Retirement Planning - Textbook

 Equity (E): This is a 'High risk – High Return' option as the funds are invested in equity Subscriber can choose to invest up to 75% in this class  Corporate Bonds (C): Funds are invested in fixed income bearing instruments which offer medium returns  Government Securities (G): Funds are invested only in Government Securities  Alternate Assets (A): Funds are invested in real estate bonds and infrastructure projects. Maximum capping is 5% investment since this is a very high risk investment. Under Auto Choice, the asset allocation of the subscriber’s fund follows a life-cycle based approach reducing the allocation to equities with the subscriber’s increasing age. Under auto choice, the subscriber can choose one of the three options for Life Cycle– Conservative Life Cycle-takes a conservative approach capping equity exposure to a maximum of 25% Moderate Life Cycle- this is the default option with the equity exposure being capped at maximum 50% Aggressive life cycle- under this fund, the equity allocation can go up to 75% CFP Level 2 - Module 1 - Retirement Planning - India Page 145

Under Active Choice: Subscriber can enroll for NPS through the online application mode from the convenience of his home / office. The prime objective of the scheme is to provide all citizens of India with an attractive long term savings avenue to plan for retirement through safe and reasonable market based returns. The account can be opened by all Indian Citizens between 18 to 60 Years. Steps for online account opening:  Subscriber can enroll for NPS by clicking on 'Apply Now' option under NPS (National Pension System)  Subscriber will get online form, which needs to be filled with mandatory fields.  Receipt number for subscriber registration (account opening) will be generated. There will be provision to complete the registration (account opening) later based on receipt number search.  Subscriber's e-KYC will be done through Aadhaar (OTP based authentication).  Subscriber enters remaining details like Bank details, scheme details, nominee details etc.  Subscriber needs to upload photograph and signature (Cheque and PAN for Tier II). CFP Level 2 - Module 1 - Retirement Planning - India Page 146

 Subscriber will enter the contribution amount (this is the amount subscriber wants to invest in NPS) and click for payment.  Subscriber will be directed to online payment platform wherein subscriber will complete the payment through HDFC Bank Net Banking.  On successful payment, PRAN will be allotted to the subscriber and PDF form will be generated based on data given. This can be saved for reference and need not be sent separately (This is only applicable for Aadhaar based NPS account opening).  NPS Account opening Contribution: Particulars Tier I Tier II Minimum Contribution required at the time of account opening Rs.500/- Rs.1000/- Minimum Subsequent Contribution amount required Rs.500/- Rs. 250/- Minimum contribution required per year Rs.1000/- NIL Minimum number of contributions required in a year 1 NIL NPS Models There are 4 different types of models/variants of the NPS system 1. All Citizen Model 2. Government Sector Model 3. Corporate Model 4. NPS Swavalamban/NPS Lite/Atal Pension Yojana 1. All Citizen Model The All Citizen Model is for the people who are not working as an employee – such as self- employed individuals, professionals, business owners etc. The Central government had initially issued the NPS for the government employees in 2004. On first AY, 2009, the NPS was made available to all citizens of India. Any citizen of India, resident CFP Level 2 - Module 1 - Retirement Planning - India Page 147

as well as non-resident between the age of 18 and 65 years of age can apply for an NPS account. 2 & 3. Government Sector and Corporate Model For the Central and State Government employees who receive their pension post retirement from the government, the government model applies. Except for the Armed Forces, this model applies to all government employees who have joined service after 1st January, 2004. Under the government model, the employee contributes 10% of his salary to the pension fund with a matching contribution from his employer, in this case the government, to the fund. From 01.04.2019, the employer’s contribution has been enhanced to 14% in case of central Government employees The Corporate sector employees, as the name suggests, fall under the corporate model Any entity registered under the companies Act, cooperative act, Central or state Public sector enterprises, partnership firm, LLP, trust or Proprietorship firm may join the NPS. The employees of the entity will be registered with the NPS Trust as subscribers. The rights of subscribers under the corporate model also remain intact – with the freedom to operate one’s individual account, appoint nominees, change or switch asset allocation, change pension fund manager, and so on. The employer can co-contribute to the employees’ pension funds and claim this as a business expense in their tax filing. Employee’s contribution qualify for tax benefit under section 80C. 4. Atal Pension Yojana (APY) The socio-economically disadvantaged citizens fall under the purview of the Atal Pension Yojana model. These are the low income group citizens between the ages of 18 to 40 years who receive support from the government as a share in their pension contributions. Under the APY, the government guarantees a monthly pension for the subscribers in the range of Rs. 1000- Rs. 5000 – the subscriber can choose the amount of pension required on retirement and the contributions can be adjusted accordingly. The age of entry in this scheme from 18 to 40 and age of exit and start of pension is 60 years. Therefore the minimum period of contribution for the subscriber has to be 20 years. CFP Level 2 - Module 1 - Retirement Planning - India Page 148

An age-wise indicative table of contribution levels under APY is as below – Entry Total Years Monthly Contribution Amount Required Age of (years) Monthly Monthly Monthly Monthly Monthly Contribution Pension Pension Pension Pension Pension 18 of Rs. of Rs. of Rs. of Rs. of Rs. 19 42 29 41 1000 2000 3000 4000 5000 21 40 42 84 126 168 210 22 39 23 38 46 92 138 183 228 24 37 25 36 50 100 150 198 248 26 35 27 34 54 108 162 215 269 28 33 29 32 59 117 177 234 292 30 31 31 30 64 127 192 254 318 32 29 33 28 70 139 208 277 346 34 27 35 26 76 151 226 301 376 36 26 37 24 82 164 246 327 409 38 23 39 22 90 178 268 356 446 40 21 20 97 194 292 388 485 106 212 318 423 529 116 231 347 462 577 126 252 379 504 630 138 276 414 551 689 151 302 453 602 752 165 330 495 659 824 181 362 543 722 902 198 396 594 792 990 218 436 654 870 1087 240 480 720 957 1196 264 528 792 1054 1318 291 582 873 1164 1454 CFP Level 2 - Module 1 - Retirement Planning - India Page 149

Gratuity: An employee is eligible to receive gratuity once he/she completes 5 years of working with an organization. It is a benefit paid under the Payment of Gratuity Act 1972. It does not require any contributions from the employee. This is a payment purely from the employer as an expression of his gratitude to the employee for having served long enough with his company. However it can be paid earlier if an employee dies or becomes disabled during the course of the employment, even before completing 5 years of service. 2.8 Mandatory contributory system Employee provident fund: Employees contribute some part of their salary ( basic pay + dearness pay ) or you can say some % of salary in provident fund, employer may also contribute in the same fund, once employees retire or leave the organization will get their provident fund with interest. If withdrawal takes place after 5 years, the whole provident fund is tax free. Employee Pension Scheme- EPS 1995 was launched by Employee Provident Fund Organization (EPFO) under Employee’s Provident Fund and Miscellaneous provision Act 1952. It is a good scheme for private sector employees for receiving pension at age 58. Contribution is done by only employer. He contributes 8.335 of salary but salary subject to maximum Rs.15000. Central Government also contributes 1.16% of salary but salary subject to maximum of Rs.15000. To understand the above concepts we are taking an example, there are three types of employees – A, B and C A joined a government job in 1998 B joined a government job in 2006 C works for the private sector CFP Level 2 - Module 1 - Retirement Planning - India Page 150

When A retires, he will get tax free gratuity subject to maximum Rs.20 lacs. He will get guaranteed pension which will be 50% of his last drawn basic along with dearness allowance. He will be given permission to commute his pension upto 40%, which will be restored after 15 years of pension life. When B retires, he will get the benefits of the Defined Contribution System as on and after 1-4- 2004 whosoever joined government job except defense personnel. He will get pension from his account of NPS (National Pension System) which will depend on accumulated corpus in his NPS account and rate of interest rate offered by Life Insurance Company at the time of retirement. He will get Employee Provident fund, Gratuity and leave encashment. When C retires, he will get pension from his EPS scheme which is almost not more than 12500 if covered under EPF act 1952. If he has NPS account, will get the same as B would get. CFP Level 2 - Module 1 - Retirement Planning - India Page 151

Chapter 3: Retirement Products in India Introduction On account of the difficulties faced by the defined benefit schemes, whether statutory or non- statutory and whether run by the Government or private bodies, the world over the trend is to adopt defined contribution schemes and even shift from the defined benefit pattern to a defined contribution one. It has already been seen that the defined contribution system has many advantages from the contributor’s point of view and is a far more transparent system. Accounting Standards have also made it mandatory to provide for the liabilities of future benefits payable to the employees in the books of accounts before preparing Profit and Loss Account and the Balance Sheet. The purpose is to tell the employer as to how much financial liability his company is carrying on its shoulders and the prudent financial principles demand that such liabilities should be funded as and when they arise. In the defined contribution schemes, this difficulty generally does not arise because the employer knows the amount of contribution to be made as in the case of Employees’ PF and thus meets his liability. In this Topic, we shall study all defined contribution plans relating to employee benefits. Since the Central Government has scrapped its GPF and defined benefit pension scheme for new employees except the armed forces with effect from 1-1-2004, this should be kept in mind while studying GPF scheme. The effect of this notification on the defined benefit pension scheme for the Central Government shall be discussed in next topic. Defined Contribution Plans In the earlier section, we have discussed types of retirement plans viz. defined benefit plans and definite contribution plans. We have also studied the characteristic features and advantages– disadvantages of defined contribution plans. Whenever we refer to defined contribution plans, the reader must remember that “Under DC schemes, the contributions are usually expressed as a percentage of salary or total earnings. The rate of contribution could be a flat rate or could be tiered by some other consideration like length of service or seniority etc. But the final benefit payout is never fixed and would be based on the accumulation of the contributions made”. In this section, we will study the defined contribution plans available in the Indian market, their key features, their functioning, funding and withdrawal norms. In India, there is no social security and the CFP Level 2 - Module 1 - Retirement Planning - India Page 152

choice available to the working class is very limited, for example, State and Central government employees are covered under General Provident fund (GPF) and industrial workers and all other establishments under Employees’ Provident Fund (EPF). Thus, the employees have to join one of these schemes depending on where they are employed and do not have choice to choose any one of them unlike developed countries. Provident Fund The Provident Fund is a retirement benefit scheme, under which a stipulated sum is deducted from the salary of the employee as their contribution towards the fund. The contributions of the employer and the employee are then invested in government securities. The interest earned on those securities is credited to the Provident Fund account. Thus, the corpus in an account consists of the employee’s and the employer’s contributions and the interest on these contributions. The accumulated sum is paid to the employee at the time of his/her retirement or resignation (subject to certain conditions). If the employee were to die before getting the accumulated balance, the corpus would be given to the employee’s legal heirs. Under section 80C of the Income Tax Act, the employee gets a tax deduction. The three types of Provident Funds are: Statutory Provident Fund (SPF) The history of the Provident Fund legislation in India dates back to the year 1919. Various provident fund schemes were first framed u/s 96-B of the Government of India Act, 1919. Later, the Provident Fund Act, 1925 was enacted to amend and consolidate the laws relating to both Government and other Provident Funds. A statutory provident fund is set up under the provisions of the Provident Fund Act, 1925. This fund is maintained by Government and Semi Government organizations, local authorities, railways, universities and recognized educational institutions. Retired employees normally will not be concerned with such funds after their retirement. Employees’ Provident Fund Scheme, 1952 Except for a Statutory support of contributory P.F. for coal mine workers, there was no provision of post retirement benefits to industrial & commercial workers before 1952. With the increasing participation of private sector in the industrial development and growth of new enterprises, the government introduced a provident fund scheme in the early 50s known as Employees Provident Fund scheme, providing for accumulation of certain share of the wages contributed by the employees and CFP Level 2 - Module 1 - Retirement Planning - India Page 153

employers during the working life. The accumulation was paid as lump sum on retirement. The Employees Provident Fund Organisation created by the Employees Provident Fund and Miscellaneous Provisions Act 1952 (PF Act), runs the scheme with its network of officers spread across the country. The Board of Trustees formed under the PF Act manages the corpus. The Ministry of Finance fixes the return on the corpus to each employee on an annual basis. There are three schemes in force as of now:- 1. Employees Provident Fund Scheme (E.P.F. Scheme), 1952 2. Employees Deposit linked Insurance Scheme (EDLI scheme). 1976 3. Employees Pension Scheme (E.P.S.), 1995 All are funded Schemes Employee Definition “Employee” as defined in Section 2(f) of the Act means any person who is an employee for wages in any kind of work manual or otherwise, in or in connection with the work of an establishment and who gets wages directly or indirectly from the employer and includes any person employed by or through a contractor in or in connection with the work of the establishment. Membership All the employees (including casual, part time, Daily wage contract etc.) other than an excluded employee are required to be enrolled as members of the fund the day, the Act comes into force in such establishment. Definition of Basic Wages “Basic Wages” means all emoluments which are earned by employee while on duty or on leave or holiday with wages in either case in accordance with the terms of the contract of employment and which are paid or payable in cash, but does not include: a. The cash value of any food concession; b. Any dearness allowance (that is to say, all cash payment by whatever name called paid to an employee on account of a rise in the cost of living), house rent allowance, overtime allowance, CFP Level 2 - Module 1 - Retirement Planning - India Page 154

bonus, commission or any other allowance payable to the employee in respect of employment or of work done in such employment. c. Any present made by the employer. Salary: Basic Wages + D.A.+ Retaining Allowance + Cash value of food concession. Excluded Employee “Excluded Employee” as defined under para 2(f) of the Employees’ Provident Fund Scheme means an employee who having been a member of the fund has withdrawn the full amount of accumulation in the fund on retirement from service after attaining the age of 55 years; or an employee, whose pay exceeds Rs. 15000 per month at the time, otherwise entitled to become a member of the fund. Withdrawal facilities Employees’ Provident Fund Scheme takes care of following needs of the members and provides withdrawal facilities for the following purposes: (i) Retirement (ii) Medical Care (iii) Housing (iv) Family obligation (v) Education of Children (vi) Financing of Insurance Polices Annual Statement of Account As soon as possible and after the close of each period of currency of contribution, annual statements of accounts will be sent to each member through of the factory or other establishment where the member was last employed. The statement of accounts in the fund will show the opening balance at the beginning of the period, amount contributed during the year, the total amount of interest credited at the end of the period or any withdrawal during the period and the closing balance at the end of the period. Members should satisfy themselves as to the correctness of the annual statement of accounts and any error should be brought, through the employer to the notice of the Provident Fund Office within 6 months of the receipt of the statement. CFP Level 2 - Module 1 - Retirement Planning - India Page 155

Employees’ Provident Fund Interest Rate The rate of interest is fixed by the Central Government in consultation with the Central Board of trustees, Employees’ Provident Fund every year during March/April. The interest is credited to the members account on monthly running balance with effect from the last day in each year. Returns on EPFO funds are set annually by the Govt. and are annual around the budget time. The rate of interest for the year 2018-19 is 8.65% p.a. Benefits A) A member of the provident fund can withdraw full amount at the credit in the fund on retirement from service after attaining the age of 55 years. Full amount in the provident fund can also be withdrawn by the member under the following circumstances: A member who has not attained the age of 55 year at the time of termination of service. A member is retired on account of permanent and total disablement due to bodily or mental infirmity. On migration from India for permanent settlement abroad or for taking employment abroad. In the case of mass or individual retrenchment. B) In case of the following contingencies, withdrawal of the proceeds of the provident fund at the credit of the member will be allowed after his completing a continuous period of subscription to the fund of not less than two months, immediately preceding the date on which the application for withdrawal is made by the member: Where employees of closed establishments are transferred to other establishments, which are not covered under the Act. Where a member is discharged and is given retrenchment compensation under the Industrial Disputes Act, 1947. Withdrawal before retirement A member can withdraw upto 90% of the amount of provident fund at credit after attaining the age of 54 years or within one year before actual retirement or superannuation whichever is later. CFP Level 2 - Module 1 - Retirement Planning - India Page 156

Accumulations of a deceased member Amount of Provident Fund at the credit of the deceased member is payable to nominees/legal heirs. Transfer of Provident Fund account Transfer of Provident Fund account from one region to another, from Exempted Provident Fund Trust to Unexampled Fund in a region and vice-versa can be done as per Scheme. Nomination The member of Provident Fund shall make a declaration in Form 2, a nomination conferring the right to receive the amount that may stand to the credit in the fund in the event of death. Rate of contribution for EPF Scheme By the employee: @12% of the EPF Salary every month. (Basic + DA) If DA forms part of retirement benefits Full amount of the employee’s contribution goes to his Provident fund account. Contribution by the Employer: @12% of the EPF Salary every Month But the employer’s Contribution is bifurcated @8.33% of the salary up to Rs. 15000 goes to Employee’s pension Scheme, balance to the EPF account. This fund is maintained by Central Provident Fund Officer under Ministry of Labor and the rate of interest is decided by the government. As per the latest changes in the Employee Pension Scheme that are effective since 1st September 2014, the EPF is distributed as 12% of the employee’s salary goes into the EPF account and 12% of the employer's salary is divided into 3.67% for EPF, 8.33% for EPS. Employer also pays for 0.5% for EDLI 0.85% as EPF admin charges and 0.01% as EDLI Admin charges. The minimum pension under EPS is Rs 1000 and EPF is mandatory for those employees drawing a salary less than Rs 15,000 a month. EDLI cover for each employee has been raised to Rs.6,00,000 maximum CFP Level 2 - Module 1 - Retirement Planning - India Page 157

Withdrawals A member can withdraw for the following purposes if he has completed 5 years service and his own share of contribution with interest is not less than Rs. 1000. 1. For purchase of a site/plot for construction of a house the withdrawal can be least of following: a. The cost of site/plot or; b. 24 months salary (Basic + D.A.) or; c. Employee’s and employer’s contribution with interest 2. For the alteration or improvements to dwelling house the withdrawal is least of following: a. 12 months salary (Basic + D.A.) or; b. The cost of alteration or; c. Employee’s and employer’s contribution and interest thereon 3. For Ready built house or construction of a house, withdrawal is least of following: a. 36 months salary or; b. The cost of the house or; c. Employee’s and employer’s contribution and interest thereon. Advances for Repayment of Loan If a loan is already taken from a Govt. body or a Co-operative Society for purchase of a dwelling house/flat or for the construction of a dwelling house or including acquisition of a site, and 10 years of membership of the fund. Withdrawal from PF for repayment of such loan shall be the least of the following amounts: (a) Outstanding loan (b) PF balance including the member’s and employer’s contributions with interest (c) 36 months’ salary (Basic + D.A.) CFP Level 2 - Module 1 - Retirement Planning - India Page 158

Advance for Illness Eligibility >Non refundable advance from his account in the fund for any of the three circumstances of illness: 1. Hospitalization lasting for one month or more or; 2. Major surgical operation in a hospital or; 3. Suffering from TB, leprosy, paralysis, cancer, mental derangement or heart ailmet Such an advance even for the treatment of a member of his family. The amount of such an advance not to exceed the member’s own contribution with interest in the fund or the member’s salary for 6 months. Advance for Marriage/Education Non Refundable’ advance from the PF for (i) The member’s own marriage, (ii) The marriage of his or her daughter, son, sister or brother or (iii) for the post matriculation education of his or her son or daughter - Conditions: (1) The member should have completed 7 years’ of membership of the fund, and (2) The amount of his own share of contributions with interest should be Rs. 1,000 or more. (3) This advance shall not exceed 50% of the member’s own share with interest. (4) Maximum 3 advances shall be admissible to a member in his lifetime. Tax Benefit: This provident scheme is EEE ( exempt , exempt , exempt ) First Exempt means contribution made by employee subject to maximum Rs.1.5 lacs quality U/S 80 C. Second Exempt means interest accrued on the amount accumulated is tax free. CFP Level 2 - Module 1 - Retirement Planning - India Page 159

Third Exempt means the withdrawals done during the tenure of the fund for an emergency or marriage or education or the withdrawals at the end of the tenure on retirement or death are also completely tax free. Amount withdrawal before 5 years of service is taxable. But, it is not taxable if his services are terminated by reasons of: a. His illness b. For a cause beyond the control of the employer. c. Discontinuation of the employer’s business. Note: If an employee gets the provident fund and transfer to another recognized provident fund trust on joining new service, total service with all the employers as provident fund member has to be counted for tax benefit. Universal Account Number (UAN) and Employer Portability The UAN (the Universal Account number) is a 12 digit code allotted to every member of the EPFO - using which he can manage his Provident fund account. This number is issued by the Ministry of Employment and Labour under the Government of India. The UAN is used to identify the employee’s account with the EPFO – and is used as a reference number for all contributions and service related issues. The UAN number of the employee remains the same throughout his lifetime. It is portable and can be moved around with him to another employer when he moves between jobs. Public Provident Fund (PPF) under the Public Provident Fund Act, 1968 The Public Provident fund or PPF is a long term savings and tax planning option backed by the government of India available to Indian resident citizens. The Public Provident fund was set up under the Public Provident fund act 1968. This act was repealed in 2020 along with the Government Savings certificate Act and was merged into the Government Savings Promotion Act. The PPF Act itself was also changed into the Public Provident fund Act 2019 with some minor changes. CFP Level 2 - Module 1 - Retirement Planning - India Page 160

Viability of PPF Scheme – A Credible Aggregator of Retirement Corpus  The PPF is a relatively secure investment as compared to other tax saving instruments such as ELSS (Equity Linked Savings schemes).  It is a debt oriented fund offering a fixed interest rate as determined by the government based on the government yields.  PPF calculates interest on the outstanding investments on a compounded basis which helps the corpus to multiply at a steady inflation-adjusted pace.  One of the major benefits of the PPF account is that it cannot be attached by the courts if a litigation goes against the subscriber. He cannot be asked to use his PPF account proceeds to pay off his debts. However, this does not apply to the Income Tax authorities. Salient Features: Item Description Eligibility Any adult in his / her name or in minor's name in the capacity of guardian of the minor. Minimum Rs. 500/- per annum is required to be deposited. amount The accounts in which deposits are not made for any reason are treated as discontinued accounts and such accounts cannot be closed before maturity. The discontinued account can be activated by payment of the minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year. Maximum Rs. 1.5 lac per annum amount The depositor has flexibility and freedom for depositing any amount and n number of times. Maturity period 15 years excluding the year in which account opened. Year means financial year. An Account, on the expiry of fifteen years, can be extended for a further period of five years at a time. Interest Rate The interest is paid as per the rates declared by the Government from time to time. CFP Level 2 - Module 1 - Retirement Planning - India Page 161

Nomination The rate of interest was 8% per annum up to 30.11.2011. facility Transferability The interest rate increased to 8.6% per annum w.e.f. 01.12.2011. Loan facility The interest has been increased to 8.80% w.e.f. 01.04.2012. The interest has been revised to 8.70% w.e.f. 01.04.2013. Interest rates keep on changing as per market interest rates. Interest rate is 7.7% p.a. as on 01-04-2020. The interest is compounded annually. The interest for the month is calculated on the minimum balance available in the account from 5th of a month to the last date of the month. Available A PPF account can be transferred from a branch of State Bank of India or a nationalized bank to Post Office and vice versa and also from a branch of State Bank of India to a designated branch of Nationalized Bank. A PPF account cannot be transferred from one person to another. Even in the case of death of a depositor, the nominee cannot continue the account. A depositor can avail of loan facility in the third financial year from the financial year in which the account was opened. Application in prescribed form is to be made for loan along with the pass book of the account. In case, the loan is sought from minor's Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor. The loan can be taken up to 25% of the amount in the account at the end of the second year immediately preceding the year in which the loan is applied for. The loan is repayable in lump sum or convenient installments. Where loan is repaid within 36 months, interest is charged at 1% (w.e.f. 2019) and if it is not repaid within 36 months, the interest at the rate of 6% is charged on the outstanding balance. The interest is to be paid in not more than two installments after the loan amount is fully repaid. Once the first loan is repaid, second loan can be obtained on same terms. This facility is available till the end of 5th financial year from the end of the financial CFP Level 2 - Module 1 - Retirement Planning - India Page 162

Withdrawal year in which initial subscription was made. facility A depositor can make partial withdrawals, once every year from his PPF account Premature after expiry of five years, from the end of Financial Year, in which the initial Encashment deposit was made. Application in prescribed form is to be made for withdrawal along with the pass book of the account. In case, the withdrawal is sought from minor's Account, the guardian has to make a declaration that the money is required for the use/benefit of the minor. The amount of withdrawal is restricted to 50% of the credit balance at the end of the fourth year immediately preceding the year of withdrawal or the year immediately preceding the year of withdrawal, whichever is lower. In case of accounts extended beyond Maturity period partial withdrawals are allowed once in a year with the condition that the amount of withdrawal during a five year block period should not exceed 60% of the balance in the account at the commencement of the block period. 1. change in residential status of the account holder 2. to finance higher education of the dependent children of the account holder 3. to finance treatment of serious ailments or life threatening diseases of account holder, spouse, dependent children or parents, or higher education of the account holder. Tax benefits NOTE> the premature closure is at a cost of a one percent reduction in the rate at which interest is credited to the account.\" Interest Available under Section 80C Taxability Interest income is totally tax free. Other features The benefits of exemption of interest from Income Tax is not available on deposits made in a PPF account after expiry of fifteen years without exercising option in writing for continuance of the account within one year. PPF accounts can be opened and operated through an authorized agent appointed by the National Savings Organization. CFP Level 2 - Module 1 - Retirement Planning - India Page 163

Only local cheques are accepted for deposit and the date of presentation of local cheque and demand draft is treated as date of deposit in the Account. Balance in PPF account cannot be attached under court decree. Entire deposit in a PPF account is exempt from the Wealth Tax. The deposit in a minor account is clubbed with the deposit of the account of the guardian for the limit of Rs.1,50,000 On death of the account holder his nominee(s)/legal heir(s) cannot continue the account. The account has to be closed in such case. Deposits in excess of Rs.1,50,000 in a financial year in a PPF account are refunded without interest and the excess amount is not considered for income tax rebate. Pension plans from Mutual Funds A pension plan is an annuity which is bought to generate income during retirement. Functional similarity of these annuities to pensions is the reason why they are also called pension plans. Pension plans are preferred by investors who receive a large sum as superannuation benefit post retirement. Investor chooses to invest the proceeds in a pension plan so as to generate safe and regular income for the rest of his life. Various agencies provide pension plans but pension plans offered by Mutual Funds are good. Mutual funds offering pension plans which are hybrid in nature having investment in both debt and equity component. Mutual Fund pension plans collect money from several investors and invest the pooled money in equity and debt markets. Equity exposure is in the range of 40% which is lower as compared to balanced funds (65% to 70%). Investors can either invest lump sum amounts or can choose the route of systematic investment plan (SIP). The SEBI re-categorisation of mutual funds in 2018 resulted in the opening up of a new category called solution oriented scheme schemes – this included schemes for goals such as retirement and children’s education. Tax Benefit and Lock-in Period, Systematic Monthly/Annual Investments in Units Investments in the scheme are eligible for tax exemption under section 80C of the Income Tax Act 1961. Most of the funds have a lock- in period of 5 years or until retirement whichever is earlier. CFP Level 2 - Module 1 - Retirement Planning - India Page 164

The taxation of capital gains on these schemes is as per normal mutual fund debt or equity taxation rules- depending upon the nature of asset allocation of the scheme. Investments can be done via Systematic Investment Plan on a monthly or annual basis to keep up regular investing into the retirement goal. Lock-in Period and Withdrawal prior to Retirement Most Pension mutual funds have a lock-in of 5 years or retirement whichever is earlier, in order to bring discipline in investing for retirement goals. On completion of lock-in, one can choose to withdraw lump sum or take annuity payments in the form of a Systematic withdrawal plan. Some schemes also have a high exit load till a period of 5 years in order to discourage the early exit of funds by investors. Systematic Withdrawal on Retirement akin to Annuity with Benign Taxation An Annuity is paid out by most pension funds in the form of a monthly or annual installment – in order to enable the subscriber to meet his regular expenses. Pension schemes from mutual funds do not provide this annuity – instead one can choose the option to take a systematic withdrawal (SWP) from the scheme. Under this option, a specified amount can be withdrawn every month from the accumulated corpus as and SWP – this is akin to having an annuity payment coming in every month from the pension fund. Since SWP includes one’s capital invested as a part of the amount withdrawn – the taxation of the SWP is much better than that of an annuity payment or of a dividend receipt. An annuity is considered as a part of the subscribers’ income and he has to pay tax as per his marginal rate on this amount. The dividend taxation also having changed to the marginal rate of tax from 1st April 2020, implies a heavy rate of taxation if one avails for dividend payout options on their investments to ensure regular inflow. Under SWP, one also has the benefit of the Rs. 1 lac exemption on capital gains in the financial year. The investor is only liable to pay tax on capital gains over and above this Rs. 1 lac Since a major portion of the SWP received is capital, the amount of gain included in the SWP is relatively smaller hence one is subject to lesser tax. CFP Level 2 - Module 1 - Retirement Planning - India Page 165

It may be noteworthy here that the Rs. 1 lakh exemption limit on capital gains applies only under schemes where equity related investments are above 65% of the fund corpus. one has to choose the fund option where such condition is fulfilled to avail of this exemption. Pension plans from insurance companies Life Insurance companies offer pension plans in India. These plans are considered insurance-cum- investment There are two types of pension plans offered by Insurance companies: a. Immediate annuity Plans: In this plan lump sum amount is to be invested thereafter regular income or pension is provided immediately at the end of every period. b. Deferred Annuity Plans: these plans have two phases to their tenure – the accumulation phase and the vesting phase. During the accumulation phase, the policyholder deposits premiums on a regular basis in the policy and the amount thus accumulated continues to grow till the vesting date. On reaching the vesting age, the policyholder can commute up to 60% of the amount thus accumulated tax free and the rest has to be used to purchase an annuity. Unit Linked Pension Plans Market-linked investments from insurance plans are called Unit Linked. In ULIP plans, it is in the hand of investors to decide the investment portfolio. A unit linked policy is locked in for a period of 5 years with no option to withdraw the policy either partially or wholly before completion of the lock-in. CFP Level 2 - Module 1 - Retirement Planning - India Page 166

FUND DETAILS ASSET CLASS RISK & RETURN Money Government Equity RATING Securities, Fixed Market Income Instruments, Instruments & Cash & Bonds Deposits FUND COMPOSITION Equity To generate long term 0% to 0% to 20% 80% Very High Oriented- capital appreciation in 20% to Aggressive 100% line or better than Nifty index returns Income To deliver High 0% to 80% to100% - Moderate oriented - potential returns due 20% Moderate to investments in instruments with higher duration and credit exposure Capital To invest in high 0% to 40% to 100% - Low Protection grade fixed income 60% oriented - Conservative instruments and Government securities at the short end of the yield curve,to deliver stable returns Mortality and Tax Benefits Pension insurance plan provide insurance cover also during accumulation period, therefore insurance companied deduct some premium by cancelling units. This is called mortality charges. CFP Level 2 - Module 1 - Retirement Planning - India Page 167

In case of the insured’s death during the term of the policy, the nominee is eligible to receive the sum assured. On the death of the policyholder post the retirement age and the beginning of the annuity payments, the nominee has an option to take the death benefit as a lump sum or purchase an annuity from the amount. Tax treatment: The premium paid is deductible under section 80CCC of the Income Tax Act 1961 subject to a maximum permissible limit of Rs. 1.5 lacs under section 80C. On reaching the vesting age (which is the age at which the policy begins to pay annuity), the policyholder has a choice to commute up to 60% of the accumulated corpus (as per changed rules of the IRDA from July 2019) and the remaining is used to purchase annuity. The commuted amount is exempt from tax while the annuity received from the policy thereon is added to the Gross taxable income of the policyholder and taxed at the marginal slab rate of tax. Death benefit received by the policyholder’s nominee is tax-free. However if the nominee chooses to continue receiving annuity payments, such payments would be taxable at the nominee’s slab rate like in the case of the policyholder. In case of surrender of policy, if the policyholder has availed tax benefits under section 80C on the premium payments, the surrender value is added back to his income and charged to tax. In case of not having availed tax benefits, the surrender value is reduced for the capital amount i.e. the premiums paid and the rest is chargeable to tax at the policyholder’s slab rate. Lock-in Period: The policy is locked in for a period of 5 years from inception – before the completion of which no partial or whole withdrawals are allowed. Annuities provided by traditional insurance plans: As we know there are two types of annuities plans i.e. immediate annuity plans and deferred annuity plans. In deferred annuity plan money is invested in government securities or corporate bonds till vesting age. CFP Level 2 - Module 1 - Retirement Planning - India Page 168

We are taking an example of LIC Jeevan Akshay-VII Immediate annuity plan. Introduction: • This is an Immediate Annuity plan wherein the Policyholder has an option to choose type of annuity from 10 available options on payment of a lump sum amount. • The annuity rates are guaranteed at the inception of the policy and annuities are payable throughout the lifetime of Annuitant(s). Annuity Options: The available annuity options under this plan are as under: Option A: Immediate Annuity for life. Option B: Immediate Annuity with guaranteed period of 5 years and life thereafter. Option C: Immediate Annuity with guaranteed period of 10 years and life thereafter. Option D: Immediate Annuity with guaranteed period of 15 years and life thereafter. Option E: Immediate Annuity with guaranteed period of 20 years and life thereafter. Option F: Immediate Annuity for life with return of Purchase Price. Option G: Immediate Annuity for life increasing at a simple rate of 3% p.a. Option H: Joint Life Immediate Annuity for life with a provision for 50% of the annuity to the Secondary Annuitant on death of the Primary Annuitant. Option I: Joint Life Immediate Annuity for life with a provision for 100% of the annuity payable as long as one of the Annuitant survives. Option J: Joint Life Immediate Annuity for life with a provision for 100% of the annuity payable as long as one of the Annuitant survives and return of Purchase Price on death of last survivor. Annuity option once chosen cannot be altered. Minimum Annuity: CFP Level 2 - Module 1 - Retirement Planning - India Page 169

Tax benefit: During accumulation period premium paid by insured can claim u/s 80 C. And annuity is taxable. Government sponsored regular income schemes Senior Citizens Savings Scheme (SCSS) is a government-backed savings instrument offered to Indian residents aged over 60 years. The deposit matures after 5 years from the date of account opening but can be extended once by an additional 3 years. The SCSS interest rate for April to June 2020 has been set at 7.4%. This is the highest interest rate among the various small savings schemes in India. History of interest rate in SCSS: CFP Level 2 - Module 1 - Retirement Planning - India Page 170

Salient Features: a) Who can open:- (i) An individual above 60 years of age. (ii) Retired Civilian Employees above 55 years of age and below 60 years of age, subject to condition that investment to be made within 1 month of receipt of retirement benefits. (iii) Retired Defense Employees above 50 years of age and below 60 years of age, subject to condition that investment to be made within 1 month of receipt of retirement benefits. (iv) Account can be opened as individual capacity or jointly with spouse only. (v) The whole amount of deposit in a joint account shall be attributable to the first account holder only. (b) Deposit:- (i) Minimum deposit shall be Rs. 1000 and in multiple of 1000, subject to maximum limit up to Rs. 15 lakh in all SCSS accounts opened by an individual. (ii) In case any excess deposit made in SCSS account, excess amount will be refunded immediately to the depositor and only PO Savings Account Interest rate will be applicable from the date of excess deposit to the date of refund. (iii) Investment under this scheme qualifies for the benefit of section 80C of Income Tax Act, 1961. (c) Interest:- (i) Interest shall be payable on quarterly basis and applicable from the date of deposit to 31st March/30th June/30th September/31st December. (ii) If the interest payable every quarter is not claimed by an account holder, such interest shall not earn additional interest. (iii) Interest can be drawn through auto credit into savings account standing at same post office, or ECS. In case of SCSS account at CBS Post offices, monthly interest can be credited into savings account standing at any CBS Post Offices. (iv) Interest is taxable if total interest in all SCSS accounts exceeds Rs.50,000/- in a financial year and TDS at the prescribed rate shall be deducted from the total interest paid. No TDS will be deducted if form 15 G/15H is submitted and accrued interest is not above prescribed limit. (d) Premature Closure:- (i) Account can be prematurely closed any time after date of opening. (ii) If account closed before 1 year, no interest will be payable and if any interest paid in account shall be recovered from principle. (iii) If account closed after 1 year but before 2 year from the date of opening, an amount equal CFP Level 2 - Module 1 - Retirement Planning - India Page 171

to 1.5 % will be deducted from principal amount. (iv) If account closed after 2 year but before 5 year from the date of opening, an amount equal to 1 % will be deducted from principal amount. (v) Extended account can be closed after the expiry of one year from the date of extension of the account without any deduction. (e) Account closure on maturity:- (i) Account may be closed after 5 year from the date of opening by submitting prescribed application form with passbook at concerned Post Office. (ii) In case of death of account holder, from the date of death, account shall earn interest at the rate of PO Savings Account. (iii) In case spouse is a joint holder or a sole nominee, account can be continued till maturity if spouse is eligible to open SCSS account and not have another SCSS Account. (f) Extension of Account:- (i) Account holder may extend the account for further period for 3 years from the date of maturity by submitting prescribed form with passbook at concerned post office. (ii) Account can be extended within 1 year of maturity. (iii) Extended account shall earn interest at the rate applicable on the date of maturity. Taxability on Senior Citizens Savings Scheme  Investments made in a Senior Citizen Savings Scheme account qualify for income tax deduction benefit up to Rs. 1.5 Lakh under Section 80C of the Income Tax Act, 1961.  Interest on SCSS is fully taxable. In case the interest amount earned is more than Rs. 50,000 for a fiscal, Tax Deducted at Source (TDS) is applicable to the interest earned. This limit for TDS deduction on SCSS investments is applicable from AY 2020-21 onwards. Post Office Monthly Income Scheme (POMIS) Monthly Income Scheme is offered by Post offices and banks in the country. In this scheme investor needs to invest lump sum and thereafter every month will receive interest and at the time of maturity invested money will be returned to hi. The rate currently being offered is 6.6% p.a. payable monthly. Minimum and Maximum investment: CFP Level 2 - Module 1 - Retirement Planning - India Page 172

 In multiples of INR 1000/-  Maximum investment limit is INR 4.5 lakh in single account and INR 9 lakh in joint account  An individual can invest maximum INR 4.5 lakh in MIS (including his share in joint accounts)  For calculation of share of an individual in joint account, each joint holder have equal share in each joint account. (a) Who can open:- (i) a single adult (ii) Joint Account (up to 3 adults) (Joint A or Joint B)) (iii) a guardian on behalf of minor/ person of unsound mind (iv) a minor above 10 years in his own name. (b) Deposit:- (i) Account can be opened with minimum of Rs. 1000 and in multiple of Rs. 100. (ii) A maximum of Rs. 4.50 lakh can be deposited in a single account and 9 lakh in Joint account. (iii) In a joint account, all the joint holders shall have equal share in investment. (iv) Deposits/shares in all MIS accounts opened by an individual shall not exceed Rs. 4.50 lakh. (iv) Limit for account opened on behalf of a minor as guardian shall be separate. (c) Interest:- (i) Interest shall be payable on completion of a month from the date of opening and so on till maturity. (ii) If the interest payable every month is not claimed by the account holder such interest shall not earn any additional interest. (iii) In case any excess deposit made by the depositor, the excess deposit will be refunded back and only PO Savings Account interest will be applicable from the date of opening of account to the date of refund. (iv) Interest can be drawn through auto credit into savings account standing at same post office, or ECS. In case of MIS account at CBS Post offices, monthly interest can be credited into savings account standing at any CBS Post Offices. (v) Interest is taxable in the hand of depositor. (d) Pre-mature closure of account:- (i) No deposit shall be withdrawn before the expiry of 1 year from the date of deposit. (ii) If account is closed after 1 year and before 3 year from the date of account opening, a deduction equal to 2% from the principal will be deducted and remaining amount will be paid. CFP Level 2 - Module 1 - Retirement Planning - India Page 173

(iii) If account closed after 3 year and before 5 year from the date of account opening, a deduction equal to 1% from the principal will be deducted and remaining amount will be paid. (iv) Account can be prematurely closed by submitting prescribed application form with pass book at concerned Post Office. (e) Maturity:- (i) Account may be closed on expiry of 5 years from the date of opening by submitting prescribed application form with pass book at concerned Post Office. (ii) In case the account holder dies before the maturity, the account may be closed and amount will be refunded to nominee/legal heirs. Interest will be paid up to the preceding month, in which refund is made. (f) Tax:- There is no tax benefit in this scheme. It means investment does not qualify u/s 80C and interest is completely taxable. Reverse Mortgage With increased urbanization and prevalent nuclear family culture, many senior citizens are forced to fend for themselves. This situation has been aggravated by increase in the cost of living accompanied by longer life expectancy, thus making it very difficult for the senior citizens to make both the two ends meet. In order to help those senior citizens who own their house but don’t want to sell it, the Government of India introduced reverse mortgage a scheme in 2008. This scheme is exact ‘reverse’ of plain home loan scheme. In case of a home loan one takes a lump sum loan and repays it in installments in future. Under the reverse mortgage scheme, you get installments and the loan is repayable in lump sum in future. Here, the payment stream comes to the borrower for a fixed period of time in the form of monthly, quarterly or yearly payments. The maximum permissible monthly payments under this scheme cannot exceed Rs. 50,000 per month. You can even get lump sum payments under reverse mortgage loan however the total amount which you can get as lump sum which cannot be more than 50% of the total eligibility amount subject to a maximum of Rs.15 lakh. The one time lump sum loan can only be taken for the purpose of meeting medical expenses for yourself, your spouse or any dependent person. CFP Level 2 - Module 1 - Retirement Planning - India Page 174

The money receivable under regular reverse mortgage scheme money so borrowed can only be used for the genuine needs of the owner like medical emergencies, day to-day expenses, repairs and renovation or repayment of loan taken for the same property. Pre-requisites for availing reverse mortgage: The reverse mortgage loan is available to any person who is owner of a residential house property and has completed 60 years of age. In case of a couple wishing to avail this scheme, one of the spouses should have completed 60 years of age and the other should be over 55 years of age, though it is not necessary that only a couple can avail this loan. Even a person who is single and a senior citizen, can avail loan under reverse mortgage scheme but the property should be owned by him/ her You need to mortgage your residential property which is being used by you as your own residence. So the property should be used by the person who is taking this loan as his primary residence. Moreover the property should be self-acquired, implying you cannot get a loan on inherited property or any property received by you as gift. Therefore under this scheme you cannot mortgage any other property like commercial property or other residential property which is let out though owned by you. Even in case of a property on which any loan has been taken cannot be used for taking this reverse mortgage until and unless entire loan has been repaid. Tenure: Various banks have devised their own schemes within the framework of the scheme announced by the government. Broadly the tenure of such loan shall not be more than twenty years. This is the period during which the owner of the house will continue to receive the periodic payments. However in case the borrower outlives the tenure of the loan, the payment stream shall stop but he can still continue to stay in the house. Even after his death, his spouse can also continue to stay in the same house without having to worry about repayment of the loan. CFP Level 2 - Module 1 - Retirement Planning - India Page 175

Rate of Interest: The rate of interest will vary from one lender to another. It is generally in between 9.5% - 11% p.a. The lenders are free to provide the loans under fixed or floating rate regime. Taxation aspect of reverse mortgage: As per the provisions of income Tax act, 1961, the act of mortgaging the property for the purpose of securing reverse mortgage is not treated as transfer affecting any tax liability. Moreover the money received by the owner of the property under reverse mortgage shall not be treated as income.. However it is important to note that as and when the property is disposed of, either by the bank or the borrower or its legal heirs, the normal provisions of capital gains will apply and the owner or his legal heirs shall be liable to pay capital gains tax as per the provisions applicable to general sale of property. However if the legal heirs decide not to sell the property but pay the outstanding dues fully, no tax implications will arise as redemption of the property does not amount to transfer. So from the above it becomes very clear that reverse mortgage is the golden walking stick in the hands of senior citizens in their old age and has come to rescue of such senior citizens who stay in their own house. Reverse Mortgage Loan Enabled Annuity (RMLeA) In RML people are very much confused about the tenure of loan. To solve this problem Reverse Mortgage Loan enabled Annuity (RMLeA) has been introduced by the National Housing Bank in collaboration with Star Union Daichi Life Insurance Company Ltd., and Central Bank of India. Reverse Mortgage Loan enabled Annuity (RMLeA) provides higher annuity payments for the entire lifetime of the annuitant to ensure he lives with dignity after retirement. Difference between RML and RMLeA as given below: CFP Level 2 - Module 1 - Retirement Planning - India Page 176

CFP Level 2 - Module 1 - Retirement Planning - India Page 177

CFP Level 2 - Module 1 - Retirement Planning - India Page 178

Chapter 4: Employee Benefits on Superannuation Gratuity The first and foremost retirement benefit that every employer would have in place is Gratuity. Gratuity is a lump sum payment to any employee when he retires or leaves service. It is basically a retirement benefit to an employee so that he can live life comfortable after retirement. 1. Payment of Gratuity is a Defined Benefit. 2. Gratuity is a lump sum payment to any employee when he retires or leaves service. 3. Gratuity means, “money given in recognition of services” as per Oxford Dictionary. 4. It is a gratuitous payment or a parting gift towards his employees when the employees part with him after rendering long and faithful service. Passing of Legislation: 1. The states of Kerala and West Bengal pioneered to make gratuity a legal payment by passing legislations. 2. Kerala in 1970 and 3. West Bengal in 1971. 4. The Central Government got a legislation passed by the Parliament in 1972. 5. Now, it is a statutory benefit under the Payment of Gratuity Act 1972. Gratuity can be either received by:  The employee himself at the time of his/her retirement, Or  The legal heir in the event of the death of the employee. CFP Level 2 - Module 1 - Retirement Planning - India Page 179

Coverage: 1. The whole of India 2. But in the State of Jammu & Kashmir, not applicable to plantations or ports. Application: 1. Every factory, mine, oilfield, plantation, port and Railway Company; 2. Every shop or establishment – within the meaning of any law in a State, and in which 10 or more persons are or were employed, on any day of the preceding 12 months; 3. Any other establishments with 10 or more employees, as the Central Government may notify in this behalf. Note: A shop or establishment to which this Act has become applicable shall continue to be governed by this Act – not withstanding that the number of persons employed therein at any time falls below 10. So, once covered, always covered. Employee: “Employee” means any person (other than an apprentice) employed on wages, to do any type of work and whether or not such person is employed in a managerial or administrative capacity. Continuous Service (Clause 1): \"Completed year of service” means continuous service for one year. An employee shall be said to be in continuous service for a period of one year if he has, for that period, been in uninterrupted service – including service which may be interrupted on account of  sickness,  accident,  leave,  absence from duty without leave, CFP Level 2 - Module 1 - Retirement Planning - India Page 180

 Lay off (not strike),  strike or lockout or cessation of work not due to any fault of the employee. The period of service not to be included :  Absence treated as ‘break in service’ has in accordance with rules or regulations governing the employees.  Strike or lockout or cessation of work due to any fault of the employee. One year service – Continuous Service (Clause 2) Where an employee is not in continuous service within the meaning of clause (1), he shall be deemed to be in continuous service a) for the period of one year If he as actually worked for not less than – i) 190 days in the case of an employee employed below the ground in a mine or in an establishment which works for less than 6 days in a week and ii) 240 days, in any other case; b) for the said period of 6 months If he has actually worked for not less than – i) 95 days in the case of an employee employed below the ground in a mine or in an establishment which works for less than 6 days in a week and ii) 120 days in any other case. Period not to exclude:  For the purpose of Clause (2), it shall include the days of –  Permitted lay-off  Leave with full wages  Absent due to temporary disablement caused by accident arising out of and in the course of his employment; and  In the case of a female, maternity leave not exceeding 12 weeks. CFP Level 2 - Module 1 - Retirement Planning - India Page 181

Service of a Seasonal Employee:  An employee, employed in a seasonal establishment, shall be deemed to be in continuous service for a season if he has actually worked for not less than 75% of the number of days on which the establishment was in operation. WAGES Section 2 (s)  “Wage” as per act = Basic + D.A.  Does not include – any bonus, commission, house rent allowance, overtime wages and any other allowance. Forfeiture of Gratuity: A. The gratuity payable to an employee may be wholly or partially be forfeited if the services are terminated i) For his riotous or disorderly conduct or any act of violence ii) Moral turpitude B. If services of an employee are terminated on account of any act or willful omission or negligence causing – Damage or loss to, or destruction of Property belonging to the employer – Gratuity to the extent of such damage or loss can be forfeited. Nomination: 1. This facility is made available to an employee who has completed one year of service. 2. It provides for multiple nominations and proportions of the Gratuity to be earmarked for each of the nominees. 3. An employee can make the nomination only in favor of members of his family if he has a family. 4. Any nomination made in favor of a person who is not a member of the family is void after having family. CFP Level 2 - Module 1 - Retirement Planning - India Page 182

Protection of Gratuity:  No gratuity payable under this act shall be liable to attach in execution of any decree or order of any civil, revenue or criminal court. Entitlement of Gratuity:  Gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than 5 years.  Continuous service of 5 years shall not be necessary where the termination of the employment is due to death or disablement.  Payment on Superannuation, Disability and Resignation from Employment  Gratuity is part of the defined benefit scheme by the employer to the employee rendering long service with him for more than 5 years.  This payment is generally due to him in superannuation or on his retirement/resignation  However, Gratuity is payable even when the employee is disabled wherein he/she is incapacitated for the work he/she was appointed to do before the accident or disease. It is also payable to the employee’s nominees or legal heirs in case of the employee’s death during his work tenure.  In these conditions, the rule of 5 years of minimum continuous service does not apply. Calculation of Gratuity: 1. Monthly rated employee: Rate as per section 4(2)  15 days wages (Basic + D.A.) for each year of completed service (more than 6 months to be taken as one year)  Wages – Terminal (last drawn salary)  To calculate per day wage monthly wages is divided by 26 (15/26) Ex. Mr. X joined on 1st day of September 1970 and retired on 30th April 2014 at Superannuation age of 60 years when his monthly emoluments were as under: CFP Level 2 - Module 1 - Retirement Planning - India Page 183

Basic salary Rs. 17,000; Dearness allowance Rs. 13,000; City Compensatory allowance Rs. 1,0000; House rent allowance Rs. 20,000. The company pays gratuity as per the Payment of Gratuity Act, 1972. Mr. X is entitled to get the gratuity amount of: Sol. Rs. 761538 15/26 *(17000+13000) *44 2. Piece rated employee  15 days wages (Basic + D.A.) for each year of completed service (More than 6 months to be taken as one year)  Monthly Wage = Average wages of last three months  To calculate per day wage monthly wages is divided by 26 (15/26) Ex. Rajeev is a piece rated employee working in a garment fabrication organization. He retires on June 01, 2007 after working 10 years. Total amount of last three months paid him was Rs. 40000 (Basic + DA +HRA + Overtime), which includes HRA and overtime Payment of Rs. 12000. What amount of Gratuity will be paid to him as per act? Sol. Rs. 53846.15385 15/26 * (28000/3) *10 3. Seasonal Employee  7 days wages (basic + D.A.) for each season of completed service  Monthly Wage = Last drawn salary  To calculate per day wage monthly wages is divided by 26 (7/26) Ex. An employee joined in the year 1994 in a seasonal mill. (one season in a year) After working as the years as a seasonal employee up to the year 2009. He retires with the following monthly salary: Basic Salary Rs. 8500 D A Rs. 2500 HRA Rs. 3000 How much Gratuity is payable to him as per act? Ans. Rs. 47384.61538 7/26 * (8500+2500) *16 CFP Level 2 - Module 1 - Retirement Planning - India Page 184

Concept Checker 1. What is the minimum number of employees in an establishment for it to come under the purview of the Payment of Gratuity Act? a. 20 and above b. Above 20 c. 10 and above d. Above 1 Ans: c 2. An establishment had 9, 10, 20, 9 and 8 employees in the years 2000, 2001, 2002, 2003 and 2004. Are the employees of that establishment covered under the Payment of Gratuity Act, 1972: a. Since 2000 b. Since 2001 c. Since 2002 d. Not now covered. Ans: b 3. What is the maximum amount of gratuity payable as payment of gratuity Act a. Rs. 3,50,000 b. Rs. 2,50,000 c. Rs. 20,00,000 d. No ceiling. Ans: c 4. How much amount of gratuity is payable for each year of completed service to the monthly rated employees? a. 15 days’ wages b. Half a month’s wages c. 20 days’ wages d. None of the above. Ans: a CFP Level 2 - Module 1 - Retirement Planning - India Page 185

5. How much amount of gratuity is payable for each season of service to the seasonal employees? a. 7 days’ wages b. 10 days’ wages c. 7.5 days’ wages d. None of the above. Ans: a 6. Wages for the purpose of gratuity payment means: a. Basic Pay b. Basic Pay and Dearness Allowance c. Basic Pay, Dearness Allowance, City Compensatory Allowance and House Rent d. Emoluments including all allowances, bonus and commission etc. Ans: b 7. Which of the following leave period is excluded from the period of Service for payment of gratuity? a. Without pay leave b. Maternity leave in case of female employee c. Sickness leave d. None of the above. Ans: d 8. Can an employer have an arrangement to pay gratuity higher than that prescribed under the Act? a. No b. Yes, but always within the prescribed ceiling on the maximum amount c. Yes, but always at the prescribed rate for each year of completed service d. Yes, at the same or a higher rate and with or without the prescribed ceiling. Ans: d CFP Level 2 - Module 1 - Retirement Planning - India Page 186

9. What is the maximum Tax Free gratuity in case of A) Gratuity payable to Govt. employees: a. Full amount of gratuity b. Rs. 20,00,000 c. Rs. 2,50,000 d. None of the above Ans: a B) Gratuity payable to employees in any other method than under the Act: a. 15 days’ terminal wages with a ceiling of Rs. 20,00,000 b. 15 days’ average wages of the last 10 months with a ceiling of Rs. 2,50,000 c. Half month’s terminal wages without ceiling d. Half month’s average wages of the last 10 months with a ceiling of Rs. 20,00,000. Ans: d 10. Mr. X joined in a company on 10th March 2007 and died in an accident on 30th October, 2007. The company pays gratuity as per the Payment of Gratuity Act. His terminal monthly wages was: Basic Pay Rs. 8000 D A Rs. 3000 HRA Rs. 2000 What amount his nominee would get as Gratuity? Ans. Rs. 6346.153846 15/26 * (8000+3000) *1 Tax Treatment of Gratuity Section 10 (10) (i): Any death-cum-retirement gratuity received by the Central Government or the State Government employees or the employees of a local authority or the employees of civil and services is exempt from tax Non-Govt. Employees Who are covered under the ‘the payment of Gratuity (Amendment) Act, 2010’ u/s 10(10)(ii) CFP Level 2 - Module 1 - Retirement Planning - India Page 187

For monthly rated employee: Minimum of three is exempted. 1. Actual Gratuity Received 2. Rs. 2000000 3. 15/26 multiply No. of completed year of services or part thereof exceeding 6 months * last drawn salary. Ex-1. Mr. X retired from a company where Gratuity Act is applicable after completing 30 years and 9 months. At the time of retirement his last drawn salary is Rs. 25,000 including HRA of Rs. 5000. He got the gratuity of Rs. 3,60,000. Calculate what is the amount of his Taxable Gratuity? Ans. 2308 Sol. Least of three is exempted 1. Actually received = 3,60.0000 2. 20,00,000 3. 15/26 * (25000-5000) *31 = 357692 Ex-2. Mr. X an employee of ABC Ltd. receives Rs. 3 lacs as gratuity. He retires on January 12, 20012after serving for 33 years and 6 months. At the time of retirement monthly salary of Mr. X was Rs. 12000. Calculate the taxable amount of gratuity if he covered under payment of gratuity act 1972? Ans. Rs. 71538.46154 Sol. Least of three is exempted 1. Actually received = 300000 2. 2000000 3. 15/26*12000*33 = 228461.5385 For seasonal employee Minimum of three is exempted. 1. Actual Gratuity Received 2. Rs. 2000000 3. 7/26 multiply no of seasons * last drawn salary. CFP Level 2 - Module 1 - Retirement Planning - India Page 188

Piece rated employee Minimum of three is exempted. 1. Actual Gratuity Received 2. Rs. 20,00,000 3. 15/26 multiply no of every completed year of service or part thereof exceeding 6 months * average of last 3 months salary Ex-1. Mr. X is a piece-rated employee. He receives a gratuity of Rs. 150000. He retires on March 31, 2012 after being employed for 15 years and 6 months. During the period 31-12-2011 to 31-03- 2012, he has been paid a total wages of Rs. 45000, which includes overtime of Rs. 5000. Calculate his tax exempted Gratuity? Ans. Rs. 115384.6154 Sol. Least of three is exempted 1. actually received = 150000 2. 2000000 3. 15/26 * {(45000-5000)/3} * 15 = 115384.6154 Taxable (1,50,000-115384.1154) = 34615 In case of other employees, u/s 10(10)(iii) Minimum of the following is example for tax 1. Actually gratuity received. 2. 20,00,000 3. Half month salary based on average salary (Basic + DA which forming part of retirement benefits + Fixed % commission on turn-over) of last 10 months preceding the month in which event occurs for every completed year. Taxability of Gratuity for private sector employees not covered under Gratuity Act. Payment of gratuity for prolonged term of service by an employee is a retirement benefit which is compulsory from enactment of the Gratuity Act, 1972. If the employee is not covered by payment of Gratuity Act then he can obtain benefit of Gratuity under terms of employment. Below mentioned details explain taxability of Gratuity received by private sector employees who are not covered under CFP Level 2 - Module 1 - Retirement Planning - India Page 189

Gratuity Act. When employee receives gratuity under terms of employment then he is not covered under Gratuity Act. From the 3 conditions mentioned below, the amount which is the lowest is exempt from tax. 1) Half month’s average salary for each completed year of service. 2) Maximum exemption limit is of Rs.20,00,000/- in a lifetime. 3) Actual Gratuity received at the time of retirement After exemption, the balance amount is taxable. Other key considerations while calculating tax exemption for employees not covered by payment of Gratuity Act are as follows: 1) For calculating length of service, fraction of a year shall be ignored. Only completed years of service is considered. 2) Average monthly salary is calculated on the basis of average salary of 10 months, immediately preceding the month in which employee retires. 3) Salary includes Basic Salary + Dearness Allowance which forms point of retirement benefit+ Commission paid on a fixed percentage of turnover. Taxation of Gratuity from more than 1 employer If Gratuity is received in the same year, exemption will be least of two: 1. 20,00,000 2. Sum of exempted gratuity from all employers. Ex. Mr. X retired from XYZ Ltd. after completing 28 years 7 months. Salary at the time of retirement is Rs. 12500 p.m. Actual gratuity received is Rs. 135000. Average salary for previous 10 months is Rs. 9350. Calculate the exempted amount of gratuity if XYZ Ltd. is not covered under Payment of Gratuity Act? Ans. 130900 Sol. Least of three is exempted 1. actually received = 135000 2. 20,00,000 3. ½ * 9350 *28 = 130900 CFP Level 2 - Module 1 - Retirement Planning - India Page 190

Special Provisions and Calculation of Gratuity payable on Death Gratuity payable depends upon two factors-  Numbers of years of service  Last drawn salary However, in case of death of employee, the gratuity is calculated and paid based on the length of the service and the maximum benefit is restricted to Rs. 20lacs Tenure of the service Amount to be Paid Less than 1 year 2 times the basic pay More than 1 year and less than 5 years 6 times the basic pay CFP Level 2 - Module 1 - Retirement Planning - India Page 191

More than 5 years but less than 11 years 12 times the basic pay More than 11 years but less than 20 years 20 times the basic pay More than 20 years Half of salary for every completed 6 monthly periods subject to a maximum of 33 times of the salary Activity Go through the provisions of the Payment of Gratuity Act, 1972, the wordings as existing now, given as additional reading at the end of the Topic. Also read the provisions of the Payment of Gratuity Rules notified by the respective Governments to be aware of the provisions. You can then enquire from a group of working persons in your neighborhood to ascertain the gratuity benefit that their employers have in place to realize the effect of the provisions of the Act. Leave Encashment Leave encashment falls under “Defined Benefit” category. Under this benefit, the employee gets cash payment for surrendering his unutilized leave that he has accumulated. Different types of leaves that an employee is entitled are: 1. Casual Leave/Emergency leave 2. Sick Leave/Medical leave 3. Privileged Leave Privilege leave can be accumulated during the service period. If the terms of the employment allow Privilege leave can be accumulated to avail a cash benefit by surrendering some of the leave accumulated while in service period or at the time of leaving. Encashment of leave by surrendering leave standing to one’s credit is known as ‘Leave Salary’. The employer would wish that only minimum leave is utilized so that office working is not affected. Because of this concern, though employers have provisions for leave and leave accumulations, they allow the employees to avail a cash benefit by surrendering some of the leave accumulated so that the utilization of the leave is reduced to that extent and the office working affected to a lesser extent. CFP Level 2 - Module 1 - Retirement Planning - India Page 192

If the employer has chosen to make payment for retirement benefits from his own funds, an appropriate charge to the statement of profit and loss for the year is made through a provision for Accruing Liability. This accruing liability is to be done by an Actuarial Valuation by qualified professional called actuaries. Tax treatment of Leave Salary Encashment during the Course of Employment Leave encashment to an employee, while he continues to be in service with the same employer, is fully taxable. In this case however, the assesses can claim relief under section 89(1) of the Income tax act. Encashment of accumulated leave at the time of retirement Section 10(10AA)(i) Is fully exempt for only Central and State government employees. Other employees Section 10(10AA)(ii) Leave encashment of the accumulated leave at the time of superannuation or otherwise received by other employees (including the employees of local authority and public sector undertakings) is exempt to the extent of the minimum of the following: 1. Leave Encashment actually received 2. 10* Average salary of last 10 months 3. Rs. 300000 4. Cash equivalent of un-availed leave calculated on the basis of maximum 30 days leave for every completed year. SALARY = Basic Pay + D. A. (forming part of retirement benefit) + Commission based upon fixed % of the turnover Average Salary = Average of the salary drawn by the employee during the period of 10 months immediately preceding the retirement. Leave salary paid to legal heirs of a deceased employee is not liable to tax. CFP Level 2 - Module 1 - Retirement Planning - India Page 193

Concept Checkers Q1. If earned leave credited to Rohit’s a/c is 40 days per year, what will be the maximum permissible un- availed leave under the income tax act, 1961 if he served for 26 years? Ans. 26*30 = 780 Q2. If earned leave credited to Mohit’s a/c is 24 days per year, what will be the maximum permissible un- availed leave under the income tax act, 1961 if he served for 30 years? Ans. 24*30 =720 Q3. Mr. X joined on 1st November 1998 in XYZ Ltd. and retired on 1st Novermber 2020. He got leave encashment of Rs. 415000. His last drawn salary is Rs. 40000.His last 10 months salary is 3.5 lacs. He availed 160 leave during the service. What will be his taxable leave salary amount? Ans. 115000 Least of four is exempted 1. Actually received i.e. 415000 2. Rs. 300000 3. 10*(350000/10) = 350000 4. (22*30-160)/30 * 35000 = 583333.333 Taxable (415000 – 300000) = 115000 Q4. Mr. Y joined on 1st January 1997 in XYZ Ltd. and retired on 1st August 2020. He got leave encashment of Rs. 315000. His last drawn salary is Rs. 22000.His last 10 months average salary is 25500. He availed 340 leave during the service. What will be his tax-exempted leave salary amount? Ans. 255000 Sol. Least of four is exempted 1. 315000 2. 300000 3. 10*25500=255000 4. (23*30-340)/30 *25500=297500 CFP Level 2 - Module 1 - Retirement Planning - India Page 194