Retirement Planning - Textbook

Q5. Mr. X joined on 1-1-2003 and retires on 1/1/2020. He got amount of Rs. 36000 as leave encashment salary against 150 days of unavailed leave. His employer provides 40 days leave for each year of service. How much amount of leave salary would be tax free if his Average salary for the last 10 months is Rs. 8000? Ans. Nil Sol. Least of four is exempted 1. 36000 2. 300000 3. 10 * 8000 4. 0/30 * 8000 Max permissible leave 17*30 = 510 Leave already taken (17*40-150) = 530 Q6. Mr. A was employed with ABC Ltd. He retired w.e.f. 1-2-2020 after completing a service of 25 years and 8 months. He submits the following information : Basic Salary : Rs. 15000 p.m. at retirement D.A.: 100% of basic (40% of which forms part of salary of retirement benefits) He was entitled to 40 days leave for every year of service. He received leave encashment amounting to Rs. 60000 on account of 280 days leave. Calculate taxable amount? Ans. (60000-21000) = 39000 Sol. Least of four is exempted 1. 60000 2. 300000 3. 10*(15000+15000*.4) = 210000 4. 30/30*21000=21000 Max permissible leave as per act =25*30 = 750 Leave already taken (25*40-280) = 720 CFP Level 2 - Module 1 - Retirement Planning - India Page 195

4.3 Ex-Gratia Lump-sum Compensation An ex-gratia is a voluntary payment made by the employer without any obligation to make such payments. Often made by an organization or the government under the following circumstances –  To compensate for the damages incurred by the employee or his family during duty  As a goodwill gesture in time of company’s profits  As a part of the severance package in case of layoffs  As a means of compensation for loss of life or disability of the employee during service  To employees where bonus cannot be given or is not part of the standard compensation structure  In non-profit organizations such as hospitals or NGOs where the employer wishes to thank its employees for their dedication and service as a one-time gesture. There are generally no limits to the payment one can receive as ex-gratia since it depends on the situation and the employer’s discretion. This is not considered a part of the employee’s salary or regular compensation – could be considered an incentive. It is different from Bonus since it is not necessarily linked to the employee’s performance on the job and there is no minimum or maximum amount. Taxability of the ex-gratia payment- If a person or his heir receives ex-gratia from Central government/state government/ local authority/Public Sector Undertaking due to injury to the person/death while on duty such ex- gratia payment will not be taxable. (Source: https://www.incometaxindia.gov.in/Pages/faqs.aspx?k=FAQs%20on%20Salary%20Inco me) All other ex-gratia payments are taxable as profits in lieu of salary and included as part of the CTC for taxation purpose. CFP Level 2 - Module 1 - Retirement Planning - India Page 196

If the ex-gratia payment has been made at the time of layoff, it will be included in the severance pay and exempt to the extent of Rs. 5 lacs as per the provisions of the Industrial Dispute Act, 1947* *It is to be noted that the Industrial Dispute Act doesn’t apply to individuals working in managerial or supervisory capacity earning more than Rs. 10000 as wages per month. 4.4 Pension Scheme for Government Employees – Rules for commuting pension A government employee is eligible to receive pension after 10 years of qualifying service The minimum pension payable is Rs. 9000 per month and the maximum limit on the pension is 50% of the highest pay in the government of India - this is currently Rs. 125,000 per month. He/she can commute up to 40% of his/her due pension as a lump sum. The remaining has to be compulsorily used to purchase annuity Commutation of pension implies that the employee on retirement is withdrawing some amount of the pensions becoming due to him for the rest of his lifetime as a onetime lump sum withdrawal. The formula for commutation is as below – Commuted Value of pension = 40% x Commutation factor x 12 X Pension ordered Where, commutation factor will be as per the pensioner’s table and the reference age for the commutation factor that table will be the age on his next birthday Below is an example of the commutation factor table Age Commutation value Age Commutation value Age Commutation value next expressed as number next Expressed as number next expressed as number Birthday of year's purchase Birthday Of year's purchase Birthday of year's purchase 20 9.188 41 9.075 62 8.093 21 9.187 42 9.059 63 7.982 22 9.186 43 9.040 64 7.862 CFP Level 2 - Module 1 - Retirement Planning - India Page 197

23 9.185 44 9.019 65 7.731 24 9.184 45 8.996 66 7.591 25 9.183 46 8.971 67 7.431 26 9.182 47 8.943 68 7.262 27 9.180 48 8.913 69 7.083 28 9.178 49 8.881 70 6.897 29 9.176 50 8.846 71 6.703 30 9.173 51 8.808 72 6.502 31 9.169 52 8.768 73 6.296 32 9.164 53 8.724 74 6.085 33 9.159 54 8.678 75 5.872 34 9.152 55 8.627 76 5.657 35 9.145 56 8.572 77 5.443 36 9.136 57 8.512 78 5.229 37 9.126 58 8.446 79 5.018 38 9.116 59 8.371 80 4.812 39 9.103 60 8.287 81 4.611 40 9.090 61 8.194 CFP Level 2 - Module 1 - Retirement Planning - India Page 198

CFP Level 2 - Module 1 - Retirement Planning - India Page 199

https://pensionersportal.gov.in/pensioncalculators/revisedpensioncalculator/pensioncalculator _6pc.asp The formula for commutation is as below – Commuted Value of pension = 40% x Commutation factor x 12 X Pension ordered = 40% * 8.194 ( age next birthday i.e. 61)*12*45000 = 1769904 4.5 Family Pension Family pension is granted to the widow / widower or to the children of a Government servant who entered in service on or after 01/01/1964 but on or before 31.12.2003 and at the time of death was in receipt of pension. Family pension is payable to the children up to 25 years of their age, or marriage or till they start earning a monthly income exceeding Rs.9,000/- + DA Widowed/divorced/unmarried daughter is also entitled for the family pension till her remarriage or death or till she starts earning a monthly income exceeding Rs.9,000/- + DA Family pension is payable to wholly dependent parents of the deceased Government servants when he/she is not survived by a widow or eligible child. The family pension will be payable to mother first, failing which to the father. If the son or daughter, of a Government servant is suffering from any disorder or physical/mental disability so as to render him or her unable to earn a living even after attaining the age of 25 years, the family pension can continue to be paid for his/her lifetime The pension is at a uniform rate of 30% of the last drawn salary subject to a minimum of Rs. 9000 per month 4.6 Employees’ Deposit Linked Insurance Scheme (EDLIS) Page 200 Under Employee’s Provident Fund 1952, eligible employees 3 benefits which are: a. Employees Provident Fund CFP Level 2 - Module 1 - Retirement Planning - India

b. Employee’s Pension Scheme c. Employee’s Deposit Linked Insurance Scheme ( EDLIS) In EDLIS employee’s nominee or legal heirs are entitled to receive a lump sum insurance claim from the EPFO in case of death of the member during service. The objective of the scheme is to provide financial security to the family members of the employees covered under this scheme. The Insurance Claim Amount The claim amount of the EDLI is decided by the last drawn salary of the employee. The claim amount would be the 30 times of the salary. Along with this, the bonus of Rs 1.5 lakh is also given. For this calculation salary is ‘basic pay plus DA’. Calculation of claim amount = 30 X Average monthly salary (Including DA) for the last 12 months (capped at Rs. 15000) + 50% of the average balance in the member’s account during the last 12 months of his membership) capped at Rs. 1.5lacs For example, if Basic+ DA of an employee is Rs.15000 and average PF balance in his account preceding the month in which he died is Rs.240000. He will get (30*15000+ 50% of Rs.240000)= Rs.5,70,000. The minimum pay-out under EDLI insurance is Rs. 2.5 lacs and the maximum is Rs. 6 lacs Features of the EDLI –  All private sector salaried employees contributing to the EPFO or their organization’s registered Employee provident fund scheme are eligible for the EDLI benefit.  The age group of the employees covered is between 18 to 85 years of age  There is a bonus of Rs. 1.5lacs available under the EDLI scheme  Once all documents are provided and the EPFO commissioner has accepted the clam, the payout has to be done within 30 days from the receipt of the claim. Otherwise the claimant is entitled to receive interest at 12% p.a. on the claim amount CFP Level 2 - Module 1 - Retirement Planning - India Page 201

Contribution: Employee > nil Employer > 0.5% of salary but salary should not be more than Rs.15000( basic + DA ) This means Rs.75 is the maximum contribution made by employer. 4.7 Pensions in Public Sector Bank and other Public Sector Enterprises The Government of India paid pension to all its employees under the CCS (Centralized Civil Services Pension Rules 1972) provided their joining date was before 1.1.2004 or their appointment was finalized before 1.1.2004 and joined service after that date. The employee had to complete 10 years of qualifying service for a pension. There is a point that employees of government sector and public sector who joined job on after 1st April 2004, would not get inflation linked pension. They will be covered under National Pension System, which is known as New Pension Scheme (NPS) apart from those working in defence ministries. NPS is considered a defined contribution plan for government and PSU employees who joined their job on after 1st April 2004. This scheme is based on two tiers – Tier 1- contribution to Tier1- is compulsory for getting pension. It is considered pension account Tier2 – Optional and this account will work just like your saving account. CONTRIBUTION: Employee > other than central government employee 10% basic salary + DA (dearness allowance) Tier 1 account. Employer > matching contribution by the employer But central government contributes 14% of basic and DA for its employees. Since tier-2 accounts are voluntary, the government does not make any contributions to this account. CFP Level 2 - Module 1 - Retirement Planning - India Page 202

For employees who joined the Public sector enterprise prior to 1.1.2004, the old Central Civil Services Pension rules apply. The Pension to a Public Sector Bank or enterprise employee is to be 50% of their average emoluments provided the employee has worked for more than 33 years for the PSU. In case, the number of qualifying service years is below 33 years, the basic pension would be proportionate to their service. The different classes of pensions available for the public sector/government employees- Superannuation A superannuation pension shall be granted to a employee who is retired on his attaining the age of superannuation. The minimum service of 10 years is required if employee retires at superannuation age. And maximum service is considered 33 years while calculating pension. Pension on Voluntary Retirement (VRS): Employees who take voluntary retirement from the government job, are eligible to receive VRS pension. The minimum tenure of service to opt for VRS is 20 years. Voluntary Retirement: Any Government servant can apply for voluntary retirement, three months in advance, only after the completion of twenty years of his qualifying service, provided there is no vigilance or Departmental Enquiry pending /initiated against him/her. Invalid Pension: Invalid Pension may be granted if a Government servant applies for retirement from the service on account of any bodily or mental infirmity which permanently incapacitates him/her for the service. The request for invalid pension has to be supported by medical report from the competent medical board. The minimum number of years of service has to be 10 years to qualify for this pension CFP Level 2 - Module 1 - Retirement Planning - India Page 203

He may also be granted invalid pension even without completing 10 years in service, provided he was examined by the medical authority either before or after appointment and was declared fit for government service. The pension is at 50% of average emoluments subject to a minimum of Rs.9000 and maximum of Rs.125, 000 per month. Compassionate Allowance: (i) A Government servant who is dismissed or removed from service shall forfeit his pension and gratuity: Provided that the authority competent to dismiss or remove him from service may, if the case is deserving of special consideration, sanction a compassionate allowance not exceeding two-thirds of pension or gratuity or both which would have been admissible to him if he had retired on compensation pension. (ii) A compassionate allowance sanctioned under the proviso to sub-rule (i) shall not be less than Rs. 9,000/- p.m. Compulsory Retirement Pension: A Government servant compulsorily retired from service as a penalty may be granted, by the authority competent to impose such penalty, pension or gratuity, or both at a rate not less than two-thirds and not more than full compensation pension or gratuity, or both admissible to him on the date of his compulsory retirement. The pension granted or allowed shall not be less than Rs. 9,000/- p.m. Extraordinary Pension: Extraordinary Pension in the form of Disability pension/extraordinary family pension may be paid to the Government servant/his family if disablement/death (or the aggravation of disablement/death)of the Government servant, during his service, are attributed to the Government service. For the award of extraordinary pension, there should thus be a casual connection between disablement and Government service; and death and Government service, for attributability or aggravation to be conceded. The quantum of the pension, however, depends upon the category of the disablement/death. Government servants appointed on or after 1.1.2004 are not covered by the CCS(Extraordinary Pension) Rules. CFP Level 2 - Module 1 - Retirement Planning - India Page 204

Family Pension: The nominees/dependents/legal heirs of the employee are eligible to receive family pension in case of death of the employee during service. The pension amount is about 50% of the last pay drawn or average emoluments whichever is more beneficial. Families of government employees who passed away before completing 7 years of service are also eligible to receive 50% of average emoluments as family pension for 10 years. Widow daughter / divorced daughter/ unmarried daughter of deceased Government servant is also entitled for the family pension till her remarriage or up to life time or starts earning a monthly income exceeding Rs.9,000/- + DA admissible from time to time p.m. whichever is earlier. Family pension is payable to wholly dependent parents of the deceased Government servants w.e.f. 01/01/98, when he/she is not survived by a widow or eligible child. The family pension will be payable to mother first, failing which to the father. If the son or daughter, of a Government servant is suffering from any disorder or disability of mind or is physically crippled or disabled so as to render him or her unable to earn a living even after attaining the age of 25 years, the family pension can continue to be paid for life time subject to conditions. CFP Level 2 - Module 1 - Retirement Planning - India Page 205