Employee Provident Fund withdrawal v/s transfer

With every change or move in career, follows a long list of essential paper work formalities to clear previous dues. It takes a lot of effort from both sides – i.e. Company as well as the employee to work hard towards this clearance. Many times, the excitement of a new job role or a city change is so huge and overwhelming that you leave many things undone with the previous job.

One of the severance formalities mostly left attended is clarity on Employee Provident Fund. On leaving a job, it is in the interest of employee to either transfer his provident fund account to his new job or withdraw the collected amounts. The decision has to be made at the time of leaving the last job. 

 

What is a better option – To withdraw or Transfer EPF?

Previously, with the numerous and delayed paper work, employee usually preferred to get their PF funds withdrawn over transferring it to new jobs. However, now with the Universal Account Number (UAN) facility, it has become a much more simpler process to handle the transfer. However, on a numerical front also it has its own calculations when you make your decision.

a) No of years in last service- In case of your service of short span say less than 3 years, withdrawing your PF would not accumulate to a huge sum plus the amount received on withdrawal would be taxable. Also, if continue with the same PF number for more than 10 years you can easily be eligible for pension (after 58 years of age). The pensionable salary depends on your last drawn basic salary.

b) Number of years left to retire – If a person is nearing his retirement age and making a job change, it is best advised to let the PF grow on its own and transfer it to new job rather than withdrawing it.

c) Purpose of withdrawal – If the person is in need of funds for an important cause like building his home, sponsoring on his children's education expenses or to fund a medical emergency, it is advised to withdraw the amount if no other alternative is available. Although, if he intends he can even avail a n advance on the same. But this should be for an identified 'Need' and not a 'Undesirable Want'

d) Taxability - The amount of PF withdrawn before five years of continuous service is eligible for taxation. So, be wise to understand if you want to withdraw the money or get it transferred to your new job.

Year of Service	PF eligible monthly Basic Assumed	Annual Employee Contribution (12%)	Annual Employer Provident Contribution (3.67%)	Annual Employer Pension Contribution (8.33%)	Interest earned on assumed PF rate =8.5%	Amount at end of tenure
1	6500	9360	2863	6497	1039	13262
2	6500	9360	2863	6497	2166	27650
3	6500	9360	2863	6497	3389	43262
4	6500	9360	2863	6497	4716	60201
5	6500	9360	2863	6497	6156	78579
6	15000	21600	6606	14994	9077	115862
7	15000	21600	6606	14994	12246	156314
8	15000	21600	6606	14994	15684	200204
9	15000	21600	6606	14994	19415	247825
10	15000	21600	6606	14994	23463	299494
11	15000	21600	6606	14994	27854	355554
12	15000	21600	6606	14994	32620	416380
13	15000	21600	6606	14994	37790	482376
14	15000	21600	6606	14994	43399	553981
15	15000	21600	6606	14994	49486	631673
16	15000	21600	6606	14994	56090	715969
17	15000	21600	6606	14994	63255	807430
18	15000	21600	6606	14994	71029	906665
19	15000	21600	6606	14994	79464	1014335
20	15000	21600	6606	14994	88616	1131156

The amount received at end of 20 years is Rs 11,31,156/- completely tax free

Monthly pension after age of 58 is Rs.4286/-

For more information related to your provident fund contribution, transfer or even on advance eligibility , please contact us at saarthifp@gmail.com or visit www.vijayshahandassociates.in

Gold Schemes launched this Diwali

This Diwali ,Government has launched two schemes like Gold Monetization Scheme and Sovereign Gold Bond. The main purpose of these schemes is to offer the benefit of Gold price volatility and hedge against inflation to investors. It has dual benefits of earning power i.e. interest yield (interest on the invested amount equivalent to the value of Gold deposited), that does not exist in the traditional way of investing in gold like physical gold or Exchange Traded Funds. Moreover, this will save vault charges which are currently being borne by individuals for safeguarding gold.

GOLD MONETIZATION SCHEME: This scheme works like an gold savings account which earns interest for the gold that is deposited and will also save recurring cost. Gold can be deposited in any physical form like jewellery, coins or bars subject to a minimum of 30 grams. These accounts can be opened for three different tenures - short term(1-3 years) , medium term (5-7 years) and long term (12-15 years). The interest is calculated on basis of gold weight and also the change (appreciation) in the value. On maturity,the depositor can buyback gold equivalent to its value or take away the amount as per his preference on application. In case, if the depositor wants to redeem the Gold Saving account interim, it is also possible

SOVEREIGN GOLD BOND: The bond can be subscribed by by resident of India which includes individuals, HUFs, trusts, charitable institutions, etc. The minimum investment required is of 2 grams to maximum 500 grams . Although, the maximum period is of 8 years an easy exit from 5th, 6th and 7th years onward. The interest to be earned is at 2.75 percent interest per annum on the amount initially invested. The bonds would be listed on the exchanges which will provide easy entry/exit route to the investor. The pricing of this bonds is dependent on weekly average price of gold by the India Bullion and Jewellers Association Ltd. The price would also be made available on RBI website. These loans can be used as collateral for loans and other purposes.

The main purpose of these schemes is to encourage participation in tradeable gold and to reduce the our dependability on the imported gold.It will also help to reduce the current account deficit. Also, the idle gold lying in our households can also get more earning value attached to it.

More information can be made available at the government links as below:

https://mygov.in/sites/default/files/master_image/Draft_Gold_Monetization_Scheme.pdf

https://mygov.in/sites/default/files/master_image/GoldBond_Draft.pdf

Loan Against Gold

Gold has for years been one of the favorite assets to be passed on as a heritage value to next generation or otherwise for self consumption. Hardly have we ever considered it as an investment asset i.e. To be redeemed for goal achievement. Hence, we always have maintained that use gold as an diversification tool but never invest all your savings in to it. Since, if any investment is never sold or used for our goal fulfillment, it has no place in our net worth. It is just a personal asset for gratification. So, if this asset can be now used for meeting your short term funding requirement without actually parting with it , it should be considered as a useful end purpose of gold. So, we today learn about loan against gold or gold loan.

What is Loan Against Gold?

A loan which is availed by pledging your gold ornaments ( around 18 – 24 karat) with the lending institution is known as gold loan. The loan cannot be availed against gold coins or bars. The loan is sanctioned based on purity of gold and verification of supporting gold documents. The value is decided on basis of gold and all stone weight is deducted from the same.Beyond this basic identification papers and residential of borrower is verified. The maximum lendable limit of Loan to value of ornaments is 75% but the lending banks can themselves decide their individual limits for lending. This rule is only applicable for non agricultural end usage.

What is tenure of gold Loan?

The tenure for gold loan differs for different lending authorities. It varies from 12 months to 48 months.

What is the interest rate charged?

 

The average interest rates floats from 12% -13% depending upon the bank average floating rates. Also, special lending rates are made available for women lenders or for end use in agricultural sector.

How does the repayment of this loan happen?

Barring the interest repayment on monthly basis, the borrower can repay the entire loan at the end of tenure. The loan can be repaid at any of the branches or online as per the bank features but the pledged gold can be released only at the branch where is it physically stored.

Word of caution

For years gold has been used to be pawned with unorganised segment of lenders for very high interest rates but now when we have the opportunity to gain access to more lower rates of interest we should use it wisely. Please don't get attracted to extreme low rates offered by some novice lender since the security of your gold hedged could be compromised. Also, it is to be considered that the loan is taken to be repaid and not to be used as a never ending cycle for easy money.

In the coming week , we will discuss the recently launched schemes by government for monetization of gold.

Loan against Securities

Moving ahead with our series of assets utilization for short term goals, we now move across to discuss the next set of bigger chunk of our net worth. i.e. Our Investment Assets. 

 

What is loan against Securities?

Loan against securities is basically an overdraft facility made available against pledging of your securities with a financial institution for a certain amount against the market value of the security. The various instruments that are generally included under this are:

• Demat shares
• Mutual Fund units
• Fixed Maturity plans (FMP)
• Exchange Traded Funds (ETF)
• Insurance Policies
• Savings Bonds

Who is eligible for this loan?

As per the individual products, the eligibility is determined. Generally, an individual between the age of 21 to 70 is given this loan. It may differ as per different bank wise. Also, there are sub conditions for eligibility in the products discussed above. However, there is an approved list of securities published by every lender to determine to certify the loan. Also, in certain cases HUF, or companies, patnerships or sole proprietorship are not allowed to secure these loans.

How much can one borrow against securities?

Usually almost 50% of the total market value is made available as an overdraft against securities. This amount is also reviewed from time to time (sometimes as frequent as weekly) to match the fluctuating market value. The overdraft facility is an annual contract renewable every year in line with change in approved list of securities.

What are charges or how do I repay the loan?

Beyond the processing charges, the bank charges you interest on amount withdrawn by you and for the period for which it is utilized.It is usually charged on monthly basis in your account. This makes it flexible to ensure that you don't have a fixed cost attached every month and our paying only for your expenses.

So, Loan against security is helpful in case of some short term fund requirement although, it is not recommended to be utilized for some unrequired expenditure but used for asset building.

Know more about Loan against Property

One of the recent popular modes to acquire additional funds is to secure a Loan Against Property. It is preferred mode over the other competitive loans like a Personal Loan or a Home Loan. The main deciding factor to select any particular kind of loan is the interest rate or the formalities involved in acquiring one.

What is Loan Against Property (LAP)?

The term ‘loan against property’ is in which the borrower takes a loan from a bank or financial institution against the security of a property owned by the borrower. The nature of the property will determine the amount of the loan that is possible.

Being a secured loan, the interest charged on it are lower than any other alternatives of loan. The average range of interest rate is from 12%-16% pa for a tenure of 15 years.The only deciding criteria is the condition of the property that helps the lender decide the market value of the property. The loan is given on certain percentage basis (around 40-60% of the value) of the market value of the property.

What kind of properties are used for LAP?

• Self occupied residential Property or any other self owned property
• Commercial Property owned by borrower

The only criteria being that the property should be free from any mortgage or any other lending.

What is the main purpose for LAP?

Although, LAP has the following applications, as a Financial Planner, we advise to go for these options only if you have secured well for your primary financial goals and have a huge property asset lying unutilised at your end.

• Business expansion
• Son/Daughter marriage
• Son/Daughter Higher education abroad
• Dream vacation

Who is eligible to get a LAP?

Any individual including the salaried,professionals or even self employed individuals are eligible to take a loan. The main criteria in addition to financial stability is the age factor of availing the loan.( generally the minimum age to acquire a LAP is 24 years). 

Compare the LAP services

A visible comparison of the existing LAP services made available by financial institutions. Please note that the detailed information can be made available on their respective websites.

	SBI	HDFC Bank	Bajaj Finance
Interest rates	2.50% Above base rate. Currently at 12.50% pa	11.35% to 13.35% pa	Not available
Margin for Loan	60% of Market Value	60% of Market Value	Not available
Tenure	5 -10 years – term loan in equated monthly income	Upto 15 years.EMI /Overdraft facility available	15 years
Eligibility	24 times of net monthly salary or 2 times net annual income	Varies from case to case	Varies from case to case
More details	Special product called rent plus for commercial /residential rental earnings	Overdraft facility , rent receivables	Lease Rental discounting
Website	https://www.sbi.co.in/portal/web/personal-banking/loans-against-property	http://www.hdfcbank.com/personal/products/loans/loan-against-property	https://www.bajajfinserv.in/finance/loan-against-property

Update on discussion topic for coming weeks - on asset utilisation

Fixed Assets can serve a dual purpose of fulfilling our financial goals and also help in meeting our additional unplanned requirements. There is a possibility that we may have designed our financial plan well and earmarked our assets for achieving these long term goals. This is a very idealist situation. But in reality, there could be multiple goals in between which could require additional funds to be fulfilled. So how can we meet these goals? Can we earmark these long term fixed assets to help us meet the short term goals? Can we utilise their market value by temporary mortgaging them to supplement our additional goals including business expansion or dream vacations or even spending to refurbish the entire home. In our coming few posts , we would be discussing these alternatives to Personal Loan or Home Loan. Stay with us to understand more about them.

Gift a better future

The older generation now in their mid fifties or more elderly usually complain about the younger ones not being frugal in their spending nor having a say on their children's money habits. They find it many times shocking that in spite of high earning and multiple earning opportunities the younger lot is struggling to manage their home finances well. At times, the spending made on personal gifting,holidays or extravagant birthday celebrations gets a mixed reaction from the older lot. For them, the concept of savings is still at 80% of monthly total earning.

So, many times they try to enforce these simple things to get compulsive savings for the future of the their next generation. The approach remains non-interfering and easy for them to monitor.

• Gift a savings account – Create a separate savings account with joint holding with your children or grandchildren. In case of any special occasion like birthday or anniversary celebration or any other achievement, add in some money into it as your souvenir. You can even add a small amount on a monthly basis to add to the savings.
  
  

• Gift a small piece of metal – We are habituated to gift idols of God on any house warming party or even marriage ceremonies for that matter. So, if instead we contribute as per our budget a small piece of silver/ gold coin or even raw metal to the family it can be a useful investment for them. Today, the available denominations of coins are very small ( as low as half gram). So, instead of gifting loads of ceramic house decorations or expensive flowers, this can give the recipient liberty to spend it as per their preference.

• Create a demat account – If you intend to handover some kind of capital market investment to your children in future, start adding value to it by creating a demat account. On doing so, you can ensure that the wealth is in bits and pieces transferred to them as well as you can also add more value to it by purchasing time and again capital instruments to it. You can be assured of transfer of assets in your presence without any chaos or dispute.

• Contribution to expenses - This method though might be useful for a little younger aged children but it stills create great sense of responsibility among the children. It may include asking the children to contribute in home expenses or even pay rent for their stay at home although you might not need that money. The same can be then reinvested by you in their name for future growth aspects. Decide the quantam of contribution always in terms of percentage to avoid them getting into mode of numerical values calculations.

These methods are age old and can be implemented at any stage of life. For some it might sound foolish to do so considering the amount saved via this strategy. So, what we advise is to alter these techniques as your situation.It is recommended however to make a beginning.