Archive / Investment Adviser (Level 1) / Introduction to Personal Financial Planning

nism-series-xa-savings-ratio-debt-service-ratio-benchmark[ INVESTMENT ADVISER (LEVEL 1) ]

A family earns a gross annual income of ₹20,00,000 and pays total annual debt EMI repayments of ₹6,00,000. What is their Debt Service Ratio (DSR), and does it satisfy standard financial planning benchmarks?

[ A ]50.0% (Excessive debt burden)

[ B ]15.0%

[ C ]30.0% (Healthy; comfortably within the standard recommended ceiling of 35% to 40%)[ CORRECT ]

[ D ]70.0%

Takeaway

Option C is correct: 30.0% (Healthy; comfortably within the standard recommended ceiling of 35% to 40%)

Derivation

Debt Service Ratio = (Annual Debt Repayments / Gross Income) × 100 = (₹6,00,000 / ₹20,00,000) × 100 = 30.0%. This ratio measures how much of gross income is already committed to servicing existing EMIs before any other expense, saving, or investment is funded. The standard financial planning rule of thumb treats 35% to 40% as the upper ceiling beyond which a household's finances become fragile to income shocks like job loss or medical emergencies, since so little income remains discretionary. At 30.0%, this family sits below that ceiling with some room to absorb an additional loan or an income disruption without immediate distress.

Why the others fail

A — 50.0% (Excessive debt burden)

Overstates the family's actual debt commitment; dividing ₹6,00,000 by ₹20,00,000 correctly yields 30.0%, not this much higher figure.

B — 15.0%

Understates the family's actual debt commitment; dividing ₹6,00,000 by ₹20,00,000 correctly yields 30.0%, not this much lower figure.

D — 70.0%

A DSR this high would signal severe debt distress well beyond the recommended 35-40% ceiling, which does not match the ₹6,00,000-on-₹20,00,000 figures given.