Provident Fund (PF) interest rate raised to 9.5% - Implications for you

The interest rate on PF has been raised by 1% to 9.5%. Read on for more details, and to know what you should be doing now.

For FY 2010-2011, the rate of interest on Provident Fund (PF) has been raised by 1% - from 8.5% to 9.5%. This decision was recently taken by the Employees Provident Fund Organization (EPFO).

This rate of interest would apply to employees in public sector and private sector. This revised rate of interest would be paid out by both EPFO and exempted trusts managing PF money.  Some Background The interest rate on EPF is set by the EPFO every year. Till last year, the rate was 8.5%, which has now been revised to 9.5%. What does this rate hike mean? As you would know, this 9.5% rate of interest – which is completely risk-free – is higher than prevailing market rates. Add to this the income tax benefit available under section 80C for PF / VPF payments, and the effective returns are as high as 13.8%. Bank FDs today pay in the range of 7.50-7.75% for longer maturities of 10 years. Even Public Provident Fund (PPF), which is similar in terms of safety and income tax benefits, pays only 8% interest. So suddenly, PF has become the most attractive investment option for risk-averse investors! What should you do? PF is meant for long term savings, primarily retirement. It creates a strong, solid core around which you can build your retirement portfolio. As you would know, the best investment option for the long term is stocks, and therefore, most of your long term investment should be in equities. This is especially true if you are young. (Please read “Stocks - The winning bet for the long term” and “Equity Investment is Risk Free – Here's the Proof” for more). Thus, most of your long term investment, especially for retirement, should be in equities or equity mutual funds (MFs). (To know whether you should invest directly in shares or through a MF, please read “Direct investment in Stocks versus Mutual Funds (MFs)”). However, if you feel you need to invest more in risk-free avenues, or if you think the proportion of risk-free investments (PF, VPF, PPF, RBI bonds, etc) in your retirement fund portfolio is less, you can start contributing more towards Voluntary Provident Fund (VPF). This is because with this increase in rate for PF, it has become the most attractive investment option among all long-term, risk-free avenues. Please read “Provident Fund (PF) and Voluntary Provident Fund (VPF)” to get in-depth knowledge about provident fund (PF) and voluntary provident fund (VPF).

5 Points to note when buying a house / residential property

What are the factors to be considered while buying a house / flat? Here are some tips.
Buying a property is a huge decision for most middle class investors. It requires a large amount of down payment to begin with and then you have to hope against hope that the builder delivers the project on time. Property is a very poor-liquidity asset class and if you land up with an incompetent builder who takes your money and does not complete the project, you are stuck with no recourse for a very long time to come.
Here are five tips to help you avoid such situations. Remember them before you buy your dream house.

1. Go to the biggest builder This probably should be the most important factor in your consideration in buying a house. Big builders who have a good bank balance and a history of successful project deliveries are any day better than run of the mill small builders. In the 2008-2009 market downturn, investors learnt it the hard way. Many small builders who had taken the investors money as down payment for a project vanished overnight. Investors who had put in their hard earned money lost out big time as the builders had decamped with all the money. Going with the biggest builder in your city will come with a price tag. Their projects will always be slightly expensive than other projects which are run by small time developers. But its worth to pay a small premium and buy into a stable, good and dependable project. You will be assured that your dream house will be built, even if there is a slight delay. Big builders protect their reputation very aggressively and will deliver projects to keep their brand name untarnished. 2. Choose the location wisely. Location of your dream house can be a very important factor in the valuation of the property in the long run. It is true that if you are buying the house to live in it, you should probably not be looking at the valuation. But buying a house which is distant from basic amenities like schools, hospitals and malls is a risk the investor is taking upon himself. It’s often seen that builders dish out baits by advertising properties which are far flung from the city by masquerading them as weekend homes, cheap homes, and retirement homes among many others. Be wary of buying your first home in a place where you think you cannot stay, and where you think you cannot rent it out easily. You might have to pay a small premium to buy in a location where all amenities are located, but that is often better than buying in remote localities. Good things don’t come cheap. 3. Avoid the builder’s offers Builders keep on launching projects with many offers to lure investors. Sometimes they want to pay the EMI till you take possession of the house; at other times they are ready to do up your kitchen; yet at times they throw in a LCD in the living room. Recently, a Pune builder was giving away cars with every house! Please understand that there is no free lunch anywhere. The builders will account for all these extra charges in their overall costs and then sell the apartment to you. So it makes no sense to ride on these offers. There are no free things you are getting with your house. You are better off buying these products yourself separately. A builder is there to sell you your dream house; if he is selling you add-ons to a house, comprehending his desperation is anyone’s guess. Avoid the offers; buy what he is supposed to deliver best – your dream home. 4. Pay as your house is built When you buy your dream home, you have the option of paying with time. This time linked payment option can be dangerous. For example, if you agree to pay 10% in one year and 20% in another, you will need to do that irrespective of whether the builder has progressed development of the project or not. A smarter way around this problem is to opt for a payment plan according to the slab construction of the building. So, when the base slab is laid, you agree to pay the builder 10%; when the building is constructed half way, you pay up 50% of your home equity and when it is 100% complete you pay the rest of the amount. This makes sure that the builder will get paid only when he completes the project. In a way, the builders’ incentive to be paid leads him to progress the project in a fast paced manner. Thankfully this is an option that banks are themselves stressing upon for sometime now. Avoid builders who do not have this construction-linked payment scheme with them. 5. Safeguard against delays in project completion It is common knowledge that builders route the money you have paid for a particular project to fund other projects, at times in another city. This can lead to major delays in the delivery of your dream home. It is always better to clarify upfront with the builder through a formal agreement what your options are in case of a major delay. You cannot be waiting forever expecting your dream house to be built. And with no regulators in the real estate industry as of today, it is every man’s fight against the builders. Make sure you understand what options you can take if there is a delay. Getting a lawyer to vet your agreement is always a wise decision. Get the builder to agree on terms and conditions that you want in case there is a delay. It’s better to be safe now than to be sorry later. Use the above five points to be armed for any eventualities that might happen in your tryst in buying your dream home.

What is an Equated Monthly Installment (EMI)?

We all keep hearing about EMI, and most of us also pay EMIs for various loans. But what exactly is an EMI? What is its breakup? If you have to prepay a loan, whan should you do it? Let's understand.

Once upon a time, we used to purchase houses using home loans, and paid an Equated Monthly Installment (EMI). But today, many desirable things are available with “easy-EMIs” - this includes laptops, LCD TVs, foreign holidays, and more.

We happily purchase these products on loan, and pay EMIs. But do we know what an EMI is? What its components are?

Any loan today is repaid in equal monthly amounts, which are called Equated Monthly Installments or EMIs.The EMI depends on the loan amount, the rate of interest and the duration or the time of repayment of loan.  The EMI consists of two portions – the principal amount, and the interest on the loan. Through the principal portion of the EMI, you repay the loan in small bits every month. Thus, the outstanding loan amount (or the remaining loan amount) reduces every month by this amount. Through the interest portion of the EMI, you pay the bank the interest on the outstanding loan amount. When the loan starts, the interest component is very large, and the principal component is very small. Every month, the interest component becomes smaller than the previous month, and the principal component becomes larger than the previous month.  Over time, the principal component becomes larger than the interest component, and towards the end of the tenure of the home loan, the interest component becomes negligible. When should you prepay a loan? With this understanding, can we decide when is the best time to prepay a loan? This question is quite relevant for home loans, as the amounts (and thus, the interest) involved is very large. Towards the end of a loan, we are mostly paying the principal and very little of interest. Whereas towards the beginning of a loan, we are mostly paying interest, and very little in terms of repaying the principal. Therefore, if we repay the loan towards the beginning, we would be saving a lot more on the interest than if we repay the loan towards its end.

The interest rates have risen in the past few months. Should you be breaking your old FDs and opening new FDs with higher rates? Is there any penalty involved? What should you do? Read on.est rates have risen – Should you break your old fixed deposit (FD) to get a higher interest rate?

The interest rates have risen in the past few months. Should you be breaking your old FDs and opening new FDs with higher rates? Is there any penalty involved? What should you do? So what should you be doing? Is there any advantage in breaking your old fixed deposit prematurely, and keeping the money in a new FD paying a higher interest rate? And is there any disadvantage in doing so? 

Let's weigh the pros and cons, and find out what you should be doing. 

What is “breaking” a fixed deposit (FD)?

Breaking an FD means pre-mature withdrawal of your money locked into an FD – you break an FD when you take out the money before the term of the FD is over. 

Charges involved in breaking an FD

Rate of interest applicable

The first penalty is in the form of a reduced interest rate for you.

When you break an FD, banks don't give the rate of interest at which you kept the FD – you get the rate applicable for the duration for which you actually kept the money with the bank.

Confusing? Let's understand this through an example.

Let's say you kept an FD for 4 years, with an interest rate of 8%. Now, you want to break it after 2 years. In this case, what interest rate would you get?

You would get the rate applicable to a 2 year FD prevailing at the time when you had kept your FD, and not the interest rate of 8% which was applicable to a 4 year FD.

So, if the rate for 2 years FD was 7.25% when you had kept your 4 year FD, you would only get an interest of 7.25% per year for the 2 years you have kept the money with the bank – and not 8% per annum. 

Penalty in rate of interest

But it doesn't stop at that – most banks also charge a penalty in interest rate, which is 0.5% to 1%.

When you break an FD, banks normally give you interest that is lower by 0.5%-1% than the interest we saw above (the interest for an FD of the duration for which you have kept the money with the bank).

Let's continue our example to understand this better.

If the rate for 2 years FD was 7.25% when you had kept your 4 year FD, and if the penalty is 1%, you would actually get an interest of 6.25% per year for the 2 years you have kept the money with the bank (and not 7.25% or 8%).

Waiver of interest rate penalty Some banks do waive off this penalty if the liquidation or premature withdrawal of the FD is due to some emergency. But the definition of “emergency” is not well defined, and this waiver is given on a case-to-case basis. Some banks also waive off the penalty if you reinvest the withdrawn amount with the bank. Some banks provide this waive off only if the new FD is kept for a period higher than the remaining period of the original FD.  Example Let's calculate the payout from the FD in both the cases: Holding the original FD till maturity, and Breaking the FD and reinvesting at a higher rate Holding the original FD till maturity FD amount:1 Lakh Rate of interest: 8% Period of FD: 4 years Interest received:32,000  Breaking the FD and reinvesting at a higher rate FD amount:1 Lakh Rate of interest: 8% Original period of FD: 4 years Actual period of holding: 2 years Rate applicable for 2 years: 7.25% Penalty: 1% Actual rate applicable: 6.25% Interest received for 2 years:12,500 New FD duration: 2 years New FD rate of interest: 9% Interest received for these 2 years:18,000 Total interest received:12,500 +18,000 =30,500  Conclusion In our example, you are actually at a loss of1,500 when you break an FD and reinvest it at a higher rate! So, tread carefully while you are breaking your FD!  When does breaking an FD make sense? Breaking the FD and reinvesting the sum in a higher-interest nearing FD is positive for you only when the original FD is relatively newer – in this case, the penalty doesn't hit you that much. If the original FD is old or nearing maturity, it is best to continue with it and reinvest the money only when it matures. Example of breaking a newer FD Let's calculate the payout from the FD in both the cases when the old FD is relatively new: Holding the original FD till maturity FD amount:1 Lakh Rate of interest: 8% Period of FD: 4 years Interest received:32,000 Breaking the FD and reinvesting at a higher rate FD amount:1 Lakh Rate of interest: 8% Original period of FD: 4 years Actual period of holding: 6 months Rate applicable for 6 months: 6.5% Penalty: 1% Actual rate applicable: 5.5% Interest received for 6 months:2,750 New FD duration: 3.5 years New FD rate of interest: 9% Interest received for these 3.5 years:31,500 Total interest received:2,750 +31,500 =34,250  Conclusion In our example, you are at a profit of2,250 when you break a relatively new FD and reinvest it at a higher rate! So, break an FD only if it is relatively new, and only after you do your calculations!

What Is Job Rotation

For the question “what is job rotation?” there are really several answers, depending on the type of work an individual is involved in initially. Some describe this concept as a management approach with the goal of broadening the skills and experience of production workers. In this case, managers and business owners want to ensure that someone is available to take on other tasks when vacation and illness cause a spot to be open.
In some businesses, the object is to educate employees, giving them information about other operations in the company. Not only does this peak the interest of many on the payroll, but it can also allow employees to ask questions and suggest improvements in areas they wouldn’t normally see.
At another level of a larger company, managers and supervisors are sometimes moved, in a series of planned job rotations. Business owners and operating officers might use a rotation plan so that management personnel are familiar with various sections of the business. Then, when the time comes to fill a vacant position due to retirement, for example, there may be more than one candidate familiar with the duties of that slot.
In certain industries and with work that involves physical labor, job rotation may be used to avoid over-stressing some workers. The constant, repetitive use of the same muscles can be one of the hazards of the workplace. Wise use of rotation may help workers stay healthy, and maintain a good work atmosphere as well. Safety is often a key consideration in this situation.
Other business consultants and management gurus add another factor: flexibility in choosing staff to perform various tasks. But they caution that job rotation should not be used without some planning, especially if the concept is new within the organization. Inserting a rotation plan in any complex company requires cooperation from production workers, supervisors, department managers and officers.
Consultants and experienced business managers offer one especially interesting thought on the subject. They caution the inexperienced owner or manager to use a rotation system to prevent and prepare, not as a response to problems that begin to appear in the work process. This is a must, these observers say, when job rotation is used to reduce physical wear and mental stress.
While business owners and managers should have a tentative set of guidelines for any job rotation plan, it may be wise to hold a meeting or meetings for the purpose of getting input from workers and supervisors. This inclusion of employees is not only recommended as a rotation-plan step, but will be good for the general atmosphere of the company, according to most advisers. With a bit of research most companies can come up with a brief questionnaire that will help in gathering input. Owners and managers should then pay close attention to the details and include the ideas in a rotation plan. With the correct system in place, employees in certain departments may be able to direct a rotation plan themselves, with little or no input from “higher up.”
Simply put, job rotation means that production workers or office staff take on duties in two or more areas, even within the same day. The unstable atmosphere some managers fear may be avoided by careful planning and implementation of a rotation program.

What Is Pay Time Off?

For every working man and woman there are several benefits to the job in addition to wages or salary. These can include paid vacation time, personal days and sick days, depending on the company and its policies.

There are some differences among the various time-off benefits and it is important that the employee understand company policy before he or she begins work. One of the significant differences is between paid days off and sick days, though the line has blurred somewhat between these two paid benefits.
Paid time off is intended to be used for personal business, family issues etc. as opposed to sick leave or sick days, which the employee is supposed to use when health issues actually keep the person from working. Sick leave is sometimes used when the employee needs to keep a doctor’s appointment or have some important medical tests performed at the doctor’s office or at the hospital.
But the most common use for sick days, at least according to company handbooks and employee manuals, is the day when the employee is ill with any of a variety of sicknesses that would interfere with work production.
In contrast, paid time off or pay-time off is intended to be used for personal business that is generally not related to sickness or medical visits. Because employees have made use of sick days for personal business and vice versa, many companies have changed their policies to reflect one type of day off- “paid time off.” These days can then be used for any personal business, health related or otherwise.
Of course paid time off can include the standard two weeks of vacation and national holidays, though many companies also offer one or two personal days and sick-leave time as an added benefit. This can be an attractive part of the employment package for new employees and long-term employees alike.
Since the line between sick time and paid time off has blurred or disappeared altogether, employees may be away from work more often, especially if they use accumulated sick days as days off with pay (which essentially makes them vacation days).
When companies take a close look at their pay-time off policy, they may find that some employees come to work while ill. The company then may be obligated, in writing, to pay the person for unused sick days when the person leaves or retires. This is a key reason some companies continue to distinguish between sick leave and paid days off.
In most companies, employees who work 40 hours per week on a regular basis (full-time employees) are eligible for paid time off, usually after a probation period of 90 days. Employees and company managers should make sure that both fully understand when pay-time off is allowed and what uses these days may be used for. Some part-time employees become eligible for paid time off with a sufficient number of months or years or work. This varies from company to company, as the issue of pay-time off changes and is adjusted to fit new lifestyles.

What Is Dearness Allowance (D.A.)?

The dearness allowance is a part of the total compensation a person receives for having performed his or her job. For example, workers in India might have a base salary or pension, along with an allowance for housing and the dearness allowance. D.A. is a percentage of the original salary. The percentage is reviewed and may be changed on a six-month cycle.

One explanation for D.A., according to work guidelines, is that the Dearness Allowance is provided to help against rise in prices for those on pension. This allowance may also be provided to family members receiving benefits from a worker’s pension. For example, a central government order might change the Dearness Allowance by 6 percent for employees of the main branch of government, due to new information about living expenses and price increases. The amount might be paid in a lump sum at some point to bring the overall pension and allowances up to what they should be.

There are also times when a new level of Dearness Allowance might be established along with housing and transportation allowances. This generally occurs when the overall pay schedule is revised. Base salary levels are reported separate from the various allowances. In India the D.A. has a history dating back to World War II. At that time, many of the lower-paid employees received D.A. based on their wages or salaries. Many changes to Dearness Allowance and its computations have occurred over the last 60 years, according to both private and government studies.

One guideline suggests that the D.A. is paid twice each year (January and July) based on a percentage of pay in two specific months. Numbers used to calculate the D.A. include 12-month average of pay and a set index level to get the percentage increase in prices/cost of living. Dearness Allowance is paid on a range of base-pay levels.

According to the systems developers at tech company Taranaga, the combination of a Dearness Allowance with base pay was approved by the Indian government in New Delhi in 2007. What happened was that the D.A. (that protects pensioners in case of a cost-of-living increase) was combined at a 50 percent level with base pay. One of the details included in the decision also set a “ceiling” for certain benefits. The decision means that those benefits will be calculated on base pay plus daily allowance, rather than just on base pay.

There are similar cost-of-living adjustments and indexes in the United States and other countries. Some of these operate in the same way as the Dearness Allowance in India, giving percentage increases to make up for rising costs. Others are allowances for workers who must live and work in areas where the general cost of housing and meals is higher than a certain base amount. For example, some federal government employees are paid an “overseas” allowance that makes their total pay a bit higher than what they might receive in the U.S. These allowances vary with the country and the location an employee is assigned to.