Income Management and Pay Slips

Income Management

• Provident Fund Schemes include EPF, PPF, and NPS
• Pension, Retirement and Estate Planning
  • The 4% rule of financial freedom applies
• Pension Schemes run by the Government of India: NPS, Atal Pension Yojana
• Post Office Saving Schemes: Sukanya Samridhi Yojana, National Saving Certificate
• Life Insurance: Term, Endowment, Whole life, Unit Linked Insurance
  • The Rule of 20X applies to life insurance
• Personal Accidental Cover includes Motor, Health, and Group Insurance
• Basic Insurance Schemes are run by the Government of India
  • Examples include PM Suraksha Bima Yojana, PM Jeevan Jyoti Yojana, and Ayushman Bharat
• Protection against Ponzi Schemes and Fraud is needed
• Grievance Redressal Agencies exist for Banking, Securities Market, Insurance, and Pension Industry

Pay Slip/Salary Slip

• A salary slip is a monthly document from an employer to employees
• Details the breakdown of salary and deductions for a specific period
• All companies are legally required to issue salary slips
• Salary slips are important for:
  • Proof of employment
  • Income tax planning
  • Seeking future employment
  • Availing loans and credit cards
  • Availing government benefits
• Cost to Company (CTC) is the total employer expense on an employee, including basic salary and allowances
• Gross Salary is what an employee receives before deductions
• Net Salary is what an employee receives after deductions

Earnings

• Basic salary typically constitutes 30-35% of the total salary and is fully taxable
  • It tends to be higher at junior levels
• Dearness Allowance (DA) offsets the impact of inflation, usually 30-40% of basic pay
  • It is directly based on the cost of living
• House Rent Allowance (HRA) depends on the city of residence
  • It can be 50% of basic pay for metro cities and 35-40% for other cities
  • It is exempted from income tax up to a certain limit if the employee pays rent
• Conveyance Allowance covers travel expenses to and from work and is tax-exempt up to a specific amount
• Medical Allowance is for medical expenses incurred during employment
  • Employees can save income tax on this with medical bill submissions
• Special Allowance is performance-based, varies across organizations, and is 100% taxable

Deductions

• Professional Tax is a small tax levied by state governments
  • For example, it is Rs. 200 per month in Karnataka
• Employee Provident Fund (EPF) is a retirement fund accumulation, 12% of basic and DA
• Tax Deducted at Source (TDS) is deducted by the employer on behalf of the income tax department based on gross tax slab
• Loan deductions are made if an employee has an outstanding loan with employer proof

Government Savings and Investment Options

• Government of India accepts deposits from the public, offering tax-saving instruments
• Examples: National Saving Certificates (NSC), Kisan Vikas Patra, Sukanya Samridhi Deposit, Public Provident Fund (PPF).
• These schemes vary in duration and interest rates.

Employee Provident Fund (EPF)

• The Employee's Provident Fund Organisation (EPFO) in India is the world's largest Social Security Organisation
• The EPF is a social security benefit received post-employment or at retirement, enabling salaried professionals to save monthly
• It provides post-retirement benefits for employees or their legal heirs

EPF Key Information

• Coverage: Applies to establishments with 20 or more employees
• Contribution: Employee contribution is 12% of EPF wages
  • Employer contribution of 12% is divided between EPF (3.67%) and EPS (8.33%)
• UAN: The Universal Account Number is a 12-digit number provided by the EPFO, remaining the same throughout an employee's life
• Provident Fund Scheme (Accumulation plus interest upon retirement, resignation, death)
• Pension Scheme (Monthly pension for members on retirement of disability)
• Insurance Scheme (insurance up to Rs. 7 lakh is payable in the event of premature death)
• EPF receives contributions from both employees and employers
• Compound interest accumulates on a monthly basis (currently at 8.10%)
• No contribution to a PF account for 3 years results in the account earning no interest beyond that period

Employee's Pension Scheme (EPS)

• Basic Salary plus DA: Rs.15,000
• Employee's contribution towards EPF (12% of Rs.15,000): Rs.1,800
• Employer's contribution towards EPF (3.67% of Rs.15,000): Rs.550
• Employer's contribution towards EPS (8.33% of Rs.15,000): Rs.1250
• Total monthly contribution towards EPF by an employer (Rs.550 + Rs.1250): Rs.1800
• The total contribution made by the employee and employer per month: Rs.3600
• Employee's Pension Scheme (EPS) is a superannuation fund for future pension backed by the Government of India
• Nominees also receive a pension
• The employer contributes 8.33% of the employee's basic salary and DA towards the scheme, maximum amount is Rs.1,250
• Requirements for EPS:
  • The individual must be an EPFO member
  • Completed at least 10 years of service
  • Attained the age of 58 years
• Pension calculation: Pensionable Salary x Pensionable Service / 70; pensionable salary is the average of the last 60 months

UMANG

• UMANG (Unified Mobile Application for New-age Governance) is a mobile app and a Digital India initiative
• Allows access to central and state government services
• EPFO users can monitor their EPF and pension balance
• It connects to other government schemes like gas booking, Aadhar card, and income tax services

Public Provident Fund (PPF)

• PPF is a government-backed, long-term savings scheme
• Intended for those in the unorganized sector without EPF access
• Available in post offices and banks, and offers guaranteed returns with tax benefits
• Key Features:
  • Minimum deposit: Rs. 500; maximum deposit: Rs. 1,50,000 per financial year
  • Maturity: 15 years with a current interest rate of 7.1% p.a., compounded annually
  • Loan facility: Available from the 3rd to 6th financial year
  • Withdrawal: Permissible from the 7th financial year (not more than 50%)
  • Extension: The account can be extended after maturity, for blocks of 5 years
  • Tax Deduction: Deposit qualifies for deduction under Section 80-C of the Income Tax Act

Compound Interest Rate (Annuity)

• Investments give better rewards when are compounded over the long run
• Compounding involves earning interest on previously earned interest
• Annuity is the set amount paid/received each year for a defined number of years
• In PPF, annual payments can range from Rs. 500 to Rs. 1,50,000 for 15 years

Pension, Retirement, and Estate planning

• Retirement is permanently leaving the workforce behind and no longer generating income
• Necessary to generate adequate financial backup during retirement
• Indian retirement age is 58-65 years
• Pension provides income during unproductive retirement years
• Estate planning manages an individual's assets
• Assets/investments are passed down from one to another, often to the spouse and then to nominees
• A pension holder passes on assets to a spouse and then to nominees
• Need for pension:
  • Decreased earning potential with age, rise in nuclear families, migration of earning members
  • Increased longevity, rise in the cost of living
  • The goal is a dignified life in old age with financial independence

National Pension System (NPS)

• NPS is a government-sponsored social security scheme for long-term retirement planning
• Investors are encouraged to invest during employment, and is a market-linked voluntary contribution retirement scheme
• Post-retirement, about 60% of the matured sum can be withdrawn either as a lump sum or via installments, while remaining 40% must be used to purchase an annuity
• Any Indian national between 18-65 years can join
• By investing in NPS, you can build a retirement corpus and avail pension amount during your retirement years
• The money cannot be redeemed before 60 years of age
• Allows partial withdrawal for specific needs such as children's education, children's marriage, critical illness

Atal Pension Yojana (APY)

• APY is a pension scheme by the Government of India aimed at unorganized sector workers
• A minimum guaranteed pension of Rs.1000, Rs.2000, Rs.3000, Rs.4000 or Rs.5000 per month starts after attaining the age of 60 years, until death
• The specific pension amount is dependent on the contributions of the subscribers for their chosen pension amount
• Requirements:
  • Any Indian citizen between 18-40 years of age, can have a a savings bank or post office savings bank account,
  • Irrespective of their employment status
• The contribution amount depends on the age, time of opening, frequency of contribution and pension slabs chosen
• Contribution frequency: Monthly/quarterly/half-yearly and Closure not before 60 years (Interest rate 7.1%)
• Once the subscriber dies, his/her spouse will receive the exact pension amount
• After the death of the subscriber's spouse, the nominee of this account gets a corpus amount of premiums paid

Post Office Saving Schemes

• The Post office is one of the oldest organizations in India
• Biggest advantage of these schemes is their sovereign guarantee backed by the Government of India
• The India Post Payment Bank (IPPB) offers Internet/Mobile Banking

National Savings Certificate (NSC)

• Fixed income scheme opened at a post office as a secure, low-risk product
• Government of India initiative to invest while qualifying for deduction under the Income Tax Act
• Key Features:
  • Many accounts can be opened
  • Available from any post office
  • Joint accounts are allowed
  • Maturity: 5 years
  • Minimum deposit: Rs. 1000, then in multiples of Rs. 100
  • Interest rate: 6.8% compounded annually but payable at maturity.

Sukanya Samridhi Yojana

• Scheme aimed at the betterment of the girl child through Beti Bachao and Beti Padhao campaign
• Key Features:
  • Interest rate: 7.6% compounded annually payable at maturity
  • Minimum deposit: Rs. 250; maximum deposit: Rs. 1,50,000 per annum
  • An account can be opened in the name of a girl child below 10 years of age
  • Deposits made until completion of 15 years from the opening date
  • Deposits can qualify for deduction under Income Tax Act
  • Closure at maturity: After 21 years from opening or at the marriage of girl child after attaining 18 years

4% Rule of Financial Freedom

• Percentage a retiree withdraws from their retirement account per year
• Provides a steady income while allowing the invested balance to grow during retirement
• Corpus required: 25 times of estimated annual expense
• For example, if the annual expense after 50 years of age is Rs.5,00,000, then required corpus is 1.25crs
• Withdraw 4% every year, i.e., Rs 5 lakh and this applies for a period of 30 years

Insurance and Protection

• Insurance allows for income continuation during events like disasters, illness, accident, etc.
• One can transfer the risk of a potential loss, from you to the insurance company, in exchange for a fee or premium.
• The premium is a fixed amount that one pays covered against uncertain and potentially catastrophic losses is affordable

Common Insurance Policies

• Personal: Life, Health, Accident Cover, Property: Home, Auto, Appliances
• Commercial: Agriculture, Industry, Building, Equipment. Others: Weather, Travel, Retirement

Life Insurance:

• Protection against unforeseen circumstance of death of the earning member
• Contract provides for payment of a sum of money to the person assured or following him to the person entitled to receive the same, on happening of a certain event

Life Insurance: Term Life Insurance

• Nominees will receive the Sum Assured in the event of unfortunate demise of the policyholder
• Policies are active for a fixed period of time
• Low premiums
• Does not carry any cash value

Life Insurance: Endowment Policies

• Provide periodic payment of premiums and a lump sum amount either in the event of death of the insured or on the date of expiry of the policy, whichever occurs earlier

Whole Life Insurance

• Term insurance with a savings accumulation benefit
• Provides death benefit while the life insured is alive
• Savings get accumulated in cash value as per the investment mandate
• Premiums are higher and there are traditional and unit-linked variants

Rule of Income Replacement

• Life insurance replaces the lost earnings of the breadwinner
• Insurance Cover = Current Annual Income*Years left to Retirement

Unit Linked Insurance Plans (ULIPs)

• Financial planning for wealth creation and security for dependents
• Offer an optimal mix of insurance and wealth creation based on risk-return profile and investment horizon
• A portion of the premium helps insurance, while the rest is invested in equity/debt instruments
• ULIPs allow for switching between funds and offer tax benefits under Section 80 C.
• Offer a combination of risk cover and investment, investment risk generally borne by the investor.

Personal Accident Cover Policy

• Insurance plan that provides monetary compensation in the event of bodily injuries, disability or death caused solely by accident
• Provides protection against death or disability

Health Insurance

• Coverage that covers the cost of an insured individual's medical and surgical expenses
• The insured is the owner of the health insurance policy or the person with health insurance coverage

Motor Insurance

• Insurance for cars, trucks, motorcycles and other road vehicles
• It is also called vehicle insurance, auto insurance

Group Insurance

• One contract covering a group of lives
• A master policy, the terms of insurance cover depend upon the characteristics of the group as a whole, defines the group, benefits, contribution amount, etc.
• Commonly covers members of an organization or employees

Basic Insurance Schemes by Government of India: PM Suraksha Bima Yojana

• Provides accidental insurance cover to bank accounts in the age group of 18-70 years
• Annual premium deducted from bank automatically bank accounts
• Insurance covers permanent and partial disability due to accident

Basic Insurance Schemes by Government of India: PM Jeevan Jyoti Yojana

• Provides life insurance cover to bank account holders in the age group of 18-50 years
• Annual premium deducted from bank accounts of persons
• Person would be eligible to join the scheme through one savings bank account only

Basic Insurance Schemes by Government of India: Ayushman Bharat

• Provides healthcare to poor rural families/identified urban worker families
• No restriction on family size, age, or gender
• No money to be paid for treatment during hospitalisation
• Covers pre-existing conditions from day one
• Including pre & post hospitalisation expenses

Ponzi Scheme

• A fraudulent investment scheme offering high rates of return, but generates returns from new investors money
• Investors are attracted by returns that other investments cannot guarantee
• Mass marketing fraud involves fraudulent emails for investments

Credit and Debit Card Fraud

• Someone uses your card/card information/PIN without your permission
• Best practice: Never share PIN with anyone
• Investment fraud involves recruiting members to invest in a business with expectations to recruit new members
• Lottery scams deceive people in sending a fee to collect a prize

Identifying Ponzi Schemes

• High returns with little/no risk, overly consistent returns, unregistered investments and unlicensed sellers, non-transparent disclosure
• Difficulty in receiving payments

Protection from Fraud

• Investors lost money due to unregistered entities offering investment schemes and illegal mobilisation of funds
• Be cautios about fraudulent agencies luring investments with higher returns
• Never agree on a deal that sounds too good to be true
• Research on the company's background and financial performance to weigh risks

Grievance Redressal of various markets

• Securities Market
• Banking Industry
• Insurance Industry
• Pension Industry