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Ramalingam

Ramalingam Kalirajan  |8182 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Jun 03, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more
Dhanashree Question by Dhanashree on May 29, 2024Hindi
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if my basic salary is less than Rs. 15,000.00/ month then is it right to deduct the employer contribution Rs. 1,800.00/-

Ans: Understanding Employer Contribution to Provident Fund for Basic Salary Below Rs 15,000
When your basic salary is less than Rs 15,000 per month, there are specific guidelines for employer contributions to the Provident Fund (PF). Let’s delve into the details to understand whether it is correct to deduct Rs 1,800 as the employer’s contribution.

Basics of Provident Fund Contributions
The Provident Fund is a social security scheme for employees. It ensures savings for retirement. Both the employee and employer contribute to the PF. The contributions are usually a percentage of the employee's basic salary plus dearness allowance (DA).

Contribution Rates
Typically, the employee contributes 12% of the basic salary plus DA to the PF. The employer also contributes 12%, but this is split into two parts: 8.33% goes to the Employee Pension Scheme (EPS) and the remaining 3.67% goes to the Employee Provident Fund (EPF).

Specific Case: Basic Salary Below Rs 15,000
If your basic salary is below Rs 15,000, the employer’s contribution to the PF follows a specific structure:

Employee Contribution: 12% of basic salary + DA
Employer Contribution: 12% of basic salary + DA, split between EPF and EPS
Maximum Limit on Employer’s EPS Contribution
For EPS, the employer’s contribution is capped. The maximum salary considered for EPS contribution is Rs 15,000. Thus, 8.33% of Rs 15,000 (which is Rs 1,250) is contributed to EPS. Any amount above this goes to the EPF.

Calculation Example
Let’s assume your basic salary is Rs 12,000 per month.

Employee Contribution: 12% of Rs 12,000 = Rs 1,440
Employer Contribution:
EPS: 8.33% of Rs 12,000 = Rs 999.60 (capped at Rs 1,250 if basic salary is Rs 15,000)
EPF: 3.67% of Rs 12,000 = Rs 440.40
Scenario: Rs 1,800 Employer Contribution
If the employer is contributing Rs 1,800 when your basic salary is less than Rs 15,000, it’s essential to check the distribution between EPS and EPF. It could mean higher contributions towards EPF, which is allowed.

Is Rs 1,800 Deduction Correct?
The correctness depends on how the Rs 1,800 is split:

EPS Contribution: Should be a maximum of 8.33% of Rs 15,000 or Rs 1,250.
EPF Contribution: The remaining amount after deducting the EPS portion from the total 12% of basic salary.
Empathising with Your Concern
Understanding these deductions can be confusing. It’s important to ensure clarity on how your contributions are calculated. Checking your pay slip and the contribution details can help.

Importance of Accurate Deductions
Accurate PF contributions ensure sufficient retirement savings. It also ensures compliance with legal requirements. Any discrepancies can affect your savings and benefits.

Reviewing Your Payslip
Check Basic Salary: Ensure the basic salary mentioned is accurate.
Review Deductions: Verify the PF deductions.
Seek Clarification: If there are discrepancies, discuss with your HR department.
Benefits of PF Contributions
Tax Savings: Both employee and employer contributions qualify for tax benefits.
Retirement Savings: Ensures a corpus for post-retirement life.
Pension: Part of the contribution goes towards pension, providing regular income after retirement.
Analytical Perspective
From an analytical perspective, understanding the PF structure helps in financial planning. Knowing the exact deductions and contributions clarifies your take-home salary and retirement benefits.

Assessment of Employer Contributions
Regularly assessing employer contributions ensures that they align with statutory requirements. This assessment also helps in identifying any errors early, ensuring corrective measures.

Consulting a Certified Financial Planner
A Certified Financial Planner (CFP) can provide detailed insights into your PF contributions. They can also help you understand the impact on your overall financial planning and retirement savings.

Conclusion
To conclude, if your basic salary is less than Rs 15,000, the employer's contribution should align with the statutory guidelines. Rs 1,800 as an employer contribution can be correct, depending on the split between EPS and EPF. Regular review and consultation with a CFP can ensure accurate contributions and optimal retirement savings.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Ramalingam

Ramalingam Kalirajan  |8182 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Mar 10, 2025

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Sir, My sons salary is 1.5 lakhs per month but the employer is deducting EPF subscription only on 15000 and similarly the Employers contribution is also made on 15000. Is it permissible uner the Act ? Is it not mandatory to increase the EPF subsription and Employers contribution on his basic pay which is higher than 15000?
Ans: Your son earns Rs 1.5 lakh per month, but EPF deductions are only on Rs 15,000. This is a common concern among salaried individuals. Let’s assess whether this is permissible and what options are available.

 

EPF Contribution Rules Under the Law
The Employees’ Provident Fund (EPF) is governed by the Employees’ Provident Fund and Miscellaneous Provisions Act, 1952.

As per the EPF rules, it is mandatory for employees earning up to Rs 15,000 per month to contribute 12% of their basic salary plus dearness allowance (DA) towards EPF.

Employers must match this contribution with their own 12%, but part of it (8.33%) goes to the Employees’ Pension Scheme (EPS).

For employees earning more than Rs 15,000 per month, EPF contributions above Rs 15,000 are not mandatory. Employers are allowed to restrict contributions to Rs 15,000 unless both employer and employee voluntarily agree to contribute more.

 

Is the Employer’s Practice Legal?
Since your son earns Rs 1.5 lakh per month, his employer is legally allowed to cap the EPF contribution at Rs 15,000.

The law does not mandate contributions on the full basic pay if it exceeds Rs 15,000.

If your son wants a higher EPF contribution, he can opt for Voluntary Provident Fund (VPF), but the employer is not obliged to match it.

 

Should Your Son Increase His EPF Contribution?
EPF is a safe and tax-efficient retirement savings option. However, it has limitations when it comes to wealth creation. Let’s assess the pros and cons of increasing EPF contributions.

 

Advantages of Increasing EPF Contribution
Safe and Guaranteed Returns – EPF provides fixed returns declared by the government.

Tax-Free Interest – Interest earned on EPF is tax-free up to Rs 2.5 lakh annual contribution.

Forced Savings for Retirement – Higher contributions ensure disciplined long-term savings.

 

Disadvantages of Increasing EPF Contribution
Limited Growth Potential – The return on EPF is lower than actively managed equity mutual funds.

Liquidity Constraints – Funds in EPF are locked until retirement, with limited withdrawal options.

Employer’s Contribution Won’t Increase – Even if your son contributes more via VPF, the employer’s share remains capped at 12% of Rs 15,000.

 

Alternative Investment Options for Better Wealth Creation
If your son wants higher returns, he should consider other investment options instead of increasing his EPF contribution.

 

1. Actively Managed Mutual Funds
Actively managed mutual funds have higher return potential than EPF over the long term.

They are professionally managed and provide exposure to high-growth sectors.

A mix of large-cap, mid-cap, and flexi-cap funds can create a balanced portfolio.

 

2. Voluntary Provident Fund (VPF) – A Safe Option
If he prefers safe investments, he can opt for VPF, which offers EPF-like returns but without an employer match.

It is suitable if he wants fixed returns with tax benefits.

 

3. Public Provident Fund (PPF) for Long-Term Safety
PPF is a great option for long-term tax-free compounding.

The investment is locked for 15 years, ensuring retirement security.

 

4. Diversified Portfolio for Growth
Instead of putting all savings in EPF, he should allocate funds across different asset classes.

A combination of EPF, mutual funds, and fixed-income products will provide both safety and growth.

 

What Should Your Son Do Next?
Your son should evaluate his long-term financial goals before deciding on EPF contributions.

 

If He Prefers Safety:
Keep EPF contributions as they are.

Increase investment in VPF or PPF.

 

If He Wants Higher Returns:
Keep EPF limited to Rs 15,000 cap.

Invest in actively managed mutual funds for better wealth creation.

Consider a mix of equity and debt investments based on risk appetite.

 

Final Insights
Your son’s employer is following the law correctly by restricting EPF contributions to Rs 15,000. While increasing EPF contributions can provide stability, it limits growth potential and liquidity. Instead, a diversified approach with actively managed mutual funds and fixed-income options can offer better long-term wealth creation.

Encourage your son to review his financial goals and create an investment strategy that balances safety and returns.

 

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

..Read more

Latest Questions
Ramalingam

Ramalingam Kalirajan  |8182 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Apr 03, 2025

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Dear Sir, I am 47 years old IT professional. My current salary is 1.5 lakhs per month. I have a daughter who just completed her 10th board exam. My corpus is around 1.6Cr FD&PPF; 30 lakhs in MF & stocks; 50 lakhs in EPF. I have no debt and living in my own house. Please suggest if I can plan for retirement
Ans: Your financial position is strong, and planning for retirement at 47 is a smart decision. Below is a detailed 360-degree approach to assess whether you can retire comfortably and how to ensure financial security.

Understanding Your Current Financial Position
Income: Rs 1.5 lakh per month.

Corpus:

Rs 1.6 crore in Fixed Deposits (FD) and Public Provident Fund (PPF).

Rs 30 lakh in mutual funds and stocks.

Rs 50 lakh in Employees' Provident Fund (EPF).

Liabilities: No debts.

Assets: Own house, ensuring no rent or EMI burden.

Family Responsibility:

Daughter has just completed the 10th board exam.

Higher education expenses need to be planned.

Key Considerations Before Retirement
Expected Retirement Age

If you plan to retire early (before 55), corpus sustainability needs careful assessment.

If you work till 60, it will provide a larger financial cushion.

Post-Retirement Expenses

Living expenses, healthcare, travel, and lifestyle costs must be considered.

Inflation will increase future expenses.

Daughter’s Education

Higher education costs are significant.

Corpus should cover both education and retirement without compromise.

Medical Expenses

Health costs increase with age.

A high health insurance cover is essential.

Wealth Growth vs. Safety

A mix of equity and debt investments ensures growth while preserving capital.

Excessive reliance on FDs and PPF may limit long-term wealth accumulation.

Assessing If You Can Retire Comfortably
Current Corpus Size

Rs 2.4 crore (excluding house) is a strong starting point.

But, inflation will reduce its real value over time.

Expected Corpus Growth

Investments in mutual funds and stocks should continue to grow.

PPF and EPF offer stable but lower returns.

Withdrawals Post-Retirement

Sustainable withdrawals should not deplete the corpus too soon.

A balanced investment strategy is required.

Gaps in Planning

Heavy reliance on FDs and PPF may not be ideal.

More equity exposure can ensure inflation-beating returns.

Steps to Strengthen Your Retirement Plan
1. Optimising Investment Strategy
Continue investing in mutual funds with a mix of large-cap, mid-cap, and flexi-cap funds.

Reduce dependence on FDs for long-term needs.

Equity mutual funds help counter inflation and grow wealth.

Avoid index funds as they provide average returns without active management.

Regular funds through a Certified Financial Planner (CFP) offer expert monitoring.

Diversify investments between equity, debt, and fixed-income products.

2. Planning for Daughter’s Education
Higher education costs can be Rs 30-50 lakh in the next 5-7 years.

Separate this goal from your retirement plan.

Increase equity investment to build an education corpus.

Avoid withdrawing from retirement savings for education.

3. Building a Healthcare Safety Net
Health insurance should cover at least Rs 30-50 lakh.

Consider super top-up plans for additional coverage.

Maintain an emergency medical fund to cover non-insured expenses.

Review insurance policies periodically.

4. Creating a Sustainable Withdrawal Plan
Avoid withdrawing a large portion of the corpus in early retirement years.

Keep at least 5 years of expenses in liquid assets.

Equity exposure should reduce gradually as retirement progresses.

Use dividends and interest income before selling assets.

Final Insights
Retirement is possible, but adjustments are needed for long-term security.

Continue investing aggressively for the next few years.

Ensure daughter's education is planned separately.

Review investments and insurance regularly.

Keep flexibility in withdrawal strategy post-retirement.

A structured plan will ensure a financially secure and comfortable retirement.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

Ramalingam

Ramalingam Kalirajan  |8182 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Apr 03, 2025

Asked by Anonymous - Apr 03, 2025Hindi
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My employer offers a salary sacrifice scheme for pension contributions, but I don't fully understand how it works. What are the potential advantages and disadvantages of joining such a scheme, and how does it affect my take-home pay and long-term financial planning?
Ans: A salary sacrifice scheme for pension contributions allows you to give up a portion of your salary in exchange for increased employer contributions to your pension. It has tax and National Insurance (NI) advantages but also some potential drawbacks.

How Salary Sacrifice for Pension Works
You agree to reduce your gross salary by a chosen amount.

Your employer contributes this amount directly to your pension.

Since your taxable salary is lower, you pay less income tax and NI.

Your employer also saves on NI and may pass on some or all of this saving to your pension.

Advantages
1. Tax and NI Savings
You don’t pay income tax or NI on the sacrificed amount.

Your employer saves on NI (currently 13.8%) and may increase your pension with these savings.

2. Higher Pension Contributions
Since more money goes into your pension, your retirement corpus grows faster.

Compounding over time enhances long-term wealth.

3. Increased Take-Home Pay
Although you sacrifice part of your salary, the NI savings may offset some of the reduction.

Depending on employer policies, your net pay may not drop significantly.

4. Potential Employer Matching
Some employers pass their NI savings into your pension, increasing your total contributions.

Disadvantages
1. Reduced Gross Salary
A lower salary means reduced future pay rises if they are percentage-based.

Life cover, sick pay, and redundancy pay linked to salary may be affected.

2. Lower Borrowing Capacity
Mortgage applications consider salary; a lower reported income might reduce borrowing potential.

3. Impact on State Benefits
If salary drops below certain thresholds, statutory benefits like maternity pay and state pension could be affected.

4. Restricted Access to Pension
The extra pension savings cannot be accessed before retirement (except under specific conditions).

Effect on Take-Home Pay
Your net pay will be slightly lower, but less than the actual amount sacrificed.

The tax and NI savings cushion the impact.

If your employer adds their NI savings, your total retirement savings increase.

Effect on Long-Term Financial Planning
Your pension fund grows faster, improving retirement security.

Short-term disposable income is slightly reduced, so budget planning is important.

Consider how the reduced salary affects other financial goals like buying a house or saving for education.

Should You Opt for It?
If employer NI savings are passed to your pension, it’s highly beneficial.

If you are close to lower tax bands or state benefit thresholds, assess the impact.

If you plan to apply for a mortgage, check how it affects your eligibility.

A Certified Financial Planner (CFP) can help assess your personal situation before making a decision.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

Ramalingam

Ramalingam Kalirajan  |8182 Answers  |Ask -

Mutual Funds, Financial Planning Expert - Answered on Apr 03, 2025

Asked by Anonymous - Apr 03, 2025Hindi
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Hi Sir , Greetings of the day!! hope you are doing well !! I want to do a savings of 50 lacs in as much less time span as possible because I want to buy a property in Gurgaon. My monthly salary is 1 lac 11k and I am currently investing 10k in mutual fund monthly and 50k in nps yearly. Can you please guide me how can I save 50 lacs and in how much time ?
Ans: Your goal of saving Rs 50 lakh for a property in Gurgaon is ambitious but achievable with the right strategy. Below is a structured approach to help you reach your target in the shortest possible time.

Understanding Your Current Financial Position
Your monthly salary is Rs 1.11 lakh.

You invest Rs 10,000 per month in mutual funds.

Your annual NPS contribution is Rs 50,000.

You haven't mentioned any liabilities or existing savings. If you have any ongoing EMIs or debts, they should be factored in.

Key Considerations for Achieving Rs 50 Lakh Target
The speed of reaching Rs 50 lakh depends on savings rate and returns.

High savings rate is the most reliable way to accumulate wealth.

Investment returns are uncertain and depend on market conditions.

A balanced approach is necessary to ensure stability and growth.

Increasing Your Savings Rate
Currently, you are investing Rs 10,000 per month.

If you can increase it to Rs 50,000 per month, you will reach Rs 50 lakh faster.

Cutting discretionary expenses will free up more money for investments.

Consider reducing unnecessary spending on dining out, luxury items, and vacations.

Redirect bonuses, incentives, or salary hikes towards savings.

Choosing the Right Investment Instruments
Mutual Funds for Growth
Actively managed equity mutual funds can generate better returns than fixed deposits.

A mix of large-cap, mid-cap, and small-cap funds can balance risk and reward.

Mid-cap and small-cap funds have higher growth potential but also higher volatility.

Avoid index funds as they provide average returns and lack active risk management.

Debt Investments for Stability
Fixed deposits, debt mutual funds, and PPF provide stability.

These should be used for short-term parking rather than long-term growth.

Debt mutual funds are taxed based on your income tax slab.

Avoid locking too much money in low-return instruments.

Balancing Risk and Return
Investing entirely in equity mutual funds can generate high returns but comes with volatility.

A mix of 80% equity and 20% debt can provide stability.

As your target nears, shift more funds towards safer instruments.

Avoid speculation and high-risk investments like cryptocurrency.

Role of NPS in Your Goal
NPS is good for retirement but not ideal for short-term goals.

Partial withdrawal is allowed only under specific conditions.

Do not rely on NPS for your property purchase.

Managing Tax Efficiency
Equity mutual fund LTCG above Rs 1.25 lakh is taxed at 12.5%.

Short-term capital gains (STCG) are taxed at 20%.

Debt mutual fund gains are taxed as per your income slab.

Investing in tax-efficient instruments will maximize returns.

Estimating the Timeframe
If you invest Rs 50,000 per month, you can accumulate Rs 50 lakh in about 7-8 years with moderate returns.

If you invest Rs 75,000 per month, you can reach Rs 50 lakh in about 5 years.

The faster you increase your savings, the sooner you will achieve your goal.

Final Insights
Increase your monthly investment to at least Rs 50,000.

Focus on actively managed equity mutual funds.

Keep a small portion in debt for stability.

Avoid unnecessary expenses and invest salary increments.

Do not depend on NPS for this goal.

Monitor and adjust your portfolio as needed.

Stay disciplined and patient to achieve your target.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment

...Read more

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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