Generating Retirement Benefits - Defined Benefits.

Defined Benefits.
Here the benefits that are given to an individual are clearly defined. The person who is receiving the benefit knows the extent of the benefit that is received.

Characteristics:
• Fixed payout available to the employee on completion of certain conditions.
• Guaranteed payout irrespective of the market conditions.
• Final responsibility of ensuring payment rests with the employer, any shortfall will be made by the employer.

Types of Defined benefits
a. Gratuity:
• Gratuity is the payment that is made by the employer in appreciation of the work done by the employee. This is generally done during the time of retirement.
• Any gratuity received while still in service is taxable to the employee.
• Gratuity received by the government employee is fully exempt from Tax.
• Rs. 350000 is exempt from Tax for other employees.

Gratuity Amt = No. of years of service * Avg monthly Salary of last 10 months before retiring.
(Salary only includes basic pay and dearness allowance).

b. Leave salary:
• An employee is entitled to leave according to the rules of the employment.
• If the employee does not take leave during a specified period then:

 The leave could lapse.
 It can be carried forward in future years.
 It can be encashed.

• Encashment of leave during employment is taxable.
• Encashment of leave during the retirement is non taxable for central / state employee.
• Encashment of leave during retirement or leaving a job has specific tax treatment for the non government employee.

c. Retrenchment Compensation:
• Retrenchment is the termination of the service by the employer for any reason other than disciplinary action.
• Upto Rs. 5 lakh is not taxable.

d. Voluntary Retirement Scheme:
• In this, compensation is received by the employee at the time of voluntary retirement or terminating the job.
• It is applicable to all types of employee who have completed 10 years of service or 40 years of age.
• The vacancy caused by the voluntary retirement is not to be filled up.
• Amount receivable will not exceed 3 month salary of each year completed or salary at the time of retirement * by the balance months of service left before the date of retirement.
• Maximum amount available for Tax exemption = Rs. 5 lakh.

e. Employee Pension Scheme:
• A pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. The pension can be given to the member or spouse and children.

 If member is alive, pension to member.
 If member is not alive, Pension to to spouse and two children below 25 years of age.
 This scheme is applicable to all members who joined EPF after 15.11.1995.

Funding of the Pension Scheme
• An amount equal to 8.33% of Wages is pooled into the EPS from the Employer's contribution. ie., If a PF member gets Rs. 1000/- as monthly wages and he and his employer contributes 10% each, Rs. 100 + Rs.17 (=117) goes to Provident Fund and Rs. 83 goes to Pension Fund.
• Govt. also contributes to this Welfare Scheme at the rate of 1.16% of wages.