Get the NPS in your next salary increment

Employers contribution to NPS will be tax exempt

NARENDRA NATHAN & KHYATI DHARAMSI Are you upset by the budget because your tax saving has increased only by a meagre 2,060? What if we tell you that, in fact, it can go up by much more? Surprised? What you need to do is look at the bigger picture. In this case, its your contribution to the National Pension System (NPS). The Budget has proposed that from 1 April 2012, employers contributions to the NPS can be deducted as a business expense by them. And the icing on the cake is that such contributions will not be included in the 1 lakh limit exemptions that you can avail of under Section 80C. Presently, in case of an employee, a deduction up to 1 lakh is permitted in respect of specified expenses/ investments against his total income. This deduction includes the contribution made to the pension fund, says Milind S. Kothari, partner, MZS & Associates. However, this has been altered in the budget proposal. So, in your next salary increment, ask your employer to restructure your salary and include the NPS. Your employer will not have a problem acceding to your wish as according to the latest budget, employers are allowed deduction on their contribution to the NPS. Earlier, only the contributions towards a recognised provident fund, approved superannuation fund or gratuity fund was allowed as a business expense. As pension funds are outside the purview of the aforesaid classified funds, the employers contribution towards them was not allowed as a business deduction, says Kothari. However, employers can claim deduction only on 10% of the salary (basic and dearness allowance). So, if your basic annual salary is 5 lakh, your employer will be willing to contribute up to 50,000 only. Restructuring your salary will also help reduce your tax outgo. Suppose you earn a basic salary of 15 lakh and, apart from the various salary components of HRA, leave travel allowance, etc, get an additional 6 lakh as special allowance. Currently, you can reduce your taxable income by 1.2 lakh by investing in taxsaving instruments under Section 80C and infrastructure bonds. However, if you request your company to pay 4.5 lakh as special allowance and put the balance 1.5 lakh into the NPS, your taxable income will reduce further. So, from 2012, you will be able to reduce your taxable income by 2.7 lakh, which means you will pay tax on 18.3 lakh. As the exemption limit has increased to 1.8 lakh, this further gets reduced to 16.5 lakh. This year, if you pay a tax of 3.66 lakh, for 2012-13, you will have to pay only 3.15 lakh a saving of 51,000. There are other advantages of contributing to the NPS. In the NPS you can contribute a specified amount to equity and choose how to invest based on your risk appetite. Also, as the account is in an employees name, you can transfer it with ease, says Gangapriya Chakraverti, an independent HR consultant. Though clarification is awaited on how the arrangement will work, it is likely to be confined to the tier-I account. Investors cannot withdraw from the tier-I account before they turn 60. Even then, 60% of the corpus must go into investing in an annuity for a monthly pension.

Whats your real take-home pay?

The salary often whittles down to a small monthly amount. Heres what you should know
PRIYA KAPOOR & KHYATI DHARAMSI An annual salary of 30 lakh sounds fantastic, doesnt it? Come placement time at top business schools and such astronomical salaries seem the norm. Average salaries are quoted in seven figures and the highest pay package is worth a crore. All this attracts students in droves to pursue management courses, their belief cemented by the fact that the money they invest in fees will be recouped in a couple of years. So why does it take most of them longer to repay the education loan? Simply because the actual salaries they take home are much less than those quoted to them. Dushan Kapoor was offered the post of an HR executive at an annual salary of 2.75 lakh. He expected his take-home pay to be about 20,000 after deducting tax and the PF contribution. However, his happiness was shortlived when he saw the salary break-up a few days later. The company had included accommodation, telephone reimbursement and meal coupons in the package, which reduced my take-home to 15,000, he says. Dont be envious if you know someone who quotes his cost-to-company (CTC) as 1 lakh a month. In all probability, hes pocketing only 70,000. CTC is an expected income, but how much you get is subjective and is known at the end of the year. This is because a large chunk is the performancelinked bonus, says Sunil Goel, CEO, Global Hunt, a headhunting firm.

The bonus usually comprises 10-20% of the CTC, but what you get in hand is 65-75% of the figure that was quoted, says Kris Lakshmikanth, managing director at HR consultancy firm, The Headhunters India. Delhi-based Kamal Singh (name changed) has recently got an offer of 7.5 lakh a year through campus placement. My annual variable pay is 1.5 lakh, s she have any take-home sa very sure of t will be a tax know if there tions, she ad Singh sho her prospectiv various factor the CTC are en in moneta form. For instance, emp l oye r s may prov i d e h e a l t h and life insurance covers to employees and show the premiums pa by them as a part of your total salary. Other factors that bloat your CTC are the expenses incurred on training you, subsidised meals provided in the cafeteria, transport facility, uniform maintenance allowance, etc. In the case of international job offers, there are other issues that you may have to deal with. Delhibased Bhaskar Khanna got an offer of 50,000 dirham from a Dubai-based company, but he rejected it. Initially, the offer seemed attractive, but uired about the ving there, I found hat the rental and transportation costs were too high. I would have barely managed to save anything, says Kapoor. An international offer should also be evaluated in terms of the economic conditions and tax structure in that country. The gratuity and retention bonus is often included in the CTC, but you will only get it if you work with the same employer for at least 2-5 years. The retention bonus can sometimes be as high as 15% of the CTC. One of the reasons companies highlight a high CTC package is that the top business schools do not allow them to enter the campuses below a specific salary offer. Many students have to take an education loan to pursue an MBA degree. So the salary they get after completing the course helps determine whether it is viable to invest two years of ones life in it, says an industry insider. While some companies take into account the fixed component, others quote the CTC figures. The good news is that this process will soon become more transparent. IIM Ahmedabad has recently come out with a placement standard report, wherein the recruiters will have to mention all the heads under which the salary will be paid. Salary offers will be checked by external auditors. This will help aspiring students make a more astute choice. They will compare offers based on roles, not on inflated CTCs, says Gabula. This will ensure that there are no nasty surprises for the students, says Saral Mukherjee, professor, IIM Ahmedabad. Before deciding on an institute, aspirants should find out the average salary (after taking into account various deductions), domestic and international salary offers as well as the lowest and highest package. If your aim is to join a specific industry ask for a list of offers in that domain.

Break free from BAD Insurance

Almost every Indian investor has a life insurance policy that he doesnt want. Priya Kapoor tells you how to get rid of plans that are proving to be a drag on your finances.
Alife insurance policy is a key component of a financial plan. Chosen well, it safeguards the financial future of a family if the breadwinner passes away. If, however, it is bought for the wrong reasons, the same policy can become a drain on resources and prevents the policyholder from meeting crucial financial goals. Bangalorebased marketing manager Jitendranath Patri is paying a premium of 1.06 lakh a year for six policies that give him a combined cover of 20.4 lakh. I feel I have overinvested in insurance. These plans take up a huge chunk of my savings. I must resort to some course correction here, he says. In Kolkata, Meraj Mubarki is agonising over his inability to save enough for his dream house. Im in a financial mess. My insurance policies take up too much of my savings, leaving me with very little for my house, says the 33-yearold college professor. Worse, it leaves this sole breadwinner grossly underinsured. Mubarki is covered for 6.75 lakh, though he needs an insurance of at least 60 lakh. In Mumbai, software professional Amit Kolambkar is thoroughly miffed with the returns from his Ulips and feels cheated. The agent didnt explain how the plan works and how I can decide my allocation to equity, he says. Getting stuck with an unsuitable insurance policy is a malady as widespread as the common cold. Theres one wrong insurance policy in almost every household. What do you do if you find that you have the wrong insurance? Escaping from an insurance policy entails a very high cost. You can lose up to 50% of what you have paid. In extreme cases, you might have to forfeit your entire investment. This is what keeps people from junking a plan, however unsuitable it is. There is a psychological barrier of losing money, which is why people avoid exiting an insurance policy. But it is better to incur a loss at the initial stage rather than continue and compound the mistake, says Arvind A Rao, chief financial planner, Dreamz Infinite Financial Planners. We look at the options for policyholders who want to junk their insurance plans and explain the circumstances in which each should be exercised. OPTION I Let the policy lapse Dont pay the premium and the policy ends automatically. This is the easiest way to exit a policy. It is also the costliest if the policy has not completed three years. The premium paid in the first two years is forfeited and the policy ends. You also stand to lose the tax benefits availed of in the first two years on the premium payment. You get nothing, except freedom from the policy. Financial planners say this option should be chosen only if you realise that the policy is grossly unsuitable to your needs. If the policy doesnt meet your objective, it is better to let it lapse even though you stand to lose the premium for 1-2 years, says Pankaj Mathpal, managing director, Optima Money Managers. The rule is different for Ulips. Even if it is discontinued after the first year, the policyholder is entitled to some amount after paying surrender charges. However, this sum comes to him only after the lock-in period of five years (three years, if bought before 1 September 2010). The fund value, after imposing all charges and penalties, is frozen in the account and earns 3.5% returns till this period. OPTION II Surrender the policy After three years, an insurance policy fetches a surrender value. If you have paid the premium for three years, your insurance policy would have built a reasonable

corpus value. So, if the plan is surrendered after this period, the policyholder can get some money back. It will, however, be a fraction of what he has paid over three years because of the surrender charges levied by the insurer. In the third year, the surrender value is roughly 30% of the total premium paid, but this figure goes down as the term of the policy progresses. Till last year, insurers used to levy very high surrender charges on Ulips in the first three years. But last year, the Irda put a cap on these charges. This is 3,000 or 20% of the annual premium in the first year. For plans with a premium of over 25,000, the cap is higher at 6,000 or 6% of the annual premium. The surrender charges come down progressively to zero in the fifth year. No surrender charge is levied on policies that are more than five years old, says Tripathy. Surrendering a policy gives you some money back, but it also ends the life cover. So, before you decide to junk your policy, find out if you have enough cover. Also, calculate the cost of a fresh insurance policy at the time. You might discover that the premium is very high because you are older. OPTION III Turn it into a paid-up policy Stop paying the premiums, but dont discontinue the policy. A better alternative to surrendering your insurance policy and losing the life cover is to turn it into a paid-up policy. As in the case of surrendering it, you can use this option only if you have paid the premium for three years and the policy has built up a minimum corpus. Instead of returning the money to the investor, the insurance company uses it to offer him a life cover. Every year, it deducts mortality charges from the corpus. However, in case of traditional endowment and money-back plans, this cover is proportionate to the number of years for which the policy was in force. For instance, if a policy offers a life cover of 10 lakh for 20 years and the policyholder converts it into a paid-up plan after five years, the life cover will be reduced to about 5 lakh. On maturity of the plan, the diminished corpus and the accumulated bonus are given to the investor. This feature has been widely exploited by agents to mis-sell Ulips to gullible investors. Last year, the Irda issued new rules for Ulips. If the premium of a plan bought after 1 September 2010 is stopped, the policy will be discontinued. This is meant to reduce the incidence of mis-selling. The paid-up option is by far the best way to exit an insurance policy because it gives the policyholder the best of both worlds. He is freed from the burden of paying the premium that are a drag on his finances, but continues to enjoy the life insurance cover that was the primary objective of the plan. OPTION IV Let it continue If close to maturity, pay the premium till the full term. Of course, if the insurance policy is only 2-3 years away from maturity, one should continue with it for the full term. This is because the painful period of high charges in the initial years has already gone and it doesnt make sense to let go of the accumulated benefits at the fag end of the term. If you are finding it difficult to pay the premium, withdraw from the Public Provident Fund or any other longterm investment to pay the premium for your policy. You could also consider taking a loan for this. The Life Insurance Corporation of India, for instance, offers loans against the policy for paying the premium. How to know if you have the wrong insurance Low cover: Though insurance needs vary for individuals, a policy should give you a life cover of at least 40 times the annual premium. If it does not, you are paying too much for the cover. High premium: According to a thumb rule, you need a cover of at least five times your annual income. The premium for this cover should not account for more than 6-8% of your annual income. Tenure: An insurance is meant to replace the income of the policyholder and should, therefore, cover him for his entire working life. If the policy ends before he retires, it wont be of much help

when he needs it most. Return projections: An endowment policy appears attractive because of the projected corpus on maturity. But one must factor in inflation. In 25 years, a moderate 5% inflation will reduce the value of 20 lakh to a mere 5.5 lakh.