• Applicable on interstate and import transactions
100
Taxes Likely to be subsumed under
GST
Purch CVD
Excis VAT ase CST &
e ADE Tax SAD
Duty

Luxu Entry
Servi ry Tax
Surcha
rge & ce tax

GST
Cess Tax

Surcha
rge &
Cess

SGST/
CGST UTGS IGST
T
101
Understanding CGST, SGST, UTGST & IGST

State 1
Foreign Territory

State 2
Union territory without legislature

102
 Comparison of Tax scenario under Old &
GST regimes

Old Regime GST Regime

Manufacturing Cost 4,00,000 4,00,000
Excise @ 12%, Infrastructure cess @ 1%
52,000 CGST@9% 36,000
[email protected]% 56,500 SGST@9% 36,000
Dealer Invoice Value 5,08,500 4,72,000
Dealer Cost (4,00,000+52,000) 4,52,000 4,00,000
Margin 50,000 50,000

Sale Price for Dealer 5,02,000 4,50,000

[email protected]% 62,750 CGST@9%40,500

SGST@9% 40,500
Price @ which the car is sold 5,64,750 5,31,000
to the customer Saving to the customer= Rs. 33,750 103
 INCOME TAX

Introduction & Background

 Why, Need
Heads of Income , Slab in India
Exemptions
Deduction
ITR filing
 What Government Do from our
TAX?
 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).
 The Government also provides cooking gas at concessional rate or gives subsidy.
 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.
 Though the judicial process involves delay, yet the Salaries, perks of Judges,
Magistrates and judicial staff has also to be paid by the Government.
 Thus on considering these various duties of the Government, we need to appreciate
that we must pay tax as per law. We have to act like a responsible citizen.
 Typical Tax Slab
General Public (Under 60 Yrs Age) Senior Citizens ( 60 -80 Yrs. age) Very Senior Citizens( More than 80 Yrs Age)
Income tax Slab Rate of Tax Income tax Slab Rate of Tax Income tax Slab Rate of Tax
Upto Rs. 2.5 Lakhs Nil Upto Rs. 3 Lakhs Nil Upto Rs. 5 Lakhs Nil
Rs. 2.5- 5 Lakhs 5% Rs. 3- 5 Lakhs 5% Rs. 5- 10 Lakhs 20%
Rs. 5-10 Lakhs 20% Rs. 5-10 Lakhs 20% Above Rs. 10 Lakhs 30%
Above Rs. 10 Lakhs 30% Above Rs. 10 Lakhs 30%

 Education Cess 3% +Health Cess of1 %

 Surcharge of 10% on Rs. 50 Lakhs to Rs. 1 crore + Income earners
 Surcharge of 15% on Rs. 1 Cr. Plus income earners
 Tax credit of Rs. 2,500/- for income upto Rs. 3.5 Lakhs u/s 87A
 Standard deduction of Rs. 40,000/-for Salaried and Pensioners
 There are no separate slab for male & Female

(Note – Each Financial Year will have different Tax slabs and Tax rates.)
Important
Terms
Definition of 'Assessee' – Section 2(7) of Income Tax.
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
Assessment Year (A.Y. 2019‐20):
Assessment year means the period starting from April 1 and ending on March 31
of the next year.

Previous Year (F.Y. 2018‐19)

The financial year immediately preceding the assessment year
 Important
Terms
Residential Status
 Resident–World income is taxable in India
 Non Resident(NRI)–Only income arising or accruing in India is
taxable in India
 Resident but Not Ordinarily Resident–Income accruing or
arising outside India may also be taxable in India

Resident: On basis of stay in India computed separately every year

If satisfies any of the below condition:
1. He is in India for a period of 182 days or more in the FY
OR
2. He is in India for 60 days or more during that FY and has been in
India for 365 days or more during 4 previous years immediately
preceding the relevant Financial Year.
Gross Total Income
Deductions
Total Income
 HEADS OF
INCOME
 Income From Salary
 Meaning of Salary:
• Wages;
• Pension;
• Annuity;
• Gratuity;
• Advance Salary paid;
• Fees, Commission, Perquisites, Profits in lieu of or in addition to
Salary or Wages;
• Annual accretion to the balance of Recognized Provident Fund;
• Leave Encashment;
• Transferred balance in Recognized Provident Fund;
• Contribution by Central Govt. or any other employer to Employees
Pension A/c as referred in Sec. 80CCD.
 Income from Salary
I. CTC
II. Gross Salary
-is employee provident fund (EPF) and gratuity
subtracted from the Cost to Company (CTC). To put it in
simpler terms, Gross Salary is the amount paid before
deduction of taxes or other deductions and is inclusive of
bonuses, over-time pay, holiday pay, and other
differentials.
For the same example listed above, let’s deduce Mr. A yearly salary by subtracting
gratuity and Employee Provident Fund contributions.
Rs. 4,00,000 - Rs. 21,600 - Rs. 18,326
= Rs. 3,60,074
 Income from Salary
Particulars Amount
Basic Salary —

Add: —

1. Fees, Commission and Bonus —

2. Allowances —

3. Perquisites —

4. Retirement Benefits —

5. Fees, Commission and Bonus —

Gross Salary —

Less: Deductions from Salary —

1. Entertainment Allowance u/s 16 —

2. Professional Tax u/s 16 —

—
Net Salary
 Income from Salary

What is the difference between Exemption and

deduction?
 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.
 Exemption_: Section 10 deals with exemptions
 Deduction: Section 80 C to 80 U deals with
deduction
Section 10(5)-Leave Travel
Allowance
 Section 10(13A): House Rent Allowance(HRA)

 This is the famous exemption which is used by many

salaried individuals. However, the wrong belief is that
whatever the rent they pay is actually exempted from
their income. The reality is different. The amount of
exemption is least of the following.

a) Actual HRA Received

b) 40% of Salary (50%, if house situated in Mumbai, Calcutta,
Delhi or Madras)
c) Rent paid minus 10% of salary
(Salary= Basic + DA (if part of retirement benefit) + Turnover
based Commission)
Employee No - 1234 Name - XYZ
Example: PF No -
Joining Date - 21/12/2012 SB/AYE/1234567/123/1234567

BASIC 30,000PF 2,000

Professional
HRA 13,000 Tax 200
CONVEYANCE 2,000
SPECIAL ALLOWANCE 3,000
MEDICAL 1,250
LTA 5,000
Total Earnings 54,250
Salary ( considering no commission & DA) 30,000*12=3,60,000/-
10% of Basic Salary 3,60,000*10%=36,000/-
Rent Paid per month 10,000/-
Particulars Calculation Amount(INR)

a)Actual HRA Received 13,000*12 1,56,000/-

b) 50% of Salary 3,60,000*50% 1,80,000 /-

c)Rent paid (-)10% of salary (10,000*12)-36,000/- 84,000/-

Exemption Which ever is less(a,b,c) 84,000/-

 Allowances Exempt under Section 10(14)(I)-
No limit
 Travelling Allowance
 Daily Allowance
 Conveyance Allowance:-This is the different
allowance than transport allowance. It is the
expenditure granted to an employee to meet
the expenses on conveyance in performing of
his office duties.
 Helper Allowance
 Academic Allowance:- Allowance granted for
encouraging academic, research & training
pursuits in educational & research Institutional.
 Uniform allowance
“standard deduction” of Rs. 40,000.

Particulars Until AY 2018- From AY 2019-

19 20
Gross Salary (in 5,00, 000 5,00,000
Rs.)
(-) Transport 19,200 Not Applicable
Allowance
(-) Medical 15,000 Not Applicable
Allowance
(-) Standard Not Applicable 40,000
Deduction
Net Salary 4,65,800 4,60,000
Benefit of Extra 5,800 now available
 Deduction U/s (16)
There are basically two deduction

1.) Entertainment Allowance [Section 16(ii)] -

(Government Employees)
2.) Professional Tax [Section 16(iii)] -(KIPL- 2,350/-)
 Income from House Property
Particulars Amount (Rs.)

Gross Annual Value xxx

Less: Municipal taxes (xxx)

Net Annual Value xxx

Less: Deductions u/s 24 Standard deduction (xxx)

Deduction on interest paid (xxx)

Taxable income from house property

Deductions: 1. Standard Deduction u/s 24@30% of

Annual Value
2. Interest paid on home loan( Max
Rs. 200,000/-)
3. Loan Principle payment u/s 80C
4. Deduction for fist time home
buyer u/s 80EE
 Income from Other
Sources
1.) Income:
• Dividend
• Interest- From Savings, Term deposit,
income tax refund, other
• Income of winnings from lotteries,
crossword puzzles etc., excluding income
from owning race horses
• Income from the activity of owning and
maintaining race horses
 Income from Other Sources -
DEDUCTIONS
Deduction on Interest Income Under Section 80TTA
For a residential individual (age of 60 years or less) or HUF, interest
earned upto Rs 10,000 in a financial year is exempt from tax. The
deduction is allowed on interest income earned from:
 savings account with a bank;
 savings account with a co-operative society carrying on the
business of banking; or
 savings account with a post office
Senior citizens are not entitled to benefits under section
80TTA.
 Interest income in case of Fixed Deposit (PAN)
Tax on Fixed Deposits
Senior citizens, with effect from 1 April 2018, will enjoy an income tax
exemption up to Rs. 50,000/- on the interest income they receive from
fixed deposits with banks, post offices etc. under Section 80TTB.
 Exempt Income
The PPF and EPF amount you withdraw after maturity is
exempt from tax and must be declared as exempt income from
income from other sources.
Note that: The EPF is only tax exempt after five years of
continuous service.
Family Pension
If you are collecting pension on behalf of someone who is deceased, then you must
show this income under income from other sources. There is a deduction of Rs
15,000 or one-third of the family pension received whichever is lower from the
Family Pension Income. This will be added to the taxpayer’s income and tax must
be paid at the tax rate that is applicable.

Taxation of Winnings from Lottery, Game Shows, Puzzles

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%
 Deductions under Chapter VI-A

 Maximum Limit- Rs.1,50,000/-

 You can save tax on salary income from this section alone
 Different Investment in this section includes
 Life Insurance premium (Paid by an individual, spouse, and child. In the case of
HUF, on the life of any member of HUF).
 EPF-Employee contribution can be claimed for deduction.
 Public Provident Fund (Paid by an individual, spouse, and child. In the case of
HUF, on the life of any member of HUF).
 National Savings Certificate (NSC).
 Sukanya Samriddhi Account
 ELSS or Tax Saving Mutual Funds
 Senior Citizen Savings Scheme
 5-Years Post Office or Bank Deposits.
 Tuition fee of kids.
 Principal payment towards home loan.
 Stamp duty and registration cost of the house.
 Deductions under Chapter VI-A

Deduction under Sec.80CCC is available only for individuals.

Contribution to an annuity plan of the LIC of India or any other
insurer for receiving the pension. Do remember that the amount
should be paid or deposited out of income chargeable to tax.
Note:- this is also the part of the combined limit of Rs.1.5 lakh
available under Sec.80C Sec.80CCC, and Sec.80CCD(1)
 Deductions under Chapter VI-A

 An individual’s maximum 20% of annual income (Earlier it was 10% but after
Budget 2017, it increased to 20%) or an employees (10% of Basic+DA) contribution
will be eligible for deduction.
Note:- this is also the part of the combined limit of Rs.1.5 lakh available under Sec.80C
Sec.80CCC, and Sec.80CCD(1)
 There is a misconception among many that there is no upper limit for this section.
However, the limit is least of 3 conditions.
 1) Amount contributed by an employer,
 2) 10% of Basic+DA and
 3) Gross Total Income.
 This is additional deduction which will not form the part of Sec.80C limit.
 The deduction under this section will not be eligible for self-employed.
 Deductions under Chapter VI-A

 This is the additional tax benefit of up to Rs.50,000 eligible

for income tax deduction and was introduced in the Budget
2015, One can avail the benefit of this Sect.80CCD (1B) from
FY 2015-16.
 Both self-employed and employees are eligible for availing
this deduction.
 This is over and above Sec.80CCD (1).
Deductions under Chapter VI-A
 Deductions under Chapter VI-A

An Individual’s of HUFs expenses actually paid for medical treatment of specified

diseases and ailments subject to certain conditions can be claimed under this
section.
The maximum deduction is Rs. 40,000. This can also be claimed on behalf of the
dependents. The tax deduction limit under this section for Senior Citizens and
very Senior Citizens (above 80 years) is now revised to to Rs 1,00,000.
With effect from the assessment year 2016-17, the taxpayer shall be required to
obtain a prescription from a specialist doctor (not necessarily from a doctor
working in a Government hospital) for availing this deduction.
Can claim the deduction for the medical treatment of self, spouse, children,
parents brothers, and sisters of the individual.
 Deductions under Chapter VI-A

 If the loan is taken by an individual for any study in India or outside India,
then they can claim the deduction.
 The interest part of the loan on such education loan can be claimed for
deduction for pursuing individual’s own education or for the education of
his relatives (Spouse, children or any student for whom the individual is
legal guardian).
 The entire interest is deductible in the year in which the individual starts
to pay interest on the loan and subsequent 7 years or until interest is paid
in full (i.e for total 8 years).

NOTE:-Interest should be paid out of the income of chargeable to tax.

 Deductions under Chapter VI-A

 Donations to certain approved funds, trusts, charitable

institutions/donations for renovation or repairs of notified temples,
etc can be claimed as a deduction under this section.
 This deduction can only be claimed when the contribution made by
cheque or draft or in cash. In-kind contributions like food material,
clothes, medicines etc. do not qualify for deduction under this
section.
 The donations made to any Political party can be claimed under
section 80GGC.
From FY 2017-18, the limit of deduction under section 80G / 80GGC
for donations made in cash is reduced from current Rs 10,000 to Rs
2,000 only.
 Deductions under Chapter VI-A

 This section only applies to those who have not availed HRA in their salary or not
claiming the deduction on their rent in any of the other sections of income
Conditions:
 Applicable to Individual or HUF.
 Tax Payer may be either salaried or a self-employed. However, must not be
getting HRA.
 Tax Payer himself or spouse/Minor Child/HUF of which he is a member
should not own any accommodation at a place where he is doing a job or
business
 If Tax Payer owns a house at a place other than the place noted above, then
the concession in respect of self-occupied property is not claimed by him
[Under Section 23 (2) (a) or 23 (4) (a)].
 Tax Payer has to file a declaration in Form No.10BA regarding the
expenditure incurred by him towards the payment of rent.
 Deductions under Chapter VI-A

How much amount of deduction one can avail under Sec.

80GG?
If the all five conditions are satisfied, the amount deductible
under Section 80GG is LEAST OF THE FOLLOWING.
 Rs.5, 000 per month;
 25% of total income of taxpayer for the year; or
 Rent Paid less 10% of total income (Rent Paid-10% of Total
Income).
 Deductions under Chapter VI-A

Example:
What is total income for the purpose of Sec. 80GG?
We can calculate it as below.
Total Income=Gross Total Income-LTCG-STCG-Income referred under the
Sec.115A-Amount deductible under Sec.80C to 80U (except Section
80GG)

 Mr. X’s total income (calculated as per above formula) is Rs.4,

00,000. He pays an annual rent of Rs.1, 50,000. Then least of the
below will be applicable for deduction under Sec. 80GG.
•Rs.60, 000 per year.
•Rent Paid-10% of Total Income=Rs.1,50,000-Rs.40,000=Rs.1,10,000’-.
•25% of Total Income i.e. Rs.1, 00,000/-.
So least of the above will be Rs.60, 000/-, which one can claim under
Section 80GG for that particular FY.
The tax rebate of Rs.2,500 for individuals with income
of up to Rs 3.5 Lakh has been proposed in Budget
2017-18.
To avail this benefit, there are certain conditions and they
are as below.
 The taxpayer must be a resident individual.
 Your Total Income (Less Deductions from 80C to 80U)
is equal to or less than Rs.3,50,000.
 The rebate is the 100% of income tax on such income
or Rs.2,500 (whichever is less).
 Total ITRs are – ITR 1 to ITR 7
ITR-1
i. Earlier ITR-1 was applicable for both Residents, Residents Not ordinarily resident
(RNOR) and also Non-residents. Now, this form has been made applicable only for
resident individuals

ii. The condition of the individual having income from salaries, one house property,
other income and having total income up to Rs 50 lakhs continues

iii. There is a requirement to furnish a break-up of salary. Until now, these details
would appear only in Form 16 and the requirement to disclose them in the return had
never arisen

(Note- Refer Official Websites for Income Tax Return filing)