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8 Ways To Lower Your Debt Burden

Fri, 21 Apr 2023 18:38:48 +0000

The Buyt Desk

Borrowing money from banks or other financial institutions is common nowadays. Getting the loan is possible with just a few clicks on a smartphone and fast online verification processes. Borrowing multiple loans result in the collection of debt over time. Sometimes, there is a need to get a high-cost debt like a credit card or from the market having high-interest rates. This could result in a debt trap (a situation that forces a person to take new loans and has more debt than they can repay). You can do multiple things to prevent the debt completely or at least pay off most of that in a year or less than that.

You can cut down your debt by opting for the following tips –

Create a budget

This is the best thing you can do to get out of your debt. Track your expenses i.e. how much you are earning and investing, and where you are spending the money, it is good to develop a budget. Learning more about income and monitoring expenses can greatly help in reducing or preventing unwanted spending. To accurately calculate the money you owe, note down your debts, their balances, minimum payment periods, and interest rates.

Avoid taking more debt

Focus on paying the debts you currently owe before taking on any new debt. Make sure you don’t add any new debt unless you have some urgent needs. Making unwanted purchases while repaying the current debt will make debt management highly challenging.

Never miss a bill

When the debts keep accumulating, you will have to pay additional interest on the current interest and late fees. This eventually increases your debt amount even further. To avoid debt accumulation, completely and timely pay your bills. Create a monthly note on the calendar and timely pay the installment on the agreed date.

To ease this payment process, automate your credit card payments and EMIs. Plan these payments shortly after the payment date or for the next day. If you get a monthly paycheck on the 5th of every month, set the date to the 6th of every month. It will help in billing the installment on time even when you forget the due date.

Check bills for errors

Never forget to check your bills and statements carefully whenever you receive them. Be sure that there are no errors and that the rates are the same with complete accuracy. For any inaccuracy or error such as an increment in the rates without any explanation, contact your lender as soon as possible.

Concentrate on high-interest debts

Initially, focus on high-interest loans or debts because they are the worst debts. For example, personal loans have 12-20% interest rates, while interest rates on a credit card can go up to 40%. So, pay them in the beginning. It will help in lowering the amount you owe in the long run. Meanwhile, timely keep paying your loans like student loans, mortgages, etc. because they have low-interest rates. You can reduce tax on them.

Consider the best interest rates during debt consolidation

Debt management becomes easier by getting a debt consolidation loan because you make just one payment to the credit union or bank instead of multiple payments to all your present lenders. Focus on the best interest rates before consolidating your debts because credit unions or banks may provide lower interest rates than the rates you owe on the loans.

Step up your installment amount

With the increase in your income like annual increment, step up personal loan debts or credit card EMI amount or installments. Do it in the same ratio as an increment on personal loans or more only when it is affordable for you. Repay the debt if you have additional money in hand such as investment income and others.

Contact your creditors and credit counselors

Know more about your repayment plans by interacting directly with the creditors or companies from which you borrow the money. They will help in setting up a realistic repayment schedule for your budget and decrease monthly payments. If you don’t have any know-how regarding developing debt repayment plans, talk to a credit counselor. But, be aware of the counselors who scam by claiming that they can pay off all debts quickly with just a single low fee.

Conclusion

If you don’t want to fall into a debt trap or reduce a debt burden, follow these tips and learn how to be financially disciplined. Increase your financial understanding and control your desire to splurge on spending.

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How Senior Citizens Can Take Advantage of Reverse Mortgage Scheme?

Thu, 20 Apr 2023 19:17:49 +0000

The Buyt Desk

Investing money after retirement is a luxury for senior citizens and getting a constant flow of extra income will surely be icing on the cake. Investing in retirement benefits. A reverse mortgage scheme helps senior citizens in generating additional income on the property that they own. Let’s understand how this scheme can benefit senior citizens.

What is Reverse Mortgage Scheme?

Introduced in 2007-08 by the government, this scheme helps senior citizens get supplement income and manage constant cash flow. Senior citizens can use this scheme to get some funds when they have the requirement of liquid cash on the property in their name.

Using that property as a mortgage, senior citizens can borrow some money from the bank or a financial institution. They can pay the borrowed amount in monthly installments. INR 50,000 yearly is the maximum monthly payment under this scheme.

Eligibility Criteria of Reverse Mortgage for Loan

The candidate must be an Indian citizen and must have 60 or more years of age.
Married couples can also apply for the loan together only if one of them must be over 60 years of age. The other partner must not be less than 55 years of age.
The property to be mortgaged must be at least 20 years old. Senior citizens living in rented houses will not be eligible for this scheme.
The banks or financial institutions settle down the loan quantum eligibility based on the condition of the borrower’s house. This scheme has generally a 60-80% loan-to-value ratio.
The candidate must own an inherited, self-occupied, or self-acquired residential property in India in his/her name. The property title should clearly show the ownership of the borrower. There should be no debt, liability, or other obligations on the property.
The minimum loan amount is INR 3 lakhs and the maximum loan amount is INR 3 crores.

Pros of Reverse Mortgage Scheme for Senior Citizens

As a senior citizen, you can claim several benefits from the reverse mortgage loan scheme –

Tax advantages

Reverse mortgage loan payouts will not be considered as income under Section 10(43) of the Income Tax Act. So, the received income on a reverse mortgage is completely tax-free and borrowers can enjoy tax exemption on the reverse mortgage loan.

Also, the loan amount invested for home restorations is eligible for tax deductions. You can claim the home repair or renovation amount as a deduction in the calculation of income. Alongside saving the taxes, you can spend these earnings on any financial instrument for more returns.

Multi-purposeful income

Using reverse mortgage loan payouts, you can finance your basic household spending, medical bills, debt payment, travel expenses, and other everyday requirements. You will have no end-use limitations excluding lumpsum payout. You can use this income the way you wish.

No pre-payment charges

In the earlier days, the borrower has to repay debt for premature loan repayment and that was almost impossible for them. In the case of a reverse mortgage loan scheme, you don’t have to repay the loan. So, you would require no pre-payment penalty. The bank has a right to sell the property for loan amount recovery when a borrower dies.

Effective use of property

Owned home property generally provides income only when it is sold off or rented. A reverse mortgage scheme helps in making the best use of your own property by earning income on it while continuing to live in it. As per the scheme, the life partner of a senior citizen can live in the house after his or her demise.

New income source

Senior citizens can use a reverse mortgage as an additional source of income alongside traditional investment options like bank FDs (fixed deposits), post office schemes, PPF, national savings certificates, and more.

If you are more than 60 years old and want to earn some supplementary income for your owned home, a reverse mortgage scheme is worth considering.

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Who is Eligible to Get a Higher Pension in EPS-95 Scheme and How to Apply?

Sun, 09 Apr 2023 19:16:17 +0000

The Buyt Desk

On November 4, 2022, the Supreme Court decided to enable higher pensions to all eligible employees under EPS-95 (Employees’ Pension Scheme, 1995). This is applicable for employees who were employed before September 1, 2014, or retired after September 2014 but were working before that

Also, the employees who were contributing towards EPF in a higher amount beyond the earlier ceiling of INR 5,000 and INR 6,500 but couldn’t opt for higher contributions can also apply for a higher pension in the EPS-95 scheme. Employees who have been EPS members for a minimum of 10 years and are of age 50 or 58, depending on their joining date under the Employees’ Pension Scheme can now apply for the higher pension.

All eligible candidates will have to contribute a higher amount towards EPS 95 from their share based on the actual salary till the time they retire or continue to be EPF active members. The employees will also have to submit the extra EPS contribution for the past years.

The higher contribution for the earlier years will be allowed when the actual wages went beyond the notified wage ceiling of INR 5,000 and INR 6,000. It will be applicable till the date higher contribution commences reducing from the present salary or till retirement. All employees who retired after September 1, 2014, need to follow this norm.

According to section 2(f) of PF Act 1952, employees having over INR 6500 pay was not eligible to be EPF scheme member. Act’s section 26 (6) facilitates them to be an EPF member at the employee’s joint request and the establishment’s employer. EPFO has opened its online portal for eligible candidates under EPS and employees who retired before September 1, 2014. For existing EPFO members eligible for a higher pension, the portal has been accessible after a circular issuance on February 20, 2023.

How to apply for a higher pension in the EPS-95 scheme?

As per the circular dated December 29, 2022, and February 20, 2023, existing employees and eligible pensioners have to access EPFO’s Member e-Sewa portal for option validation. Before submitting the application, a member has to keep a UAN number along with him and make sure the name, Aadhaar number, and date of birth of a member are available in the records of EPFO.

Steps for retired people after September 1, 2014, or those who are actively working

Open the Member e-Sewa portal and click on the “Pension on higher salary: Exercise of joint…. 3rd May 2023” option.
On a new page, wait for a few seconds or click the option “Exercise of joint……of EPS-1995”.
Input the essential information. You will receive a one-time password (OTP) on your mobile number linked with your Aadhaar card.
After entering the OTP, validate your information. If any changes need to be made from the provident fund to the pension fund or fund re-deposit, consent will be required in the application form. However, if funds require to be transferred from exempted provident fund trust to a pension fund, submit an undertaking for this plus interest up to the payment date.

Along with the application form, you will have to submit several documents.

Check if all details are mentioned accurately and then tap on the Submit button. On successfully submitting the form, an acknowledgment number will be created. Note this number for future reference.

Steps for employees who retired before September 1, 2014

Members who preferred and contributed for higher EPS contribution prior to September 1, 2014, according to the pre-amended scheme but got their higher EPS pension rejected by EPFO during retirement can apply using the following steps –

Open the Member e-Sewa portal and click “Pension on Higher Salary: Online application for validation of Joint Option”.
On a new page, wait for 1-2 seconds. Keep your PPO (Pension Payment Order) along with you before submitting an application. Submit the PPO number in full with no special characters with the required details as given in the EPFO records.
Submit the mandatory details and tap on the ‘Get OTP” option to receive OTP.
After entering the OTP, follow the same process as mentioned above in steps 4 and 5.

Once you have submitted the application form, EPFO officials like RPFC (Regional Provident Fund Commissioner) will review the form and additional documents.

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How to Manage Your Money Post a Job Loss?

Fri, 24 Feb 2023 16:21:28 +0000

The Buyt Desk

Job losses are quite challenging to deal with because you will face a dry spell of no regular income for a while. You can successfully sail through this difficult time using some smart moves if planned properly. But, make sure you don’t stop your EMIs (equated monthly installments) and keep your PPF (Public Provident Fund) and EPF (Employees’ Provident Fund) untouched.

Here are some ways you can better manage money matters when you lose your job.

Make use of emergency corpus

An emergency corpus is one of the essential building blocks of effective financial planning. Between 6 and 12 months of household expenses are recommended along with EMIs as an emergency corpus. This corpus can be kept aside in short-term FDs (fixed deposit), in a liquid fund, or your savings account. Ensure that you use existing emergency corpus just for your total immediate requirements such as medical, food, insurance premiums, and more. For example, skip paying your society maintenance costs for some months. Dip into your emergency corpus until you get another job.

What if you don’t have emergency corpus?

If there is no emergency corpus, then attentively review your present portfolio. There might be multiple traditional insurance plans that you no longer need or regularly underperforming mutual funds. There may be a portfolio with several liquid fund investments, each having a negligible amount. Combining these liquid fund investments can make a neat share that can be an emergency corpus.

You can even sell unnecessary physical gold to build a contingency corpus. It will prevent you from making hurried decisions during financial emergencies.

Keep a track of your spending and budgeting

When you lose a job, limit your spending, particularly on non-essential things. Keep checking for leakages. Budgeting provides a hold on things financially and deciding where to invest the money you currently have. For example, school fees, EMI payments, credit card dues, and utility bill payments can’t be ignored.

Avoid spending money on eating out, vacation trips, and electronic appliances for some months till you again start receiving a regular income. Openly communicate your lob loss and expenses required to be limited in line with a revised budget with your family members. It would help you in preventing multiple unwanted expenses contributed by family members in a month.

Review financial goals

The temporary job loss usually does not affect your long-term financial goals. But, when it continues for about 6 or more months, review these goals. Also, review short-term goals because these are coming up right away. Be careful about how effectively you can finance them. Do not continue with your SIPs from emergency corpus as it will be unwanted cash spending. Find other income sources like contract-based consulting jobs or freelancing assignments.

Keep PPF and EPF untouched

Do not touch your investments reserved for your retirement like PPF, EPF, etc. That’s because it can affect your retirement kitty in the long term. Avoid withdrawing your retirement corpus for short-term goals during the job loss stage. Prefer withdrawing from your EPF or PPF corpus as the last option just to repay the high-interest rate debts, prevent defaults, and meet medical emergencies.

Manage loan EMIs and credit card debts

Don’t miss your loan EMIs and credit card bills. This is because there are up to 48% yearly interest rates on credit cards and up to 16% interest on personal loans. Hence, make sure you timely pay the credit card bill and loan EMI before the due date. Stopping these payments will result in penal interest and penalty. This will dip your budget in an existing cash-tight situation.

The right way to prevent credit card bills is to spend less. Stop your credit card use till you start receiving regular income. Don’t stop repaying EMIs immediately after losing a job. Keep on paying your EMIs for a minimum of 3-6 months from a contingency corpus. However, if you still can’t get a new job, consider other options. For example, discussing enhancing a loan tenure or applying for a loan moratorium to a bank.

Note that considering the increase in the loan tenure or a loan moratorium could maximize your interest costs over time. So, consult an expert first.

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How to Handle Failed ATM Transactions?

Mon, 06 Feb 2023 16:18:07 +0000

The Buyt Desk

You went to an ATM to get some cash, inserted your ATM card in the machine, and entered the correct PIN, but the money did not come. However, you got a notification, ‘The amount has been debited from your account. You waited there for a while, but the cash was not dispensed. What should be your next step?

Is it fraud, technical issues, or something else? Well, it is not a usual incident to not get cash dispensed from ATM after a withdrawal, but the amount debited from the account. Nevertheless, it happens! Hence, you should know what to be done next after the incident.

The Possible Reasons

There could be a technology-related error in the ATM. Although banks conduct regular visits to ATMs, sometimes glitches happen, which causes such errors.
The fraud possibility cannot be overruled, especially when the ATM you used was at an unattended place. In such ATMs, fraudsters attach a skimmer device to the machine that takes out all card details to carry out fraud activities.

What are Your Options

You have three options to address this situation.

Contact the Bank Customer Care Number Immediately

First, you must keep the bank notification you received with you. Call your bank customer care number and explain what happened. After hearing you out, the bank executive will register the complaint and share the complaint number with you. The authorities will probe the matter after that. The bank is liable to refund the sum deducted from your account within seven working days from the day complaint was filed, provided the trouble had happened because of their fault. If they fail to do so, you are entitled to get a refund along with the late payment of Rs 100/day.

Contact the Branch Manager

You can visit the branch office of your bank and register a complaint by contacting the branch manager or the concerned person. Complaining on the bank’s website is also an option.

Contact RBI

If the above two methods do not work, take the matter to the Reserve Bank of India. You can either write the complaint in a letter or mail it. RBI takes 30 days to process the refund.

If this ever happens, do not sit back and feel sad. Choose any of the mentioned options to raise a complaint and get your money back into your account.

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How to Calculate Human Life Value in Your Life Insurance?

Tue, 31 Jan 2023 16:26:10 +0000

The Buyt Desk

Purchasing a term life insurance policy is an important decision. But what is the appropriate size of the cover that you should purchase? Human Life Value(HLV) evaluates your value and helps you in choosing the correct insurance cover amount.

Evaluate the Right Cover Amount

The right sum assured is based on the stage of a candidate when the cover is being purchased. For example, if an individual is below 40 years of age, he/she must choose a plan having a cover of 20x the yearly salary. However, candidates above 40 years of age must go for a sum covering about 10-15 times the annual income. Alongside this, the family size and expenses should be considered.

Computing the coverage amount without any doubt is easy. For estimating the term insurance cover amount, better understand the Human Life Value.

What is HLV (Human Life Value)?

In India, death is a challenging conversation. So, connecting a price to one’s life is even more challenging. But, determining a value on life is used to evaluate the type of monetary support your dependents will require in your absence.

Experts suggest that every person should not only choose a term plan, but they must do so after examining their correct Human Life Value. This is true that no value or amount can cover up the presence of a person. But, a policy you have purchased to secure the future of your family members can at least lessen their financial sufferings. HLV is not computed depending on the value brought by the candidate to their household. But, it is calculated considering the financial value of a policyholder. The liabilities in the course of the life of the candidate are also put into consideration.

Lifestyle, rate of inflation, changes in income, and living standard are other factors that help in computing the right amount.

Method to Compute HLV

Human Life Value or HLV is calculated based on several factors. It includes the current age of a person, monthly expenses, potential retirement age, monthly payments, EMIs, probable future investments, and current savings. One-time heavy investments such as education or marriage of children should also be considered to compute HLV.

Let us assume that a 30-year-old person with Rs 25 lakh yearly earnings must consider a total life cover of Rs 5 crore. For some people, this amount might seem big. But, the reality lies in its comprehensive calculation. A calculation based on inflation movement and long-term FD (fixed deposit) rates will reflect that a family may require a loan for their regular investments when they have a life cover of Rs 1 crore.

On the other hand, a family with a life cover of Rs 5 crore will maintain the existing lifestyle without any stress and can provide better education and healthcare to their children and other members.

Final Words

To financially secure your loved ones, a term insurance policy is a crucial step to moving on the right path. But, this pure intent can result in wrong outcomes if you fail to compute the HLV properly. An incorrect calculation can just save them from a shower instead of protecting them from a storm. So, according to the most reliable insurance companies, purchasing an insurance cover of a minimum of 10 times your annual earnings is worth it. They also recommend computing the true value based on the range of factors mentioned above to determine the sufficient SA under a term life insurance policy.

Several online calculators or tools are also available to figure out the HLV. Hence, you can also use them but be sure to select only the trustable calculators. Compare several policies and carefully read the terms and conditions. Don’t forget it is a lifetime decision and can’t be made with any negligence by avoiding the examination of important aspects attentively.

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How To Apply For Premature Withdrawal From NPS?

Sat, 28 Jan 2023 13:49:44 +0000

The Buyt Desk

From January 1,2023 the PFRDA (Pension Fund Regulatory and Development Authority) has declared that all central government employees will have to submit their withdrawal requests in the form of applications for partial withdrawal through their related nodal offices. Employees in central/state autonomous bodies and the central/state government would need to follow this rule. Hence, from now subscribers have to necessarily provide the mandatory documents to nodal officers to verify the reasons for partial withdrawal.

Prior to this rule, the Pension Fund Regulatory and Development Authority(PFRDA) facilitated subscribers to make their partial withdrawals under NPS with self-declaration.This withdrawal rule was announced on January 14, 2021, during the COVID-19 pandemic.

The PFRDA stated that with the reduction of the COVID-19 they want to move back to the older system of partial withdrawal request via respective nodal offices.

PFRDA in a circular of January 14, 2021, declared that NPS partial withdrawals via self-declaration has been stopped. Now the subscriber have to submit their request to POPs or the nodal office. .

Who is Eligible for Premature Withdrawal from NPS?

The NPS (national pension system) is a government-controlled secure investment scheme. It facilitates subscribers to withdraw their amount before maturity or prematurely just after completing their three years. However, they can’t withdraw more than 25% of their total contributions.

The withdrawal is permitted just for certain reasons. For example, children higher education, children’s marriage, critical illness treatment, and purchase or construction of a residential house only in some specified circumstances.

The subscribers are allowed to withdraw partially thrice during the whole subscription tenure under NPS. Based on the investment amount, the subscribers after 60+ age get a specific amount (40-60% of the whole amount) in a single go. The subscriber can withdraw the remaining amount as a pension. INR 500 is the initial minimum deposit. After that, they can invest up to INR 500 or above INR 49,000 in succeeding months.

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This is How You Can Plan Your Emergency Fund

Mon, 23 Jan 2023 16:48:14 +0000

The Buyt Desk

Emergency fund refers to the amount of money you can set aside to successfully meet unforeseen, urgent, and real emergencies that can’t be dealt with insurance plans or other ways. You should have an emergency fund for supporting you in unplanned and unexpected situations like medical emergencies, temporary job loss, or sudden travel for dealing with family emergencies.

Apply a Figure to the Contingency

Starters must keep a minimum of 3-6 months’ worth of basic living expenses as emergency funds. After some time, you can increase this figure to 6-12 months’ worth of expenses.

Wondering how to determine your appropriate monthly living and non-negotiable spending? The following is the approach you can follow.

Initiate with important ones like rent and/or home loan EMI, utilities, transportation or fuel costs, food, and non-food consumables, school fee, healthcare investments, salaries for support staff, and other load EMIs. You may also wish to consider significant annual expenses like insurance premiums.
Remaining non-essential but frequently done expenses on vacations, eating out, entertainment, and other things are not the categories you invest an amount on during emergencies. Therefore, those can be simply left out for starters. The purpose is to emphasize just common important and inevitable spending.

Hopefully, now you would have understood that your living spending is different from what your friends or colleagues experience. Thus, just because a friend takes out INR 2 lakh for emergencies, this doesn’t shows that the same amount of money is enough for you.

This is important for you to determine what is perfect for you. Other than the things mentioned in the above points, there are some more things you can consider. These are listed below points.

Are you and your life partner both employed or you are the only earning member in your family?
Does your job profile belong to a high-risk industry and how strong it is stable?
What total number of dependents do you have?
What is the total number of occasional dependents you have in your extended family, who need your support to meet financial emergencies?
Would you like to have an extra buffer to keep on saving for your crucial goals including children’s education, retirement, and others in times of emergencies?

At the bottom line, thumb rules like “save 6 months’ worth of expenses” are considered perfect to start with. However, for a highly secure future, you will have to keep on saving further. In certain cases, saving 6 months’ worth of expenses may not prove sufficient.

Let us assume that you are planning to quit your job and thinking of starting a new business, you may require keeping aside enough amount of money for some years. At this time, just having 6 months’ worth of expenses would not make you feel safe.

In today’s world, credit cards are also preferred to meet emergencies. Credit cards can be used to tide over your short-term emergencies. Remember that, ultimately, you will have to look for the funds and pay again. Hence, a credit card is not the right alternative for an emergency fund.

Don’t know how to save a huge amount to quickly meet emergencies?

Save your emergency funds gradually using your monthly savings. You can even use your bonus to top it up irregularly. Whenever some amounts are frozen in the bad investment simply exit them. Now, use the proceeds to increase the emergency fund.

Where to Store Emergency Funds?

Conservative people should stick to their FDs (fixed deposits). Alternatively, they can keep a small section of their savings account and get Flexi-FDs, which have identical liquidity to a savings account but deliver FD-like returns.

Less conservative people can consider a blend of debt funds and FDs.

Emergency fund size is dynamic. Thus, review it annually. Save more when you need a large amount due to changes in situations. Replenish the fund for emergencies as soon as possible. You can do this regularly through monthly savings or by using your yearly bonus partially.

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How to Accumulate Money for Dream Holiday?

Thu, 12 Jan 2023 16:07:13 +0000

The Buyt Desk

Most of us have at least one dream destination where we want to go and live for a few days. Some live their dream with all their efforts, while some juggles managing expenses and never save enough to make their dream come true.

If you fall into the people of the second category, this article is to help you.

What explanation do you give when asked about your dream holiday?

Short of finance! Isn’t it? Does planning finance for a dream holiday that difficult? The answer is ‘No’. Financial planning for a holiday can leverage you to save enough to enjoy a holiday every year.

Planning finance for a holiday does not mean cutting expenses or curbing the urge to buy something. It means utilizing the finances the right way. Here are the tips and tricks to execute that.

Start Early to Save More – If your dream holiday destination is within the country, your expenses will be less. If it is a foreign location, it would be high. Keep this fact in mind before you start the plan to save. You can start with a small saving every month. Keeping a small amount aside every month would avert the expense shock that leads to the plan cancellation.

To gain interest in contribution, you can park your money at places that offer a good return, such as RD, FD, equity-linked funds, etc., instead of keeping it in the saving account. All these options will let your money grow and give you more cash for your holiday to make it more memorable.

The advantage of parking money in assets is that it leverages you to adjust your amount according to your comfort. Sometimes, if you have more money, you can add that to your holiday kitty and make it bigger.

Plan the Holiday – Suppose you gave two years to your dream holiday and saved accordingly. That does not mean you should wait until the last moment for flight and hotel bookings. A significant amount of the holiday goes into flight/train fare and hotel charges. You can save considerably on these expenses if you plan your holiday two to three months early because both offer early-bird discounts.

It becomes paramount when your holiday destination is a foreign land because, in that case, you spend in dollars or other higher currency but have saved in rupees. If you plan, you get lots of options in accommodation which saves cost. Most hotels give early-bird discounts in foreign.

Also, you can consider options like booking an apartment instead of multiple rooms in a hotel. It also reduces the cost of travel expenses in totality.

A holiday gives you time to spend with your family, friends and most importantly with yourself. It is the time when you put a pause on your fast pace life. Therefore, the holiday should always be on your wish list.

You can use the same trick to plan short and domestic holidays without taking unnecessary stress.

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How to Save Tax Levied on Enchased Leaves?

Wed, 11 Jan 2023 17:17:09 +0000

The Buyt Desk

Leave is the most astonishing word for the employed population. Three types of leaves a service individual gets during his employment, i.e., casual leaves, sick leaves, and paid leaves. Some organizations keep this in two categories, sick and paid leaves, under different names. The number of leaves an employee gets in an organization depends on the leave policy of that organization, but a minimum of 10-12 days is mandatory. All employees do not have to use all leaves entitled to them. The unused paid leaves get carried forward, which can be enchased or used to reduce the notice period served during resignation or retirement, depending on the policy. In general, unused paid leaves can be redeemed only at the time of resignation or retirement. However, many organizations have different rules regarding the encashment of these leaves. Nonetheless, any leave encashed during employment is taxable.

It means you will have to pay tax for all the leaves you encash during employment according to the tax slab you fall.

Do Not worry! There is a scape way present for you!

Use Section 89 of the Income Tax Act for Leave Encashment Exemption

For the central and state government employees, the leave enchased at the time of retirement or resignation gets complete tax exemption. And non-government employees can get a partial exemption on tax using section 89 of the Income Tax Act. Let’s dig deep to know how.

Leave Encashment Policy Differs in Organization

Some organizations give the option to adjust leave in the notice period employees have to serve when they resign, while some give leave encashment options. If you choose the second, the amount earned on the encashment of balance leave gets taxed as per your tax slab.

You can use section 10(10AA) (ii) to get tax exemption. According to the section, you can take exemption from the lowest of the following.

The actual amount received or Rs 3,00,000.
Average of last ten months’ salary.
The number of unavailed leaves * 10-month average salary.
Salary per day * unutilized leave (considering a maximum of 30 days leave per year) for every year of completed service

The average salary is an amalgamation of basic salary, dearness allowance, and commission. The leave credit means the number of leaves availed minus the number of leaves granted.

Example. Mr. A’s salary is 1 lakh/month. He has 100 balance leaves out of 150 after two years of work. Mr. A’s calculation for tax exemption under section 10 (10AA) (ii) would go this way.

Leave encashment received	Rs. 333,332
Allowed leave encashment	Rs. 3,00,000
Average of 10-month salary	Rs. 10,00, 000
Salary per day * unutilized leave (considering a maximum of 30 days leave per year) for every year of completed service	3,300(1002-50) = 495,000

The lowest here is leave encashment received, i.e., Rs. 333,332. The leave encashment taxable as income from salary would be 333,332-300 000 = Rs 33,332.

Note: The figures taken here are rough and only for the example.

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