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VRS: To take it or leave it?

A N Shanbhag | December 07, 2004 12:37 IST

With the advent of the Senior Citizens Savings Scheme, those opting for retirement, voluntary or otherwise, suddenly have a window of opportunity.

Basically, the SCSS is open for those opting for retirement provided they are 55 years of age. However, the moot question that such people face is obvious -- should they be opting for the VRS (voluntary retirement scheme) in the first place?

Life presents very few occasions to an individual where a decision taken has a great impact on not only his own future but also that of his family members.

An offer of VRS is one such important occasion. This article is addressed to all such persons with a view to enable them take the best decision.

Let us take a live case of one such person, whose particulars are provided in the table.

TABLE

Age

45 years 7 months

Service put in

26 years 2 months

Residual service

14 years 5 months

Current gross pay

Rs 15,668

Entitlement for VRS
Ex gratia

Rs 745,308

PF

Rs 346,910

Leave encashment

Rs 151,050

Gratuity

Rs 299,565

Pension commutation

Rs 114,328

Total

Rs 16,57,161

Monthly pension

Rs 6,138

Analysis

The ex-gratia is exempt up to Rs 500,000.

Assuming that the rest of the amount is subject to tax at the highest rate of 33.66 per cent, the amount remaining in hand works out at Rs 662,737.

  • [745,308 - 500,000 = 245,308]
  • [33.66% of 245,208 = 82,571]
  • [745,308 - 82,571 = 662,737]

Since the rest of the benefits suffer very little tax, if any, the total investible amount in hand is Rs 15,74,590. Now the question is, should this person continue in service or should he opt for the retirement scheme?

For the sake of comparison, we shall ignore the taxes and the tax-planning strategies that can be adopted.

If VRS is taken

For abundant precaution, we shall assume a very conservative interest rate of 8 per cent p.a., payable monthly, even when it is possible to park investible funds in avenues yielding 9 per cent p.a., payable quarterly.

At 8 per cent, on Rs 15,74,590 the interest will be Rs 10,497 every month. Add to that the pension. The total monthly income will be

Rs 16,635, which is Rs 967 more than the salary he is earning at present. The future value of an annuity of Rs 967 received per month, at the end of 14 years and 5 months (which is his period of residual service) is Rs 3,14,905.

Now, one immediate and obvious conclusion that the above analysis throws out is that the employee will not be required to sacrifice his financial lifestyle in case he opts for the VRS. This is because his gross pay was

Rs 15,668 per month, whereas the aggregate of interest on the VRS amount and the pension works out to Rs 16,635. Isn't it strange that a person's income can be greater when he isn't working than when he is?

However, one point hitherto not considered is that, if the employee continues in his service, his salary will rise with time and consequently, there will be incremental effects on gratuity, Provident Fund, etc.

But on the other side of the coin, there will be no ex-gratia of Rs 6,62,737 plus the future value of annuity of Rs 3,14,905, aggregating to around Rs 9.75 lakh (Rs 975,000).

The possibility of the incremental values of these benefits taken together with the increase in salary at the time of normal retirement being substantially higher than the ex-gratia offered right now certainly looms large.

However, the following additional factors have to be taken into consideration before taking the decision:

Actuarial valuation

In the event of the death of the employee during the remaining tenure of his service, the above analysis will have to be drastically revised in favour of VRS.

Time is money

We know about the time value of money. But have we considered the money value of time? This is a very important aspect, neglected by many. Money has time value that is expressed in terms of interest.

Similarly, time has money value. Unfortunately, this cannot be accurately quantified and will heavily depend upon the future events such as getting another job, starting a business, pursuing a rewarding hobby, etc.

Residual benefits

Most employers continue to give some benefits to their retired employees. These may be in terms of annual domiciliary medical expenses, hospitalisation expenses with a high ceiling, continuation of housing loan, allowing the employee to retain their provident fund dues with their employer for a specified period, etc.

A suggestion

The interest rate on provident funds is normally higher than the market rate. Most importantly, it is tax-free. I would like to take this opportunity to drop a suggestion for all those who have opted for VRS.

There was a ceiling on voluntary contribution of the employee to his Provident Fund of 20 per cent of his gross salary.

When FA91 replaced Sec. 80C with Sec. 88, the ceiling was removed so that now, there is no limit on the quantum of voluntary contributions made by an employee to his provident fund. It would be a good idea to contribute up to the maximum capacity during the financial year of retirement.

Taking such an action or leaving the provident fund with the ex-employer for as long as possible does not deprive anyone of the right to contribute to the Senior Citizens Savings Scheme since it permits contributions to the account within one month of the date of receipt of the retirement benefits.

If the various benefits are received in parts at different times, the restriction of depositing it in the account within one month of its receipt applies to the receipt of each such benefit. Provident Fund is certainly a retirement benefit as defined by the scheme.

To sum

As observed earlier, life offers such opportunities very rarely. Failing to plan is akin to planning to fail. It will hurt your family if your decision in this regard is not planned. Do undertake proper analysis before you take any step.

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Number of User Comments: 5




Sub: vrs

you have mentioned that those who are taking vrs can save in scss if he/she is above 55 yrs ; But this scheme can be ...


Posted by pksubramanian





Sub: VRS

events like children marriage is really a costly affair in indian society which a middle class employee generally fulfills with its PF account .these factors ...


Posted by gaurav





Sub: VRS

Dear Sir It is not VRS Most of the cases it is Compulsory Retirement Scheme take it or get out no time to look for ...


Posted by H K Rajan





Sub: VRS. TO TAKE IT OR LEAVE IT

Mr Shanbag's article is tempting to take vrs and invest in retirement solutions which reads attractive. Retirement solutions has arrived strongly and is aggressively advertising ...


Posted by Masud Ali





Sub: Pension calculation.

There seems to be something wrong in the pension calculation. If 1.14 lacs is commuted, the annuity will be for appox Rs 2.3lacs. Depending on ...


Posted by Vikram Puri




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