(Synopsis of lecture delivered to Senior Executives Forum in MCCI&A, Pune India by Shri D S Gade )
Venue : Mahrattha Chamber of Commerce & Industries , Pune
Date : August , 18th, 2010
I. What is Retirement ?
Concept of Industrial Retirement is of recent origin. It started in 1881 in Germany first along with the starting of Industrial Revolution and it spread over the world soon. A point at which you stop earning, or a point at which you withdraw from your job, occupation or profession is called retirement. The age at which you do so is the retirement age. This age of retirement differs from country to country. It is 60 in USA and Eurpoe. In India - It is 60 in Central government, 58 in Maharshtra, 55 in Private sector and 65 for claiming income tax benefits.
A point at which you stop earning or a point at which you withdraw from your job, occupation, or profession is called retirement. The moment you retire, you become bekarthat is unemployed. Over a night, person earning handsome money every day or month suddenly becomes a non earning burden on the family. The life hereafter is to live on old savings or mercy of the other earning members.
(B) What is Financial Planning for Retirement ?
It means systematic efforts made to achieve an objective of making retired life financially secured, and through this way, make it comfortable, peaceful and secured.
( C ) Why plan ?
(1) Natural requirement : Everybody has to retire in life. It is certain. And hence every body has a dream to have asecured,comfortable and peaceful retirement life. Everybody has got sweet memories of his happy and comfortable Childhood what we call in Marathi as “Ramya te Balpan” On same line every person should have a “Ramya te Mhatarpan” i.e.cofortable and peaceful old days life. Sant Tukarm has said “Yach sathi kela hota attahas” i.e. all the struggles throughout the life were to make the last day of the life memorable.
(2) Social Factor :- Few days before I read a news in Marathi news paper. The theme of the news was one girl rejected a matrimonial proposal of a boy on the ground that he had some senior citizen in his house, whom she called “Dustbins”. This one incident narrates the psychology of the new generation regarding senior citizen. Why this happens ?
In Indian situation this problem was not so serious till recently, where a joint family system is prevailing. Seniors used to be the head of the family, youngers used to earn with the help of family property, and deliver the money to seniors to manage. But now a days youngers have no work in villages, they migrate to cities for earning their bread, stay there in small stables where seniors have no place . Joint families are vanishing very fast dueto this urbanization of population. Every family will have only one or two children as per Govt.directions . In China
(3) Longer life spans : Due to continuous researches in medical science, life span of human being is increasing day by day. In India USA Japan
(4) Senior citizen population :- As of today, average population of senior citizen i.e. persons above 60 years of age in the world is about 8% of the total population. This percentage is also going up by leaps and bounds every day. In India India India
The ratio of young population to senior population in India USA
(D) Why plan for finance only ?
No. Actually we need to plan for three things for retirement, viz.health,wealth,and help. Every subject itself is so important that it will require separate lecture for each aspect. But if you could manage wealth properly, managing other two things will be easier .Money is the basic need of life. Sant Ramdas Swami in his book DASBODH has written four hundred years before “milavati tituke bhakshiti,te kathin samayee maroon jati,dirgha vichare vartati techi bhale “Those who spend everything earned, will not survive in difficult times ,those who plan for the future will only be wise. “Arthasya Purusho Das” i.e. man is servent of money. An English proverb goes as “Money makes mare go.” If you save money, money will save you. It is said that money is not the everything in life. But that is also true only when you have enough money to survive.
( E) How do we plan ? Actually financial planning for retirement starts much before you retire, in fact, the time when you start earning in life.
Planning whether before or after retirement have main three aspects –
(a) Earn money, by saving Tax.
(b) Buget your expenses.
( c)And then invest the savings wisely .
Planning after retirement has two more points to be taken care of :-.
(d) Arranging funds and physical help for difficult situation such as bed ridden or
physical handicapedness
(e) And pass the remainder of wealth to your heirs after your death..
After you start earning, you need to start saving as early as possible, and as much as possible. Keeping in mind the life spans and circumstances discussed above, you are going to have a longer non earning period than your earning period. A person stating earning at the age of 25 will work for 35 years and after that he may survive without earning any income, for any period from 15 to 40 years. So one has to save from his working period earnings to cater to non earning period. It is obvious that if you do not save anything from your earnings, you will have no funds to cater to your non earning period. In fact, if you take into account inflation factor, you will need more funds than your earnings today.Acturial valuers have calculated ,by taking into account all these factors, how much savings you need today to hedge your needs after retirement. It comes to about 35% of your earnings today. Whatever you earn today,35% of that must be saved for future. Save in different areas, i.e. do not keep all eggs in one basket. Have a balanced portfolio to cover safty,as well as inflation and appreciation. Consult financial experts.
(F) Tax Saving :-First priority may be to invest to save tax. Evasion of Income Tax is an offence. But avoidance of it is not. Everybody has the right to avoid the payment of Income Tax by planning his affairs within the four walls of law. When you start earning money keep in mind the taxation view, and take benefits of all tax free incomes offered by the law. Section 10 of Income Tax Act 1961 lists such items of income as below .Take advantage of this tax free incomes. Especially retirement benefits offered as tax free such as Provident Fund, public provident fund ,Gratuity and superannuation fund must be availed whenever opportunity arises.
(I)Tax-free Income:-
(1) Agricultural income:- Any income earned by way of actually cultivating the land by sowing the seeds, growing the crops, and selling it in the market as it is, is tax free.
(2) Any sum received by an individual as a member of a Hindu undivided family, out of the income of the family,
(3) In the case of a partner of a firm, his share in the total income of the firm.
(4) In the case of an individual, the value of any travel concession or assistance received by, him, from his employer or after retirement from former employer for himself and his family, in connection with his leave travel expenses actually incurred for the purpose of such travel and “family", includes, the spouse and children, the parents, brothers and sisters ,wholly or mainly dependent on the him
(5) Any allowances or perquisites paid or allowed outside India by the Government to a citizen of India for rendering service outside India
(7) Any death-cum-retirement gratuity received up to an amount equal to one-half month's salary for each year of completed service, calculated on the basis of the average salary for the ten months immediately preceding the month in which he retires. Or Rs.300000 whichever is less
(8) Amount received in commutation of pension received from the Central Government or any payment in commutation of pension received under any scheme of any other employer, to the extent it does not exceed one-third or one half of the pension which he is normally entitled to receive,
(9) Any payment received by an employee of the Central Government or a State Government as the leave encashment salary in respect of the entire balance of earned leave at his credit at the time of his retirement and for other employees ten months leave calculated on the basis of the average salary drawn by the employee during the period of ten months immediately preceding his retirement.
(10) Any compensation received by a workman under the Industrial Disputes Act, 1947 to the extend that the amount shall not exceed- an amount calculated in accordance with the provisions of the Industrial Disputes or Rs.fifty thousand rupees, whichever is less:
(11) Payments made under the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 (21 of 1985),
(12) Any amount received or receivable by an employee at the time of his voluntary retirement or termination of his service, to the extent such amount does not exceed five lakh rupees
(13) In the case of an employee, the tax paid on perquisite income by his employer,
(14) Any sum received under a life insurance policy, other than any sum received under a Keyman insurance policy.
(11) Any payment from a provident fund or a recognised provident fund, provided the person is member of the fund for minimum five years. and from public provident fund.
(13) Any payment from an approved superannuation fund made on the death or retirement of employee.
(14) any special allowance specifically granted to an employee by his employer to meet expenditure actually incurred on payment of house rent paid by him in excess of 10% of his salary.
(15) Any such special allowance or benefit, specifically granted to meet expenses exclusively incurred in the performance of the duties of an office to the extent to which such expenses are actually incurred for that purpose;
(16) scholarships granted to meet the cost of education;
(17) any payment made, for reward or award whether in cash or in kind, by the Central Government or any State Government
(18). any income by way of pension received by an individual who has been awarded "Param Vir Chakra" or "Maha Vir Chakra" or "Vir Chakra" or such other gallantry award
(19) any income by way of dividends
(20) any income by way of income received in respect of the units of a specified Mutual Fund or income received in respect of units from the specified company:
(21) any income arising from the transfer of a long-term capital asset, of eligible equity share in a company purchased on or after the 1st day of March, 2003 and before the 1st day of March, 2004 and held for a period of twelve months or more.
(II) Deductions for certain incomes and payments :-
Chapter VIA of the Income Tax Act 1961 provides the list of such income or expenses which are to be deducted from total Income under some conditions.
(1) Under sec.80C,80CCC,and 80CCD, an aggregate amount of Rs.1 lakh invested in following items is eligible for deductions from total income
(i) Insurance premium of life insurance policy on the life of self ,spouse ,and children and incase of HUF ,any member of the family. not exceeding 20% of the insured amount.
(ii)Premiums to purchase certain deferred annuities
(iii) Contribution by an individual to any Provident Fund ,public provident fund.
(iv) Contribution by an employee to an approved superannuation fund;
(v)Subscription to any such security of the Central Government or any such deposit scheme as
Government may, specify;
(vi) Subscription to National Savings certificate VIth issue.
(vii)Contribution, in the name of any person in the family for participation in the Unit-linked Insurance Plan, 1971 of the Unit Trust of India
(viii) (xi) Contribution in the name of any person in the family for participation in any such unit-linked insurance plan of the LIC Mutual Fund
(ix) (xii) Amount paid for contract for such annuity plan of the Life Insurance Corporation or any other insurer as the Central Government may, specify;
(x)Subscription to any units of any Mutual Fund as the Central Government notification in, specify
(xi) Contribution by an individual to any pension fund set up by any Mutual Fund as the Central Government may, specify
(xii) Subscription to any such deposit scheme of, or as a contribution to any such pension fund set up by, the National Housing Bank , as the Central Government may, specify.
(xiii) Subscription to any such deposit scheme of a public sector company which is engaged in providing long-term finance for construction or purchase of houses in India
(xiv) Amount paid as tuition fees (only tuition fees) for any two children (and not grand children)
(xv) Amount paid for the purchase or construction of a residential house property towards
any installment ,stamp duty, registration fee and other expenses .
(xvi) Subscription to equity shares or debentures of any eligible issue of capital approved by the Central Govt.
(xvii) as subscription to any units of any mutual fund approved by the Central Govt.
[(xviii) as term deposit for a fixed period of five years with a scheduled bank; and
[(xix)) as subscription to such bonds issued by the National Bank for Agriculture and Rural Development, as the Central Government may, specify.
[xx) Amount deposited in an account under the Senior Citizens Savings Scheme Rules,
(xxi) Five year time deposit in Post Office
(xxii) Contribution to annuity plan of Any Insurance Company(Contribution to ec.80CCC)
(xiii)Contribution by an employee to notified Pension Scheme.(80CCD)
(2) Expenses allowed as deductions :-
(i) Mediclaim Insurance premium paid for self,spouse,dependent children up to Rs.15000 plus 15000 for parents. For senior citizen rs.20000.
(ii) Maintenance and medical treatment expenses or a deposit with specified insurance company for a disable dependent Rs.50000, and in case such person is with severe disability 75000.
(iii) Payment of an amount for medical treatment of deceases such as cancer, aids, neurological disease, etc.up to Rs.40000 and for senior citizen Rs.60000.
(iv) Any amount of interest on loan taken for education for self or relative, for seven successive years.
(v) Donations given to certain funds, charitable institutions from 50% to 100% of such donation amount.
(vi) House rent paid for residence, to any assessed if the rent paid is in excess of 10% of his total income.
(vii) Donations for scientific research or rural development complying with certain conditions.
(viii) Donations given to political parties.
(ix) Deduction to a person with disability upto Rs.50000 and in case of person with severe disability rs.75000.
(G) Budget your expenses :- Whether you have retired or yet to retire, you cannot save unless you prepare a buget of your income and expenses. Identify and evaluate your needs. Track your spending to keep them in budget. Watch for cash leakages. Don’t spend beyond earnings.beaware of luxuries dressed up as necessities. Do not count on windfall gains. In retired time, take care of your medicines first. Saving of money is earning of money. After you retire, and if you are staying in a metro city, or a district place, you may think of shifting to a smaller town or village if possible. That will save you lot of money. If you are addicted to any hazardous habits try to leave them for the double benefit of saving in money and also improving your health. Reduce your needs. While planning your expenditure, give priority to insurance premiums if policies are still in force, repayments of loans,govt.taxes,medicines for you and your spouse. If surplus is there still, plan for other retirement activities such as pilgrimages, or other hobbies. Consult your other family members for such budget so that you get a co operation from them in implementing it. Keep it updating too.
(H) Planning for Investment :-
(a) Bank operations:- First of all if you do not have a bank account ,open it, as far as possible ,with a scheduled bank jointly with your spouse. After having saved the money ,you need to invest them securedly.Operation of bank accounts should be by any one or survivor, so that your spouse will have no problem even if you are not there. Use the nomination faculty .Make all financial transactions through cheques to avoid any type of cheating. Here again do not keep all funds in one bank. Every bank deposit is secured by insurance only to the extend of Rs.1 lakh per bank per person. So take care that you do not have more than one lakh in one bank in one name. Here bank means the bank with all branches together, and not the branch of the bank. Many of the co operative Credit Societies are not covered by insurance. Similarly many co operative banks are in danger zone because of high NPA ratio, and non payment of insurance premium. Be aware of such hidden holes. Keep record of all deposits with bank and watch for payment of interest, encashment and reinvestment on maturity. If you are conversant very much with bank operations through net work, it is easy and convenient. However if you are not, do not go for that, as it is otherwise very risky.
(b) Priority for investments :- As discussed earlier, if you are a tax payer gives first priority to tax saving investments. If you are not a tax payer you need not go for that. Then consider following options
(i) Public Provident Fund – Although this investment is also covered by tax saving investment, this is a good investment for all other persons also. In fact it is a hen giving golden eggs. Minimum amount required for investment is Rs.500 per annum,maximum allowed is Rs.70000 /-Entire interest on it is tax free. Lock in period is five years , after that you can withdraw certain amounts every year. This account cannot be attached by court for payment of any dues to anybody. This is a unique advantage of this investment. Minimum period is fifteen years and thereafter it can be extended twice for five years each time. You should have this account in the name of all the family members. Rate of interest at present is 8%.
(ii) Senior Citizen Saving Scheme:-Presently this scheme gives 9% interest payable quarterly, which is better return than other good banks.Interet is taxable. It is also covered by tax saving schemes. It can be opened by a person of more than 60years age, along with his spouse, even if spouse is younger than 60 years. it can be opened for five years first and can be renewed for three years thereafter .
(ii)Post Office Schemes:-These schemes have a best security, plus fair rate of return .
(a) Monthly income schemes of Post Office coupled with Recurring deposit account and 5% bonus on maturity is better option than other postal schemes.
(b)National Savings Certificates also have a tax benefit, along with interest accrue on it
every year.
© Kisan Vikas Patra is good for long term planning. It gives double of original amount
in 8 years seven months.
(d) Time deposits.
(iii) 8% Govt.of India
(c ) Shares and mutual Funds :- This is a little bit of speculation and may give good return if you have the knowledge, time and aptitude to know about this. It may give very high return as well as very big loss if not done properly. Taking help of reliable broker is a must. Frequently booking profits will be helpful. A long term capital gain from this source is tax free. So invest for long term.
(d) Medical Insurance ;- Medical expenses are soaring up very fast and are going beyond capacity. It is therefore necessary to have an insurance.Take it as early as possible, so that after you retire insurance company may refuse to insure it. It also has a tax benefit as discussed earlier.
(e) Investment in a residential house. One must plan to buy a house as early as possible, if you donot have one. Take a loan from any one of so many available, such as HDFC,ICICI,LIC.It also have tax benefits.
(f) Gold & jewellery :- Gold is good investment in current situation. Earlier it was not as attractive, except the safety of money. Gold exchange market established recently has made it easy now.
(I) Arranging finance for difficult days (i) Loan:- you may face financial difficulties any time in life especially after you become a non earning member. Try to borrow against your investment with proper advice from the bank where your money is parked. It is cheaper and safe. you may also get cash credit against your pension from your bank.
(ii) reverse mortgage of a house :-This is a recently introduced scheme by the Govt.especially for senior citizen. It is a sale cum mortgage of a house. If you have house of your own and need money ,you may mortgage your house to bank , against which bank will give you funds with interest. You and your spouse will continue to stay in the house (may be till you survive ).After your death bank will sale the house and recover their loan amount and pay the balance to your heirs. While selling the house your heir will have a pre emptive right to buy the house.
(iii) If you are a below poverty line person govt.have some schemes, You may approach a Tahasildar or Collector of your area to get monthly help of Rs.200 and 10 kg.of food grains free.
(J) Help during extreme oldness ,physically handicapped ness: Govt.gas made a law as “The maintenance and welfare of parents and citizen act” making it compulsory for son,daughter,grandson ,and grand daughters to look after their forefathers for food,clothing,residence,and medical aid. In the absence of such relatives, any body who inherits his property will be responsible .Concerned Govt.departments,such as Police,Law,Home,Health have been directed to co ordinate for implementation of this Act.
(K) Will :- Remainders of your property, after death, will pass on to your legal heirs as per the law applicable to your religion. The Act will not consider giving favorable treatment to one who helped you during your life time or one who was sentimentally attached to closely. If you want to do that, you need to make a will. Make a list on a piece of paper of your all belongings movables or immovable and write who should get what. Sign it in the presence of two witnesses. Mention the name of executor of the will , who may be anybody you believ,even your son,wife,etc. If your health is not good it will be safer to have the will certified by a doctor that will was made when you were fully in your senses. It does not required to be registered, nor any stamp paper.
(K) Old Age Homes: - As stated earlier it may be difficult in future by your children to look after you in your old age. It will therefore be better to be prepared for shifting to some old age home .Govt. in the law mentioned above have made a provision to have an old age home for each district for at least 150 persons.
(L) Expectations from Govt. and amendments in Income Tax Act:-
(i) About retiring age ? :- Why should there be a retiring age at all ? We have seen Presidents, Prime ministers ,politicians, industrialists working efficiently even in their eighties and nineties. How a common person becomes unfit as soon as he reaches 60 ? In today’s age to make a person unemployed at 55 to 60 is a mental torcher to him. . Let the person work till he is medically fit, at the most change his nature of work and pay packet. In all developed countries seniors are employed in many sectors on priority. A common complaint against this suggestion is that younger will not get the job if seniors not retire. It is like to rob the Peter to pay the Paul.
In India
(ii) Why different retiring age limits in different situations ? Income tax Act requires person to reach 65 years to get tax benefits. Central Govt. age is 60 where as maharashtra Govt. age is 58 and private sector 55 !
(iv) Children who maintain their parents need to give some deduction from Income .
(v) Different limits on expenditure regarding medical treatment in Income tax Act such as section 80DD,80DDB,80U should be removed. In fact Govt.is supposed to give them these facilities free.Instead Govt. is putting limit on the expenses incurred by them. Why we are harassing those who are struggling for life ?
(vi) Give 100% deductions under section 80G toNGOs working for welfare of seniors. They are doing a job which Govt. cannot do.ASCOP,FESCOM,various trusts of seniors are doing a great job.
(vii) Interest payable on deposits of Seniors should be related to a price index or inflation index bonds should be introduced .
(viii) Provide for fair rate shops of medicines for seniors.
(ix) Increase number of old age homes fast.
(x) Have a separate ministry for Seniors. It is a largest group of people still growing .
(xi) Provide tax concessions to industries giving employment to seniors on the basis of Sec.80JJA.
