Income
Money earned from sources such as salary or wages. In the booklet it is the starting point of every budget: savings are what is left of income after expenditure.
In plain language
Income is the money that comes in. The booklet's definition is simple: "Money earned from various sources like Salary, Wages, etc."
It is one of four words that financial education asks you to manage: income, expenditure, assets and liabilities. Chapter 1 says financial education helps people develop "a positive attitude towards managing their income, expenditure, assets and liabilities properly."
The word is used in two ways in the booklet, and it helps to keep them apart:
- Your income: what you earn from work or business, which you then spend, save and invest.
- Income from an investment: interest or dividend that an investment pays you while you hold it.
The same word also decides your income tax, which is charged on the annual income of a person.
How it works
Income in your budget (Chapter 2):
Savings = Income − Expenditure
Savings are "the surplus of income over expenditure." If income does not grow but spending does, savings shrink.
Income first, spending last (Chapter 3). The booklet quotes Warren Buffett: "Don't save what is left after spending; spend what is left after saving." So it rearranges the same three words:
Income − Savings = Expenditure
Income from investments (Chapter 3). In the three pillars of investment, return can be "in the form of income, appreciation of capital invested or both. Income means an investment's earnings in the form of interest or dividend payment."
Income for tax (Chapter 10). Taxes are calculated on the annual income of a person, for a year running 1 April to 31 March. The year in which income is earned is the previous year; the year in which it is taxed is the assessment year.
Income at loan time (Chapter 8). Lenders ask for the latest 3 months' bank statement where salary or income is credited, and salary slips for the last 3 months.
A worked example
Amounts are illustrative.
Farhan works in a garment unit in Tiruppur and earns a salary of Rs 28,000 a month. His wife Rukhsana earns Rs 7,000 a month from tailoring at home.
Household income: 28,000 + 7,000 = Rs 35,000 a month.
The old way (save what is left): they spent Rs 33,500 last month and saved only Rs 1,500.
The booklet's way (spend what is left): on salary day they first move Rs 5,000 to a recurring deposit.
Income − Savings = Expenditure
35,000 − 5,000 = Rs 30,000 available to spend
They cut Rs 3,500 of spending to fit.
Income from investment: after a year, their deposits earn interest. That interest is also income, the second meaning of the word.
Income for loans: when Farhan applies for a two-wheeler loan, the bank asks for 3 months' salary slips and 3 months' bank statements showing his salary credits.
Why NISM asks about it
Chapter 1 (Introduction) names income as one of the four things to manage; Chapter 2 (Key Concepts in Personal Finance) defines it and gives savings as the surplus of income over expenditure; Chapter 3 (Financial Planning) gives the Buffett rule and income as a form of return; Chapter 10 (Tax Saving Options) taxes annual income. Expect: the definition, and which equation the booklet recommends (Income − Savings = Expenditure).
Common exam traps
- Savings = income − expenditure, not income + expenditure.
- The recommended habit is to save first, then spend (Income − Savings = Expenditure).
- "Income" from an investment means interest or dividend, not the gain from selling at a higher price (that is capital appreciation).
- Income is earned in the previous year and taxed in the assessment year.
- The four words are income, expenditure, assets and liabilities. Savings and investment are separate concepts.
Check yourself
1.According to the chapter, proper management of income, expenditure, assets and liabilities leads a person to which situation?
- a)Guaranteed profits from the securities market
- b)Better financial well-being
- c)Returns higher than the market average
- d)Complete elimination of investment risk
Show the answer
Answer: (b) Better financial well-being
The chapter ends its promise at "better financial well-being" — and where the promise stops is exactly what is being tested. Financial education is never claimed to produce guaranteed profits, market-beating returns or the elimination of risk. It could not: Chapter 3 will state plainly that "risk and investing go hand in hand" and that risk is "the probability or likelihood of a loss occurring in relation to your expected returns". Whenever a Chapter 1 option upgrades the promise into certainty or outperformance, it is a distractor. Well-being is a state — obligations met, goals funded — and a person with modest money and a clear plan can have more of it than a person with a large unplanned heap.
2.A household knows its income, its assets and its outstanding loan, but has never recorded what it spends in a month. Which figure can it therefore NOT compute, and why does that matter most?
- a)Net worth, because expenditure is subtracted from assets
- b)Savings, because savings is income minus expenditure — and without it the household cannot commit to any monthly plan, SIP, premium or contribution
- c)Its liabilities, because expenditure and liabilities are the same thing
- d)Nothing important — expenditure can always be estimated later
Show the answer
Answer: (b) Savings, because savings is income minus expenditure — and without it the household cannot commit to any monthly plan, SIP, premium or contribution
Net worth is assets minus liabilities, so the household can already compute that. What it cannot compute is savings, which Chapter 2 defines as the surplus of income over expenditure — and savings is the number every later chapter depends on. A recurring deposit, a systematic investment plan, an insurance premium, an NPS contribution and a loan EMI all require a reliable monthly surplus figure; without it the household is guessing, and a guess that turns out too high produces a lapsed policy or a defaulted EMI. This is why the chapter places "proper management of income and expenditure" at the foundation of the list. Note that liabilities are what you owe, not what you spend — a distinction option (c) blurs deliberately.
3.How does the booklet define savings?
- a)The total balance lying in a bank account
- b)The surplus of income over expenditure
- c)Money invested in fixed deposits
- d)Income earned from salary and wages
Show the answer
Answer: (b) The surplus of income over expenditure
"Savings are the SURPLUS OF INCOME OVER EXPENDITURE." The word surplus makes savings a flow, not a balance. A family earning ₹40,000 and spending ₹42,000 has negative savings this month even if ₹3 lakh sits in its account from earlier years — it is running down the past rather than adding to it. The chapter breaks the two components out: income is "money earned from various sources like Salary, Wages, etc." and expenditure is "money spent on various items which include essential and NON-ESSENTIAL items". Note that both essential and non-essential spending count; an option restricting expenditure to essentials is wrong.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- Capital appreciationThe gain made when the market value of an investment rises above what you paid for it — as distinct from income, which is the interest or dividend the investment pays you along the way.
- Previous yearUnder the Income Tax Act, 1961, the year in which income is earned. It is taxed in the following assessment year; each runs from 1 April to 31 March.
- ExpenditureMoney spent on various items, both essential and non-essential. The booklet teaches you to save first and treat expenditure as what is left: Income − Savings = Expenditure.
- Financial planningThe process of estimating what a person will need money for across their lifetime and building an investment plan to meet each of those needs — savings with a purpose attached.
- Net worthEverything you own minus everything you owe — the one number that says where a household actually stands, and the starting point of any financial plan.
- SavingThe difference between money earned and money spent. Saving becomes investment only when that surplus is committed for a period in the expectation of getting back a larger amount.