New Pension Scheme (NPS)

Government of India had introduced the new pension scheme with effect from 1.1.2004 to all central govt employees who are appointed on or after 01.01.2004 except armed forces. The new pension scheme called contributory pension scheme has been introduced deviating from the existing system of Defined Pension to Govt employees. The existing Defined Pension scheme allowed the retiring Govt employees, the pension benefit from the date of retirement without making any contribution from his side, whereas the new pension scheme deviated from this concept and introduced the concept of contribution from employees with matching contribution from govt to earn pension.

The new pension scheme provides for contribution of 10% of their basic salary ( Basic pay + Dearness pay + Dearness allowance) by the employees which will be recovered from their salaries. The Govt will also be making equal contribution from its side and the scheme will continue till he attains the age of 60 years and the proceeds will be given to employees with the condition that 40% of the proceeds is to be invested in a pension plan to provide for pension for life time of the employee and his dependent/spouse. In case the employee leaves the scheme before 60 years , it is mandated that 80 % of proceeds has to invested in the pension plan.

The Government of India has formed the Pension Fund Regulatory and Development Authority (PFRDA) to monitor the functioning of the scheme and will be the apex regulatory authority for this purpose.

The intention behind the Govt for introduction of this scheme has been the pension budget is on the rise and with the implementation of new pay commission etc the pension liabilities has increased considerably and the money available with the Govt for developmental work is reduced and it has to meet all the social obligation with in the same budget. Further with large number of Govt employees joining the rolls, the money thus accumulated could to be diverted to financial system leveraging the country’s growth. Further various surveys also pointed out that the economic gains made would be substantial as the mobilization of assets would lead to effective investments in the stock, bond and mortgage markets, thus supplying the capital to finance corporate growth, government infrastructure and housing through market . This situation could lead to better infrastructure and corporate growth resulting in more employment generation. This money could also act as a buffer to prevent any volatility in the stock market by FII etc whenever they exist the market. The Govt felt since the stock market is now well regulated and laws are in place the time is ripe for introducing the pension reforms.

This new scheme was in contraversery from the day one and all the Govt employees associations, the trade unions and the left parties opposing the scheme as this scheme is against the welfare of the employees. They argue that the money thus collected is invested in the stock market the returns are not guaranteed and it is argued that the Harshad Mehta, Ketan Parekh episode bears testimony that stock markets are vulnerable to scams. The volatility in the market is not predictable and it may erode one’s hard earned wealth and it is at the mercy of market.

Though 17 State Govts have implemented this scheme in their states, the Left ruled states like Kerala, West Bengal, Tripura are still opposing this scheme and not implemented this scheme in their states. Due to opposition from left parties, the Pension Fund Regulatory And Development Authority Bill is still pending in the parliament and is not able to push the legislation in to law.

Continued in part ll

part lll income tax effect

Please read the earlier parts for continuity.
We have already seen the effect of pension on the salaries and if we look in to the pension contribution one has to make the difference will further narrow down.
I just checked from a retirement planner ( with the return of 12 % and inflation at 5% ) about the savings towards retirement to earn the pension at the rate of Rs 1.50 lakhs every month ( 1.50 lakh * 12 = 18.00 lakhs) till life which is the pension receivable by the employee if he had remained in the Govt service, in the same post with no promotion or increment. The pension amount of Rs. 1.50 lakhs per month (after 30 years) was arrived based on the salary increase at annual average of 10 % as per the past pay commissions which was also discussed in earlier articles.


My retirement planner...
Money, I need every year after I retire (Rs)
1,800,000
My age today (years)
30
I would like to retire at (years)
60
Period I have with me to plan my retirement (years)
30
The expected rate of return on my savings (%)
12.00
My assumed inflation rate (%)
5.00
Results...
To meet your annual expenses before you retire you need to save (Rs)
64,829,136
Every year, you need to save (Rs)
268630

The contribution will be Rs 2.70 per annum and if you subtract the sum from the pay package offered by the company and taking into account the pay out of Rs 1.75 lakhs the net will be 1000000 – (270000 + 175000) = 550000 and the magical figure of Rs 10.00 lakhs has been reduced to Rs 5 .50 lakhs. So, the difference which was Rs. 6.00 lakhs earlier has come down to Rs 1.50 lakhs than your present salary Hence , it is always desirable to verify all the factors before taking any decision.
If you are first time reader, go through all the earlier articles for better understanding . I request your comments.

Part ll Income tax effect

Now the employee decides to leave the Govt service and joins a multinational with a CTC of Rs. 10.00 lakhs. As discussed a already CTC is not the take home salary and it involves everything like the statutory contribution like PF etc and other allowances like leave travel concession etc., medical premium etc ,

Now we will work out the income tax payable.The same conditions are applied as done earlier with savings of Rs 1.00 lakh under NSC OR repayment of principal etc for availing the benfit under sec 80 C and Rs 1.50 lakhs is saved by means of interest payment towards housing loan.

TOTAL INCOME	1000000
non taxable
food coupons + other non taxable etc	5000
EXEMPTION
LTC (availed)	15000
TA	9600
TAXABLE INCOME	973900
DEDUCTION
80 C	100000
24( INTEREST ON HOUSE)	150000
NET TAXABLE INCOME	723900
TAX @ 30 % + surcharge	170514

 

Hence the net salary will be 1000000 – 170514 = 829486.The income tax is calculated in broad based manner for comparison purposes and other deductions available like tution fees, professional tax etc has not been taken into account.

So if you see the difference which was 150 % from the existing salary has come down to 105 % and approximately Rs. 1.75 lakhs reduced from your salary

The numbers which looked phenomenal has been reduced by 50 % and taking in to account the other invisibles offered in Govt like pension etc can narrow the difference further which is discussed in the following part.

Continued in part lll

Income tax effect

Times of India carried a article about DRDO recommending and forwarding a pay proposal for increase in salary 3 to 4 times of existing salary along with other benefits to its scientists/engineers to prevent the high attrition . Further" Times Now " telecast news about the Govt considering revision of retirement age from 60 to 62. I hope this news will be welcomed by Scientists / Engineers. We should see whether the pay commission pays attention to the recommendation of DRDO/CSIR etc.

If you see a person leaving such organization ,the main point of argument from his side will be the offer received from the IT companies is two times or three times of salary than what is he getting in these R&D organization.

On plain look it may look like so, whether the net salary received is same is to be seen in the light of income tax.

We will take a typical employee aged 30 + yrs having some 9-10 years drawing a basic salary in the range of 11500 -12000 (by 9-10 year may be due for promotion and could have been promoted to the grade of 12000) decides to leave these organization and joins a private sector with an CTC Of Rs.10.00 lakhs. On the outlook it look a huge sum and he is excited about the numbers in the Offer letter and decides to leave.

But the truth is otherwise.

The first catch will be it is not the actual take home salary and it is the cost spent by the company on you and it includes everything. These aspect has been looked in to earlier articles and another element is income tax which also has the effect on your take home at the end of year. On plain look the employee will be delighted that his new income will be 150 % more than his present salary. What will be the post tax return?

We will work out the salary and income tax on the person when he is still in govt service. His total salary will be around Rs .4.00 lakh per annum.

description	amount	MONTH	yearly
basic	12000
DP	6000
DA @ 41	7380
HRA @ 30	5400
TA	800
CCA	300
SPL. INCREMENT	650
TOTAL	32530	12	390360
YEARLY PROF ALLOWANCE			10000
TOTAL			400360

Now we will work out the income tax with the assumption that he is availing the benefit of section 80 C by contributing to GPF or ELSS or principal towards housing loan etc to the maximum of Rs 1.00 lakh. Further he also avails the interest payment upto Rs. 1.50 lakhs.

TOTAL INCOME	390360
EXEMPTION (TA)	9600
TAXABLE INCOME	380760
DEDUCTION
80 C	100000
24( INTEREST ON HOUSE)	150000
NET TAXABLE INCOME	130760
TAX @ 10 % + surcharge	3138

So his net income post tax will be 400360 – 3138 =397222. The income tax calculation is worked out in a broad based manner and for comparsion sake and many details like deduction available like payment of professional tax, exemption on tuition fees etc were no taken in to account.

Rational decision

Cambridge dictionary gives meaning to rational as " based on facts and not affected by emotion and imagination." Hence the rational decision means a decision taken 1. Is based on facts after verifying them for its correctness 2. Are not affected by the emotions and imagination. Normally decisions taken on rational basis will stand tall during crisis and the failure is rather uncertain. The rational decision taking has become paramount in today's life and it is not only applicable to corporate for their survival and profitability it is equally applicable to individuals. An individual has to take the decisions rationally based on facts and not affected by emotions and imaginations. If we really see whether decisions are taken rationally it is a big no and decisions are taken momentarily and by comparison. These could create a big loss in individual's life and finance. I feel the sectors where the rationality has taken dip now and decisions are taken by the people irrationally are

1. The job market in IT/ITES sector
2. The stock market
3. The real estate The job market in IT/ITES sector has no doubt created huge job opportunity and created wealth to employees. This has caused a situation wherein the people from other sector also looked at IT sector whether they are from civil, mechanical, chemical engineering etc or people from other discipline like accountant, dentist. Nowadays everyone is looking at the opportunities in IT sector irrespective of their back grounds. The IT Companies started recruiting the BA/ B.Sc graduates in big way to cut costs. The difference between professional degrees from other degrees is that they require specialized form of training to understand and undertake the job. For e.g., to construct a dam or building is a specialized form of activity and a civil engineer is the best suited to perform that job. If everybody with some month of training can join IT sector and become software engineer then what is the difference between the four years of study they did in comparison to few month of study done by others. Here the question of rationality comes and the decisions by other professionals are rational?
   The Indian stock market also performing in peculiar way and within a period of one year, the BSE SENSEX has reached a level of 20000 from 10000 a year back. Though the Indian growth story continues whether the rise in the stock market level is justified is the big debate going on in the financial world. The market is not rising based on the growth earning and profit of the companies. The market has gone beyond the level of such fundamentals and is chased by dollar inflows from FIIs. The rationality in the market has gone and it will take some time for the rationality to return.
   Similarly the other sector where the rationality has taken a beating is the real estate. The price of the neighborhood which was commanding a price of few lakhs is now commanding a price of crore. The price hike is not supported by any infrastructure development and the situation has only worsened with clogged roads, power cuts and erratic water supply. Still the prices are raising and the rationality of price hike is not known. As the saying in stock market goes " the bulls and bears make money only the pigs gets slaughtered" is true and the individuals are the worst sufferers in such a situation.
   Now is the best time to take rational decisions.

Continued from the last article ...

Please read the earlier parts for continuity.

If you are a first time reader, you are requested to go through the earlier articles for better understanding and continuity. The blog articles are mainly focused on educating/ understanding the benefits available in Govt R&D Institution since the opportunities outside is tempting and looks far better than what is offered in these organization.

The earlier article dealt with the job risk and the job market outside works as per the market cycle and the cycle has its own ups and downs. Further the industries has cycles and sometimes the industry which is famous may become defunct after some times. In the middle of last decade the textile industry was the largest employer and there were lot of textile mills in Bombay and lot of people were employed there. Now what is the condition of those mills? Now they are closed and the land is auctioned at hundreds of crore for building complexes, malls etc. The companies and brands in textiles like Bombay dyeing , Vimal were gone ( now reliance has re-launched the Vimal brand ) and TV segment leader of yesteryears BPL TV has gone and that place is taken over by LG ,SAMSUNG etc. The good old ambassador, fiat cars were out and replaced by new car companies and new models. These all happened with in a period of 40 – 50 years. There are daily market news about new stock entering in to SENSEX, Nifty and Pushing outside the other stock which has fallen out. Nobody would have forgotten the Tech crash of 2001 and the employees were given march orders abruptly. The rupee rise coupled with removal quota in WTO regime made many garment companies feeling the pinch and many employees were being thrown out. The US housing sub-prime crisis has lead many foreign banks and financial companies to bankruptcy and job cuts and we do not know their impact in India. The rupee rise is giving sleepless nights to IT/ITES companies. Anything may happen any time and nothing is certain. Have any one wondered what is the plight of those employees? People have very little memory and everything is forgotten.

The working life of a person stretches to 30 or odd years and one do not know the uncertainties. The person who is in a secured life in Govt dept with the assured pension should evaluate all these factors .If you had read the earlier articles the pay of these R&D institution's engineers/scientists are not as bad as it is portrayed. The articles tries to provide a insight into the benefits of Govt service in terms of monetary benefits, pensionary benefits, the so called new concept floated by the builders " Walk to Work" which is readily available in the form of accommodation inside the campuses, study leave to pursue a higher education , sabbatical leave to work in industry, profit sharing on invention etc.

Individual is responsible for his actions and the only point is he is taking informed decisions taking into consideration all the facts .

I request you to offer your comments.

 

Part II JOB RISK Vs JOB SECURITY

Please read the first part for continuity.

The job is also as risk as our finance. The job market is also dependent on various forces of market. Due to globalization, liberalization and privatization started in 90s by Dr. Manmohan Singh as finance minister the Indian economy opened up and lot of new opportunities and jobs were created. Subsequently the Y2K problem opened up a wave of job opportunities in the software sector .These software companies became the darling of masses and everyone wanted to become software engineer..

Then came the tech bubble in 2001 and lot of people were rendered jobless and many were given pink slips. Then again the industry grow at 40% -50 % growth rate .Now the IT/ITES industry has bypassed the govt which used to employ the large number of people in employment generation. Now the IT companies like TCS etc whether you believe it or not employ more than one lakh people. The entire top tier IT companies went overdrive in their recruitment announcing 10000 to 15000 recruitments in a year. The IT/ITES industry has become the envy of others and even persons who are specilasied on other fields looked upon the IT industry as their messiah and left their job. The IT juggernaut does not leave the GOVT employees too and many of the employees left their job and joined the IT sector.

Now the US SUB PRIME issue has taken the toll on many of the banks and other financial institutions in USA and Europe and resulting in reduced IT budget meaning loss of revenue to our Desi companies. Adding to the woes are the rupee rise which has dramatically risen from the Rs.47 = US $ 1 to Rs.39 per dollar. There is an another sword hanging on their head in the form of withdrawal of exemption of STPI benefit from 2009.

These factors could play a devastating role on the functioning of IT companies and the companies will resort to downsizing their manpower and may eventually shut shop and go elsewhere where the manpower is cheaper. We are already witnessing such trend by these companies in shifting or opening up campuses in tier II Cities like Bhubaneswar, Chandigarh etc to cut cost. In such as scenario a mere 5 % job cut in top tier companies will result in around 10000 to 15000 software engineers rendered jobless. You will be forced to solve your problem and along with the huge loans taken for Housing, Car etc. Further remember no politicians is there to support the cause because they know that you are not their vote bank.

Though I hope the views may look pessimistic but the reality cannot be hidden.

Whether the employees in govt sector who are in job security evaluated these aspects before taking a call? While we take so much of care and caution for our finances for their risk and return , are we not supposed to give the same care and caution for our job ?

 

 

 

 

 

 

Job Risk Vs Job security

If you are first time reader, please go through the earlier articles for continuity and better understanding.

ASSOCHAM survey published recently has some interesting facts.

Job stability is attracting an increasing number of B-school graduates belonging to smaller towns to leave aside lucrative salaries in private sector and opt for a career in public sector.As many as as 85% of student in tier ii cities such as Ghaziabad, Lucknow, Chandigarh, Dehradun, Jaipur, Indore, Kochi etc said their first choice would be to join Schedule A PSU with job stability is a main factor. However in metros such as Delhi, Bangalore, Kolkata, Mumbai the students were more interested in working for corporate sector.

This survey shows two kinds of preferences with metro students opting for more lucrative private sector and tier ll cities students preferring PSUs for job stability.

You would have noticed in the news channel and other financial dailies about Investment in direct equity, real estate , commodities etc which are considered as high risk and high return category and investment in mutual fund investment etc considered as moderate risk because of their diversification. The investment in debt instrument like bond, FD etc are considered as safe investment. The above type of investments fetches returns varying from high to moderate return and low return according to the investment type and similarly they carry high risk to moderate risk and low risk.

Even in the universe of mutual funds schemes or funds like sectoral fund, thematic fund are considered as high risk with high return and balanced funds which invest partly in equity and partly in debt is considered as moderate risk with moderate return and the investment in debit fund is considered as safe with less return.

In the same way there is plenty of advice given to mitigate risk and to go for asset diversification in equity, real estate, gold etc. As we saw in earlier articles the risk and security are opposite to each other and the advises are given to us so that we do not lose our hard earned money. There are plenty of research done to assess or calculate the risk and returns etc and still we remember the Harshad Mehta, Ketan Parikh scams etc.

Sometime I wonder Whether this rule is applicable only to finance and not to other areas ?

Whether our job is not as important as our finances?