Monday, 30 October 2017

What are Benefits of Pre Mature Voluntarily Retirement?

In the year 2000, Special VRS scheme was introduced in the banking industry and was made very attractive and lucrative. The bank employees opted for the VRS without applying any mind or without calculating the Breakeven point to arrive at an age which will be best suitable for taking the VRS. At that time interest rates on deposits were at the rate of 12% per annum and the VRS optees got 1% staff rate extra. The VRS optees never imagined that interest rates on deposits will get reduced to low of 8 to 8.50 % and depreciating rupee will erode the purchasing power of the VRS amount encashed by the VRS optees. [The Rates of Interest has been further reduced to mere 6.25 % as on October 2017 when this article is being updated by the author] At that time I calculated that if one had remaining service of 5 to 6 years then it may sound feasible to opt for VRS in 2000 when extra emoluments in lieu of the remaining service were being offered. Anyhow the VRS 2000 was a one time option and after that, the VRS optees were deprived of extra emoluments in lieu of remaining service. Had the IBA and the Banks kept the VRS open even after 2000 to till date then I am sure that whole banking industry would have undergone change with new and young faces replacing the old and senior bankers.

Due to certain personal circumstances, I had to opt for VRS in the year 2012 without expecting any extra emoluments for my remaining service of around 60 months. But before opting for the Voluntary Retirement I made my own calculations so that I had not to repent afterward. Though I am not in favor of early voluntary retirement and remain active till the date of superannuation at the age of 58 or 60, yet I want to share the few benefits of the early VRS (say 5 years before date of superannuation and after completing service of more than 30 years) for those members who might be planning for their retired life:
  1. The gratuity of Rs.Ten lac [which is now enhanced from Rs.10 lacs to Rs.Twenty Lacs now in 2017] which was payable on superannuation will be encashed by the retiree 5 years in advance as there will be no change in gratuity due to ceiling amount of Rs.10 lac and if we calculate the future value of Rs.10 lac (received prematurely) as on date of superannuation it will work out to Rs.16 lac approx if invested in the Bank FD at the rate of 10% inclusive of staff rate. The visible undisputed benefit of Rs.6 Lacs [Loss of Rs.4 Lac for those who are eligible to get Gratuity of Rs.20 Lac].
  2. If VRS is taken early then the commutation factor is higher and the retiree gets higher commutation pension value. Now check the future value of the total commuted value of the pension by adding compounded interest at the rate of 10% (compounded quarterly) for the remaining number of years of service and deduct from it the actual commuted pension payable at the age of 60 or 58 years. The difference is a clean profit for getting retirement at an early age.
  3. If VRS is taken 3-5 years in advance the individual can also look after the family affairs especially marriages and settlements of children. An individual can also look forward to an alternative at a younger age, keeping in view the average age of bankers, as per latest study report, is estimated at 65 years.
  4. As the Pension amount is very less as compared to Salary, the incidence of Income Tax will also reduce from 30% or 20% to 20% or 10%.
  5. [I think cumulative effect of items at Serial Number 1, 2 and 3 will be almost "No Profit No Loss in the current scenario when the Gratuity is increased to Rs.20 Lacs.]
  6. Now you will laugh at my calculations. The commuted basic pay gets restored after 15 years and if you took the normal retirement it would have been restored at the age of 75 whereas longevity of life is reduced due to the aging process. But in case you took the VRS at the age of 55 then full pension will get restored 5 years in advance at the age of 70 and as per latest study report, the average age of bankers is estimated at 65 years. Now hypothetically invest the increased amount of pension on account of the restoration of the full amount into a Recurring Deposit account for 5 years and you will be richer by the amount of maturity value of this recurring deposit.
  7. Due to early retirement your monthly pension will be much less than the monthly salary on which you might be paying TDS on salary ranging from Rs.4000 to Rs.7000 per month and this amount of loss of TDS will be to the Income Tax Department as your pension account will not attract TDS after normal investments U/s 80CC.
  8. You might be having accumulated P.Leave or Earned Leave for a maximum period of 240 days and the bank never gives interest on this intangible asset but when you opt for VRS you have the opportunity to get it cashed similarly as you would have done on the date of superannuation. This means that you will be getting Leave Encashment amount 5 years in advance making you richer by the interest in monetary terms getting added to the leave encashed amount 5 years in advance.  
  9. Last but not the least, by taking early retirement you can shout "Hello Pension, Bye Bye Tension" to plan for the tension-free retired life. Medical studies have revealed that the average age of a pensioner increases by 5 to 10 years as compared to that of any person in active service.
The above calculations are made on certain assumptions and one must check his or her conditions before opting for VRS. We provide free counseling to persons thinking to opt for VRS. What are you thinking now? To ask further questions on the issue you are welcome to Register at our Main Site where our Experts and Super Specialists are waiting to answer your questions free of cost.

This article was originally written in May 2012 by the author and it has been reviewed or updated in October 2017 for any material changes in assumptions.
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