With the advent of the Senior Citizens Savings Scheme, those opting for retirement, voluntary or otherwise, suddenly have a window of opportunity.
Basically, the SCSS is open for those opting for retirement provided they are 55 years of age. However, the moot question that such people face is obvious -- should they be opting for the VRS (voluntary retirement scheme) in the first place?
Life presents very few occasions to an individual where a decision taken has a great impact on not only his own future but also that of his family members.
An offer of VRS is one such important occasion. This article is addressed to all such persons with a view to enable them take the best decision.
Let us take a live case of one such person, whose particulars are provided in the table.
|
TABLE | |
Age |
45 years 7 months |
|
Service put in |
26 years 2 months |
|
Residual service |
14 years 5 months |
|
Current gross pay |
Rs 15,668 |
|
Entitlement for VRS |
Rs 745,308 |
|
PF |
Rs 346,910 |
|
Leave encashment |
Rs 151,050 |
|
Gratuity |
Rs 299,565 |
|
Pension commutation |
Rs 114,328 |
|
Total |
Rs 16,57,161 |
|
Monthly pension |
Rs 6,138 |
Analysis
The ex-gratia is exempt up to Rs 500,000.
Assuming that the rest of the amount is subject to tax at the highest rate of 33.66 per cent, the amount remaining in hand works out at Rs 662,737.
Since the rest of the benefits suffer very little tax, if any, the total investible amount in hand is Rs 15,74,590. Now the question is, should this person continue in service or should he opt for the retirement scheme?
For the sake of comparison, we shall ignore the taxes and the tax-planning strategies that can be adopted.
If VRS is taken
For abundant precaution, we shall assume a very conservative interest rate of 8 per cent p.a., payable monthly, even when it is possible to park investible funds in avenues yielding 9 per cent p.a., payable quarterly.
At 8 per cent, on Rs 15,74,590 the interest will be Rs 10,497 every month. Add to that the pension. The total monthly income will be
Rs 16,635, which is Rs 967 more than the salary he is earning at present. The future value of an annuity of Rs 967 received per month, at the end of 14 years and 5 months (which is his period of residual service) is Rs 3,14,905.
Now, one immediate and obvious conclusion that the above analysis throws out is that the employee will not be required to sacrifice his financial lifestyle in case he opts for the VRS. This is because his gross pay was
Rs 15,668 per month, whereas the aggregate of interest on the VRS amount and the pension works out to Rs 16,635. Isn't it strange that a person's income can be greater when he isn't working than when he is?
However, one point hitherto not considered is that, if the employee continues in his service, his salary will rise with time and consequently, there will be incremental effects on gratuity, Provident Fund, etc.
But on the other side of the coin, there will be no ex-gratia of Rs 6,62,737 plus the future value of annuity of Rs 3,14,905, aggregating to around Rs 9.75 lakh (Rs 975,000).
The possibility of the incremental values of these benefits taken together with the increase in salary at the time of normal retirement being substantially higher than the ex-gratia offered right now certainly looms large.
However, the following additional factors have to be taken into consideration before taking the decision:
Actuarial valuation
In the event of the death of the employee during the remaining tenure of his service, the above analysis will have to be drastically revised in favour of VRS.
Time is money
We know about the time value of money. But have we considered the money value of time? This is a very important aspect, neglected by many. Money has time value that is expressed in terms of interest.
Similarly, time has money value. Unfortunately, this cannot be accurately quantified and will heavily depend upon the future events such as getting another job, starting a business, pursuing a rewarding hobby, etc.
Residual benefits
Most employers continue to give some benefits to their retired employees. These may be in terms of annual domiciliary medical expenses, hospitalisation expenses with a high ceiling, continuation of housing loan, allowing the employee to retain their provident fund dues with their employer for a specified period, etc.
A suggestion
The interest rate on provident funds is normally higher than the market rate. Most importantly, it is tax-free. I would like to take this opportunity to drop a suggestion for all those who have opted for VRS.
There was a ceiling on voluntary contribution of the employee to his Provident Fund of 20 per cent of his gross salary.
When FA91 replaced Sec. 80C with Sec. 88, the ceiling was removed so that now, there is no limit on the quantum of voluntary contributions made by an employee to his provident fund. It would be a good idea to contribute up to the maximum capacity during the financial year of retirement.
Taking such an action or leaving the provident fund with the ex-employer for as long as possible does not deprive anyone of the right to contribute to the Senior Citizens Savings Scheme since it permits contributions to the account within one month of the date of receipt of the retirement benefits.
If the various benefits are received in parts at different times, the restriction of depositing it in the account within one month of its receipt applies to the receipt of each such benefit. Provident Fund is certainly a retirement benefit as defined by the scheme.
To sum
As observed earlier, life offers such opportunities very rarely. Failing to plan is akin to planning to fail. It will hurt your family if your decision in this regard is not planned. Do undertake proper analysis before you take any step.